20Orion Industries Ltd. v. Neil’s General Contracting Ltd., 2013 ABCA 330 (CanLII); Keith G. Collins Ltd. v. Canadian Imperial Bank of Commerce 2011 MBCA 41 (CanLII).
19Bankruptcy and insolvency act RSC 1985 c B-3 s.178(1)(d).
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There are alternatives to the bankruptcy process, the most obvious consisting of sim-ply negotiating alternative arrangements with creditors, including consolidating one’s obligations. Where that fails, the Bankruptcy and Insolvency Act provides a formal alterna-tive to the bankruptcy process. If individual debtors owe less than $250 000 not including a mortgage held on a primary residence (recently raised from $75 000), they can make a proposal to their creditors to pay less than the full amount owed, and/or over a longer time. If the offer is accepted and properly fulfilled, a certificate is issued and the debtor is then released from those obligations without having gone through bankruptcy. Failure to live up to such an accepted proposal will automatically result in bankruptcy. Debt coun-seling is involved, and the arrangements are usually made through the trustee/administra-tor. This is a Division Two proposal.
The arrangements for companies and larger debtors owing over $250 000 is more formal and complex; they involve more oversight and fall under a Division One proposal.
A singular advantage for both Division One and Division Two proposals is that any action being taken to seize property is stopped until the time allotted for the pro-posal process has been completed. Even then, an application can be brought to the court to extend this time. This has led to some abuses. Large corporations with very large debt obligations (over $5 million) often proceed using a different federal statute, the Companies’ Creditors Arrangement Act (C.C.A.A.),21 which has a similar effect and allows some additional flexibility. Note that one of the objects of the recent amendments to the Bankruptcy and Insolvency Act was to bring the procedures followed under these two acts into closer harmony and create more flexibility with respect to proposals, allowing more efficient restructuring of the business.
Usually secured creditors of large corporations will include terms in the original con-tract that give them the right to take over the management of that corporation in the event of default. This is called receivership and is often confused with bankruptcy.
Receivership eliminates the need to go through the bankruptcy process, but the effect can be just as devastating on the business. A professional receiver is appointed by the creditor and literally takes over the business, displacing the directors and other managers in the process. No court order or formal process is required, just default on the debt triggering the receivership option. Table 5.6 provides a summary of the consequences of bankruptcy.
Division Two proposal is an alternative for individuals Division One proposal is an alterna-tive to bankruptcy for a company
C.C.A.A. also provides alternative to bankruptcy for company
Receivership is not bankruptcy
refused to invalidate the payment and did not require return of the money and that decision was upheld on appeal. The reasons are instructive. The payment was made to a storage facility so that the insolvent company could get access to and sell a valuable piece of equip-ment being stored at that facility. The payequip-ment had to be made to obtain the equipment so that it could be sold in an attempt to stay in business; therefore, the payment was not a fraudulent preference but a legiti-mate payment necessary for the continued operation of the business.
Compare this to Keith G. Collins Ltd. v. Canadian Imperial Bank of Commerce. Here the bankrupt made a payment to CIBC and the TD to pay off credit card debts out of a mortgage he obtained on his house. This was done one month before going bankrupt and clearly had the effect of favouring one creditor over the other. This was a fraudulent preference prohibited under the Bank-ruptcy and Insolvency Act, and the Banks were required to return the money paid to the trustee.
The cases clearly distinguish between a legitimate business expense and a prohibited fraudulent preference.
21RSC 1985, c. C-36.
157
Loss of assets but no discharge;
corporation dies
Payment as agreed; no bankruptcy;
corporation survives
No bankruptcy, but creditors take over company
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Questions for Student Review
1. Explain the role played by the Sale of Goods Act and the qualifications that must be met for the Act to apply to a particular transaction.
2. How is the person who bears the risk determined under the Sale of Goods Act? Explain how this can be modified by the parties.
3. Explain the five rules that determine when title will pass under the Sale of Goods Act.
4. Explain the obligations imposed on a seller with respect to title, sale by sample and description, fitness and quality, and merchantable quality.
5. Discuss the nature of limitation or exemption clauses and their effect on the provisions of the Sale of Goods Act.
6. Describe the abusive business practices that are controlled by trade practices or business practices statutes. Describe how the statutes’ provisions are enforced.
7. Explain what is meant by a cooling-off period, and explain how pyramid and referral selling schemes are controlled under consumer protection legislation.
8. Explain the purpose of a prospectus, how it is issued and what must be included.
9. Explain who are insiders, what controls are placed on them, and why.
10. Explain the purpose of the federal Competition Act, and list five competition offences.
11. Explain what is meant by bid rigging, double ticketing, and predatory pricing.
12. List and explain five deceptive marketing practices, and explain how they are treated differently from offences against competition.
13. What kind of matters are reviewable by the Competition Tribunal? What is the purpose of such a review?
14. Indicate other federal statutes that have a consumer protection aspect to them.
15. Explain what is meant by a secured transaction, indicating the special position of the creditor. Who holds the title under the Personal Property Security Act?
16. Distinguish between attachment and perfection, and describe how perfection can be accomplished.
17. Describe the rights of the creditor when there is a default under the Personal Property Security Act. What must the creditor do to protect his or her right to sue for a deficit?
18. Explain the significance of a holdback under the builders’ lien or construction lien statutes.
19. Distinguish between an indemnity and a guarantee.
20. Explain the position of a guarantor with respect to the debtor’s obligations and how those obligations are affected by subsequent dealings between the parties.
21. Distinguish between insolvency and bankruptcy, and between an assignment and a receiving order, and explain the role of a trustee in bankruptcy.
22. Distinguish between an act of bankruptcy and a bankruptcy offence.
23. Explain the positions of secured, preferred, and unsecured creditors in the event of a bankruptcy.
24. Explain the effect of a discharge on the bankrupt.
25. Explain the difference between the provisions of the Division One and Division Two proposals.
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Questions for Further Discussion
1. The purpose of the Sale of Goods Act is to imply terms into any contract of sale where the parties have not specifically agreed otherwise. In some provinces a few of these terms are imposed and any attempt to override them is void. Some other provinces accomplish the same result through separate consumer protection legislation. Consider whether the par-ties should be able to contract out of any of the terms of the Sale of Goods Act. Should such restrictions apply to both consumer and business transactions? Should there be any provision of the Sale of Goods Act that the parties cannot limit in this way? Should there be a distinction made between consumer and commercial transactions? Consider also consumer legislation generally. Should such legislation ever interfere with the parties’
rights to have whatever terms they deem appropriate in a contract, whether it relates to a consumer transaction or not? Do such restrictions unduly interfere with the commercial process?
2. In Canada the regulation of the securities industry is provincial, whereas in the US it is federal. Would we be better off with a federal securities regulator? The purpose of such regulations is to create a level playing field. This is done by controlling the use of insider trading. Is this an interference with the marketplace? Would it be better to reduce the control of the use and disclosure of such information and restrict control to fraud, market manipulation, and misleading information?
3. Does the process of taking collateral security unfairly assist secured creditors over unse-cured creditors? Does the requirement of registration sufficiently answer any criticism? In your answer, consider the process of bankruptcy and how secured creditors are given preferred treatment, often leaving an unsecured creditor with nothing.
4. Competition lies at the heart of the capitalist enterprise. Is government regulation neces-sary, and does it achieve its intended aims? What are some of the negative impacts of regulating competition? What other methods of controlling competition might be more effective?
5. Consider the bankruptcy process. It seems to be inconsistent with every principle of fun-damental contract law and commercial relations. Is it fair to the creditors and to the debtor? What about discharge? Should debtors be allowed to escape their obligations in this way? Can you come up with a better alternative? Why prohibit student loans from being discharged through bankruptcy? Should there be other exceptions?
Cases for Discussion
1. Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 (CanLII), (2008), 238 O.A.C. 130 Mr. Mustapha suffered considerable trauma when, in the process of replacing a used jug of water with a new one, he discovered dead flies in his sealed jug of water. He had a particular sensitivity to this and suffered an unusual reaction. When he complained to the water producer, they offered him a few free water bottles and the cleaning of his dis-penser as settlement. He was offended and sued. Explain the basis of his complaint and the likely outcome. What do you think should be the remedy Mr. Mustapha should receive, if anything? How would it affect your answer to discover that Mr. Mustapha suf-fered an unusual reaction, becoming argumentative and edgy, losing his sense of humour, and becoming unable to drink bottled water?
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2. Royal Bank of Canada v. Head West Energy Inc., 2007 ABQB 154 (CanLII), 75 Alta. L.R.
(4th) 263
Harrison Western Canadian Inc. leased several trailers from Wells Fargo Equipment Finance Company. These leases were registered as secured transactions under the Alberta Personal Property Security Act in April and May of 2004 against Harrison Western Cana-dian Inc. at the appropriate registry. In July of that year Harrison Western changed its name to Head West. Subsequently, Head West became indebted to the Royal Bank, which secured that indebtedness with a general claim against the company’s assets and regis-tered that secured claim under the P.P.S.A. at the appropriate registry. Head West became insolvent and was taken over by a receiver, and the trailers were sold for $401 760. Both Wells Fargo and the Royal Bank claimed those funds. Which creditor was entitled to the funds and why?
3. Royal Bank of Canada v. Samson Management & Solutions Ltd., 2013 ONCA 313 (CanLII) Brasseur operated a business (Sampson Management and Solutions) in need of financing.
He arranged a line of credit with the Royal Bank for $150 000. Both he and his wife (Cusack) signed guarantees in support of the loan. The amount was raised to $250 000 for which new guarantees were signed by both Braseur and his wife. Additional loans were arranged first for $500 000 and then $750 000. These new lines of credit were guaranteed by Brasseur, but not by his wife; nor did she consent to them. The Samson business failed in 2011 and the Royal Bank demanded payment from both Brasseur on the basis of his $750 000 and from his wife Cusack for her $250 000 guarantee. Explain what arguments she could raise in her defence.
Would your answer change if the wording of the guarantee she signed allowed for further indebtedness and she had received independent legal advice?
4. R. v. Clarke Transport Canada Inc. 1995 CanLII 7327 (ON SC); 130 D.L.R. (4th) 500 (Ont.
Gen. Div.)
A group of five companies provided freight forwarding services through container ship-ments in the Toronto area. They would take orders from customers, charge on the basis of weight, fill a container with those orders, and transport the goods by rail. All five agreed to control prices. They exchanged information and promised not to undercut each other’s prices. Explain how their conduct would be viewed under the Competition Act.
What arguments might they raise in their defence?
5. Jen-Zam Enterprises Inc. v. Mehrabian, 2006 CanLII 17753 (ON S.C.)
Mehrabian traded in a Toyota 4Runner on a new Subaru Legacy, receiving a $14 000 credit.
It turned out later that the 4Runner was stolen. This action is brought by the automobile dealer (Jen-Zam) to recover the $14 000 from Mehrabian. Mehrabian takes the position that he is completely innocent, knowing nothing of the vehicle being stolen. Assuming that he is innocent and sold the vehicle not knowing it was stolen, explain the arguments available to the parties as to their respective legal positions and the likely outcome of the action.
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