Can a bankrupt seller’s trustee cancel my purchase contract before closing?

A signed purchase agreement still matters when the seller becomes insolvent, but the person who controls it changes. Under the federal Bankruptcy and Insolvency Act, the process the seller is in decides who holds authority over your contract and what rights you keep. The first question is which process has started: a bankruptcy, or a proposal to creditors.

If the seller is declared bankrupt

Once a bankruptcy order is made or an assignment is filed, the bankrupt ceases to have any capacity to deal with its property, which the Act says, subject to the Act and to the rights of secured creditors, immediately passes to and vests in the trustee. From then on the trustee, not the seller, holds power over the property you agreed to buy. The Office of the Superintendent of Bankruptcy, which supervises estates under the Act, describes bankruptcy as debtors signing over all their assets, apart from those exempt by law, to a licensed insolvency trustee.

What the Act says about contracts

With the inspectors’ permission, a trustee may elect to retain, assign, surrender or disclaim a bankrupt’s lease. A court can, on the trustee’s application, assign the bankrupt’s rights and obligations under an agreement to someone who agrees to take them, subject to the exceptions and conditions in that section. And where the seller has filed a notice of intention or a proposal, the Act lets the debtor disclaim agreements it is party to, with the trustee’s approval or a court order, subject to conditions.

Your protections if a contract is disclaimed

A party to the agreement can apply to a court, within a short period set by the Act, for an order that it not be disclaimed. In deciding whether to make an order under that section, the court considers, among other things, whether the trustee approved the disclaimer, whether it helps a viable proposal and whether it would cause a party significant financial hardship. If an agreement is disclaimed anyway, a party who suffers a loss is considered to have a provable claim, which is a claim made inside the insolvency process, not a right to the business or to a deposit back.

What to do while you wait

Read the contract’s insolvency and termination clauses, check whether any deposit sits with a lawyer or with the seller, and ask the trustee in writing which process the seller is in and whether it intends to complete. Then have an insolvency lawyer read your agreement before you act, because your remedies turn on its exact wording.