Can a receivable in Quebec become uncollectible before closing?

In a purchase of assets, a receivable stays the seller’s property until it is assigned, and what the buyer expected to collect can shrink meanwhile. A share purchase differs: nothing is assigned, and the risk shows up in the price and in post-closing adjustments. For an asset purchase, the Civil Code of Québec decides who carries each risk.

When the customer can still pay the seller

An assignment can be set up against a customer once the customer has acquiesced in it or has received a copy or a pertinent extract of the act of assignment or other evidence of it (art. 1641). Until then, the customer can set up against the buyer any payment made to the seller, and any other cause of extinction that occurred before that point (art. 1643). A customer who pays the seller before then can set that payment up against the buyer.

Set-off can erase part of a balance

Debts also disappear by compensation: where two persons owe each other certain, liquid and exigible sums of money, the debts are extinguished up to the lesser amount (arts. 1672 and 1673). If the seller owes a customer a refund or rebate, the customer may be able to net it against the invoice you bought. Ask what each customer owes and is owed, not only for the ageing report covered in what to check in accounts receivable.

What the seller actually warrants

On a sale for value, the seller of a claim warrants that it exists and is owed, unless the buyer took it at its own risk or knew it was uncertain (art. 1639). A promise that the customer can pay is separate: where the seller gives one by a simple warranty clause, it covers solvency only at the time of the assignment and only up to the price the seller received (art. 1640). A customer who fails after closing is the buyer’s loss unless the agreement provides more.

Registration and tax

An assignment of a universality of claims, present or future, can be set up against third persons by registering it in the register of personal and movable real rights, provided the other formalities for setting it up against debtors have been observed (art. 1642), so a search can show whether the seller has already registered a bulk assignment of its receivables. If receivables are sold for less than face value as part of a sale of substantially all of a business to a buyer who proposes to continue it, the federal Income Tax Act allows a joint election on the treatment of the difference (s. 22). Whether it fits your deal is for your accountant.