Does a court-approved insolvency sale wipe out existing claims against the business?

Buyers are drawn to insolvency sales because a court order can remove obstacles that a private sale cannot. That does not make the purchase risk-free. What the order clears depends on the statute the sale proceeds under and on the order’s wording, and it is narrower than the idea of a clean sale suggests. This answer follows the Bankruptcy and Insolvency Act’s rules for a sale during a proposal.

What the court can clear

Under the Act, an insolvent person who has filed a notice of intention or a proposal may not sell assets outside the ordinary course of business unless a court authorizes it. The court may authorize a sale free and clear of any security, charge or other restriction. If it does, it must also order that other assets, or the sale proceeds, become subject to a security, charge or restriction in favour of the affected creditor. In effect the claim moves rather than vanishes.

What the court weighs before approving

The Act lists factors for the court, including whether the sale process was reasonable, whether the trustee approved it, how the sale affects creditors and other interested parties, and whether the price is reasonable and fair given the assets’ market value. Affected secured creditors must be given notice of the application, and a sale to a related party faces extra scrutiny.

What can still follow the business

A free-and-clear order deals with the security, charges and restrictions it names. Other duties come from statutes that apply to whoever operates the business. British Columbia’s employment standards guidance, for example, says a purchaser takes on the seller’s obligations to employees under that Act when a business is disposed of. Ask counsel whether the order changes that result rather than assuming it does.

Which process the seller is in

The Office of the Superintendent of Bankruptcy supervises estates and matters under the Bankruptcy and Insolvency Act, and certain matters under the Companies’ Creditors Arrangement Act. Receiverships and other processes have their own sale rules, so confirm which one applies. Our answer on buying from a trustee and from a receiver explains who you are dealing with.