How are accounts receivable transferred to the buyer in an Ontario asset purchase?

In an asset purchase, each receivable is a debt that a customer owes the seller. Section 53(1) of the Conveyancing and Law of Property Act, below, sets out when an assignment of a debt passes the legal right to it. If you are buying shares instead, ask your lawyer whether anything needs to be assigned. This page covers Ontario only; check the rules where you are with a lawyer. It is about how the transfer works, not whether to take the receivables or how to check them. For checking, see what to check in accounts receivable before buying.

The written assignment

Section 53(1) of the Conveyancing and Law of Property Act deals with an absolute assignment, made on or after December 31, 1897, of a debt or other legal chose in action. The assignment must be made by writing under the hand of the assignor, and it must not purport to be by way of charge only. Where express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt, the assignment is effectual in law to pass the legal right to the debt from the date of that notice. That is subject to all equities that would have been entitled to priority over the assignee’s right if the section had not been enacted. Ask your lawyer how the provision applies to your receivables and what the assignment document should say.

Notice to each customer

The notice is express notice in writing to the debtor, trustee or other person from whom the seller would have been entitled to receive or claim the debt. Ask the seller for a list of who owes what, and ask your lawyer who will sign and send the notices and whether they go out at closing. Where the Personal Property Security Act applies, notice also matters for payments. Under section 40(2), an account debtor may pay the seller until it receives notice, reasonably identifying the relevant rights, that the account has been assigned; if the account debtor asks, the buyer must furnish proof of the assignment within a reasonable time, and if the buyer does not, the account debtor may pay the seller. See what if a customer pays the seller after I buy the receivables.

Where the Personal Property Security Act comes in

Section 2 of the Personal Property Security Act says that, subject to subsection 4(1), the Act applies to a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation. Section 4(1)(g) then says that, except as otherwise provided under the Act, the Act does not apply to a sale of accounts or chattel paper as part of a sale of the business out of which they arose unless the vendor remains in apparent control of the business after the sale. Ask your lawyer whether the Act applies to your sale and whether a financing statement should be registered for the transfer. If the seller’s lender has security over its receivables, ask how that lender will be dealt with at closing.

The tax election

Section 22 of the federal Income Tax Act provides an election where a person who has been carrying on a business has sold all or substantially all the property used in carrying on the business, including the debts described in the section, to a purchaser who proposes to continue the business. It applies only if the vendor and the purchaser have executed jointly an election in the prescribed form. The election is a tax matter. Read what a section 22 election is and ask your accountant whether it applies to your sale.

Questions for your lawyer:

• Which document assigns the receivables, and who signs it for the seller?
• Who sends the written notices to customers, and when?
• Should a financing statement be registered for the transfer?
• What happens to receivables the seller’s lender holds as security?