What if a customer pays the seller after I buy the business’s receivables in Ontario?

This page is about a customer who pays the old owner after closing, for example because it has not been told the business changed hands. It covers Ontario only; check the rules where you are with a lawyer. It applies where the buyer has taken an assignment of the receivables. For how the assignment itself is made, see how receivables are transferred in an Ontario asset purchase.

What the customer is allowed to do

First ask your lawyer whether the Personal Property Security Act applies at all. Section 4(1)(g) says that, except as otherwise provided under the Act, it 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. Where the Act applies, section 40(2) says an account debtor may pay the assignor until the account debtor receives notice, reasonably identifying the relevant rights, that the account has been assigned. If the account debtor asks, the assignee must furnish proof within a reasonable time that the assignment has been made. If the assignee does not, the account debtor may pay the assignor. Where section 40(2) applies, a customer who paid the seller before receiving that notice paid a person the subsection allows it to pay.

Defences the customer may raise

Where the Act applies, section 40(1.1) covers an account debtor who has not made an enforceable agreement not to assert defences arising out of its contract with the seller. That customer may set up against the assignee all defences available against the assignor arising out of the terms of the contract or a related contract, including equitable set-off and misrepresentation. The customer may also set off any debt the seller owed it that was payable before the customer received notice of the assignment. So a defence the customer has against the seller on a disputed invoice may be raised against the buyer.

What to ask for in the agreement

Section 40 deals with what the customer may do. It does not say what the seller must do with money it receives on an assigned account. Ask your lawyer about a promise to hand over any payment received on an assigned account, and about notice letters signed by both sides at closing. Section 53(1) of the Conveyancing and Law of Property Act, subject to its conditions, makes an absolute written assignment of a debt effectual in law from the date express notice in writing is given to the debtor. BDC notes that buyers and sellers will typically decide how much of the price is held back in escrow or made subject to conditions; ask whether a holdback should cover this risk. For the wider post-closing picture, see how to take over a business after closing.

Questions for your lawyer:

• Does the agreement require the seller to pass on money it receives for assigned accounts?
• Will a notice letter go to each customer at closing, and who signs it?
• Did any customer agree not to assert defences against an assignee?