What is the risk of buying assets from a company that owes its suppliers?

A company that owes its suppliers may sell assets to raise cash or to wind down. For you, the question is not whether the supplier is owed money. It is whether the supplier, or someone acting for the seller’s creditors, can reach what you paid for. Ontario’s statutes, and the federal Bankruptcy and Insolvency Act, set out three routes. This page covers Ontario, so if the seller is elsewhere, confirm the rules that apply there.

A supplier’s security interest

A supplier that sold goods on credit may have registered a security interest. Under s.25(1)(a) of Ontario’s Personal Property Security Act, where collateral gives rise to proceeds, the security interest continues as to the collateral unless the secured party expressly or impliedly authorized the dealing with it free of the security interest. Section 33 gives a purchase-money security interest priority over other security interests in the same collateral given by the same debtor, subject to that section’s conditions. Under s.43, on request and payment of the fee, the registrar issues a search certificate that is proof of its contents in the absence of evidence to the contrary. Search the seller’s business name and ask for written discharges of anything that appears.

A sale meant to defeat creditors

Section 2 of Ontario’s Fraudulent Conveyances Act makes a conveyance of real or personal property made with intent to defeat, hinder, delay or defraud creditors or others void as against those persons and their assigns. Section 3 says that rule does not apply to property conveyed on good consideration and in good faith to a person who had no notice or knowledge of that intent. What you knew when you bought matters, so keep a record of how the price was set and what the seller said the proceeds were for.

The seller’s later bankruptcy

Under s.96 of the Bankruptcy and Insolvency Act, a court may, on the trustee’s application, declare a transfer at undervalue void as against the trustee, or order a party to the transfer or a person privy to it to pay the estate the difference in value. The Act defines that as a disposition of property or provision of services for which the debtor receives no consideration or consideration conspicuously less than fair market value. For a party dealing at arm’s length, s.96(1)(a) adds conditions: the transfer occurred in the period beginning one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, the debtor was insolvent or made insolvent, and intended to defraud, defeat or delay a creditor. Different rules apply to parties not at arm’s length.

No bulk sales statute in Ontario

Ontario’s Bulk Sales Act was repealed on March 22, 2017, so it no longer applies there. Whether another province still has a bulk sales regime is not something this page covers, so ask a lawyer in the seller’s province. Related reading: can the seller’s creditors come after me if I buy only the assets.