The Bulk Sales Act – Beware!

Two recent cases have highlighted the risks associated with buying assets from a business.

Let’s start with the normal alternatives of whether to buy the shares or assets (obviously, if a business is not incorporated, there are no shares). Normally the shareholders of a Canadian-controlled private corporation will seek to sell shares in order to take advantage of their lifetime capital gains exemption, if they are eligible. However, a Purchaser, when buying shares, automatically assumes all of the liabilities that exist within the corporation. Apprehensive about those liabilities, accordingly, many Purchasers prefer only to buy what they think are the assets on the left side of the Balance Sheet.

Not necessarily true. In fact, thanks to the Bulk Sales Act (Ontario) a Purchaser may well find himself liable to all of the creditors that existed at the date of the sale.

The Bulk Sales Act (Ontario) (one of only two provinces in which the Bulk Sales Act still exists; the other is Newfoundland), provides that a business Vendor, selling all or substantially all of its assets out of the ordinary course of business, must comply with this Act. Compliance requires a Statutory Declaration listing all secured and unsecured creditors and satisfaction of all of those creditor claims from the sale. In the event there are insufficient proceeds to satisfy all creditors (which more than just rarely occurs), there are alternatives for a Vendor (that is the subject of another message).

Essentially, to buy the assets representing all or substantially all of the assets of a business, the Purchaser must obtain that Statutory Declaration listing all of the creditors and be sure they’ve all been satisfied. Failure to do so means that the sale can be set aside and treated as void and, in addition, the Purchaser is personally liable to all of the Vendor’s creditors.

In a recent case, it would now appear that the Vendor provided the Statutory Declaration, but the Statutory Declaration was false. The Purchaser, relying upon what turned out to be a false Statutory Declaration, completed the transaction and is now facing the claims of the Vendor’s creditors.

In a second case, the Purchaser’s lawyers correctly identified all of the creditor exposure and required the Vendor to satisfy creditor claims. For whatever reason, the Purchaser not only dispatched the Purchaser’s lawyers prior to the Closing, but in addition, believed the Vendor’s personal commitment to pay out the creditors. The Vendor did not. As a result, one of the Vendor’s creditors has brought an Action to set aside the sale. The HST alone payable on the sale is $125,000 in addition to the loss by the Purchaser of all of the assets the Purchaser thought it had bought amounting to a further $954,000.

It is as simple as this: When buying the assets of any business, full compliance with the Bulk Sales Act is mandatory. Failure to comply will result in the Purchaser being personally responsible to the Vendor’s creditors in addition to the money that the Purchaser has already paid to the Vendor which may or may not ever find its way to the creditors.

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