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opinion BANKING ON CORPORATE BY CHERYL SATIN Bye-bye bulk sales legislation centre in North America. It also houses the headquarters of many Canadian com- panies and the primary Canadian offices of foreign corporations carrying on busi- ness here. Given the sophistication, diver- sity, and asset value of many of these enter- prises, and Ontario's position as a North American leader in several respects, why is it the only province that still has bulk sales legislation? Bulk sales legislation was introduced O across North America around the turn of the 20th century to address complaints of wholesalers who had supplied goods on credit to retailers who subsequently sold their inventory to a third party for cash and disappeared, leaving the wholesal- ers unpaid. Creditors wanted a means of attacking these schemes and getting paid regardless of whether the buyer knew of the retailer's fraudulent intentions. To accomplish this, the legislation imposes certain duties on a purchaser of a business' assets that are either acquired outside of the ordinary course or represent a substan- tial portion of the seller's assets. The buyer must receive comfort the seller has paid its debts or obtained its creditors' consent to the sale, or take steps to ensure the seller's creditors are paid out of the sale proceeds. Alternatively, the seller may ask the court to waive the need to comply with the legislation if the judge is satisfied the sale is advantageous to the seller and will not impair the seller's ability to pay its debts. If the purchaser does not fulfil its statu- tory obligations or receive court-ordered relief, the seller's creditors may request the sale be set aside or recover the value of the assets sold from the purchaser. Over time, businesses have grown sig- nificantly and industry consolidation has become prevalent. The impact of the leg- islation upon these commercial transac- ntario is the leading province in many different industries and has the third-largest financial services tions has been unfortunate. For a large, established enterprise selling a portion of its business as part of a restructur- ing or reprioritization, significant time and money may be spent on compliance in a situation where concerns about the enterprise's continued viability post-sale are not warranted. Compiling details of its "creditors" (broadly defined in the leg- islation), and obtaining consents from its creditors or satisfying all of its outstanding debts can be cumbersome and impractical for a company. And obtaining a judicial exemption can involve considerable legal and accounting fees for the seller and having its financial information on the public record. So, in practice, buyers fre- quently do not insist on compliance with the legislation, and simply ask that sellers reimburse them for any losses incurred as a result of this decision. Given the recent economic downturn and credit crisis, buyers in a commercial transaction are generally much more risk- averse. Consequently, there is an increas- ing tendency in Ontario for buyers to insist on bulk sales compliance, rather than risk any potential liability to the seller's creditors. While some may argue these financial times are further evidence such protections are needed, there are bet- ter ways to minimize the risk to creditors which were not available 100 years ago. For instance, creditors can register secu- rity interests against inventory and other assets of a debtor and have various means available to realize on that security. In addition, detailed credit histories are eas- ily obtainable. And, ultimately, the general laws relating to fraudulent conveyances continue to apply. Bulk sales laws also have inherent limi- tations, making their protections marginal at best. A creditor is more likely to lose its ability to recoup what it is owed due to a secured (or higher-ranking) creditor realizing on its security and leaving little behind than as a result of a fraudulent sale of assets. The legislation also has no application to a sale in connection with the vendor's bankruptcy or insolvency. Moreover, a buyer satisfies its statutory duties by receiving a statutory declara- tion listing all of the seller's creditors and details of the debts owed. The buyer does not have to independently verify the accu- racy and completeness of the declaration, provided it does not have actual knowl- edge it is false. As a result, a seller inten- tionally seeking to defraud its creditors can circumvent the law by swearing a false declaration. Given the additional protections now available to creditors, and the consider- able time, expense, and inconvenience of complying with the legislation despite its limited value, the Bulk Sales Act (Ontario) should be repealed. In reality, the costs are generally borne by partici- pants in a transaction that present little, if any, danger to creditors of the seller. Also, the court time used to hear and grant exemption orders can definitely be put to better use. Law reform commissions in the other Canadian provinces have found the rea- sons for repealing bulk sales laws outweigh those for either keeping or amending them. British Columbia was the first province to get rid of its bulk sales legislation in 1985 and the rest of the provinces and territories (with the exception of Ontario) followed suit, with Newfoundland being the last in 2008. It is time Ontario finally repeals its Bulk Sales Act and allows commercial transactions to be completed within the province in a manner consistent with that expected of a major financial services cen- tre and industry-leading jurisdiction. Cheryl Satin is a partner at Blake Cassels & Graydon LLP in Toronto practising in the business group. She can be reached at cheryl.satin@blakes.com. www. C ANADIAN Law ye rmag.com OC T OBER 2010 15