The case of CLE Leasing Enterprises Ltd. (Re)1 deals with an analysis of whether the Ontario Bulk Sales Act2 (the “BSA”) applies to a securitization transaction.
The facts of the case are as follows: CLE Leasing Enterprises Ltd. (“CLE Leasing”) entered into a purchase agreement with SSE Leasing Limited Partnership (“SSE”), pursuant to which CLE Leasing agreed to sell certain leases and the underlying equipment to SSE from time to time at fair market value. Each time SSE purchased such leases and equipment, SSE would concurrently enter into a lease agreement with Move Trust whereby SSE would concurrently lease the equipment to Move Trust. Move Trust would then become entitled to the lease payments made by the underlying lessees. As part of the financing, consents would be required by creditors who had security over assets of CLE Leasing.
An application was brought before the Commercial List to determine whether the BSA applied to these transactions.
The Bulk Sales Act
The BSA applies to every sale in bulk, except those sales enumerated in section 2 of the Act. The following are some of the defined terms used in the BSA:
“sale in bulk” means a sale of stock in bulk out of the usual course of business or trade of the seller;
- goods, wares, merchandise or chattels ordinarily the subject of trade and commerce,
- the goods, wares, merchandise or chattels in which a person trades or that the person produces or that are the output of a business, or
- the fixtures, goods and chattels with which a person carries on a trade or business;
“stock in bulk” means stock or part thereof that is the subject of a sale in bulk and all other property, real or personal, that together with stock is the subject of a sale in bulk;
When the BSA applies to a transaction, the parties have three options:
- (a) the buyer waives compliance with the BSA and relies instead on an indemnity from the seller or a party related to the seller or assumes the risks of non-compliance if all creditors of the seller are not paid in full;
- (b) the parties comply with the BSA; or
- (c) the parties obtain a judicial exemption from compliance with the BSA.
Subsection 16(1) of the BSA makes a sale in bulk voidable unless the buyer has complied with the BSA. Moreover, the buyer may be held to be personally liable to creditors if the sale has been declared void and the buyer took possession of the stock in bulk. In that case, the buyer is personally liable to account to the creditors of the seller for the value of the stock in bulk, including all money, security and property realized or taken by the buyer.3
The primary purpose of the BSA is to protect the interests of all creditors, secured and unsecured alike, whose debtors have disposed of all, or substantially all, of their assets. As a secondary purpose, the BSA ensures the fair distribution of the proceeds of a sale in bulk; specifically, that the creditors of a seller receive their rateable share of the proceeds of a sale in bulk, based on their priority ranking, and are therefore not prejudiced by the sale.4 The Ontario BSA was originally enacted in 1917 and substantially amended in 1959. Bulk sales acts have been repealed in all provinces and territories except for Ontario, based on reports of law commissions that have stated that the goal of protecting creditors, to the extent that it is achieved by bulk sale legislation, is only achieved at the cost of significant commercial inconvenience, disruption and expense. As well, these laws were seen as unnecessary in light of the availability of remedies under the general law of fraudulent conveyances.5
Application of BSA to Securitizations
Until 2003, cases were divided on when a sale of stock in bulk was out of the usual course of business or trade of the seller. However, the 2003 Supreme Court of Canada case of National Trust Co. v. H&R Block Canada Inc. has clearly indicated that the BSA was designed to regulate a sale of all, or substantially all, of a company’s operating assets. The court stated that “any sale of substantially all of the assets of a business, or a sale of the assets used to operate the business, as occurred in this case, must comply with the provisions of the Act.”6
Based on the National Trust Co. decision, Justice Brown concluded that the BSA did not apply to the CLE Leasing transactions. Although the leased equipment which was sold to SSE would fall under the broad definition of “stock” in the BSA, the Court decided that the sale did not fall within the definition of “sale in bulk,” as such a sale is required to be “out of the usual course of business or trade of the seller.” The Court found that:
The Proposed Transaction employs the legal device of a sale for the purpose of raising financing in the ordinary course of the operation of the applicants’ businesses. The applicants no doubt considered a number of financing options before selecting the form of the Proposed Transaction. They could have approached a financial institution to borrow money, charging the Leases and Leased Equipment as security for that loan. The definition of “sale” in the BSA makes it clear that the Act would not apply to that form of financing. Why, then, should the use of securitization as the means-of-choice for financing attract scrutiny under the BSA? It is merely another financing option.7
The Court went on to say that in these transactions,
(i) the assets at issue are being sold for fair market value to an entity in which the originator has an economic interest, (ii) the originator or other entity servicing the leased assets continues to service those assets following the transfer, and (iii) the seller continues to engage in the same business as it did prior to the sale. Hardly the mischief targeted by the BSA of preventing persons from ‘pocketing the money, leaving the creditors in the lurch.’8
The Court’s conclusion that the BSA was not intended to regulate an ordinary course financing technique such as the type of asset securitization used by the applicants in this case is a welcome decision for all companies who participate in securitization financings, as it will enable them to enter into their financing arrangements without taking the time and spending additional money to comply with the BSA or apply to court for an exemption order.