Unpaid suppliers are generally unsecured in liquidation proceedings. A supplier can elevate its unsecured claim by taking security from the debtor or modifying its supply contract by inserting an effective title retention clause. The supplier may also rely on the BIA unpaid supplier provision to assert a super-priority for the return of its goods.
Section 81.1(1) of the BIA provides for the return of goods as part of bankruptcy or receivership proceedings where the supplier, amongst other things, presents written demand for repossession in the prescribed form within 30 days after delivery. Because the effect of this provision is to grant a super-priority claim to the unpaid supplier, courts are reluctant to grant extensions to the 30 day period.
The Alberta Court in Goldman Sachs Canada Credit Partners Co. v. Pantano Energy Services Inc. recently granted an extension to the 30 day period but this required extenuating circumstances. There, the supplier delivered oil well equipment in November, 2008. A receiver was appointed over the debtor’s property in mid-December and notice of the receivership was not given until the end of the month. The December holidays intervened and the supplier did not actually receive the notice until early January, 2009, which was after the 30 day period had expired.
The supplier acted diligently in immediately contacting the receiver after receipt of the notice and applied to the Court for an extension of the 30 period requesting intervention on the basis of the judicial discretion permitted under the BIA.
In support of its application for the extension, the supplier relied on three arguments. First, it was impractical to have taken security from the debtor due to industry practice. Second, the supplier had moved expeditiously as soon as the receivership notice was received. Third, the only creditor that would be affected by its claim would be the existing secured creditor.
Counsel for the secured creditor responded by arguing that section 81.1(1) imposes a strict 30 day deadline on a supplier to submit a claim, and that such rights must be construed narrowly. Furthermore, the supplier ought to have known about the debtor’s financial difficulties ahead of the receivership and did nothing to prepare for the eventuality of insolvency proceedings – such as requiring security from the debtor.
In granting the extension, the Court was forced to balance the strict wording of the provision in the overall context of the BIA and in particular, the fact that the unpaid supplier provision overrides the BIA priority regime for a limited purpose in restrictive circumstances. The Court determined that the December holidays were a material factor affecting the supplier’s ability to act quickly to assert its rights and that it acted expeditiously once it had the facts. Finally, the Court relied on the fact that the extension would only affect the secured creditor.
As the Court remarked in its reasons, whether an unpaid supplier will be able to rely on section 81.1(1) is a matter of chance based on how quickly notice is received and processed and therefore, we would recommend as a matter of ordinary business practice, that creditors take security or insert valid title retention clauses into their supply contracts. The BIA unpaid supplier provision should only be used as a last resort as it is not particularly effective in the circumstances.