Bank of Nova Scotia v IPS Invoice Payment Systems Corporations, 2010 ONSC 2101

1429030 Ontario Inc, carrying on business as Blooming Rose (“Debtor”), borrowed funds from the Bank secured by a general security agreement ("GSA") registered first in time under the Ontario PPSA. The Bank margined the line to the Debtor against the value of its inventory and receivables. The GSA provided the Debtor was to receive all amounts from its account debtors in trust for the Bank.

In the Debtor’s insolvency, the Bank claimed amounts paid by the Debtor’s customers to the two other creditors mentioned below, in amounts to retire the debt owed to the Bank of about $500,000.

Under a subsequent Ontario PPSA registration, IPS Invoice Payment Systems Corporations (“IPS”) factored certain receivables for the Debtor on a recourse basis and paid $1.7 million into the Debtor’s account with the Bank, reducing its bank line of credit. IPS collected in about $100,000 less from the factored account debtors than it had paid to the Debtor.

IPS argued that the Bank knew of the factoring, acquiesced to the factoring, and allowed the Debtor to deal in its receivables, and the Bank had already received $1.7 million of proceeds from the original account receivable collateral, and that to allow the Bank to be paid anything more from IPS would be letting the Bank double dip.

Under a subsequent deal, the Debtor obtained funding from Integrated Business Concepts Inc. (“IBC”) to help the Debtor acquire raw materials to make seasonal products to sell to Wal-Mart. IBC did not secure its inventory financing with the Debtor, but took a personal guarantee and other security. As directed by the Debtor, Wal-Mart paid $216,000 to IBC directly for the finished goods.

IBC argued that the Bank gave permission to the Debtor to deal in its inventory and licenced the Debtor to satisfy its “obligations that are immediately incidental to an actual sale of the inventory” to third parties, as set out in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411.

In coming to its decision in favour of the Bank, the Court held that:

  1. the Bank did not authorize the factoring to IPS or the IBC inventory arrangements with the Wal-Mart receivable. The facts did not show the Bank knew of or authorized this sale of the accounts receivable, and it did not grant an implied licence to deal with this inventory as happened;
  2. “proceeds” under section 25 of the Ontario PPSA can be both (i) the sale money paid by IPS into the Debtor’s bank account and (ii) the further proceeds generated from the purchased accounts from the customers;
  3. the more difficult question before the Court was whether the recovery of the proceeds pursuant to section 25 is limited only by the full amount of the outstanding indebtedness secured by the GSA or whether it is also limited to the value of the collateral [para 21];
  4. there was no case law on this issue and every other PPSA statute in Canada, other than Ontario’s PPSA, limits recovery to the value of the collateral on the date of dealing where the secured party enforces against both the collateral and the proceeds [para 25];
  5. having reviewed various learned articles on proceeds, the Court held that recovery under section 25 is limited to the value of the collateral on the date of dealing, and in the case of accounts receivable, is the face value of the receivable [para 33];
  6. section 28 of the Ontario PPSA provides for a free and clear sale of the Debtor’s “goods” in the ordinary course of its business, but this does not extend to the sale of accounts as an “intangible”; and
  7. IPS was ordered to pay the amount it had discounted from the face value of the receivables paid to the Debtor for he factored receivables, and IBC was ordered to pay sufficient funds from the Wal-Mart payment to make up the shortfall remaining owing to the Bank, and IBC as an unsecured creditor of the Debtor was subordinate to both the Bank and IPS.