THE RIGHTS OF UNPAID SUPPLIERS October 19 , 2011

1. THE RIGHTS OF UNPAID SUPPLIERSOctober 19, 2011 Presented by: Timothy R. Dunn Partner Minden Gross LLP Ryan Gelbart Associate Minden Gross LLP Christine Lafleur Counsel Corporate/Commercial Law Group Ontario Power Authority Jonathan LauLegal Services and Business AffairsTVO

2. Presentation Agenda Introduction Overview of Bankruptcy and Insolvency Act (Canada) CCAA Plans of Arrangement and BIA Proposals Rights of Unpaid Suppliers to Repossess Goods Purchase Money Security Interests Bankruptcy Application Consignment Arrangements Statutes of Interest

3. Overview of Bankruptcy and Insolvency Act(Canada)(“BIA”)

4. Overview of Bankruptcy and Insolvency Act Federal Legislation Effective Canada-wide Deals with personal and corporate Bankruptcies BIA is now subject to review every 5 years

5. Overview of Bankruptcy and Insolvency Act Ways in which an individual or corporation can become Bankrupt Filing assignment in Bankruptcy An application by a creditor An unsuccessful proposal to creditors = deemed bankruptcy

6. Overview of Bankruptcy and Insolvency Act • Upon bankruptcy a debtors property automatically vests in trustee • Secured creditors realize their security outside the bankruptcy process • The crown and various liens take priority over both secured and unsecured creditors

7. Overview of Bankruptcy and Insolvency Act Reviewable Transactions • Arms length creditors – can challenge payments made within 3 months of bankruptcy as fraudulent preference if insolvent at time of payment. • Can also review certain transfers of property and other transactions which occur within one year prior to bankruptcy depending on circumstances. • If trustee cannot or does not want to investigate/ challenge, any creditor can apply for assignment of the cause of action. All creditors must be invited to join action, and all who do will bear pro-rata costs and benefits.

8. Commercial Plans of Arrangement and Proposals

9. Commercial Plans of Arrangement and Proposals Two Restructuring Options Company Creditors Arrangement Act (“CCAA”) Bankruptcy and Insolvency Act (“BIA”)

10. Very flexible The only requirements Debtor must be insolvent Aggregate debt in excess of $5,000,000 The process Ex Parte application for initial order CCAA Plans of Arrangement

11. CCAA Plans of Arrangement The Initial Order Initial 30 day stay of proceedings against debtor and its property; Order restraining the enforcement or exercise of any rights against the debtor and its property or against third parties as a result of the debtors default and/or insolvency; Appointment of a monitor

12. CCAA Plans of Arrangement The Initial Order • Order restraining any person from interfering with or suspending any rights of the debtor; • Order for the continued provision of essential services to the debtor; • Power to borrow and/or grant security during restructuring; • Creates professional fees charge against assets of debtor.

13. CCAA Plans of Arrangement Question: What is the benefit of having both the BIA and CCAA? Answer: CCAA is more flexible Better suited for complex restructurings BIA = strict time periods and formal requirements

14. CCAA Plans of Arrangement Rights of creditors cannot be compromised unless: Creditors have been given a right to vote in the appropriate class Creditors’ vote is in accordance with a value ascribed to the claims by a court approved procedure The class has voted by a majority in number and two-thirds in value in favor of the plan The court has sanctioned the plan on the basis that it is fair and reasonable, with considerable deference being given by the court to the degree of support of the creditors.

15. BIA PROPOSALS Who can make a proposal? s. 50(1)A proposal may be made by a business that is: Insolvent Bankrupt The receiver of an insolvent person A liquidator of an insolvent person The trustee of the estate of a bankrupt

16. BIA PROPOSALS To whom may a proposal be made? How is a proposal filed? Notice of intention Cash flow statement Monitoring and reporting by the trustee Post-filing procedures

17. BIA PROPOSALS The Statutory Stay of proceedings • The Automatic stay • Exceptions to the stay • Fresh advances • Hardship • Other exceptions • Extending the stay

18. BIA PROPOSALS • The Creditors Response • Mandatory provisions of proposals • Consideration of proposals • Classification of creditors • Proving claims under a proposal • Meetings of creditors • Approval of proposals • Refusal of proposal • Annulment of proposal • Certificate of assignment

19. Rights of Unpaid Suppliers To Repossess Goods BIA Section 81.1

20. Rights of Unpaid Suppliers Remedy may be available where: Suppliers are unsecured creditors Goods are identifiable Goods were supplied to the bankrupt Full payment was not made

21. Rights of Unpaid Suppliers Time Constraints on Unpaid Suppliers: Must present written demand for repossession in prescribed form within 15 days of bankruptcy. If not paid can proceed under Act to repossess goods. Goods must have been delivered within 30 days of bankruptcy/ receivership

22. Rights of Unpaid Suppliers Additional Conditions Relating to the Goods: Must be in possession of purchaser, trustee or receiver Must be identifiable Must be in same state as at delivery Must not have been re-sold at arms length Must not be subject to agreement for sale at arms length

23. Rights of Unpaid Suppliers What if there was part payment prior to bankruptcy? Two possible remedies: Can repossess proportion of goods up to unpaid amount Repay amount paid by purchaser and repossess all goods

24. Purchase Money Security Interests (“PMSI”)

25. PURCHASE MONEY SECURITY INTERESTS Two Ways for PMSI to Arise Vendor sells goods to the debtor on credit Lender finances debtors purchase of goods from third party

26. PURCHASE MONEY SECURITY INTERESTS Two Types of PMSIs PMSI in collateral which is inventory PMSI in collateral which is not inventory

27. PURCHASE MONEY SECURITY INTERESTS Conditions For Obtaining PMSI in Inventory Must receive signed security agreement Must register financing statement prior to possession Errors in registration may invalidate entire security Prior to possession must provide written notice to other secured creditors who have inventory as collateral General rule: Inventory = collateral held by debtor for sale or lease to third parties.

28. PURCHASE MONEY SECURITY INTERESTS Non-Inventory PMSI No Notice requirement For tangible collateral must register financing statement before or within 15 days of possession by debtor (recently increased from 10 days) For intangible collateral must register before or within 15 days of attachment (i.e. value is given, the debtor has rights in the collateral and the debtor has signed the security agreement)

29. PURCHASE MONEY SECURITY INTERESTS Practical Considerations Consider the impact of notice on the bank or other secured creditors (e.g. does a PMSI constitute a default of pre-existing security arrangements) Obtain waivers Description of goods in security agreement should match description in purchase order, invoices, etc. Ensure debtor acknowledges receipt and date of receipt of goods

30. PURCHASE MONEY SECURITY INTERESTS Recent PPSA Amendments Open for Business Act (Ontario) Increased time period time period for non-inventory PMSI Re-exclusion of sale-leaseback transactions from PMSI definition Description of collateral on financing statement will limit scope of check-box classification

31. PURCHASE MONEY SECURITY INTERESTS Responding To A Trustee In Bankruptcy Or Receiver of the Purchaser Trustee and receiver must provide notice of appointment Supplier should assert PMSI interest upon receipt of notice Get confirmation that collateral will be segregated until claim is confirmed or agree to sell goods and keep proceeds in trust PMSI holder can bring application to determine priority/entitlement and for order to ensure protection of their interests.

32. PURCHASE MONEY SECURITY INTERESTS Enforcing The PMSI Making demand and BIA notice Prior to enforcement must deliver notice of intention to enforce (BIA s.244 (1)) Notice must state: Type of security Agreement Description of collateral Amount owing to supplier Statement that supplier may not realize security until expiration of 10 day period after receipt of notice by purchaser unless purchaser consents in writing after having received notice.

33. PURCHASE MONEY SECURITY INTERESTS Making demand and BIA notice When making demand must provide reasonable time for repayment Regardless if less than 10 days still cannot enforce until expiration of 10 day period under BIA If secured creditor is concerned about collateral it can bring application under BIA for appointment of interim receiver

34. PURCHASE MONEY SECURITY INTERESTS Selling The Collateral Upon default part V of PPSA (rights and remedies) becomes operative Secured party has right to dispose of collateral Must take reasonable care of collateral Must act in commercially reasonable manner when disposing

35. PURCHASE MONEY SECURITY INTERESTS Selling The Collateral Must provide notice of intention to dispose to: The debtor Every known owner and obligor of the collateral i.e. guarantor Every person with a security interest perfected by possession which was disturbed by the supplier taking possession Every person with a security interest perfected by registration prior to date of notice Every person who delivered written notice of interest in the collateral prior to debtors notice Must provide not less than 15 days notice prior to disposition

36. PURCHASE MONEY SECURITY INTERESTS Selling The Collateral Content of notice to dispose: Description of collateral Amount required to satisfy obligation Amount of expenses or rough estimate of expenses Statement that upon payment payor will get credited for any rebates or allowances Statement that upon payment of amount due and expenses any person entitled to notice may redeem the collateral Statement that unless debt is paid collateral will be sold and debtor will be liable for deficiencies Date, time and place of public sale or date of private disposition

37. PURCHASE MONEY SECURITY INTERESTS Foreclosure On Collateral Secured creditor can foreclose on collateral in satisfaction of debt owing Must provide notice to same people as with power of sale Notice recipients may object within 15 days If an objection is served, the secured creditor can either: Sell the collateral Require that the person objecting provide proof of interest in the collateral within 10 days.

38. PURCHASE MONEYSECURITY INTERESTS Foreclosure On Collateral Secured creditor can apply for court order allowing foreclosure notwithstanding objection, if: The objection was not made for the protection of the objectors interests The fair market value of the collateral is less than the amount owing and estimated expenses Be sure to get an appraisal(s) to prove fair market value

39. PURCHASE MONEYSECURITY INTERESTS Foreclosure On Collateral If no objection is made, the secured creditor: Is deemed to have irrevocably elected to accept collateral in full satisfaction of amount owing Is entitled to the collateral free of any and all rights an interest of any other person that was entitled to notice. Becomes the owner and can do as it sees fit

40. Bankruptcy Application

41. BANKRUPTCY APPLICATION Ways In Which A Debtor Can Go Bankrupt Voluntarily, via assignment Involuntarily, via court order following an application by secured creditor As a result of a failed proposal. Deemed bankruptcy

42. BANKRUPTCY APPLICATION Debtor must receive notice of application at least 10 days prior to hearing Debtor can contest the application by filing notice at least 2 days prior to hearing If debtor does not contest = bankruptcy If debtor does contest a trial will be held with onus on creditor Creditor must prove: Debtor owes at least $1,000 Debtor committed an act of bankruptcy within 6 months of application

43. BANKRUPTCY APPLICATION Acts of Bankruptcy Fraudulent conveyance If debtor admits or financial statements show inability to pay debts Giving notice to any creditors of suspension or plans to suspend payment of debts Ceasing to meet liabilities as they generally come due

44. BANKRUPTCY APPLICATION Other Factors The amount of creditors who join the petition The secured creditors must obtain consent of a trustee to act The trustee acts for the unsecured creditors Secured creditors are not affected by a bankruptcy Government claims as unsecured creditor (other than source deductions) May be more cost effective for unsecured creditors if trustee also represents the secured creditors as receiver If debts are large, creditor should become inspector

45. Consignment Arrangements

46. CONSIGNMENT ARRANGEMENTS • Prudent method of protection in event of bankruptcy/ receivership • Agency relationship True Consignment vs. Disguised Sale • True consignment– does not create a security interest thus does not fall within the scope of the PPSA • Disguised sale– intended to look like a consignment but creates a security interest which is subject to the PPSA priorities

47. CONSIGNMENT ARRANGEMENTS Indicia Of A True Consignment • Title to good remains with consignor; • Keep separate accounts for consigned goods and true sale goods; • Keep consigned inventory separate or easily identifiable; • Keep proceeds of sale from consigned goods separate; • Should account to consignor after each sale;

48. CONSIGNMENT ARRANGEMENTS Indicia Of True Consignment • Consignee should not have to pay consignor unless consigned goods sell; • Stating “on consignment” not enough to constitute a consignment; • Consignee should have right to return and consignor should have right to demand return of goods at any time; • Written consignment agreement alone is not enough” • Ultimately onus on consignor to prove true consignment

49. CONSIGNMENT ARRANGEMENTS Advantages of Consignment Arrangement • Advantages arise upon bankruptcy or receivership • Supplier can repossess goods even in bankruptcy • Can repossess goods without reliance on BIA or PPSA • Does not fall within scope of PPSA thus not subject to notice of sale or foreclosure requirements (discussed earlier)

50. CONSIGNMENT ARRANGEMENTS Disadvantages Of A Consignment Arrangement • Does not work where goods or accounts are not easily segregated • PPSA secured creditor may be able to follow proceeds where comingling occurs • Onus on consignor to prove true consignment exists