National Trust Company v. H & R Block Canada, Inc., 2001 ONCA 5739

National Trust Company v. H & R Block Canada, Inc. [Indexed as: National Trust Co. v. H & R Block Canada, Inc.]

56 O.R. (3d) 188

[2001] O.J. No. 4127

Docket No. C28654

Court of Appeal for Ontario

McMurtry C.J.O., Borins and MacPherson JJ.A.

October 26, 2001

• Application for leave to cross-appeal to the Supreme Court of Canada was dismissed with no order as to costs and application for leave to appeal was granted with costs in any event of the cause October 17, 2002 (Gonthier, Major and LeBel JJ.). S.C.C. File No. 28975. S.C.C. Bulletin, 2002, p. 1422.

Debtor and creditor -- Bulk sale -- Remedies of creditor -- Non-compliance -- Liability of buyer of stock in bulk where failure to comply with Bulk Sales Act -- Proceeds of sale in bulk used to pay secured claims -- Buyer liable to unsecured creditor for amount of claim existing at time of bulk sale -- Bulk Sales Act, R.S.O. 1990, c. B.14, ss. 16, 17.

In 1987, Tax Time Services Limited ("Tax Time") sued National Trust for breach of contract. National Trust, which had been providing Tax Time with unsecured financing for its business, counterclaimed for $205,293 plus interest. In June 1991, while the litigation between Tax Time and National Trust was pending, H & R Block Canada, Inc. ("H & R") purchased stock in bulk from Tax Time for $800,000. Instead of complying with s. 4(1) of the Bulk Sales Act, H & R accepted Tax Time's, and its president's, promise that it would indemnify H & R for any liability arising from non-compliance with the Act. The proceeds of the bulk sale were used to pay two secured creditors, but other creditors, including National Trust, remained unpaid. In June 1993, Tax Time's action was dismissed, but National Trust was granted judgment in the amount of $327,625 on its counterclaim. Tax Time appealed, and while its appeal was pending, National Trust commenced proceedings under the Bulk Sales Act to have the bulk sale declared void and for an order requiring H & R to account under s. 16(2) of the Act for Tax Time's debt.

Tax Time's appeal was dismissed, and the application under the Bulk Sales Act proceeded. On the hearing of the application, it was agreed that the value of the stock in bulk was $800,000 and that the bulk sale did not comply with the Act. Spence J. set aside the sale and ordered H & R to pay National Trust $740,743.

H & R appealed. It submitted that s. 16(2) of the Act should not be interpreted to require it to satisfy Tax Time's indebtedness in circumstances when National Trust would not have received any payment had there been compliance with the Act. It also submitted that if it was liable, its liability should not include the costs awarded in the litigation between National Trust and Tax Time. National Trust cross-appealed and submitted that the amount of the award should be increased to $800,000 plus post-judgment interest.

Held, the appeal should be allowed in part; the cross-appeal should be dismissed

Per MacPherson J.A. (McMurtry C.J.O. concurring): H & R's calculated decision not to comply with the Act meant that all creditors, including National Trust, were deprived of their right to contest the sale, and it was now too late to speculate what the result would have been. The unilateral decision by H & R and Tax Time to pay certain creditors was not a proper accounting under the Act, and H & R was liable to pay National Trust for its debt existing at the time of the bulk sale. H & R was, however, not liable for the costs of the National Trust and Tax Time litigation or for interest on those costs. Those were debts incurred after the bulk sale and there was nothing in the Act that suggested the Act extended to protecting creditors whose debt did not exist at the time of the bulk sale. There were no other reasons to interfere with the order and the cross-appeal should be dismissed.

Per Borins J.A. (dissenting): The purpose of bulk sales legislation is to ensure that the creditors of the seller receive their rateable share of the proceeds of sale in bulk and are not prejudiced by the sale. Where the buyer has received or taken possession of the stock in bulk and there has been non-compliance with the Act and the sale has been declared void, s. 16(2) of the Bulk Sales Act provides a creditor with an action against the buyer for an accounting of the value of the stock in bulk. If the sale proceeds have been distributed in a manner that has resulted in any creditor not having been paid its full or pro rata share, then the buyer must personally pay creditors their full or rateable share of the proceeds up to the value of the stock in bulk. In conducting the accounting, the court must give effect to payments properly made from the proceeds of the sale to the seller's creditors. In the immediate case, in demonstrating that Tax Time used the entire proceeds to pay debts that Tax Time owed to secured creditors that ranked in priority to National Trust, H & R provided a satisfactory explanation or accounting to Tax Time's creditors of the distribution of the agreed upon value of the stock in bulk. National Trust did not demonstrate that it was prejudiced because of H & R's failure to complete the sale in compliance with the Act, and, therefore, no remedy was available to it under s. 16(2) of the Act.

APPEAL from an order made under s. 16(2) of the Bulk Sales Act, R.S.O. 1990, c. B.14.

Cases referred to Bank of Montreal v. Ideal Knitting Mills Ltd. (1924), 1914 CanLII 548 (ON CA), 55 O.L.R. 410, [1924] 4 D.L.R. 429 (C.A.); Busuttil v. Diamond T. Trucks (Toronto) Ltd., 1968 CanLII 276 (ON CA), [1969] 1 O.R. 245, 2 D.L.R. (3d) 167 (C.A.); Chicopee Food Market Ltd. v. Knechtel Corp. (1992), 8 B.L.R. (2d) 81, 17 C.B.R. (3d) 42 (Ont. Gen. Div.); Commercial Motor Bodies and Carriages Ltd. v. Perth Ltd. (1930), 1930 CanLII 100 (SK KB), 66 O.L.R. 209, [1930] 4 D.L.R. 1010 (C.A.), affg (1930), 1930 CanLII 358 (ON SC), 65 O.L.R. 383, [1930] 3 D.L.R. 617 (H.C.J.); Garson v. Canadian Credit Men's Trust Assn., 1929 CanLII 53 (SCC), [1929] S.C.R. 282, [1929] 3 D.L.R. 300, 10 C.B.R. 504 (sub nom. Crouse, Re); Gordon v. Assegai Inc., [1989] O.J. No. 556 (H.C.J.); McLennan v. Fulton (1921), 1921 CanLII 530 (ON CA), 50 O.L.R. 572, 64 D.L.R. 558 (C.A.); Motorsource Inc. v. A.O. Smith Corp. (1993), 1993 ABCA 10, 8 Alta. L.R. (3d) 1 (C.A.); Pizzolati & Chittaro Manufacturing Co. v. May, 1972 CanLII 355 (ON CA), [1972] 2 O.R. 606, 26 D.L.R. (3d) 274 (C.A.); Sidaplex-Plastic Suppliers, Inc. v. Elta Group Inc . (1998), 1998 CanLII 5847 (ON CA), 40 O.R. (3d) 563, 162 D.L.R. (4th) 367, 43 B.L.R. (2d) 155 (C.A.), affg (1995), 1995 CanLII 7419 (ON SC), 131 D.L.R. (4th) 399, 25 B.L.R. (2d) 179 (Ont. Gen. Div.); St. Thomas Cabinets Ltd., Re (1921), 1921 CanLII 486 (ON SC), 50 O.L.R. 492, 61 D.L.R. 487, 1 C.B.R. 521 (S.C.); Thomson v. Richardson (1967), 1967 CanLII 512 (AB SCAD), 58 W.W.R. 743, 61 D.L.R. (2d) 162 (Alta. C.A.); Wiebe v. Holmes, 1971 CanLII 1293 (MB QB), [1971] 4 W.W.R. 588 (Man. Q.B.) Statutes referred to Assignments and Preferences Act, R.S.O. 1990, c. A.33 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 12(1), 136(1) Bulk Sales Act, R.S.A. 1955, c. 33, s. 10(2) Bulk Sales Act, R.S.M. 1954, c. 30, s. 10(2) Bulk Sales Act, R.S.N.S. 1923, c. 202 Bulk Sales Act, R.S.O. 1917, c. 33 [as am.] Bulk Sales Act, R.S.O. 1950, c. 42, s. 3 Bulk Sales Act, R.S.O. 1990, c. B.14, ss. 3, 4(1), 7, 8, 9, 10, 11, 12(1) [as am.], 16, 17(1) Bulk Sales Act, S.O. 1959, c. 9, ss. 17, 18 Creditors' Relief Act, R.S.O. 1990, c. C.45 Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 Authorities referred to Alberta Law Reform Institute, The Bulk Sales Act (Edmonton: The Institute, 1990) Billig, T., "Bulk Sales Laws: A Study in Economic Adjustment", (1928) 77 U. Pa. L. Rev. 72 Catzman, F., "Bulk Sales in Ontario", (1960) 3 Can. Bar J. 28 Dunlop, C.R.B., Creditor-Debtor Law in Canada, 2nd ed. (Toronto: Carswell, 1995) Forbes, R.M., Handbook: Ontario Bulk Sales Act (Burlington, Rapport Publishing Inc., 1990) Law Reform Commission of British Columbia, Report on Bulk Sales Legislation (Vancouver: The Commission, 1983) Law Reform Commission of Saskatchewan, The Bulk Sales Act: Report to the Minister of Justice (Saskatoon: The Commission, 1990) Manitoba Law Reform Commission, Report of the Bulk Sales Act (Winnipeg: The Commission, 1988) McGhee, J., Snell's Equity, 30th ed. (London: Sweet & Maxwell, 2000) Northwest Territories Committee on Law Reform, The Bulk Sales Act (Working Paper No. 3) (Yellowknife: The Committee, 1990)

David J.T. Mungovan and Peter J. Cavanagh, for respondent. Samuel Rickett and Michael J.W. Round, for appellant.

BORINS J.A. (dissenting): --

Introduction

[1] On June 28, 1991, H & R Block Canada, Inc. purchased stock in bulk from Tax Time Services Limited for $800,000. H & R failed to comply with s. 4(1) of the Bulk Sales Act, R.S.O. 1990, c. B.14. Instead, it accepted the promise of Tax Time and its president that it would be indemnified for any liability incurred resulting from non-compliance with the Act. All the proceeds from the sale, $800,000, were used to pay Tax Time's secured creditors, First City Trust Company and Royal Bank of Canada. Additional secured and unsecured creditors of Tax Time remained unpaid.

[2] Prior to the sale, Tax Time had commenced an action against National Trust for $5,000,000 in damages for breach of contract and breach of fiduciary duty. National Trust counterclaimed for $205,293, plus accrued interest, for unpaid loans it had advanced to Tax Time. The litigation was pending at the time of the sale. National Trust had not obtained any security for its loans to Tax Time.

[3] On June 29, 1993, O'Leary J. dismissed Tax Time's claim against National Trust with costs. He awarded National Trust judgment on its counterclaim in the amount of $327,625, which included accrued interest, plus costs. On June 21, 1996, almost five years to the day after the sale in bulk had taken place, Tax Time's appeal to this court in respect of the claim and counterclaim was dismissed with costs. By this time, Tax Time was no longer in business and was unable to pay National Trust's judgment and costs.

[4] On May 20, 1993, while Tax Time's appeal with respect to the National Trust judgment was pending, National Trust commenced this proceeding under s. 17(1) of the Bulk Sales Act in which it seeks two orders. First, it seeks an order declaring the bulk sale of June 28, 1991 void as a result of H & R's non-compliance with s. 4 of the Act. Second, it seeks an order requiring H & R to account to it under s. 16(2) of the Act for the amount which it claimed it was owed by Tax Time as of the date of O'Leary J.'s judgment. The hearing of the application was delayed until the completion of Tax Time's appeal. When it came before Spence J. in October 1997, National Trust claimed that the debt then owing to it by Tax Time was just under $800,000. This amount was comprised of the judgment granted by O'Leary J. which, with post-judgment interest, had grown to $459,124, and the assessed costs of the trial and the appeal which, including interest, amounted to $340,810, for a total alleged debt owing of $799,934 .

[5] At the hearing before the application judge, the parties agreed that the bulk sale did not comply with the Act. The parties also agreed that "the value of the stock in bulk", within the meaning of s. 16(2) of the Act, was $800,000, being the amount that H & R paid to purchase it from Tax Time. The application judge declared the sale to be void, set it aside and ordered H & R to "account to National Trust Company for the value of the stock in bulk which was the subject matter of the Asset Sale by paying" National Trust $740,743.

[6] H & R appeals from this judgment. It asks that the judgment be set aside and that National Trust's application be dismissed. National Trust cross-appeals. It asks that the judgment be varied to $800,000, plus post-judgment interest thereon at 6.1 per cent per annum from February 3, 1997 to November 6, 1997 constituting $36,972, with post-judgment interest on $836,972 from November 7, 1997 at the rate of 5 per cent per annum.

[7] Significantly, there is no suggestion that Tax Time or H & R acted dishonestly. Specifically, Tax Time did not pocket any of the proceeds from the sale to the prejudice of its creditors. Rather, it paid its creditors rateably and in priority to their claims, with the result that it used the entire sale proceeds to pay a portion of the debts owing to its secured creditors. National Trust was an unsecured creditor ranking in priority behind all the secured creditors. Thus, even if H & R had complied with the Act, National Trust would not have received any payment for its debt for the simple reason that the entire amount of the sale proceeds was used to pay creditors that ranked ahead of it. Thus, the critical issue on this appeal is whether s. 16(2) of the Act is meant to be interpreted and applied to require H & R to satisfy Tax Time's indebtedness to National Trust, with the result that National Trust would be in a better position than it would have been had H & R complied with the Act. It is H & R's po sition that s. 16(2) is not meant to be interpreted to effect such a result.

[8] A second issue, raised by H & R in the event that it is unsuccessful on the first issue, is the amount for which it must account to National Trust under s. 16(2). It contends that the proper amount is the amount of the unpaid loans that Tax Time owed to National Trust on the date of the bulk sale, namely, $205,293 plus accrued interest. It submits that the application judge erred by increasing this amount to encompass the sum awarded by O'Leary J., as well as the amount of the costs awarded to National Trust by O'Leary J. and the Court of Appeal.

The Bulk Sales Act

[9] Bulk sales legislation originated in the United States at the turn of the 20th century. These laws were the product of an initiative by creditors to combat commercial fraud, which was prevalent at that time. See: T. Billig, "Bulk Sales Laws: A Study in Economic Adjustment", (1928) 77 U. Pa. L. Rev. 72 at p. 81. The laws were introduced as a direct response to a perceived inadequacy in the traditional common law remedies aimed at deterring fraudulent dispositions of property. See: Law Reform Commission of British Columbia, Report on Bulk Sales Legislation (Vancouver: The Commission, 1983) at p. 4. Bulk sales laws were adopted rapidly in the United States and Canada. By 1922, laws governing sales in bulk were in place in 45 U.S. jurisdictions and in all Canadian provinces. See: Robert M. Forbes, Handbook: Ontario Bulk Sales Act (Burlington: Rapport Publishing Inc., 1990), at p. 1. On the other hand, Great Britain has never found the need to enact bulk sales laws.

[10] In Ontario, the Bulk Sales Act was originally enacted in 1917 (R.S.O. 1917, c. 33). Although the Act was the subject of minor amendments in 1933 (S.O. 1933, c. 4), it was not until 1959 that it was amended significantly and a new Act came into force (S.O. 1959, c. 9). There has been no substantive change to the Act since 1959.

[11] The main change in the legislation in 1959 had to do with the consequences of non-compliance with the Act by the buyer of the stock in bulk, which is the issue in this appeal. What are now s. 16(1) and s. 16(2) were introduced as s. 17 to provide unpaid creditors of the seller with a remedy against the buyer. What is now s. 17(1) of the Act was s. 18 of the 1959 Act.

[12] In recent years, bulk sales legislation has been repealed in Alberta, British Columbia, Saskatchewan, Yukon and the Northwest Territories. The repeal of these statutes follows reports of law reform commissions in those jurisdictions that the goal of protecting creditors, to the extent that it is achieved at all by bulk sales legislation, is realized only at the cost of significant commercial inconvenience, disruption and expense. An additional reason cited for the repeal of bulk sales law is the availability of the general law of fraudulent disposition to protect creditors. See: Law Report Commission of British Columbia, supra, at p. 1; Manitoba Law Reform Commission, Report of the Bulk Sales Act (Winnipeg: The Commission, 1988); Northwest Territories Committee on Law Reform, The Bulk Sales Act (Working Paper No. 3) (Yellowknife: The Committee, 1990); Law Reform Commission of Saskatchewan, The Bulk Sales Act: Report to the Minister of Justice (Saskatoon: The Comm ission, 1990); Alberta Law Reform Institute, The Bulk Sales Act (Edmonton: The Institute, 1990).

[13] From the outset, bulk sales legislation has been judicially recognized as protecting the interests of creditors whose merchant debtors have disposed of most or all of their inventory, chattels and fixtures by which they carry on business. For example, in McLennan v. Fulton (1921), 1921 CanLII 530 (ON CA), 50 O.L.R. 572 at p. 577, 64 D.L.R. 558 (C.A.), Hodgins J. noted that the purpose of the 1917 Ontario Act was "to prevent a person, partnership or company from disposing of his or its assets in bulk and pocketing the money, leaving creditors in the lurch". In Re St. Thomas Cabinets Ltd. (1921), 1921 CanLII 486 (ON SC), 61 D.L.R. 487 at p. 491, 50 O.L.R. 492 at p. 496 (S.C.), Orde J. stated the purpose of the 1917 Ontario legislation as follows:

[T]o protect creditors against the effect of a secret though valid sale of the debtor's stock and the possible unfair distribution or dissipation of the proceeds, the Bulk Sales Act was passed, making it incumbent upon a purchaser under such circumstances to take certain steps to protect the creditors, if any, at the risk of finding his purchase void if he failed to comply.

In Garson v. Canadian Credit Men's Trust Assn., 1929 CanLII 53 (SCC), [1929] S.C.R. 282 at pp. 285-86, [1929] 3 D.L.R. 300, the Supreme Court of Canada declared that the object of Nova Scotia bulk sales legislation was to ". . . prevent a trader from making a sale of his stock-in-trade, goods and merchandise without the consent of his creditors thereto or the payment of their claims".

[14] Under the present scheme in Ontario, a seller may obtain an order under s. 3(1) exempting a sale in bulk from the application of the Act if the court is satisfied "that the sale is advantageous to the seller and will not impair the seller's ability to pay creditors in full". If an exemption order is not obtained, s. 4 requires that the buyer, before paying any part of the sale proceeds other than a ten per cent deposit, obtain a sworn statement from the seller listing "the amount of the indebtedness or liability due, owing, payable or accruing due or to become due or payable" by each of its secured and unsecured trade creditors.

[15] Where the buyer has received the sworn statement referred to in s. 4, the buyer has several options. Under s. 8(1), the buyer may pay the sale proceeds to the seller and acquire the stock in bulk if: (a) the claims of the secured trade creditors and the unsecured trade creditors each do not exceed a total of $2,500; or (b) the seller provides a sworn statement that it has paid in full the claims of both categories of trade creditors; or (c) the seller has made provision for immediate payment of the claims of both categories of trade creditors after the completion of the sale, except for the claim of any creditor that has waived immediate payment of its claim.

[16] Under s. 8(2), the buyer may pay the sale proceeds to the seller and acquire the stock in bulk if the seller delivers to the buyer: (a) the consent of unsecured trade creditors "representing not less than 60 per cent in number and amount of the claims that exceed $50 of all the unsecured trade creditors"; and (b) an affidavit deposing that the seller has delivered to its secured and unsecured trade creditors the statement referred to in s. 4. Where a sale in bulk is completed under s. 8(2), ss. 9 and 10 require that a trustee be appointed to receive the sale proceeds. The trustee is required to distribute the proceeds pursuant to s. 12(1), which reads as follows:

12(1) Where the proceeds of the sale are paid or delivered to a trustee under section 10, the trustee is a trustee for the general benefit of the creditors of the seller and shall distribute the proceeds of the sale among the creditors of the seller, and, in making the distribution, all creditors' claims shall be proved in like manner and are subject to like contestation before a judge and . . . are entitled to like priorities as in the case of a distribution under the Bankruptcy Act (Canada), as amended or re-enacted from time to time, and shall be determined as of the date of the completion of the sale.

Thus, s. 12(1) contains a body of priority rules to resolve conflicts between secured and unsecured creditors of the seller that might arise in the distribution of the sale proceeds.

[17] Sections 16 and 17(1) have particular application to this appeal. These sections provide:

16(1) A sale in bulk is voidable unless the buyer has complied with this Act.

(2) If a sale in bulk has been set aside or declared void and the buyer has received or taken possession of the stock in bulk, the buyer is personally liable to account to the creditors of the seller for the value thereof, including all money, security and property realized or taken by the buyer from, out of, or on account of, the sale or other disposition by the buyer of the stock in bulk.

17(1) An action or proceeding to set aside or have declared void a sale in bulk may be brought or taken by a creditor of the seller, and, if the seller is adjudged bankrupt, by the trustee of the seller's estate.

The Facts

[18] Although I briefly outlined the facts in the introduction, it is helpful to review the evidence that was before the application judge pertaining to the financial situation of Tax Time at the time of the sale and to the distribution of the sale proceeds to its creditors.

[19] Tax Time's unaudited financial statements as of January 31, 1990 and May 31, 1991 revealed that as the company continued to carry on business it was losing money and its indebtedness to its creditors was increasing. In particular, the financial statements as of May 31, 1991 showed liabilities of $1,398,858, assets of $812,908 and a negative owner's equity of ($585,950). According to Tax Time's owner, as of May 31, 1991 the company owed its secured creditors in excess of $3,500,000.

[20] On the date of the bulk sale, all of Tax Time's assets were standing as security for various loans made to it by a number of financial institutions including the Royal Bank, First City, National Bank of Canada, Norex Leasing, Federal Business Development Bank and the Bank of Nova Scotia. All of these financial institutions released their respective security interests in the assets purchased by H & R to enable the bulk sale to take place, but maintained their security interests in all of Tax Time's remaining assets. The entire sale proceeds were distributed to two of the secured creditors in order to obtain their releases.

[21] Of the $800,000 paid by H & R for the stock in bulk, $424,920.78 was paid to First City. The balance of $375,079.22 was paid to the Royal Bank, leaving in excess of $590,000 owing to the bank on account of Tax Time's operating loan. It would appear to be common ground between the parties that the sale proceeds were distributed in accordance with s. 12(1) of the Act.

[22] In addition to its obligations to its secured creditors, at the approximate date of the completion of the bulk sale, Tax Time owed 35 unsecured creditors, excluding National Trust, $100,158.

[23] Assuming that H & R had complied with the Act or that the bulk sale had received judicial exemption from compliance with the Act, and assuming that National Trust was either a creditor of Tax Time within the meaning of the Act or a judgment creditor of Tax Time, it would not have participated in the distribution of the sale proceeds at the date of the bulk sale. Nor would National Trust have participated in the distribution of any proceeds had Tax Time been forced into bankruptcy at the time of the bulk sale to H & R. This is because Tax Time's liabilities substantially exceeded its assets, and what assets it had were pledged as security to creditors with priority over National Trust. Moreover, had H & R complied with the Act and a trustee been appointed under s. 9(1) to receive the sale proceeds, the same result would also have followed on the trustee's distribution of the sale proceeds under s. 12(1). That is, no proceeds of the bulk sale would have been distributed to National Trust. The proceeds we re paid as they should have been notwithstanding defective compliance with the Act. Thus National Trust suffered no loss as a consequence of H & R's failure to complete the bulk sale as required by the Act.

[24] Subsequent to Tax Time's unsuccessful appeal from the judgment of O'Leary J., National Trust's costs were assessed as follows:

(a) For the unsuccessful defence of Tax Time's claim -- $169,388.10 with interest of 10 per cent per annum from January 31, 1993.

(b) For its successful counterclaim against Tax Time and its president, Haynes -- $47,984.94 with interest of 10 per cent per annum from January 31, 1993.

(c) For its successful appeal -- $35,000 with interest of 7 per cent per annum from June 21, 1996.

[25] Following the judgment, the appeal and the assessment of its costs, National Trust took the position before the application judge that under s. 16(2) of the Act, H & R was required to pay it $836,972.84, calculated as follows:

Judgment against Tax Time -

January 29, 1993 $327.625.59

Interest at 10 per cent per annum from January 29, 1993 to February 2, 1997 131,449.04 $459,124.63

Costs of the main action 169,388.10

Interest at 10 per cent from January 29, 1993 to February 2, 1997 67,894.47 237,282.57

Costs of the counterclaim 47,984.94

Interest at 10 per cent from January 29, 1993 to February 2, 1997 19,233.41 67,218.35

Costs of the appeal 35,000.00

Interest at 7 per cent from June 21, 1996 to February 2, 1997 1,315.16 36,315.16

Total judgment with interest and costs to February 2, 1997 $799,940.71

The judgment interest at 6.1 per cent per annum on $799,940.71 from February 3, 1997 to date of judgment, November 6, 1997 37,032.13

$836,972.84

[26] There is no coherent body of evidence concerning the nature of Tax Time's indebtedness to National Trust. However, I have developed an understanding of it from the following sources: the affidavit of Greg Jackson, who was a vice- president of National Trust in May 1993; the May 29, 1990 auditors' report prepared by Tax Time's chartered accountants; the pleadings in the action between Tax Time and National Trust that was commenced on December 21, 1987; and the reasons for judgment of O'Leary J. in that action.

[27] From 1984 to 1987, National Trust provided financing for Tax Time, particularly for Tax Time's lucrative business of discounting income tax refunds, known as its Income Tax Refund Discounting Program. From time to time, National Trust provided advances to Tax Time to operate this program. However, in 1987, apparently as a result of its contract dispute with National Trust, Tax Time stopped paying interest on the advances. Consequently, when Tax Time commenced its breach of contract action in December 1987, National asserted a counterclaim for $205,293.78 plus interest. No particulars were provided in the counterclaim respecting the calculation of this sum, except for the following:

13. As a result of advances made to Tax Time by National Trust Company and its predecessors, V & G, Tax Time is indebted to it in the principal amount of $205,293.78 on account of advances made to Tax Time together with interest thereon at the rate of 11.75 [per cent] per annum from December 15, 1987 until payment. As evidence of the said indebtedness Tax Time made the following promissory notes in favour of the defendant or its predecessor V&G.

[28] The counterclaim lists 23 demand promissory notes totalling $320,383.96 from December 15, 1986 to November 16, 1987, and goes on to plead that a demand was made for payment of the promissory notes on January 19, 1988, which was subsequent to the commencement of Tax Time's action. In its defence to the counterclaim, Tax Time denied that there had been a demand for payment and asserted, as a result of National Trust's breach of contract, that it was relieved from paying the amount claimed.

[29] In allowing National Trust's counterclaim, O'Leary J.'s reasons for judgment are brief. The substantial portion of his reasons relate to the dismissal of Tax Time's claim. He described the counterclaim as being "for an amount owing by [Tax Time] in regard to [its] tax rebate business", to which he could see no defence. Without providing any further analysis of the nature of National Trust's counterclaim, O'Leary J. concluded:

Accordingly, then, the counterclaim succeeds against Tax Time for the amounts claimed against it. That claim, with interest until today, amounts to $327,625.59.

[30] Some assistance regarding the nature of the claim is found in Tax Time's audited financial statements as of January 31, 1990, prepared by the accounting firm Schwartz Levitsky Feldman, showing bank loans of $765,286. The components of the bank loans are described in note 3 to the financial statements as an outstanding loan from the Royal Bank for $559,993 and "demand notes" payable to National Trust totalling $205,293, bearing interest at rates varying from 10.75 per cent to 11.75 per cent. With respect to the $205,293, note 3 states:

As a result of the litigation referred to in note 7 the company has ceased paying interest on the National Trust Company demand notes effective December 15, 1987. Interest from that date has not been accrued in these financial statements.

As for the "litigation" referred to in note 7, that note states:

Contingent Claim

On December 21, 1987, the company instituted legal proceedings against National Trust Company for breach of contract, claiming $5,000,000 in general damages and $5,000,000 in special damages. National Trust Company has counterclaimed for amounts owing to it as described in note 3. Legal counsel for Tax Time Services Limited are of the opinion that the damages to be recovered will likely be greater than National Trust Company's counterclaim. Therefore, the amount disclosed as a liability to National Trust Company in note 3 may never be paid. Any settlement resulting from the resolution of this contingency is expected to be accounted for as an extraordinary item.

Reasons of the Application Judge

[31] The application judge declared the June 28, 1991 bulk sale to be void and ordered that it be set aside. He further ordered that "H & R Block shall account to National Trust Company for the value of the stock in bulk that was the subject matter of the Asset Sale by paying to National Trust Company the sum of $740,743.13."

[32] The reasons of the application judge are brief. They were delivered at the conclusion of the hearing, with supplementary reasons provided on January 28, 1999 concerning the amount of compensation which National Trust claimed it was entitled to recover from H & R. After the hearing, National Trust asked the application judge to vary his judgment by increasing the amount he had ordered H & R to pay it to $843,369.88. It is in respect to the application judge's refusal to do so that National Trust cross-appeals.

[33] The application judge held that given H & R's failure to comply with s. 4 of the Act, Tax Time's payment of the entire sale proceeds to the secured creditors was not a sufficient reason to refuse to void the sale. In granting the declaration that the sale was void, he stated:

Since there was no compliance, the sale is voidable under s. 16(1). The fact that the proceeds were paid to secured creditors is not a sufficient reason not to void the sale. If it were, the Act would provide little protection to unsecured creditors. The only question left, as to the effect of the payments to the secured creditors, is whether they constitute the accounting required by s. 16(2), which is applicable because the sale must be declared void for purposes of the Act by reason of s. 16(1).

[34] The application judge concluded that Tax Time's payment of the entire sale proceeds to two of its secured creditors did not constitute the accounting to the seller's creditors required by s. 16(2). In doing so, he distinguished the facts of this case from three decisions cited by H & R as standing for the proposition that in accounting to National Trust for the value of the stock in bulk under s. 16(2), a "credit" should be given for the payments made to Tax Time's secured creditors: Chicopee Food Market Ltd. v. Knechtel Corp. (1992), 8 B.L.R. (2d) 81, 17 C.B.R. (3d) 42 (Ont. Gen. Div.); Garson v. Canadian Credit Men's Trust Association, supra; and Motorsource Inc. v. A.O. Smith Corp. (1993), 1993 ABCA 10, 8 Alta. L.R. (3d) 1 (C.A.).

[35] After disposing of the issue of the credit, the application judge held that "H & R Block has a duty to account to the creditors of the seller for the value of the stock in bulk purchased from the seller." He concluded that "the obligation to account under s. 16(2) arises at the time the sale is declared void and the amount of the debt [from Tax Time to National Trust] should be determined as at that time, which would include here any interest accrued and costs payable [pursuant to the judgment of O'Leary J. and the order of the Court of Appeal]" (emphasis added). No reasons were provided for this conclusion.

[36] As I indicated earlier, the parties agreed that the value of the stock in bulk was the same as the amount paid by H & R to purchase it, namely, $800,000. Accordingly, the application judge ordered H & R to account to National Trust for the value of the stock in bulk that it purchased from Tax Time by paying $740,743.13 to National Trust.

[37] It is unclear from the application judge's reasons or from the formal order how he arrived at the amount of $740,743.13. It appears that an explanation can be found in the application judge's supplementary endorsement of January 28, 1999, in which he gave effect to the calculation submitted by H & R. This calculation differs in two respects from National Trust's calculation, which is set out in para. 22 of that endorsement. The first difference is the application of a lower interest rate to the amount of the judgment and costs than the rate advanced by National Trust. The second difference is that the application judge's calculation does not include any amount for pre-judgment interest on the total amount of the judgment and costs from February 3, 1997 to November 6, 1997.

[38] Further, there appears to be an inconsistency in the reasons of the application judge with respect to the point in time that the calculation of the amount of Tax Time's debt to National Trust is to be made. In the reasons given at the conclusion of the hearing on November 6, 1997, he stated that the calculation was to be made as of the time the sale in bulk was declared void. However, in his supplementary reasons of January 28, 1999, he stated that National Trust was entitled to compensation from H & R "for an amount up to the debt owing by Tax Time [to National Trust] at the time of the improper sale in bulk" (emphasis added), plus National Trust's costs of obtaining judgment for that debt, and interest at an appropriate rate.

The Issues

[39] As I indicated earlier, there are two issues on this appeal:

(i) Given that Tax Time paid the entire proceeds of the bulk sale to secured creditors ranking in priority to its unsecured creditors at the date of the bulk sale, and given that National Trust was an unsecured creditor, has H & R accounted to National Trust for the value of the stock in bulk that it received from Tax Time within the meaning of s. 16(2) of the Bulk Sales Act?

(ii) If the first issue is answered in the negative, for what amount is H & R required to account to National Trust?

[40] I would observe that no issue was raised before the application judge or before this court as to whether, on the date of the bulk sale, National Trust was a creditor of Tax Time within the meaning of s. 17(1) of the Act, thereby giving National Trust standing to attack the bulk sale. Although this question causes me concern, I decline to address it given the position of the parties. See: Re St. Thomas Cabinets, supra; Bank of Montreal v. Ideal Knitting Mills Ltd. (1924), 1914 CanLII 548 (ON CA), 55 O.L.R. 410, [1924] 4 D.L.R. 429 (C.A.); Pizzolati & Chittaro Manufacturing Co. v. May, 1972 CanLII 355 (ON CA), [1972] 2 O.R. 606, 26 D.L.R. (3d) 274 (C.A.).

[41] I feel bound, as well, to indicate that I have an additional concern arising from the application judge's s. 16 declaration that the bulk sale was void and his order that it be set aside. My concern relates to the effect of the application judge's decision on the title to the property that H & R purchased from Tax Time. However, I do not address this concern as it was not argued before either the application judge or this court.

Analysis

[42] In the view that I hold of this appeal I find that I need consider only the application of s. 16(2) to the circumstances of this appeal. I do so on the basis of the following assumptions. First, on June 28, 1991, the date on which Tax Time sold its assets to H & R, National Trust had an unsecured debt due to it from Tax Time. As will become apparent, the amount of the debt is irrelevant. Second, for the purpose of the application and this appeal, that the value of the stock in bulk for the purpose of s. 16(2) is $800,000. This assumption is consistent with the agreement of the parties. Third, that Tax Time paid the entire sale proceeds to two of its secured creditors.

[43] For convenience, I repeat s. 16(2):

16(2) If a sale in bulk has been set aside or declared void and the buyer has received or taken possession of the stock in bulk, the buyer is personally liable to account to the creditors of the seller for the value thereof, including all money, security and property realized or taken by the buyer from, out of, or on account of, the sale or other disposition by the buyer of the stock in bulk.

(Emphasis added)

[44] Although there are cases in which this court has made reference to s. 16(2), this appears to be the first occasion on which the court has been called upon to interpret and apply that provision. See: Busuttil v. Diamond T. Trucks (Toronto) Ltd., 1968 CanLII 276 (ON CA), [1969] 1 O.R. 245, 2 D.L.R. (3d) 167 (C.A.); Sidaplex- Plastic Suppliers Inc. v. Elta Group Inc. (1998), 1998 CanLII 5847 (ON CA), 40 O.R. (3d) 563, 162 D.L.R. (4th) 367 (C.A.).

[45] As I have pointed out, the major change in the Bulk Sales Act as a result of its 1959 overhaul was the consequence arising from non-compliance with the Act. Under the former legislation, the only penalty imposed on a buyer for non- compliance was to render the transaction liable to be declared void as against the seller's creditors if it was attacked within the statutory limitation period. This required the creditors to have to resort to the various statutes dealing with fraudulent transfers in order to recover their debts, as described by the Supreme Court of Canada in Garson, supra, at p. 285 S.C.R. et seq. This remedy usually proved ineffectual, as the subject matter of the sale was often dissipated before proceedings were brought. See: F. Catzman, "Bulk Sales in Ontario", (1960) 3 Can. Bar J. 28 at p. 39.

[46] The introduction of then s. 17 in the 1959 Act (now s. 16) eliminated the cumbersome, and generally ineffective, remedies available to creditors. It did so by introducing an alternative remedy to execution against the buyer's property. Section 17 was designed to provide creditors with recourse to a legislated remedy -- an accounting by the buyer of the value of the bulk goods, as well as personal judgment against the buyer for the value thereof. As such, it provided additional protection for trade creditors by imposing a form of penalty against buyers who failed to conform to the requirements of the Act, thereby acting as an incentive for compliance.

[47] In my view, there are a number of factors to be taken into account in interpreting and applying s. 16(2) of the present Act. First, the section should be interpreted having regard to the purpose of the Act. Second, regard is to be had to s. 12(1) of the Act, which provides that when the sale proceeds are paid to a trustee, "the trustee is a trustee for the general benefit of the creditors of the seller and shall distribute the proceeds among the creditors of the seller . . . [who] are entitled to like priorities as in the case of a distribution under the Bankruptcy Act (Canada), as amended or re-enacted from time to time, and shall be determined as of the date of the completion of the sale". See: Busuttil, supra, at p. 253 O.R. Third, a proceeding to have a bulk sale declared void is "in the nature of a representative action for the benefit of all of the creditors". See: Sidaplex-Plastic, supra, at p. 573 O.R. Fourth, the term "liable to account" is to be interpreted according to its ordinary meaning, as an equitable decree for an accounting.

[48] With regard to the first factor, I have already discussed the purpose of bulk sales legislation, which is to ensure that the creditors of a seller receive their rateable share of the proceeds of a sale in bulk, and are therefore not prejudiced by the sale. Those proceeds are to be used to pay only those creditors who were creditors of the seller at the time of the bulk sale. See: Re St. Thomas Cabinets, supra; Bank of Montreal, supra.

[49] With regard to the second and third factors, it is necessary to note by incorporating the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 12(1) provides for the pro rata distribution of the sale proceeds. Although the scheme of distribution under that Act is somewhat complex, it is clear from s. 136(1) that secured creditors rank in priority to all other creditors. In considering the application of s. 16(2) in Busuttil, supra, Kelly J.A. stated at p. 253 O.R.:

Accordingly, the value of the stock in bulk found due by [the buyer] to [the seller] should be dealt with in the same manner as the purchase price of the stock would have been, if the sale of the same had been conducted in compliance with the requirements of the Act.

[50] I come now to the fourth factor, which is the remedy provided to a seller's creditors by s. 16(2). In my view, where there has been non-compliance with the Act and the sale has been declared void, and where the buyer has received or taken possession of the stock in bulk that is the subject of the sale, s. 16(2) provides a creditor with an action against the buyer for an accounting of the value of the stock in bulk. In keeping with the well-accepted nature of an equitable action for an accounting, the buyer is required to provide an account of all money it paid for the stock in bulk and its disbursement by the seller. If the seller has disbursed the proceeds in a manner that has resulted in any creditor not having been paid its full or pro rata share, then the buyer must personally pay creditors their full, or rateable, share of the proceeds, up to the value of the stock in bulk. I find support for this interpretation in Wiebe v. Holmes, 1971 CanLII 1293 (MB QB), [1971] 4 W.W.R. 588 (Man. Q.B.) and Thomson v. Richardson (1967), 1967 CanLII 512 (AB SCAD), 61 D.L.R. (2d) 162, 58 W.W.R. 743 (Alta. C.A.) which considered provisions similar to s. 16(2) in s. 10(2) of the Bulk Sales Act, R.S.M. 1954, c. 30 and s. 10(2) of the Bulk Sales Act, R.S.A. 1955, c. 33 respectively. In Thomson, Allen J.A., at p. 171 D.L.R., clearly considered the remedy provided by s. 10(2) of the Alberta Act, which is virtually identical to s. 16(2), to be an "action for an accounting".

[51] I find further support for this interpretation in Garson, supra, and Chicopee, supra, upon which H & R relied before the motion judge and this court, and which the motion judge did not apply on the ground that they are distinguishable from the circumstances of this case.

[52] In Garson, the Supreme Court of Canada considered early Nova Scotia bulk sales legislation that provided that where a purchaser fails to complete a bulk sale in accordance with the Bulk Sales Act, R.S.N.S. 1923, c. 202, the sale "shall be deemed to be fraudulent and shall be absolutely void against the creditors", a provision similar to s. 3 of the Bulk Sales Act, R.S.O. 1950, c. 42. The Supreme Court concluded that in such circumstances a creditor was entitled to obtain a remedy from the buyer through the application of the general law relating to fraudulent transactions. As stated in the headnote to the case [at pp. 282-83 S.C.R.]:

The creation in the Bulk Sales Act of a presumption of fraud on the part of both purchaser and vendor as against the vendor's creditors, indicates a legislative intention to put a sale in bulk made without compliance with that Act in the same category as sales made with an intention to defraud the vendor's creditors. This presumption of fraud has the effect of bringing into play all other statutes passed for the protection of creditors against a fraudulent sale of his goods by a debtor to the prejudice of his creditors, and the right to recover from a fraudulent transferee the proceeds of goods coming into his possession by an invalid transfer, and resold by him, is given by s. 21(1) of the Assignments Act (R.S.N.S. (1928), c. 200).

The Supreme Court of Canada held that the trustee in bankruptcy, on behalf of the creditors of the seller, was entitled to have the purchasers account for the $2,000 received by them on the resale of the goods purchased from the seller.

[53] In Chicopee, Granger J. was required to apply s. 16(2) of the present Ontario Act on an application by a seller's trustee in bankruptcy to have the sale of equipment and inventory declared void as contravening the Act and to recover the proceeds of the sale. The buyer agreed to purchase the seller's equipment and inventory for $576,270, but failed to comply with the Act. It then sold the property and paid the bank, which was a secured creditor of the seller, $289,292 to satisfy its security interest. It also paid $10,326 to other creditors. Thereafter, the seller made an assignment in bankruptcy, at which time it owed $104,000 to secured creditors and $391,094 to unsecured creditors.

[54] Granger J. set aside the sale and declared it void as a result of the buyer's failure to comply with the Act and held that the buyer was required by s. 16(2) to account to the trustee in bankruptcy for the purchase price of $576,270. However, as the buyer had paid $299,618 to some of the seller's creditors, he ordered that it pay the balance of $276,652 to the trustee in bankruptcy for distribution to the seller's secured and unsecured creditors. Thus, in accounting to the seller's creditors for the value of the goods purchased, the purchaser was entitled to receive "credit" for the amounts that it paid to the seller's creditors, utilizing a portion of the sale proceeds to do so.

[55] In my view, Chicopee illustrates what is to occur on a s. 16(2) accounting. In conducting an accounting, the court is to give effect to payments properly made from the proceeds of the sale to the seller's creditors. There is an obvious similarity between the facts of Chicopee and the facts of this case. Whereas in Chicopee only part of the sale proceeds was paid to creditors of the seller, in this case the entire sale proceeds were paid to the creditors of the seller, which, as I have explained, were creditors ranking in priority to National Trust.

[56] Given that the sale proceeds are required to be distributed to the seller's creditors rateably, and that the proceeds were distributed entirely to two secured creditors which ranked in priority to National Trust, an unsecured creditor, the result of an action for an accounting is obvious in this case. In demonstrating, as it did before the application judge, that Tax Time used the entire proceeds of the bulk sale to pay debts which Tax Time owed to secured creditors that ranked in priority to National Trust, H & R provided a satisfactory explanation, or accounting, to Tax Time's creditors of the distribution of the agreed upon value of the stock in bulk. Tax Time engaged in no improper conduct in its disbursement of the sale proceeds. There is no suggestion that the bulk sale was designed to prefer or to defeat Tax Time's creditors. There was no misuse of the sale proceeds. Given the following facts, no creditor of Tax Time, secured or unsecured, was "left in the lurch" notwithstanding H & R's failure to comply with the Act: (1) the sale proceeds were $800,000; (2) Tax Time's indebtedness to secured creditors exceeded that amount; (3) the entire sale proceeds were paid to two secured creditors that ranked in priority to the remaining secured creditors and all the unsecured creditors.

[57] Even if H & R had complied with the Act, because National Trust was an unsecured creditor ranking behind the secured creditors it would have been entitled to be paid nothing. Nobody was unjustly enriched at the expense of National Trust; there was no misuse of the sale proceeds. In my view, National Trust has not demonstrated that it was prejudiced because of H & R's failure to complete the sale in compliance with the Act. Therefore, no remedy is available to National Trust under s. 16(2).

[58] National Trust submits that s. 16(2) imposes a penalty on a buyer who completes a bulk sale without complying with the Act. The penalty is that the buyer must pay the seller's creditor the unpaid amount of its indebtedness, up to the amount of the value of the stock in bulk that was the subject of the sale. It submits that this penalty applies regardless of whether the creditor would not have been entitled to share in the sale proceeds had there been compliance with the Act.

[59] I disagree with National Trust's submission, the essence of which is that the legislature intended to constitute a buyer the guarantor of a seller's indebtedness regardless of whether the sale proceeds, within the scheme of distribution provided by the Act, prove to be insufficient to pay the indebtedness. Had this been the legislature's intention, it would have said so in express language. Rather, the legislature chose to adopt the language of the equitable remedy of an accounting.

[60] Examples are many whereby equity decrees that there be an accounting. See: John McGhee, Snell's Equity, 30th ed. (London: Sweet & Maxwell, 2000), at p. 705 et seq. Perhaps the most common example of an accounting in equity is a proceeding brought by the beneficiaries of an estate against the estate trustee to account for funds held in trust on their behalf. In such a proceeding, the trustee is required to explain his or her dealing with the trust funds. If it is found that the trustee misused or misapplied the funds, the trustee must account to the beneficiaries by paying them the amount that was misused or misapplied. The absence of any wrongdoing by the trustee, or misuse of the trust funds, is a defence to a suit for an accounting.

[61] Thus, in an action for an accounting under s. 16(2), the buyer of the stock in bulk is put in the position of a trustee required to account to the seller's creditors for the seller's distribution of the sale proceeds. If the buyer can demonstrate, as H & R has done in this case, that the seller did not misuse the sale proceeds, then the creditor is not entitled to a remedy. If, however, the result of the accounting is that the seller misused all or part of the sale proceeds, the buyer must account to the creditors rateably for the amount misused, up to the value of the stock in bulk, by paying them accordingly. To state it somewhat differently, the issue to be determined under s. 16(2) is whether, as a result of the buyer's failure to comply with the Act, any creditor was deprived of any money that it would have been paid but for the non-compliance. Cf., Garson, supra, at p. 288 S.C.R.

[62] In support of its submission that s. 16(2) imposes a penalty, National Trust points to s. 8(2)(a) of the Act and states that had there been compliance with s. 4 it was in a position to deny consent to the completion of the sale because its claim of $205,293 exceeded 60 per cent of the total claims of the other unsecured trade creditors, which amounted to $100,158. It is difficult to understand how this advances National Trust's submission that the purpose of s. 16(2) is to penalize a buyer who does not comply with the Act. While it is easy for National Trust to say with the benefit of hindsight ten years after the sale that it would have blocked it had H & R complied with the Act, I have great difficulty in giving any weight to this submission as it does not accord with the commercial reality of the situation as it existed in June 1991. Given the failing nature of Tax Time's business at that time, it is reasonable to infer that by blocking the sale National Trust would not have improved its position. The likelihood is that if Tax Time had not sold its assets to H & R it would have ceased business, or been placed in bankruptcy. National Trust would have been no better off in such circumstances. I do not see what effect on the remedy provided by s. 16(2) follows from the speculation that National Trust might have blocked the sale if H & R had complied with the Act. In any event, it is too late to speculate what position National Trust might have taken under s. 8.

[63] In this case, National Trust suffered no deprivation as a result of H & R's failure to comply with the Act. Because it would not have been entitled to any payment had the sale been completed in compliance with the Act, it was not deprived of any money it was entitled to receive on a rateable distribution of the proceeds. Therefore, National Trust is not entitled to a remedy. In my view, any other result would be to apply s. 16(2) in a punitive manner. The legislature did not intend that where there has been non-compliance with the Act and the buyer has accounted for the distribution of the sale proceeds, a creditor be in a better position than it would have been had there been compliance with the Act.

[64] In my view, there is another analysis which supports my interpretation of s. 16(2). Although s. 7 enables a creditor who acquires knowledge of an intended bulk sale to demand of the seller written particulars of the sale, there appears to be no provision in the Act that requires a seller to give notice of an intended sale to its creditors. Although under s. 3(2) a judge may order that creditors receive notice of an application to exempt a sale from compliance with the Act, experience suggests that this is rarely required. It is only where under s. 8(2)(a), a buyer wishes to obtain the consent of the seller's unsecured trade creditors to a sale, that the buyer must give these creditors a copy of a statement of the seller's creditors. Where the creditors' consent to the sale is obtained, the sale must be completed by a trustee as required by s. 9(1). The trustee is governed by s. 12(1) in distributing the proceeds of the sale. As I have explained, s. 12(1) contains a body of priority rules to ensure that there be evenhandedness in distributing the sale proceeds to the seller's creditors. Thus, unsecured creditors' interests in the sale proceeds may be diluted or frustrated altogether, depending upon the circumstances.

[65] The Supreme Court of Canada judgment in Garson, supra, illustrates that bulk sales law is a particular form of the general fraudulent disposition and preference law. The evenhandedness norm illustrates the affinity between fraudulent disposition and bulk sales laws. In Ontario, this can be seen by the combined effect of the Assignments and Preferences Act, R.S.O. 1990, c. A.33, the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29, and the Creditors' Relief Act, R.S.O. 1990, c. C.45 upon the distribution of the proceeds of a judgment obtained under the first two Acts among the creditors of a debtor that has dealt fraudulently in the disposition of its property to the prejudice of its creditors. The goal of the Creditors' Relief Act is to require a judgment creditor to share the proceeds of an execution pari passu with other unsecured creditors. However, secured creditors, and in many cases creditors preferred by other statutes or by the common law, retain their special ranking. See C.R.B. Dunlop, Creditor- Debtor Law in Canada, 2nd ed. (Toronto: Carswell, 1995) at p. 545 et seq.

[66] As I have pointed out, a similar distribution of the proceeds of a bulk sale among the seller's creditors on the basis of the priority of their debts is required by s. 12(1) of the Bulk Sales Act. As an application by a creditor under s. 17(1) of the Act to have a bulk sale declared void and for a remedy under s. 16(2) is in the nature of a representative action for the benefit of all of a seller's creditors, the schemes of distribution under s. 12(1) and the Creditors' Relief Act necessarily apply to an accounting ordered under s. 16(2). Thus, just as a transferee's return of the fraudulently or preferentially transferred assets to the debtor or its creditors may not compensate the creditors to the full amount of their loss, the accounting under s. 16(2) may be inadequate to fully compensate a seller's creditors for the loss resulting from a sale that has been completed without compliance with the Bulk Sales Act.

[67] Thus, a buyer is liable to account to a creditor only for any amount that the creditor would not have realized if the buyer had complied with the Act. The cumulative liability of the buyer to the seller's creditors may not exceed an amount equal to the value at the date of the sale of what was purchased, which amount is reduced by any amount paid to a creditor whose claims rank in priority to the claims of those creditors applying under s. 17(1) for a remedy under s. 16(2).

[68] In summary, under s. 16(2) the buyer occupies the status of a receiver, holding the stock in bulk and its proceeds for the benefit of the seller's creditors and having a duty to account therefor. The buyer has the burden to prove that compliance with the Act would not have produced any recovery, or any additional recovery, for the complaining creditor. If the buyer, in accounting for the distribution of the sale proceeds, can demonstrate that the seller distributed the sale proceeds rateably among its creditors, the buyer will not be required to assume any liability. Otherwise, s. 16(2) imposes a liability on the buyer limited to the value of the stock in bulk. In a sense, s. 16(2) may be viewed as draconian, as it may force a buyer who has failed to comply with the Act to pay twice for the property that it purchased. This is the risk that a buyer takes when it ignores the requirements of the Act. However, by incorporating the equitable remedy of an accounting as the mechanism for determining a buyer's liability, together with the scheme of rateable distribution of the sale proceeds contained in federal bankruptcy legislation, as well as placing a limit on the buyer's liability, the legislature has exhibited its intention that there be a significant degree of fairness to the operation of s. 16(2) and that unconscionable results in its application be avoided. In my view, it was not the legislature's intention that s. 16(2) be applied to enable a creditor, where there has been non-compliance with the Act, to be in a better position than it would have been had there been compliance.

[69] For the foregoing reasons, I would give effect to this ground of appeal. Consequently, it is unnecessary to deal with the second issue raised by this appeal.

Conclusion

[70] I would allow the appeal, set aside the order of the application judge and dismiss the application with costs of the application and the appeal. Because of this result, it is unnecessary to consider National Trust's cross-appeal, which is dismissed with costs.

[71] MACPHERSON J.A. M(CMURTRY C.J.O. concurring): -- I have had the opportunity to consider the reasons prepared by my colleague, Borins J.A. With respect, I do not agree with those reasons. Because Borins J.A. has fully set out the factual background and the relevant statutory provisions, I can state my reasons for disagreement in a fairly brief fashion.

(1) Accounting

[72] When Tax Time received the sale price of $800,000 from H & R, it paid the entire amount to the two secured creditors with the first and second ranking priorities. H & R took the position that this was an appropriate accounting within the meaning of s. 16(2) of the Act and that, accordingly, no other creditors could attack the sale even though there was no compliance with the Act.

[73] Spence J. responded to this argument as follows:

One defence is that the proceeds of sale were paid to secured creditors of Tax Time on account of debts owing and payable to them. The Bulk Sales Act provides for exemptions under s. 3. No exemption was requested. Whether an exemption could have been obtained seems to me a matter that is now too late to speculate about. I doubt it would have been granted if it would have put the unsecured creditors (for whose protection the Act is designed to operate) in worse position than compliance with the Act would have yielded. The compliance scheme starts with s. 4. No statement was delivered under s. 4 so the provisions of the Act which are engaged only when s. 4 has been satisfied have no application. Those provisions include s. 8, s. 9, s. 10 and s. 12. S. 12 contemplates in effect payment to the secured creditors first, but it has no application because s. 4 was not complied with. Indeed, if not all creditors' claims could have been satisfied in full, s. 8(2) would also have been applicable and whether the consent required by s. 8(2)(a) would have been given cannot be known.

[74] In my view, this reasoning and conclusion are impeccable. The purpose of the Act is to protect all creditors, including unsecured creditors. That is achieved in one of two ways, either full payment to all creditors (s. 3) or less than full payment, but coupled with a detailed procedure for giving creditors, including unsecured creditors, an opportunity to state their position on the proposed sale (ss. 4, 7, 8, 9, 10, 11 and 12).

[75] It is common ground that National Trust received no payment, let alone full payment, as a result of the bulk sale between Tax Time and H & R. My colleague does not regard this as important because, as he puts it, "even if H & R had complied with the Act, National Trust would not have received any payment for its debt for the simple reason that the entire amount of the sale proceeds were used to pay creditors that ranked ahead of it."

[76] With respect, this presumes that there was only one conclusion a judge could have made if H & R had complied with the Act. Unfortunately, H & R's calculated decision not to comply with the Act meant that all creditors, including National Trust, were deprived of their statutory right to contest the sale. If National Trust had been accorded this right, it might have said several things to a judge called upon to decide whether to approve the sale. It might have submitted that the price was too low. Alternatively, National Trust could have pointed out that Tax Time was retaining some of its assets; it could have submitted to the judge that more of Tax Time's assets should be included in the sale, thus raising the sale price and the proceeds available for distribution to creditors. Yet another potential submission to the judge might have been that the sale should not proceed at that time without exploring other options that would take better account of the interests of unsecured creditors, including, perhaps, the payment of at least some of the debts of unsecured creditors out of the assets Tax Time was retaining.

[77] Of course, the judge hearing the application under the Act might have rejected National Trust's arguments and concluded that the sale should proceed, that $800,000 was a fair price and that the proceeds should be distributed to the two secured creditors. The point is, however, as the application judge observed, that this is "a matter that is now too late to speculate about". In the context of blatant non- compliance with the Act by H & R and Tax Time, a unilateral decision by Tax Time of how to distribute the proceeds of the sale is not a proper accounting for the value of the stock in bulk.

[78] In light of my conclusion on the accounting issue, it is necessary for me to consider the other issues raised by the appeal and cross-appeal.

(2) Post-Sale Debt

[79] After the bulk sale between H & R and Tax Time took place in June 1991, litigation involving Tax Time and National Trust continued. The result of that litigation was the dismissal of Tax Time's $20,000,000 claim against National Trust and acceptance of National Trust's counterclaim relating to the $205,000 debt. Tax Time's appeal of O'Leary J.'s judgment relating to this debt was dismissed by this court on June 21, 1996, five years after the completion of the bulk sale.

[80] The application judge held that H & R's accounting should include not only payment to National Trust of the $205,000 debt and interest thereon, but also the costs of the litigation between National Trust and Tax Time which resulted in judicial confirmation of the debt and interest thereon. The application judge said:

It appears to me that the obligation to account under s. 16(2) arises at the time the sale is declared void and the amount of the debt should accordingly be determined at that time, which would include here any interest accrued and costs payable.

[81] I agree with the application judge that H & R is liable to National Trust for the $205,000 debt plus interest on that amount.

[82] With respect, I do not agree that H & R is also liable to National Trust for the assessed costs of the National Trust- Tax Time litigation and for interest on those costs. There is, in my view, a fundamental distinction between debt incurred before a bulk sale and debt incurred after the sale. The Act is designed to protect creditors with debts in the former, but not the latter, category: see Bank of Montreal v. Ideal Knitting Mills Ltd., [supra], at p. 413; Commercial Motor Bodies and Carriages Ltd. v. Perth Ltd. (1930), 1930 CanLII 358 (ON SC), 65 O.L.R. 383 at pp. 387-88, [1930] 3 D.L.R. 617 (H.C.J.), affd (1930), 1930 CanLII 100 (SK KB), 66 O.L.R. 209, [1930] 4 D.L.R. 1010 (C.A.); Pizzolati & Chittaro Manufacturing Co. v. May, [supra]; Re St. Thomas Cabinets Limited, [supra]; and Gordon v. Assegai Inc., [1989] O.J. No. 556 (H.C.J.).

[83] It is true that these cases deal with the distinction between existing and post-sale creditors. However, I can see no reason in principle for not making the same distinction between existing and post-sale debts of a single creditor. If a bulk sale purchaser need not be concerned with new creditors of the vendor after the sale is concluded, equally the purchaser should not need to be concerned with new debts that arise after the sale.

[84] In summary, there is nothing in the wording of the Act to suggest that the purpose of protecting creditors extends to protecting debt that does not exist at the date of the sale. If H & R had complied with the Act, it would not have been liable for the costs awarded several years later at the conclusion of the National Trust-Tax Time litigation. In my view, there is no principled reason to extend H & R's liability to the costs of subsequent third party litigation simply because H & R did not comply with the Act.

(3) The Cross-Appeal

[85] National Trust raises two issues on its cross-appeal.

[86] First, National Trust contends that the application judge erred by substituting an average interest rate for the actual post-judgment interest rates stipulated in the judgment and Order of O'Leary J. and the order of this court in the National Trust-Tax Time litigation. The application judge did not apply those rates because H & R was not a party to that litigation. Instead, the application judge substituted a rate of 6.07 per cent per annum, being the average of bank interest rates prevailing since June 28, 1991, the date of the bulk sale. I see no reason to interfere with this disposition.

[87] Second, National Trust contends that the application judge erred by failing to provide for pre-judgment interest on $800,000, the amount representing the value of the stock, for the period after the indebtedness owing by Tax Time reached that amount to the date of his judgment. In light of the disposition of the appeal, which removes H & R's liability to account for costs and interest in the National Trust-Tax Time litigation, this issue does not arise because National Trust's recovery will be well under $800,000.

Disposition

[88] The appeal relating to the component of Spence J.'s order dealing with the respondent's claim of $205,293.78 plus interest pursuant to a debt owed by Tax Time is dismissed.

[89] The appeal relating to the component of Spence J.'s order dealing with the respondent's claim of costs and interest pursuant to litigation involving the respondent and Tax Time is allowed.

[90] The cross-appeal is dismissed.

[91] In my view, success is about equally divided on the appeal and the cross-appeal, taken together. Accordingly, each party should bear its own costs. The costs order of the application judge should stand.

Order accordingly.