SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF an application under the Bulk Sales Act , R.S.O. 1990, c. B.14 in respect of a sale of assets by Cle Leasing Enterprises Ltd. and Compagnie De Location D’Equipment Clé Ltée to SSE Leasing Limited Partnership

BEFORE: D. M. Brown J.

COUNSEL: B. Sells and E. Morse, for the Applicants, Cle Leasing Enterprises Ltd. and Compagnie De Location D’Equipment Clé Ltée

HEARD: February 23, 2012

REASONS FOR DECISION

I. Modern financing and the Ontario Bulk Sales Act : new wine in an old wineskin?

[ 1 ] Does the Ontario Bulk Sales Act , which first saw the light of this world in 1917, apply to financing techniques which only emerged decades later? Such is the question raised by this ex parte application for an exemption under section 3 of the Bulk Sales Act . I granted the exemption order on February 23, 2012, and stated I would release these Reasons explaining that decision.

II. The proposed transaction

[ 2 ] Compagnie De Location D’Equipment Clé Ltée (“Cle”) owns 90% of Cle Leasing Enterprises Ltd. (“Cle Leasing”). According to the affidavit of Luc Robitaille, the President of Cle and the Chair of Cle Leasing, both CBCA corporations “are in the business of leasing equipment to small and medium sized businesses”. The applicants’ businesses are successful, as attested by the healthy 2011 audited financial statements filed on a confidential basis – assets total about $125 million, in contrast with liabilities of $111 million.

[ 3 ] The applicants wish to diversify their source of funds through an additional method of financing – selling their assets twice a year to SSE Leasing Limited Partnership, a Quebec limited partnership, for cash and the issuance by SSE of additional equity to the applicants. Cle and Cle Leasing are the limited partners in SSE, with 7929552 Canada Inc., a wholly owned subsidiary of Cle, the general partner (holding only a nominal interest in the limited partnership).

[ 4 ] Mr. Robitaille described the proposed financing transaction as follows:

The Proposed Transactions will be effected pursuant to a purchase agreement between Cle, Cle Leasing, and [SSM] (the “Purchase Agreement”). Pursuant to the Purchase Agreement, Cle and Cle Leasing will, from time to time, sell certain leases (the “Leases”) and the corresponding equipment (the “Equipment”) to [SSM]. Cle and Cle Leasing will sell the Leases and Equipment to [SSM] at fair market value. Cle and Cle Leasing will be paid in cash and by [SSM] issuing additional equity to Cle and Cle Leasing…

[T]he Limited Partnership’s only business will be to facilitate the Proposed Transactions…

Concurrent with executing the final Purchase Agreement, [SSM] will enter into a leasing agreement (the “Master Leasing Agreement”) with Move Trust (the “Leasee”), a trust established under the laws of Ontario and managed by Boat Capital LP. Pursuant to the Master Leasing Agreement, concurrent with each purchase under the Purchase Agreement, [SSM] will lease to the Leasee the Equipment (subject to the initial customer lease). The Leasee thereby becomes entitled to the lease payments paid on an ongoing basis by the customer, and in return, the Leasee will pay approximately 95% of the value of the Leases to [SSM]. As security, [SSM] will keep, in a segregated account, an amount corresponding to approximately 2% of the value of the Leases. It is contemplated that this 2% security amount will come from the 95% payment value.

Each time the financing mechanism contemplated in the Purchase Agreement and the Master Leasing Agreement is utilized, notices will be executed setting out the exact Leases and Equipment to be transferred/leased.

[ 5 ] The applicants anticipated that the first financing using this funding mechanism would close on Friday, February 24, 2012. About 12% of the applicants’ assets would be transferred to SSE under the initial financing. Consents signed by secured creditors form part of the documents the applicants must obtain in order to close the initial financing.

[ 6 ] The proposed financing is not a “one-shot” deal. According to the affidavit sworn by Mr. Robitaille:

The Proposed Transactions contemplate that this financing mechanism will be used periodically in the future through further purchases under the Purchase Agreement and through further leasing under the Master Leasing Agreement. Cle and Cle Leasing intend to utilize this financing mechanism on a bi-annual basis as a part of the ordinary course of their business.

[ 7 ] The applicants’ position is that the Bulk Sales Act applies to this initial financing, but it will not apply to future ones. As they stated in their factum:

The Initial Financing is not in the usual course of the applicants’ business; however, the planned future bi-annual transactions will be a part of the ordinary course of their business.

In oral submissions applicants’ counsel stated that his clients in effect were looking to obtain “blanket exemptions” for future transactions of this nature.

III. The Bulk Sales Act

[ 8 ] The Bulk Sales Act regulates a “sale in bulk”. Aimed at protecting “trade creditors”, the Act requires that before paying the proceeds of the sale to the seller, the buyer must receive from the seller a statement which identifies each secured and unsecured trade creditor of the seller and the amount of the indebtedness of the seller to each. Having received such a disclosure statement from the seller, a buyer may pay the proceeds of the sale to the seller only if (i) the seller delivers an affidavit showing that all trade creditor claims have been paid in full or (ii) adequate provision has been made for the immediate payment in full of all trade creditor claims. [1] A buyer must file certain sale-related documents in the office of the Superior Court of Justice within 5 days after the completion of a sale in bulk. The Act also creates a mechanism by which a seller can appoint a trustee to receive the proceeds of the sale and distribute them to creditors of the seller.

[ 9 ] The cost to the buyer of not complying with the requirements of the Act can be severe – a non-compliant sale in bulk is voidable at the suit of a creditor of the seller.

IV. “Sale in bulk”: the jurisprudence

[ 10 ] What is a “sale in bulk”? The Act defines it as “a sale of stock in bulk out of the usual course of business or trade of the seller”. [2] “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.”

[ 11 ] When is a sale of stock in bulk one which is “out of the usual course of business or trade of the seller”? The Act provides no definition of that phrase. For many years the case law sent mixed messages to the commercial community about when a sale would be “out of the usual course of business or trade”. One line of cases, including the 1921 decision of our Court of Appeal in McLennan v. Fulton , held that the Act was designed to protect a person from disposing of all or substantially all of its assets in bulk, “pocketing the money, leaving the creditors in the lurch”. Yet, another line of cases viewed the Act as applying in circumstances involving a sale of less than all of the seller’s assets. As recently as 10 years ago a decision of this Court, Toronto (Overseas) Freight Services Inc. v. Grover , held:

The Act does not require that a sale of assets wipe out the entire operation of the seller or prevent the seller from continuing to carry on any kind of business. Nor is there a requirement that there be a sale of “substantially all” of the assets of the seller. If there is a sale of substantially all of the assets of a company, that sale will obviously be a “sale in bulk”. However, the reverse is not necessarily true. Counsel referred to cases which have held that a sale of all or substantially all of a company’s assets is clearly a sale in bulk: Commercial Motor Bodies & Carriages Ltd. v. Perth Ltd.; Chicopee Food Market Ltd. (Trustees of) v. Knechtel Corp. However, all those cases say is that such a sale meets the test. They do not stand for the proposition cited, i.e. that a sale of that type is a prerequisite to the applicability of the Act.

[ 12 ] Two years later, in the 2003 decision of this Court in Millgate Financial Corporation Limited v. BCED Holdings Limited , Cullity J. was asked, in part, to determine whether a triable issue existed as to whether the sale of 8% to 10% of a company’s assets constituted a “sale in bulk”. Although he determined that he did not have to decide that question, he made the following comments:

I find the submission that the Act is confined to sales of the greater part of a vendor’s assets of any kind is difficult to reconcile with the words of the Act and, in particular, the definition of "stock in bulk".

[ 13 ] Two days after the Millgate Financial decision came out the Supreme Court of Canada released its reasons in National Trust Co. v. H & R. Block Canada Inc. clearly indicating that the Bulk Sales Act was designed to regulate a sale of all, or substantially all, of a company’s operating assets:

From the outset, bulk sales legislation has been judicially recognized as protecting the interests of creditors whose merchant debtors had disposed of all or substantially all of the inventory, chattels and fixtures by which they carry on business. See McLennan v. Fulton (1921); Re St. Thomas Cabinets, Ltd. (1921); and Garson v. Canadian Credit Men's Trust Association.

Ontario's Bulk Sales Act applies to any sale of goods "out of the usual course of business or trade of the seller" ( s. 1 "sale in bulk"). This means 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.

[ 14 ] The decision in National Trust indicates that a sale of stock in bulk out of the usual course of business will occur where a seller seeks to sell all, or substantially all, of the operating assets of its business. In his Millgate Financial decision Cullity J. observed that the usual course of a business “might extend to activities and reorganizations undertaken for the purpose of obtaining financing , or otherwise in the interests of ensuring the continuation of an efficient business structure as circumstances change.”

V. Application to the present case

[ 15 ] Given that jurisprudential background, at the hearing I questioned applicants’ counsel whether the proposed transaction, or initial financing, constituted a “sale in bulk”. The applicants took the position that in light of the case law the proposed transaction would be a sale in bulk – at least the first time around. They contended that subsequent financings similar to the proposed transaction would not be outside of the ordinary course and therefore not caught by the Bulk Sales Act .

[ 16 ] I very strongly doubt that the proposed transaction is the type of sales transaction at which the Bulk Sales Act is aimed. The applicants are selling about 12% of their assets, consisting of leases they have entered into with their customers and related equipment. This is not a “going out of business sale”, but a method to convert some of their assets into cash to continue operating the business. Although a formal sale of assets is involved – section 2.1 of the Purchase Agreement makes that clear – the substance of the transaction is the financing of the on-going operations of the applicants. The proposed transaction lacks the attributes of the sale of all, or substantially all, of the operating assets of the applicants’ businesses.

[ 17 ] Nevertheless, the applicants took the position that on its face the Bulk Sales Act applied to the proposed transaction and therefore they sought an exemption under section 3 of the Act. I will proceed to consider their exemption request for two reasons. First, that is what they want the Court to do. Second, I am reluctant on an ex parte application to declare that a transaction is not captured by the Act when the proponent of the transaction does not seek that relief and when no opposite party is present to offer countervailing arguments, if any. That said, the applicants cannot have it both ways. If, as they submit, the proposed transaction is a “sale in bulk”, then subsequent financings using this model also will be sales in bulk – how can an initial “out of the ordinary course” transaction render subsequent ones “in the ordinary course”? The Act seeks to protect trade creditors. If a court must inquire into the ability of the applicants to pay their trade creditors on this initial “sale”, why should trade creditors not enjoy similar protection on the second planned financing six months from now? No blanket exemption for future transactions is available to the applicants given their position that the Act applies to the proposed initial transaction. I will return to this point shortly.

[ 18 ] Turning to the requested exemption, section 3 of the Act provides:

3. (1) A seller may apply to a judge for an order exempting a sale in bulk from the application of this Act, and the judge, if satisfied, on the affidavit of the seller and any other evidence, that the sale is advantageous to the seller and will not impair the seller’s ability to pay creditors in full, may make the order, and thereafter this Act, except section 7, does not apply to the sale.

In National Trust the Supreme Court of Canada described the task of a judge on a section 3 exemption motion:

The process to be followed by the application judge in applying the s. 16(2) remedy provision is similar to the process used in determining whether an exemption should be granted under s. 3 of the Act. In other words, the application judge will turn his or her mind to similar considerations when deciding on a course of action under either s. 3 or s. 16(2) of the Act. Specifically, the application judge should consider, inter alia , how the creditors, both secured and unsecured, would be affected by the sale; whether the sale would be detrimental or beneficial to the creditors; and whether it would have the same impact on each of the creditors, or whether certain creditors would be differentially affected. Would the sale be advantageous to the seller? Would the sale impair the seller's ability to pay the creditors in full?

[ 19 ] The evidence before me is clear. First, the proposed transaction would be advantageous to the seller, enabling it to access new financing to carry on its business. Second, the proposed transaction will not impair the applicants’ ability to pay their creditors in full: they are seeking the consent of their secured creditors to the proposed transaction; their consolidated balance sheet does not raise any concerns that the financial terms on which the proposed transaction will take place would impair the applicants’ ability to pay their creditors; and, the evidence indicates that the applicants are solvent and paying their liabilities as they become due. For those reasons last Thursday I granted the exemption order sought under section 3 of the Act.

[ 20 ] Which leads me to deal with the future. The exemption I granted applied only to the proposed transaction; it has no effect on the future financings the applicants propose to implement using this financing model. If the applicants plan to engage in this form of financing a second time, they will have to re-apply to the Court under the Act.

[ 21 ] This is where the new wine in an old wineskin comes in. I query why this Court should have to spend scarce judicial resources considering section 3 Bulk Sales Act exemptions for these types of financings, or other securitization variants thereon, which have become popular in recent years. Applicants’ counsel put before me two orders made a few years back by this Court granting section 3 exemptions for financing-driven “sales”. If, notwithstanding the clear language of the Supreme Court of Canada in National Trust , the commercial bar lacks the confidence that the Act, and its voidability consequences, do not apply to these types of financings, then something has to be done about this problem. To seek section 3 exemptions simply because of unclear language in a very old statute does not contribute to the efficient workings of our economy; there are much simpler ways to ensure creditor protection.

[ 22 ] Consequently, if and when the applicants next seek an exemption under section 3 of the Act, I direct that they apply on notice to the Attorney General of Ontario. By so doing, a court can consider, after hearing from counsel for the AGO, whether this type of financing “sale” falls within the ambit of the Act. If the application is brought during the balance of this year, I direct that the application be brought before me on the Commercial List.

VI. Sealing order

[ 23 ] In support of their application the applicants filed their consolidated 2011 financial statements. The applicants submitted that the information contained in those statements was confidential and commercially sensitive, and they requested a sealing order.

[ 24 ] As explained by the Supreme Court of Canada in Sierra Club of Canada v. Canada (Minister of Finance) , a sealing order should only be granted when: (a) such an order is necessary in order to prevent a serious risk to an important interest, including a commercial interest, in the context of litigation because reasonably alternative measures will not prevent the risk; and (b) the salutary effects of the confidentiality order, including the effects on the right of civil litigants to a fair trial, outweigh its deleterious effects, including the effects on the right to free expression, which in this context includes the public interest in open and accessible court proceedings. Our Court of Appeal has stressed the need for a solid evidentiary basis to support any sealing order or publication ban.

[ 25 ] I am satisfied that the applicants have met the criteria for a sealing order set out in Sierra Club – the financial statements are confidential documents not otherwise available to the public and their placement in the public court record would make available sensitive information about important commercial interests. Moreover, by granting the section 3 exemption, the purchaser, SSE, will not need to comply with the requirement to file with the Court certain financial information post-closing, so it makes little sense that the sensitive commercial information filed by the seller in support of the pre-closing exemption should be available for public viewing. I order that Exhibit “A” to the affidavit of Mr. Robitaille be sealed.

D. M. Brown J.

Date : February 27, 2012