Cle Leasing Enterprises Ltd. (Re)
110 O.R. (3d) 584
2012 ONSC 3419
Ontario Superior Court of Justice,
D.M. Brown J.
June 9, 2012
Debtor and creditor -- Bulk sale -- Applicants in business of leasing motor vehicles and equipment -- Applicants seeking to raise financing by selling leases and corresponding equipment twice annually to special purpose vehicle in return for cash and issuance of shares -- Bulk Sales Act not applying to proposed securitization transaction -- Proposed sale not falling within definition of "sale in bulk" as it was not sale out of usual course of applicants' business or trade -- Bulk Sales Act, R.S.O. 1990, c. B.14.
The applicants were in the business of leasing motor vehicles and equipment. They sought to diversify their source of funds by selling their assets twice a year to SSE, a limited partnership in which they were the limited partners, for cash and the issuance by SSE of additional equity to the applicants. They applied for an exemption under s. 3 of the Bulk Sales Act ("BSA").
Held, the application should be granted.
The Bulk Sales Act did not apply to the proposed transaction. The proposed transaction did not fall within the definition of "sale in bulk" as it was not a sale out of the applicants' usual course of business or trade. The proposed transaction employed the legal device of a sale for the purpose of raising financing in the ordinary course of the operations of the applicants' businesses. The BSA was not intended to regulate, and did not result in the regulation of, an ordinary-course financing technique such as the asset securitization involved in the proposed transaction.
APPLICATION for an exemption from the Bulk Sales Act .
Cases referred to
National Trust Co. v. H & R Block Canada Inc., [2003] 3 S.C.R. 160, [2003] S.C.J. No. 70, 2003 SCC 66 , 232 D.L.R. (4th) 193, 312 N.R. 91, J.E. 2003-2167, 180 O.A.C. 1, 38 B.L.R. (3d) 1, 44 C.B.R. (4th) 249, 14 R.P.R. (4th) 1, 2003 CarswellOnt 4443, 126 A.C.W.S. (3d) 876, apld [page585]
Other cases referred to
Cle Leasing Enterprise Ltd (Re), [2012] O.J. No. 879, 2012 ONSC 1301 (S.C.J.) ; McLennan v. Fulton (1921), 1921 530 (ON CA) , 50 O.L.R. 572, [1921] O.J. No. 247, 64 D.L.R. 558 (C.A.); Millgate Financial Corp. v. BF Realty Holdings Ltd., [2003] O.J. No. 5555, [2003] O.T.C. 1163, 47 C.B.R. (4th) 278, 128 A.C.W.S. (3d) 1113, 2003 39497 (S.C.J.) ; Sierra Club of Canada v. Canada (Minister of Finance), [2002] 2 S.C.R. 522, [2002] S.C.J. No. 42, 2002 SCC 41 , 211 D.L.R. (4th) 193, 287 N.R. 203, J.E. 2002-803, 40 Admin. L.R. (3d) 1, 44 C.E.L.R. (N.S.) 161, 20 C.P.C. (5th) 1, 18 C.P.R. (4th) 1, 93 C.R.R. (2d) 219, 113 A.C.W.S. (3d) 36; St. Thomas Cabinets Ltd. (Re) (1921), 1921 486 (ON SC) , 50 O.L.R. 492, [1921] O.J. No. 236, 61 D.L.R. 487, 1 C.B.R. 521 (S.C.); Toronto (Overseas) Freight Services Inc. v. Grover, 2001 28377 (ON SC) , [2001] O.J. No. 2857, [2001] O.T.C. 540, 16 B.L.R. (3d) 140, 106 A.C.W.S. (3d) 932 (S.C.J.)
Statutes referred to
Bulk Sales Act, R.S.O. 1990, c. B.14 [as am.], ss. 1 [as am.], 3
Canada Business Corporations Act, R.S.C. 1985, c. C-44
Authorities referred to
Frankel, Tamar, and Mark Fagan, Law and the Financial System: Securitization and Asset Backed Securities: Law, Process, Case Studies, and Simulations (Florida: Vandeplas Publishing, 2009)
Gray, Wayne D., "A Ton of Prevention for an Ounce of Cure: The Case for Abolishing the Bulk Sales Act (Ontario)" (2010), 25 B.F.L.R. 491
Schwill, Robin, "The Bulk Sales Act (Ontario): Down But Not Out" (2010), 25 B.F.L.R. 525
D. Harrison and D. Murdoch, for applicants Cle Leasing Enterprises Ltd. and Compagnie De Location D'Equipment Clé Ltée.
J. Kendik, for Attorney General of Ontario.
D.M. BROWN J.: -- I. The Ontario Bulk Sales Act and Securitization Financing
[1]
The Ontario Bulk Sales Act and Securitization Financing
Does the Ontario Bulk Sales Act, R.S.O. 1990, c. B.14 ("BSA") apply to the form of lease and equipment securitization transaction the applicants propose to enter into with a special purpose vehicle? On June 1, 2012, I granted an order that the BSA did not apply to the sale of certain assets from the applicants to SSE Leasing Limited Partnership (the "Proposed Transaction"). These are my reasons for granting that order.
2This application took place against the background of an earlier February ex parte application made by the applications for an exemption under s. 3 of the BSA for a similar transaction. Although I granted the requested exemption order, [See Note 1 below] I queried whether the BSA applied to the form of the proposed securitization transaction. I ordered that notice of the next BSA application by the applicants be given to the Attorney General of Ontario. That was done, and counsel for the AGO kindly appeared on the return of this application.
II. The Proposed Transaction
[3]
The Proposed Transaction
Compagnie De Location D'Equipment Clé Ltée ("Cle") owns 90 per cent 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 [ Canada Business Corporations Act, R.S.C. 1985, c. C-44 ] corporations "are in the business of leasing equipment to small and medium sized businesses". The applicants' businesses are successful, with assets of about $125 million, against liabilities of $109 million.
4In my February reasons, I described the purpose and the mechanics of the Proposed Transaction [at paras. 3-6]:
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).
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. [page587]
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.
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.
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.
5On the present application, Mr. Robitaille re-confirmed his evidence concerning the structure of the Proposed Transaction. The present transaction will involve assets representing approximately 7.5 per cent of the total assets of the applicants. Mr. Robitaille emphasized that neither the Proposed Transaction, nor any future sale pursuant to the Purchase Agreement and master leasing agreement, involve the sale of operating assets or any other assets required by the applicants to run their businesses and that the applicants will continue to operate in the normal course following the completion of the Proposed Transaction.
III. Position of the Parties
[6]
Position of the Parties
The applicants submitted that the BSA did not apply to their proposed securitization transaction.
7In a letter dated June 1, 2012, counsel for the Attorney General of Ontario stated that the application "does not appear to raise issues which would cause the Ministry of the Attorney General to intervene given the fact that this is a private civil matter. As a result, we do not intend to make submissions regarding this matter".
IV. The Bulk Sales Act
[8]
The Bulk Sales Act
The Bulk Sales Act regulates a "sale in bulk", which the Act defines to mean "a sale of stock in bulk out of the usual course of business or trade of the seller". 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. [See Note 2 below] A buyer must file certain sale-related documents in the office of the Superior Court of Justice within five 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.
9The cost to the buyer of not complying with the requirements of the BSA can be severe -- a non-compliant sale in bulk is voidable at the suit of a creditor of the seller.
V. Guiding Legal Principles Concerning the BSA
[10]
Guiding Legal Principles Concerning the BSA
First enacted in 1917, the BSA was revised in 1959. Since that time, all other Canadian provinces have repealed their bulk sales legislation. Ontario now stands alone in maintaining bulk sales legislation, legislation which supporters and critics alike acknowledge imposes significant transaction costs on businesses. [See Note 3 below]
11Commentators have described the purpose of the BSA as one of preventing a person, partnership or company from disposing of its assets in bulk and pocketing the money, leaving creditors in the lurch, [See Note 4 below] or as "the commercial equivalent of absconding debtors legislation": [page589]
[I]ts sole concern is the conversion of illiquid assets used in operating a business into liquidated proceeds on the disposition of that business. The BSA imposes hoops that are intended to provide reasonable assurance to the creditors of the business, that, provided there are sufficient proceeds, they will be paid upon the liquidation of the business assets. [See Note 5 below]
12Given its definition of a "sale in bulk", on its face the BSA has wide application. The Act defines "sale in bulk" as "a sale of stock in bulk out of the usual course of business or trade of the seller". [See Note 6 below] "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". The BSA defines "stock" as "goods, wares, merchandise or chattels" which are "ordinarily the subject of trade and commerce", or "in which a person trades", or "that are the output of a business" and the term includes "the fixtures, goods and chattels with which a person carries on a trade or business".
13When 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. Until a 2003 decision of the Supreme Court of Canada, the jurisprudence 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, [See Note 7 below] held that the BSA 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". [See Note 8 below] Yet another line of cases viewed the Act as applying in circumstances involving a sale of less than all of the seller's assets. [See Note 9 below] As recently as ten years ago, a decision of this court, Toronto (Overseas) Freight Services Inc. v. Grover, [See Note 10 below] 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. (1930), 1930 358 (ON SC) , 65 O.L.R. 383 (H.C.J.); Chicopee Food Market Ltd. (Trustees of) v. Knechtel Corp., [1992] O.J. No. 2824 (Gen. Div.) . 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.
14Two years later, in the 2003 decision of this Court in Millgate Financial Corp. v. BF Realty Holdings, Cullity J. was asked, in part, to determine whether a triable issue existed as to whether the sale of 8 per cent to 10 per cent 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". [See Note 11 below]
15However, 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., [See Note 12 below] 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), 1921 530 (ON CA) , 50 O.L.R. 572 (C.A.), at p. 577; Re St. Thomas Cabinets, Ltd. (1921), 1921 486 (ON SC) , 61 D.L.R. 487 (Ont. S.C.), at p. 491; and Garson v. Canadian Credit Men's Trust Association, 1929 53 (SCC) , [1929] S.C.R. 282, at pp. 285-86[.]
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. [See Note 13 below]
16The 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.
VI. Application of the Legal Principles to the Present Case
[17]
Application of the Legal Principles to the Present Case
Securitization, in general terms, is a financing device which converts non-liquid assets into liquid, tradable financial assets. [See Note 14 below] One form of the financing technique, asset securitizations of leased vehicles, has enjoyed commercial popularity in Canada for some time. In the present case, the applicants seek to raise financing by selling leases, and the corresponding equipment, to a special purpose vehicle, SSE Leasing Limited Partnership, which, in turn, leases the equipment to a trust. Through this structure, the applicants seek to diversify the funding of their businesses.
18Although designed as a means to raise funds for the operations of the applicants' businesses, the form of transaction between the applicants and SSE involves a sale, specifically a sale of "Leases" and "Related Equipment", the latter term encompassing motor vehicles and equipment. [See Note 15 below] Given the breadth of the definition of "stock" in the BSA , the "Leased Equipment" which forms part of the subject-matter of the Proposed Transaction would fall within the definition.
19Is the "sale" contemplated by the Proposed Transaction a "sale" within the meaning of the BSA ? I have strong doubts that the type of sale at issue in this Proposed Transaction is that targeted by the BSA. The definition of "sale" in the BSA includes a "transfer, conveyance", but excludes a "pledge, charge or mortgage". The exclusion of those types of transactions from the definition of "sale" strongly signals that the BSA was not intended to capture a sale the purpose of which was to raise operational financing for a business. However, on the plain language of the statutory definition, the sale of the Leased Equipment in this Proposed Transaction would fall within the statutory definition of "sale", even though I doubt it falls within the intent of the definition. But such incongruities are the consequence of a statute last amended in 1959 snaring forms of commercial transactions not commonly used at that time.
20Although the sale contemplated by the Proposed Transaction may well fall within the statutory definition of "sale", I conclude that it does not fall within the definition of "sale in bulk". Such a sale must be a sale "out of the usual course of business or trade of the seller". The Proposed Transaction is no such creature. The Proposed Transaction employs the legal device of a sale for the purpose of raising financing in the ordinary course of the operations of the applicants' businesses. The applicants no doubt considered a number of financing options before selecting the form of the Proposed Transaction. They could have approached a financial institution to borrow money, charging the Leases and Leased Equipment as security for that loan. The definition of "sale" in the BSA makes it clear that the Act would not apply to that form of financing. Why, then, should the use of securitization as the means-of-choice for financing attract scrutiny under the BSA? It is merely another financing option.
21Cullity J. adverted to this issue when, in his decision in Millgate Financial, he 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". [See Note 16 below] Precisely. The BSA was not intended to impose a layer of red tape and legal fees on transactions intended and designed to raise ordinary-course financing for a business.
22Although it would be open to me to conclude that the Proposed Transaction was not a sale made out of the ordinary course of business because it involved only 7.5 per cent of the total assets of the applicants -- hardly the "all or substantially all" described in the National Trust case -- I think it makes more commercial sense to rest my conclusion that the sale is not one made out of the ordinary course on the basis that the purpose and design of the Proposed Transaction is to secure ordinary course financing for the applicants.
23In my view, the BSA was not intended to regulate, nor by its terms does it result in the regulation of, an ordinary course financing technique such as the type of asset securitization involved in the Proposed Transaction. As the applicants noted in their factum, in the Proposed Transaction (i) the assets at issue are being sold for fair market value to an entity in which the originator has an economic interest, (ii) the originator or other entity servicing the leased assets continues to service those assets following the transfer and (iii) the seller continues to engage in the same business as it did prior to the sale. Hardly the mischief targeted by the BSA of preventing persons from "pocketing the money, leaving the creditors in the lurch".
24For those reasons, I granted the order that the BSA did not apply to the Proposed Transaction. I also granted a sealing order in respect of the consolidated 2011 financial statements filed by the applicants, being satisfied that the request of the applicants met the criteria for a sealing order set out in Sierra Club of Canada v. Canada (Minister of Finance) [See Note 17 below] -- the financial statements were 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.
25By way of final comment, I was pleased to read in the letter of counsel for the Attorney General that the issue of the applicability of the BSA to securitization transactions has been referred to the ministry's Policy Division. As I stated in my February reasons [at para. 21],
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 . . . 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.
Application granted.
Notes
Note 1: [2012] O.J. No. 879, 2012 ONSC 1301 (S.C.J.) .
Note 2: Certain sales are exempt -- e.g., sales by receivers -- and buyers do not have to comply with the requirements of the Act when the claims of unsecured and secured trade creditors do not exceed $5,000.
Note 3: For arguments in favour of maintaining the BSA , albeit in a "modernized" version, see Robin Schwill, "The Bulk Sales Act (Ontario): Down But Not Out" (2010), 25 B.F.L.R. 525, at p. 531. The case in favour of repeal was made by Wayne Gray in "A Ton of Prevention for an Ounce of Cure: The Case for Abolishing the Bulk Sales Act (Ontario)" (2010), 25 B.F.L.R. 491, at p. 505. See, also, the Annotation to National Trust Co. v. H & R Block Canada Inc., 2003 SCC 66 () , [2003] 3 S.C.R. 160, [2003] S.C.J. No. 70, 2003 CarswellOnt 4443.
Note 4: Schwill, supra, p. 526.
Note 5: Gray, supra, p. 493.
Note 6: Bulk Sales Act, s. 1 .
Note 7: (1921), 1921 530 (ON CA) , 50 O.L.R. 572, [1921] O.J. No. 247, 64 D.L.R. 558 (C.A.).
Note 8: Ibid., para. 27.
Note 9: See, for example, St. Thomas Cabinets Ltd. (Re) (1921), 1921 486 (ON SC) , 50 O.L.R. 492, [1921] O.J. No. 236, 61 D.L.R. 487 (S.C.).
Note 10: 2001 28377 (ON SC) , [2001] O.J. No. 2857, 16 B.L.R. (3d) 140 (S.C.J.), para. 8 .
Note 11: [2003] O.J. No. 5555, 2003 39497 (S.C.J.) , para. 49 .
Note 12: Supra.
Note 13: Ibid., paras. 8 and 11, emphasis added.
Note 14: Tamar Frankel and Mark Fagan, Law and the Financial System: Securitization and Asset Backed Securities: Law, Process, Case Studies, and Simulations (Florida: Vandeplas Publishing, 2009), p. 17.
Note 15: Purchase Agreement, February 17, 2012, s. 2.1.
Note 16: Millgate, supra, para. 56, emphasis added.
Note 17: 2002 SCC 41 () , [2002] 2 S.C.R. 522, [2002] S.C.J. No. 42.