11/22/2016 By Monique Sassi
Cassels Brock developed this Lessons Learned series based on our experience with priority disputes between secured creditors and the realization that many secured parties make fundamental errors of law that cause them to lose priority in their collateral. Each lesson in the series will outline a basic mistake and the lesson to be learned…
Many of our clients, when faced with a delinquent debtor, are not sure what procedures need to be followed when seeking to enforce their security over the debtors property. In certain cases clients have not sent the necessary statutory notice when required, while in other cases they have sent one when it was not required, delaying the process of enforcement. In Lesson 2 we discussed the need to send a demand letter and in this lesson we will discuss when a Notice of Intention to Enforce Security (NITE) under section 244 of the Bankruptcy and Insolvency Act RSC 1985, c. B-3 (the BIA) is required.
Section 244 of the BIA
Section 244 of the BIA requires a secured party to give notice to a debtor of its intention to enforce security when:
1. the secured party intends to enforce its security over all or substantially all of the inventory, accounts receivable or other property of the debtor (the Collateral);
2. the Collateral was acquired for or in relation to a business carried on by the debtor; and
3. the debtor is an “insolvent person”, as defined in the BIA.
Once the NITE is delivered, the secured party is required to wait ten days before enforcing its security, absent special relief of the court. This 10-day notice period is intended to provide insolvent debtors with an opportunity to reorganize and negotiate with the secured party. The form and contents of the NITE are prescribed by the BIA.
Section 244 Does Not Always Apply or May Be Abridged
The following are common instances where secured parties have mistakenly assumed that s.244 of the BIA applies or where a secured party had waited an unnecessary 10 days to enforce its security:
insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and
(a) who is for any reason unable to meet his obligations as they generally become due,
(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or
(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;
Section 2 BIA
Lesson Learned: Notice of intention to enforce security under section 244 of the BIA is not always required and you must look at all of the circumstances.
1 Substantially same definition appears in every Personal Property Security Act (or equivalent) in all of the Canadian provinces (excluding Quebec).