Notice Required Before Asset Seizure

November 29, 2021

By Brian Babcock

Secured creditors must give notice before seizing the assets of the debtor.

This principle was reaffirmed by the Ontario Court of Appeal in 1758704 Ontario Inc. v. Priest.

The dispute arose from as asset purchase, under which the purchase price was paid by a promissory note secured by a general security agreement over the purchased assets and leased equipment. The promissory note had no notice requirement. The GSA specified seizure and sale as a possible remedy, saying nothing about notice.

The Agreement of Purchase and Sale (APA) did contain a notice provision.

Default occurred. The buyer failed to make payments on the leased equipment, creating additional debt to the vendor. The vendor gave notice that if the arrears were not paid, it would seize the equipment and sue for any shortfall. The buyer made payments but did not pay off the arrears.

Months later, default then occurred under the promissory note. The purchaser advised that it was putting together financing to “pay the balance”.

It did in fact apply for and obtain bank financing, but before it could proceed, the vendor seized the assets surreptitiously, without notice. This put the buyer out of business.

Section 62 of Ontario’s Personal Property Security Act governs seizure of collateral. Section 63, dealing with disposition of seized assets, requires notice in certain circumstances. The creditor argued that the assets fell into a category that were exempt from notice.

A motions judge determined that notice was not required. This was consistent with several earlier decisions of Superior Court judges. The Court of Appeal found otherwise. Since section 63 applies only to disposition, it does not, as believed by many, govern notice of seizure. That is determined by the terms of the contract, as interpreted under the common law that exists independently of the PPSA.

That judge made case law, going back over one hundred years, determines that a debtor must be given some notice on which they might reasonably be expected to act. The application of this principle depends upon the facts and circumstances of each case. It applies regardless of the wording of the document, and whether or not the debtor requests time.

The Court of Appeal decided that nothing in the PPSA extinguishes this principle.

Therefore, the motions judge was wrong in not considering that duty in this case.

On the facts of the case, the Court of Appeal found that the notice under the first default was not adequate to justify seizure. It was “tethered” to the first default, not the second. The court was particularly unimpressed by the fact that the creditor seemed to act “out of spite”.

Further, the Court of Appeal found that the notice provision in the APA did not “merge” upon the closing of the sale, but operated as long as the debt remained owing – it would make no sense to find that it did not survive closing.

The case was sent back to Superior Court to determine the buyer’s damages. Will they exceed the amounts owed to the seller? Regardless, the cost of this protracted litigation is unfortunate for both parties.

The moral of this story is:

  • sellers or creditors must give notice of seizure
  • that notice must be reasonable
  • notice clauses under an APA probably survive closing
  • failure to give notice exposes the seller/creditor to a claim for damages
  • acting out of spite is never good business – judges always favour the party with the “moral high ground” if possible.

The complexity of considering reasonable notice suggests that all but the most sophisticated lenders ought to obtain legal advice prior to proceeding with any seizure – the cost of that advice will be modest compared to the potential damages if you fail to seize properly.

If you are the unfortunate party in default, you still have rights, and if the facts are on your side, justice may be possible – but at a price.