A supplier of goods who did not exercise the precaution of taking a security interest in goods that it sold had a very limited ability to claim a proprietary right in the goods at common law. The seller could claim an unpaid seller’s lien if the seller remained in possession of the goods.68
The seller also had the right of stoppage in transit, which permitted the seller to retake possession of goods that had been delivered to a carrier.69These limited rights were of no use in cases where the buyer had obtained delivery of the goods.
In 1992 new provisions were added to the bankruptcy statute that enhanced the position of suppliers. Trade suppliers were given a right to repossess recently delivered goods. Suppliers of agricultural products were given a secured charge on all the inventory of the debtor. In both cases, the supplier’s right is given priority over any competing security interest in the goods. The provisions have attracted controversy.70
Some believe they should be scrapped. Others think that they should be redesigned. Despite this, the provisions were not greatly altered by the 2005/2007 amendments to the BIA.
An unpaid supplier who sells and delivers goods for use in the purchaser’s business has a right to repossess the goods. The right can be exercised against a trustee in bankruptcy or receiver. There are four
conditions that must exist before this right can be exercised.71First, the supplier must present a written demand for repossession to the purchaser, trustee, or receiver. The demand must set out the details of the transaction and must be given within a period of fifteen days after the day that the debtor went into bankruptcy or receivership. Second, the goods must have been delivered within thirty days before the day that the debtor went into bankruptcy or receivership.72Third, the purchaser must be bankrupt or a receiver must have been appointed at the time of the demand. Fourth, the goods must be in the possession of the purchaser, trustee, or receiver,73they must be identifiable as the goods sold, they must be in their same state, and they must not have been sold or agreed to be sold in an arm’s length transaction.
If the goods have been partly paid for, the supplier can repossess a portion of the goods proportional to the unpaid amount. Alternatively, the supplier can repay the amount of the partial payment and repossess all of the goods.74The purchaser, trustee, or receiver is allowed to retain the goods if their full purchase price is paid to the supplier after the demand is made.75The supplier’s right to repossess is lost if the right is not exercised within the fifteen-day period following the bankruptcy or receivership, unless the time period is extended by the trustee or receiver, or by the court.76The supplier is given priority over every other right or claim to goods except for that of a bona fide subsequent purchaser of the goods for value without notice of the supplier’s right of repossession.77Two justifications were given for the creation of a supplier’s super-priority over all other claimants. The first was concerned with the behaviour of debtors who are insolvent or on the eve of insolvency. The provision was intended to undo the harm that would be suffered by suppliers when the debtor orders excessive amounts of inventory immediately before bankruptcy or receivership. The second is that the protection
afforded by these provisions will induce suppliers to continue to supply goods to businesses that are encountering financial difficulties.78
On its surface, the...