Types of Creditors and Their Rights

In the preceding section, we identified a number of actions that creditors may take. Below, we briefly describe the different types of creditors and the different rights that they have or may exercise to be paid.

Secured Creditors

A secured creditor is a creditor who holds a legal right through a contract (the "security") to take an asset of the business (the "collateral") in the event that the business fails to pay the debt. Security can take many forms, including a conditional sales contract, lease, general security agreement, general assignment of book debts, collateral mortgage, chattel mortgage and real estate mortgage. The collateral can be a specific asset or a group of assets including vehicles, machinery, equipment, accounts receivable, inventory, patents, intellectual property, real estate, etc.

Generally, security on collateral (excluding real estate) must be registered under the Personal Property Security Act. Security on real estate must be registered in the Land Titles Registry.

There are many different types of security and collateral and each security agreement must be carefully reviewed to understand the collateral covered, whether the security has been properly registered and what rights the secured creditor has against the assets and in relation to other creditors. This is a specialized area of law and it is often necessary to consult a lawyer to assess these matters accurately.

The security usually provides that in the event of default, such as failure to pay, the secured creditor is entitled to take the collateral, sell it and apply the proceeds to the debt. Typically, if the proceeds are not sufficient to pay the debt in full, the secured creditor will continue to have a claim as an unsecured creditor against the business.

A secured creditor will typically have the right to appoint a "Receiver". The Receiver acts for the creditor who appoints him (i.e. the bank or financial institution) and is responsible to the bank or financial intuition for his actions. The Receiver's principal mandate is to sell the secured assets and pay the proceeds to the creditor.

If the Receiver is being appointed to take possession or control of all, or substantially all, of the accounts receivable, inventory or other assets of a company, then the Receiver must be a Licensed Insolvency Trustee (a "Trustee"). In these cases, Receivers are required under the Bankruptcy and Insolvency Act to prepare and issue certain notices and reports and to act in a certain manner. In other situations, it is not necessary for the Receiver to be a Licensed Insolvency Trustee and the Receiver will not need to comply with the notice, reporting and conduct provisions of the Bankruptcy and Insolvency Act. An example of this is where the Receiver seizes only one truck out of a fleet of five trucks

Where the security covers substantially all of the accounts receivable, inventory or other property of the business, a secured creditor is required to give a "10-day notice" under section 244 of the Bankruptcy and Insolvency Act before appointing a Receiver. This is a notice to you that the secured creditor intends to realize on its security, and may do so after the expiry of 10 days from the date of the notice. Usually, you will have had a number of discussions with the secured creditor before they send out this Notice. If you receive the notice do not ignore it.

Once the 10 days has gone by you will have virtually no right or ability to prevent the secured creditor from taking possession of their collateral and selling it. If you have received a 10-day notice it is important that you seek advice quickly so that you can avail yourself of appropriate remedies.

A Receiver may also be appointed by the Court. In this case, the Receiver is an officer of the Court and is responsible to all stakeholders including secured creditors, unsecured creditors, the business debtor and shareholders. A Court-appointed Receiver is normally appointed only where there are competing claims, a dispute between the creditors, or where there is some reason that the Court should otherwise oversee the receivership.

Unsecured Creditors

Unsecured creditors are those that do not hold security for the amount that is owed to them. These creditors normally include suppliers of goods and services and other parties with whom you do business including customers who may have damage or warranty claims.

In the event of non-payment of an account, the unsecured creditor's first course of action will usually be to withhold future deliveries of goods or services. In some cases, they will deliver future goods and services only on a C.O.D. (cash-on-delivery) basis.

If a business cannot negotiate satisfactory payment terms, the unsecured creditor may take legal action by issuing a statement of claim and proceeding through the Courts to obtain a judgment. Once it has a judgment, it can request that the Sheriff seize assets and sell them to repay the judgment debt.

An unsecured creditor has the right to apply to the Court to bankrupt the owner, in the case of a sole proprietorship, or the company.

Landlords are also unsecured creditors, however, they have special rights. In addition to the remedies they have as unsecured creditors, they can also seize business assets for unpaid rent. They can also terminate the lease. As with secured creditors, if a landlord has seized assets, you must move quickly to preserve your rights as once the landlord sells the assets you cannot reverse these proceedings. There are options available up to that point.

Government Creditors

There are many federal and provincial government claims that arise with respect to business operations. These include source (payroll) deductions, income tax, HST/GST, worker's compensation claims and provincial sales tax. A claim for the employee's portion of source deductions due (income tax, CPP and EI premiums withheld from employees) ranks in priority to secured creditors, except those that have a true lease or real property mortgage. Other government claims, in most cases, rank subordinate to secured creditor claims or proceedings can be undertaken to subordinate those claims.

What is common to all government claims is that the government can garnish or effectively seize wages, accounts receivable and bank accounts. They can also register judgments under the Land Titles system or Personal Property Security system. The receipt of a garnishment notice will often have the effect of stopping all cash inflow into the business. Garnishments can be voluntarily withdrawn by the government if you can make satisfactory arrangements for the repayment of the underlying debt. If such arrangements cannot be made then the only way to get the garnishment lifted is to take formal proceedings under the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act. These statues are explained more fully later in this Guide under the heading "Options for the Business Debtor".


In a bankruptcy or a receivership, where the Receiver takes possession of or controls all or substantially all, of the accounts receivable, inventory or other assets, employees have special rights. Specifically, each employee has a secured claim for up to $2,000 of unpaid compensation and vacation pay. This secured claim ranks in priority to all other secured claims against cash, accounts receivable and inventory.

Employees can recover the secured claim amount, plus a further amount to a combined maximum of approximately $3,300, from the federal government under the Wage Earner Protection Program Act (“WEPP”). “WEPP” will then recover the secured claim amount from the bankruptcy estate or Receiver.

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