Supplier protections in insolvency — new deemed trust for suppliers of perishable fruits and vegetables

Insolvency can be particularly jarring for suppliers who have faithfully delivered inventory or other goods to the company (usually on credit) and suddenly find themselves without the goods they have supplied and without meaningful recourse for payment. In many, if not most, cases, suppliers are unsecured creditors, and the prospects of meaningful recovery are often poor.

The federal legislation governing bankruptcies in Canada, the Bankruptcy and Insolvency Act (BIA), has long provided some protection for suppliers with respect to goods supplied on the eve of an insolvency. Under BIA section 81.1, suppliers who 1) learn about the bankruptcy or receivership of a purchaser within 15 days of it happening; 2) identify the goods they delivered within 30 days of the date of the bankruptcy or receivership; and 3) send a prescribed notice to the trustee or receiver asserting a right to the goods may be in a position to recover such goods. 

However, on top of all of that, the supplier must also hope that the goods remain identifiable, unchanged, and unsold. In the situation where all these stars align, section 81.1 of the BIA allows the supplier to recover possession of the goods, thereby avoiding the value of those goods being liquidated and distributed to all creditors in accordance with the distribution scheme of the BIA.

A similar protection is afforded pursuant to BIA s. 81.2 to farmers, fishermen, and aquaclturists (all as defined in BIA s. 81.2).  However, rather than requiring the goods supplied to be identified, it provides a super-priority charge over all inventory of the debtor.

While these “unpaid supplier” protections can be difficult to assert in a practical sense given the many requirements to do so and the tight timelines imposed by the BIA, they are virtually impossible to assert in a practical sense for suppliers who supply perishable fruit or vegetables and are not farmers, as the remedy of recovering possession is of little value where the goods have perished. 

Fortunately for such suppliers, recent amendments to the BIA (as well as the Companies’ Creditors Arrangement Act (CCAA)) have created yet another form of supplier protection — this time, a deemed trust over the produce or the proceeds of its sale if certain requirements are met.

The new BIA section 81.7, which took effect in December 2024 (along with the analogous CCAA section 8.1), provides that where a supplier sells perishable fruits or vegetables (the “produce”) to a purchaser for use in relation to the purchaser’s business, and is not paid, the produce, and any proceeds of sale of the produce will be deemed to be held in trust for the supplier so long as:

1. The supplier provides notice (which can be included in an invoice) within 30 days of the supply of the produce, in prescribed form and manner, that they intend to avail themselves of their deemed trust rights over the produce of the purchaser in the event of the purchaser’s bankruptcy or receivership (or, in the case of the CCAA, the purchaser’s application to court to sanction a compromise or arrangement);
2. The purchaser is obligated to pay the balance owing to the supplier in 30 days or less; and
3. The purchaser does not pay the entire balance.

Where these requirements are met, and the purchaser becomes insolvent in various specific ways, a deemed trust will apply to the produce or its proceeds. 

This protection is undoubtedly welcome news to the suppliers of perishable produce, and should cause them to consider their contractual arrangements, payment terms and invoice language, as their ability to take advantage of this deemed trust will depend on the appropriateness of each.

Conversely, for lenders to purchasers of perishable fruits and vegetables, new concerns will be raised about the priority of any lender security in the face of a potential deemed trust, and the scope of that trust to proceeds in the hands of the purchaser or even paid to the lender.  A new risk assessment is undoubtedly required to evaluate a borrower’s relationship with such purchasers.

While the new regime defines “proceeds of sale” as including amounts that have been combined with other funds, it also incorporates “laws of general application in relation to trusts and trustees in force where the purchaser resided or carried on business” prior to insolvency. As such, the exact scope of the deemed trust, and the requirements for asserting it in specific situations, will surely require the interpretation and assistance of the courts.

Likewise, while the new deemed trust is available upon bankruptcy, receivership, or the application to approve an arrangement under a CCAA proceeding, it does not appear to exist in the first instance where an order is granted commencing a CCAA proceeding. This means that in the CCAA context, the protection is only likely to be available to a supplier who has continued to supply produce to a purchaser, notwithstanding the purchaser having sought CCAA protection — in which case it is less likely that they are continuing to supply on credit. In all events, the exact scope of when and where this new protection is available remains to be seen.

Fillmore Riley's Bankruptcy, Insolvency & Restructuring Group 

Fillmore Riley can assist lenders, suppliers, or purchasers adapt to this new regime, evaluate specific circumstances, or assist in asserting or defending a claim to this new deemed trust.  Should you require assistance with any of these matters, we encourage you to contact our office.