Creditors' Remedies against Debtors (10:III): Difference between revisions

{{REVIEWED LSLAP | date= September 2, 2024}}

The ''Personal Property Security Act'' [''PPSA''] establishes a system for the registration, priority, and enforcement of secured loan and credit transactions involving personal property in B.C.  Secured creditors holding agreements that create or provide for security interests (i.e. chattel mortgages and conditional sales agreements) must register these security agreements in order to “perfect” its interest and establish its priority in regards to third parties. See “Perfection” on page 3.

For agreements that are subject to the ''PPSA'', Part 5 of the ''PPSA'' outlines the creditor’s remedies (ss 56 - Rights and remedies, 57 - Collection of payments under intangibles or chattel paper, 58 – Right of seizure or repossession, and 67 - Rights and remedies: consumer goods).  For agreements that involve fixtures, crops or accessions, ss 36 – 38 apply.  In addition, Part 6 contains some sections (i.e. ss 68(2) - Good faith and commercially reasonable, and 72 - Notice) that are of procedural importance.

:'''NOTE:''' The “seize or sue” rule does not apply to “true leases” but ''will'' apply to “security leases” or “conditional sales agreements”.  BC courts have been developing tests to distinguish between true leases and security leases. Disputes often arise over car leases. Creditors and debtors should consult with a lawyer who is familiar with this area of law when trying to figure out whether their contract is a true lease or a security lease. If the lease is a true lease the creditor has the option to seize and sue; see ''[https://www.canlii.org/en/bc/bcca/doc/2007/2007bcca144/2007bcca144.html?autocompleteStr=Daimler%20Chrysler%20Services%20Canada%20Inc%20v%20Cameron%2C%202007%20BCCA%20144&autocompletePos=1 DaimlerChrysler Services Canada Inc v Cameron]'', 2007 BCCA 144.

Therefore, the sale proceeds become subject to a bankruptcy stay (if a bankruptcy occurs) and the creditor may have to share the proceeds of the seizure and sale with other creditors as they will no longer have priority in a bankruptcy based on secured creditor status.

Before this Act, the common law position was that priorities among execution creditors were determined in relation to the time the writs were delivered to the sheriff. The creditor who filed the first writ would be paid in full, and then the next, and so on.

The principles of the ''Creditor Assistance Act'' allow creditors to give debtors time to pay, and not prejudice the patient creditor over another who files as soon as the debt is due. Section 3 provides that on execution, all creditors who have provided a writ or certificate to the sheriff within one month from the entry of notice will receive their share on a ''pro rata'' (or “rateable”) basis. ''Pro rata'' means that each creditor will receive a share of the funds available for distribution that is proportionate to their share of the debtor’s total debt.

Under s 3, once the sheriff collects money, an event called a levy, the persons who qualify under the Act will distribute it. These persons must  have filed a writ of execution prior to the levy or must file a writ within one month of the date notice of the levy was entered (s 2). Where the creditor does not have a judgment against the debtor at the time of levy, and the claim is for debt, the creditor may obtain a certificate of claim under  the ''Creditor Assistance Act''. If this certificate is delivered to the sheriff within one month of the levy, the creditor may participate in the rateable distribution. The procedure for the certificate of claim is in ss 6 – 21 of the Act; it is essentially a summary judgment procedure that provides a successful creditor a certificate that is as good as a judgment for enforcement purposes.

'''Under s 14, on receiving an affidavit of claim (in support of a sought certificate) the execution debtor may file and serve an affidavit of good defense to the claim within 10  days of the original service.''' The court may vary this length of time upon application. The distribution is halted pending verification of the validity of the claim.  

Under s 55 of the Court Order Enforcement Act [''COEA''], any judgment creditor may have the property of the judgment debtor seized and sold by the sheriff to satisfy the amount owing under the judgment, subject to exemptions under ss 70-79 or as otherwise provided for in the ''COEA''.  Section 60 of the ''COEA'' directs that any surplus after payment of the judgment, interest, and reasonable costs of seizure and sale be paid to the debtor.  

Section 71.3 of the ''COEA'' specifies that property in registered plans may be exempt from seizure as well (including Deferred Profit Sharing Plans, Registered Retirement Income Funds and/or Registered Retirement Savings Plans).  In order to qualify for an exemption, the plan must be registered similar to the Registered Retirement Savings Plan. However, there are some employee DPSPs that are not registered and exempt from seizure. Notwithstanding this section, property can be seized despite being in a registered plan if it was contributed to the plan after or within 12 months before the date on which the debt became due. Under section 1(1) the "Family Maintenance Enforcement Act", a maintenance debtor refers to “a person required under a maintenance order to pay maintenance costs”.

:'''NOTE:''' Refer to ''Court Order Enforcement Exemption Regulation'', BC Reg 28/98 for further details regarding exemptions under the ''COEA''. Where there are competing priority interests between judgment creditors and secured parties, each party should seek the assistance of counsel.

:'''NOTE:''' The B.C. Court of Appeal decision in ''[https://www.canlii.org/en/bc/bcca/doc/2012/2012bcca46/2012bcca46.html?autocompleteStr=Atwal%20(Re)%2C%202012%20BCCA%2046%20&autocompletePos=1 Atwal (Re)]'', 2012 BCCA 46 confirmed that a debtor whose property is sold by a trustee under  the ''Bankruptcy and Insolvency Act'', RSC 1985, c B-3 [''BIA''] is entitled to the above exemptions if the value of their property exceeds that which is prescribed in the legislation. Thus, if a debtor’s vehicle, valued in excess of $5000 is sold by a trustee in bankruptcy, the debtor is entitled to $5000 of the sale price, as provided by the exemption.  

Any goods, chattels and effects of the judgment debtor (''COEA'', s 55), money, bank notes, cheques, or other securities for money, such as  shares of an incorporated company in British Columbia (s 64; ''[https://www.canlii.org/en/bc/bcsc/doc/1984/1984canlii722/1984canlii722.html?autocompleteStr=Peligren%20v%20Ajac%E2%80%99s%20Equipment%20(1982)%20Inc%20(1984)%2C%2056%20BCLR%2017%2C%20%5B1984%5D%205%20WWR%20563%20(SC)&autocompletePos=1 Peligren (Tub City Excavating) v Ajac’s Equipment (1982) Inc]'', 1984 CanLII 722 (BCSC)), and any legal or equitable present, future, executory or contingent interest in land (s 81) may be seized after the exemptions from s 71(1) of the ''COEA'' are applied.  

Certain interests have been held to fall outside s 71 and therefore are not exempt from seizure.  Partial interest and equitable interests do not fall within s 71 and thus, for example, a purchaser under a conditional sales agreement cannot prevent seizure of the goods sold under the agreement.  Similarly, the section does not apply to a charging order or a garnishing order since the section only refers to “forced seizure and sale”.   

The judgment creditor obtains an order for seizure and sale (Small Claims Court) or a writ of seizure and sale (Supreme Court) directing the  sheriff or bailiff to seize and sell sufficient goods or securities to satisfy the debt plus expenses (''COEA'', ss 58 and 60). The seizure of  shares involves particular problems: see ss 64.1 and 65.1; see also ''[https://www.canlii.org/en/bc/bcsc/doc/1984/1984canlii722/1984canlii722.html?autocompleteStr=Peligren%20v%20Ajac%E2%80%99s%20Equipment%20(1982)%20Inc%20(1984)%2C%2056%20BCLR%2017%2C%20%5B1984%5D%205%20WWR%20563%20(SC)&autocompletePos=1 Peligren (Tub City Excavating) v Ajac's Equipment (1982) Inc]'', 1984 CanLII 722 (BCSC).

Where the sheriff seizes goods, the sheriff’s officers are entitled to assume that all the goods and chattels on the premises are the property  of the judgment debtor at the time of the seizure. The judgment debtor has a duty to claim that some of the property is personal property or  the personal property of others: see ''[https://www.canlii.org/en/bc/bcca/doc/1987/1987canlii2543/1987canlii2543.html?autocompleteStr=Supreme%20Auto%20Body%20v%20British%20Columbia%20(1987)%2C%2021%20BCLR%20(2d)%20101%20(CA)&autocompletePos=1 Supreme Auto Body Ltd v BC (Govt)]'', 1984 CanLII 2543 (BCCA).  

If the judgment creditor registers a judgment in any Land Title Office, a lien is created against the interest in the real property of the judgment debtor that is registered in the land registration district in which the judgment is registered (s 82 of ''Court Order Enforcement Act'').  Once a judgment is registered, the judgment creditor may seek a court order to have the sheriff sell the land (ss 92 and 96). If the land is held in joint ownership and the debt is in one owner’s name only, the enforcement proceedings are similar, but a creditor can only apply to have the judgment debtor’s portion of the land sold. In this case, the debtor’s joint tenancy interest is considered severed. The buyer/new owner of the partial interest in the land can be the judgment creditor, a third party, or the non-debtor owner. After the sale of the land, the new owner or the remaining non-debtor owner can bring an application under the Partition of Property Act to ‘buy out’ the new owner. '''The judgment creditor must renew the judgment after two years or it is extinguished''' (ss 83 and 91, ''COEA''), unless it is a non-expiring judgment (i.e. a judgment registered under the ''Family Maintenance Enforcement Act'').

Garnishment is a judicial proceeding in which a creditor asks the court to order a third party who is indebted to the debtor to pay the creditor instead of the debtor to satisfy the third party’s debt (the amount garnished is paid into court first). The creditor is the garnishor. The third party is the garnishee. The ''COEA'' provides that a garnishing order may be obtained before or after judgment.

A pre-judgment garnishing order is paid into court pending the outcome of the proceedings, and may be used in circumstances where the debtor's ability to pay may be compromised before judgment.  A pre-judgment garnishing order is not available against wages.  The creditor’s action against the debtor must be for a liquidated (i.e. explicitly specified) or ascertained sum. Damages for a breach of contract must be quantified as a term of that contract (see ''[https://www.canlii.org/en/bc/bcsc/doc/2010/2010bcsc409/2010bcsc409.html?autocompleteStr=Ocean%20Floors%20Ltd%20v%20Crocan%20Construction%20Ltd%20(2010)%2C%202010%20BCSC%20409&autocompletePos=1 Ocean Floors Ltd v Crocan Construction Limited]'', 2010 BCSC 409). A definition of liquidated sum is found in ''[https://www.canlii.org/en/bc/bcsc/doc/2005/2005bcsc920/2005bcsc920.html?autocompleteStr=Steele%20v%20Riverside%20Forest%20Products%20Ltd%20(2005)%2C%202005%20BCSC%20920&autocompletePos=1 Steele v Riverside Forest Products Limited et al]'', 2005 BCSC 920. The accompanying affidavit to a pre-judgment garnishing order must disclose the nature of the cause of action and the specified amount claimed.  Note that recourse to a pre-judgment garnishing order is extraordinary and therefore the provisions of the ''COEA'' must be strictly complied with or it may be overturned. The creditor themselves will generally swear an affidavit in support of a pre-judgment garnishing order.

Any debt that is “due or accruing due” to a judgment debtor may be garnished by a judgment creditor. This requires that the debt be an existing or perfected debt even though payment is not yet due. Bank accounts can be garnished as long as it is not a joint bank account. Garnishment against joint bank accounts can only occur when there is a court judgement against all joint account holders. Term deposits may be garnished as long as any conditions on withdrawal are mere matters of procedure and administration, though there may be complications where the account is transferable.

The garnishing order may be set aside if the procedural requirements are not strictly complied with because it is considered an extraordinary remedy. For example, a pre-judgment garnishing order will be set aside where the affidavit in support sets out an amount including interest  and the affidavit does not allege the existence of an agreement on the part of the debtor to pay interest: see ''Nevin Sadler-Brown Goodbrand Ltd v Adola Mining Corp and Prophecy Developments Ltd'' (1988), 24 BCLR (2d) 341. '''Never''' court ordered interest in the affidavit.  

The court has discretion to set aside a pre-judgment garnishing order, but the applicant must submit a meritorious set-off claim or show  extraordinary hardship arising out of the garnishment. While the plaintiff’s solicitor may swear in an affidavit as to what is the amount owing (see ''[https://www.canlii.org/en/bc/bcsc/doc/1987/1987canlii2685/1987canlii2685.html?autocompleteStr=Cementation%20&autocompletePos=2 Caribou Const Ltd v Cementation Co (Can) Ltd]'', 1987 CanLII 2685 (BCSC); ''[https://www.canlii.org/en/bc/bcsc/doc/1994/1994canlii845/1994canlii845.html?autocompleteStr=Trade%20Fortune%20Inc%20v%20Amalgamated%20Mill%20Supplies%20(1994)%2C%2089%20BCLR%20(2d)%20132%20(SC)&autocompletePos=1 Trade Fortune Inc v Amalgamated Mill Supplies Ltd]'', 1994 CanLII 845 (BCSC)), most practitioners prefer never to swear an affidavit to support a pre-judgment garnishing order. Whenever possible, the plaintiff should swear the affidavit: see ''Samuel and Sons Travel v Right on  Travel'' (1987), 19 BCLR (2d) 199. Practitioners should only swear an affidavit where they are personally aware of the facts and not just based on what a client alleges as fact. The remaining procedure is the same as for post-judgment garnishing orders (below) except that the court retains the money pending the action’s outcome.

The affidavit is filed in the court registry along with the form of order requested.    The garnishee is then to be served with a copy of the order, which commands them to pay the money into court.  A copy of the order must be served on the debtor at once, or within a time allowed by the judge or registrar by memorandum endorsed on the order . Failure to serve a garnishing order on a debtor “at once” may result in the garnishing order being set aside. Whether delayed service is fatal to a garnishing order depends on the circumstances of each case. See ''[https://www.canlii.org/en/bc/bcca/doc/1985/1985canlii539/1985canlii539.html?autocompleteStr=Skybound%20&autocompletePos=2 Skybound Dev Ltd v Hughes Properties Ltd]'', 1985 CanLII 539 (BCCA) for a discussion on this topic. The garnishee may dispute indebtedness to the judgment debtor (see '''Section II.B: Legal Advice for Debtors Who are Garnished''', below).  Where the garnishee pays money, the court keeps the money until it is paid out to the judgment creditor under ss 11, 12, and 13.

Funds held jointly to the credit of the defendant and another person, who is not a party to the action, cannot be garnished, see ''[https://www.canlii.org/en/bc/bcca/doc/1984/1984canlii301/1984canlii301.html?autocompleteStr=238344%20BC%20Ltd%20v%20&autocompletePos=1 238344 BC Ltd v Patriquin]'', 1984 CanLII 301 (BCCA). That case also cited cases of exceptions where a creditor bank exercised its right of offset, but ''238344 BC Ltd'' suggested these were wrongly decided.

A debtor against whom a garnishing order has been made may apply for a release of the garnishing order, and for an order for the payment of the debt by instalments on the basis of hardship.  This order, if granted, will bind the debtor’s creditors, but will only continue for as long as the debtor is not in default on any payment for more than five days, and so long as no other garnishing order is issued against them for any other debt (s 5). There is an exception where a creditor who elects to have a garnishing order changed to payment by instalments will be barred from seeking a garnishing order after the debtor defaults (see ''[https://www.canlii.org/en/bc/bcsc/doc/1984/1984canlii332/1984canlii332.html?autocompleteStr=Bank%20of%20Montreal%20v%20Monsell%20&autocompletePos=1 Bank of Montreal v Monsell]'',  (19894 CanLII 332 (), 58 BCLR 11 BC(SC). The creditor may apply to have the order  varied if new evidence of the debtor’s finances comes to light.

A debtor whose wages have been garnished may apply under s 4 of the ''COEA'' to have the exemption varied. The registrar or judge shall, within three days after receiving the application, notify persons affected by it and a hearing will be held within seven days.  

However, this exemption from garnishment does not apply to offsets or to debts to the government.  For example, debts to the federal crown may be collected from Canada Pension Plan benefits and other benefits. Social assistance (welfare) is the only kind of statutory benefit that is truly exempt from garnishment. This also applies to Canadian Emergency Response Benefits and Canada Child Benefits received under the COVID-19 Emergency Response Act. '''The creditor or debtor should also be advised that this protection against garnishment may not extend to a bank account into which the exempt income is deposited if it is commingled with other funds.'''

When a buyer has made a partial or full payment to a seller - and the goods are unascertained or future consumer goods, the buyer can place a lien against all goods that are in, or will come into, the possession of the seller that correspond with the description or sample of goods agreed upon (See Part 9 of the ''Sale of Goods Act'', RSBC 1996, c 410). This holds as long as the goods were not sold to someone else. The buyer also has a lien against any bank account where the seller normally deposits  the  proceeds  of  sales.  This  lien  has  priority  over  all  other  security  interests, but generally is not valid in bankruptcy. Generally, provincial liens will only be recognized in bankruptcy if the specific property can be identified. If the seller has maintained records or documents that clearly identify the goods  for which a deposit was paid, the buyer may be entitled to the lien. Where the seller maintains a separate trust account, the buyer can file a property claim for the trust funds which is in priority to other security interests. For examples of the trustee in bankruptcy (of the buyer’s estate) having priority over unpaid sellers, see ''[https://www.canlii.org/en/bc/bcsc/doc/2006/2006bcsc1414/2006bcsc1414.html?autocompleteStr=In%20the%20Bankruptcy%20of%20Ian%20Gregory%20Thow%2C%202006%20BCSC%2C%201414&autocompletePos=1 In the Bankruptcy of Ian Gregory Thow]'', 2006 BCSC, 1414 and ''[https://www.canlii.org/en/bc/bcsc/doc/2001/2001bcsc1476/2001bcsc1476.html?autocompleteStr=Anderson%27s%20Engineering%20Ltd%202001%20BCSC%201476&autocompletePos=1 In the Matter of the Bankruptcy of Anderson's Engineering Ltd (Re) (Trustee of)]'', 2001 BCSC 1476.   

The ''Warehouse Lien Act'', RSBC 1996, c 480 provides that every warehouse owner or operator has a lien on goods deposited with them for storage, whether  deposited by the owner of goods or by their authority, or by any person entrusted with possession of the goods by the owner, or by their authority (s 2(1)). This right does not apply to unpaid charges for goods previously stored; see ''[https://www.canlii.org/en/bc/bcsc/doc/1980/1980canlii495/1980canlii495.html?autocompleteStr=Re%20Dutton%20Pacific%20Forest%20Products%20Ltd%20(1980)%2C%20117%20DLR%20(3d)%20507%20(SC)&autocompletePos=1 Squamish Terminals Ltd v Price-Waterhouse Limited]'', 1980 CanLII 495 (BCSC). After the warehouser gives the appropriate  notices, the goods may be sold to collect the charges (ss 3 and 4).

'''NOTE:''' The Commercial Liens Act received Royal Assent on March 31st, 2022, but has not yet come into force. It will come into force by regulation of the Lieutenant Governor in Council. The act overhauls commercial liens, and repeals several lien acts, including the ''Warehouse Lien Act''.

If the lien is valid pursuant to the ''Builders Lien Act'' and the debtor wishes to discharge the lien, but disputes the amount of the claim, the debtor may wish to make the payment into court by application under s 23(1) of the ''Builders Lien Act''. This discharges the liability with respect to the lien under s 23(2). The court will then assess the proper amount to be paid by receiving evidence or directing a trial.