Creditors' Remedies against Debtors (10:III)
|This information applies to British Columbia, Canada. Last reviewed for legal accuracy by the Law Students' Legal Advice Program on August 18, 2021.|
Before taking action against a debtor, a creditor must provide a reasonable time for payment on a demand loan or term loan. That time begins to run from the date of the demand for payment and not the date of the loan. What constitutes a reasonable demand period depends upon the facts of each case. For a list of factors to be considered see Royal Bank of Canada v. W. Got Associates Electric Ltd.,  3 SCR 408, 1999 CanLII 714 (SCC), para. 18).
Under section 8 of the Limitation Act, in British Columbia, the period for when a proceeding for the collection of a debt must be commenced is 2 years from the “date of discovery” of the claim. The date of discovery is defined as the day on which the claimant knew or ought reasonably to have known all of the following:
- a) that injury, loss or damage had occurred;
- b) that the injury, loss or damage was caused by or contributed to by an act or omission;
- c) that the act or omission was that of the person against whom the claim is or may be made;
- d) that, having regard to the nature of the injury, loss or damage, a court proceeding would be an appropriate means to seek to remedy the injury, loss or damage.
- NOTE: The limitation period does not apply to court proceedings and claims exempted under sections 2 or 3.
A. Secured Creditors
A secured creditor holds a lien, mortgage, or charge against the debtor’s assets or collateral as security for the repayment of the debt.
2. General Introduction to the PPSA
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: PPSA issues, particularly those involving priority disputes or matters relating to the transitional provisions, are complex and may have to be referred to a lawyer.
3. What Does the PPSA Govern?
The scope of the PPSA is defined in s 2 as including every transaction that in substance creates a security interest without regard to its form. As well, under s 3, a transaction involving either a transfer of an account or chattel paper, a commercial consignment, or a lease for a term of more than one year that does not secure payment or performance of an obligation (i.e. does not create a security interest) is subject to the PPSA. Section 55 provides that Part 5 does not apply to transactions brought within the PPSA by s 3. It is necessary to look to the terms and the common law.
- NOTE: Section 4 lists types of transactions that are exempt from the PPSA. The PPSA does not apply to a “lien, charge or other interest given by a rule of law or an enactment unless the enactment contains an express provision that the PPSA applies”. Generally this excludes real property and natural resources.
For a creditor’s interest in a good to be practically effective, s 35(1)(b) of the PPSA states that the interest must be “perfected”, whereby the creditor becomes a “secured” party. By virtue of s 19, a security interest must satisfy two conditions to be “perfected”:
- i) the security interest must have “attached” (see below); and
- ii) the secured party must ensure that “all steps required for perfection under this Act have been completed” (see below).
In general, attachment will ensure that the security interest is enforceable against the debtor, while perfection will protect the security interest against competing third party claims.
“Attachment”: Section 12 states that a security interest attaches to the good when:
- i) value is given;
- ii) the debtor has rights in the collateral; and
- iii) except for the purpose of enforcing rights between the parties to the security agreement, the security interest becomes enforceable under s 10 (unless the parties specifically agreed to postpone the time for attachment in which case the security interest will attach at the time specified in the agreement).
a) Methods of Perfection
- i) perfection by possession of collateral applies to all forms of security interests (s 24);
- ii) perfection by registration. Subject to s 19, registration of a financing statement in the Personal Property Registry perfects a security interest in collateral. (s 25); and
- iii) temporary perfection (See ss 5(3), 7(3), 26, 28(3), 29(4) and 51).
Where a debtor defaults on a security agreement, s 56 provides that the only rights and remedies the secured party has against the debtor are those provided in the security agreement (as long as they do not derogate those rights given to the debtor by the PPSA), and those specifically provided by the PPSA (s 17 and ss 36 – 38).
Important sections of the PPSA for the creditor are ss 58 and 59, which contain rules for seizing and disposing of collateral. These sections provide that, unless the security agreement states otherwise, where the debtor defaults on their payment, the creditor may elect to take possession of the collateral pursuant to the contract, dispose of the collateral and then sue for any amount still owing. Section 67, provides for a more limited set of remedies where the collateral takes the form of consumer goods – known as the “seize or sue” rule. Formerly, under legislation repealed by the PPSA, all creditors could only seize or sue but not both. The principle of “seize or sue” still applies to “consumer goods” (see Section II.A.6: Seizure, below); it no longer applies to commercial goods.
Where the security interest does not involve fixtures, accessions, crops, or consumer goods, s 58 provides the fundamental rule for realization upon non-possessory security interest in tangible personal property: the secured party has a right to seize (in the case of a secured loan transaction) or to repossess (in the case of a secured credit sales transaction) the collateral. Upon seizing the collateral, s 17 defines the rights and obligations of secured parties in possession of collateral. The section imposes a standard of reasonable care on the secured party in possession of the collateral and the secured party must follow the notice provisions outlined in ss 59(6) – (12) before they are entitled to carry through with disposal.
7. Disposal of Collateral
After seizing collateral, the secured party under s 59(2) may dispose of it either in its present condition or after repairing it (though s 68(2) protects the debtor from incurring unnecessary expenses because all rights, etc., under the PPSA must be discharged “in good faith”). Further, s 59(3) provides that the secured party may dispose of the collateral by a private or public sale (either as a whole or in commercial units or parts) and, if the security agreement so provides, by lease. See also Section II.A.10: Voluntary Foreclosure.
Section 59(2) provides a priority scheme regarding application of the proceeds of sale:
- first, toward the reasonable expenses of seizing, repairing, etc.;
- second, toward the satisfaction of the obligations owed to the secured party; and
- last, if any surplus exists, to the satisfaction of obligations owed to persons holding a subordinate security interest, and then toward the debtor (s 60(2)).
A person who buys an item from a disposal sale takes the good free and clear of the interests of the secured party, but also debtors, , and any subordinate creditors whether or not the secured party complied with the requirements of section 59(14). In the case of a prior secured creditor’s interest, if the goods are “consumer goods” of a value less than $1,500 (and not fixtures) and the purchaser gave value for the goods, the purchaser takes them free of the prior secured creditor’s interest (see ss 30(3-4)).
8. Notice of Intention to Dispose of Collateral
- NOTE: The forms of notices under the PPSA depend on a number of factors, including the nature of the security and the terms of the security agreement. Advice concerning the validity of notices should be referred to a lawyer.
Subject to the circumstances where notice is not required as per s 59(17) (e.g. for perishable collateral, collateral requiring disproportionately high storage costs relative to its value, etc.), the requirements for notice are outlined in ss 59(6) and (10). These sections require that the secured party, or receiver, as the case may be, must provide at least 20 days’ notice of their intention to dispose of the collateral to parties including the debtor and any other creditor.
When a secured party is considering methods of disposal, they must give notice to the following parties (see s 59(6) and s 60(2)):
- i) the debtor;
- ii) any other person who is known by the secured party as the owner of the collateral (where that is not the debtor);
- iii) any creditor or person with a security interest in the collateral whose interest is subordinate to the secured party, who registered a financing statement, or whose security interest is perfected by possession at the time of seizure or repossession of the collateral; and
- iv) any other person with an interest in the collateral who has given notice to the secured party of their interest in the collateral before the notice of disposition is given to the debtor.
The secured party is required to include specific information in the notice (see s 59(7)):
- i) a description of the collateral;
- ii) the amount required to satisfy the obligation secured by the security interest;
- iii) the arrears owing (exclusive of the operation of an acceleration clause);
- iv) the expenses associated with seizure and repossession; and
- v) the date, time and place of disposition.
In the case of a receiver attending to the disposition of the collateral, the receiver must give notice to (see s 59(10) and 60(2)):
- i) the debtor;
- ii) any other person known by the secured party to be an owner of the collateral;
- iii) any creditor with a security interest subordinate to that other secured party, who has either registered the financing statement, or who has perfected its security interest by possession at the time of the seizure or repossession of the collateral; and
- iv) any other person with an interest in the collateral who has notified the receiver of that interest in the collateral before the notice of disposition is given to the debtor.
The notice that the receiver must provide need contain only (see s 59(11)):
- i) a description of the collateral;
- ii) a statement that unless the collateral is redeemed it will be disposed of; and
- iii) the date, time and place of any sale by public auction, or the place to which closed tenders may be delivered and the date after which closed tenders will not be accepted
9. Surplus or Deficiency
When a secured party is left with a surplus after disposal of the collateral, it must be accounted for and paid to the parties in the order specified in s 60(2). If a dispute regarding entitlement arises, s 60(4) provides for the secured party to pay the secured funds into court, which gives those claiming entitlement the opportunity to make an application under s 70 for payment.
Under s 60(5), the debtor is responsible for any deficiency balance unless the secured party and the debtor have agreed otherwise and made provisionsas such in the security agreement.
- NOTE: This section does not apply to consumer goods.
10. Voluntary Foreclosure
After default, a secured party may make a proposal to the debtor and other interested parties to take the collateral to satisfy obligations secured by it (s 61).
The debtor and other interested parties have 15 days to object to the secured party’s proposal. Failure to object is deemed to be an irrevocable election to forfeit all rights and interests in the good and entitles the secured party to retain the good.
If the debtor or other secured party provides notice of objection to the secured party within 15 days after the notice is given, the secured party must dispose of the collateral in accordance with the provisions of s 59 (s 61(2)). In such circumstances, under s 61(7), the secured party may make an application to the court for an order that an objection to the secured party’s proposal is ineffective because:
- i) the objection was made for a purpose other than protecting an interest in the collateral or the proceeds of the disposition of the collateral; or
- ii) the market value of the collateral is less than the total amount owing to the secured party plus the costs of disposition.
11. Restrictions on Realization
a) Subordination of Unperfected Security Interests
Under s 20(a), an unperfected security interest is subordinate to the interest of:
- a person who causes the collateral to be seized under legal process to enforce a judgment (including execution, garnishment or attachment), or who has obtained a charging order or equitable execution affecting or relating to the collateral;
- a representative of a creditor enforcing the rights of a person referred to above; and
- a sheriff acting under the Creditor Assistance Act and any judgment creditor entitled to participate in the distribution of property under the Creditor Assistance Act.
Also, if an interest is unperfected at the date of the bankruptcy or winding-up, then that interest is not effective against a trustee in bankruptcy or a liquidator (Winding-up and Restructuring Act, RSC 1985, c 6).
In addition, ss 20(c), 30(3) and 31 confirm the subordination of the interest of a secured party to a bona fide purchaser for value under various circumstances.
b) Restriction on the Right to Accelerate a Term Debt
The security agreement may contain an “acceleration clause” (s. 16 of PPSA) that provides that the total amount owing becomes due upon default in payments or on other grounds, such as whenever the secured party has “commercially reasonable grounds” to believe that they may not be repaid or that the collateral is “in jeopardy”. If there is an acceleration clause in the security agreement, other than in the case of default of payments, the acceleration clause may not be invoked unless this objective test of “commercially reasonable grounds” has been satisfied. A secured creditor has commercially reasonable grounds when they have a reasonable belief that there is a risk of non-payment. This could occur for a variety of reasons including the debtor fleeing the country, being hospitalized or illegal activity taking place on the premises. If the risk is not obvious the creditor must make commercially reasonable efforts to verify their suspicions. Commercially reasonable efforts do not mean best efforts.
c) Limitation of the Right of Seizure for Consumer Goods
For collateral that is a “consumer good”, where the debtor has paid at least two-thirds of the total amount secured, the creditor may not seize the good without first obtaining a court order (see Section II.A.12.a: Secured Party's Remedies).
d) Obligation While in Possession of Collateral
Section 17 of the PPSA imposes a standard of reasonable care on any secured party in possession of the collateral.
e) Rights of a Debtor
The PPSA preserves the debtor’s (but not the secured party’s) rights and remedies under other statutes that are not inconsistent with the PPSA as well as the specific rights and remedies provided in the security agreement, ss 17 and 56(2)(b).
f) Rights of Redemption and Reinstatement
Under s 62, a debtor has redemption rights. Any person entitled to notice of a pending disposition of collateral may “redeem” the collateral by tendering to the secured party fulfilment of the obligations secured by the collateral plus the reasonable expenses incurred by the secured party associated in seizing the collateral or otherwise preparing it for disposition. The aforementioned obligations may simply be the amount in arrears; however, it is more often the case that an acceleration clause applies, and that the obligations will be the total amount of the debt. Where the security agreement contains an acceleration clause, the debtor may apply to court for relief from the consequences of default or for an order staying enforcement of the security agreement’s acceleration provision.
12. Consumer Goods
Where the collateral is a “consumer good”, the calculation of the obligation secured and the obligation that must be tendered is varied. Consumer goods are defined as goods that are used or acquired for use primarily for personal, family or household purposes (s 1). The debtor may “reinstate” the security agreement by paying only the monies actually in arrears – negating the operation of any acceleration clause. The debtor may waive this right, but any such agreement must be in writing after default. Note that the number of times the debtor may reinstate the security agreement is limited depending on the period of time for repayment set out in the security agreement; however, the frequency of reinstatement may be varied by agreement between the parties.
a) Secured Party’s Remedies
Section 67(1) lists the options available to a secured party. The secured party may elect to pursue one of the following remedies:
- seize or repossess the goods (s 58);
- enact the voluntary foreclosure remedy (s 61) (discussed above);
- accept the surrender of the goods by the debtor; or
- start an action to recover a judgment against the debtor for the amount of the unpaid debt or unperformed obligations under the security agreement.
This is sometimes called the “seize or sue” rule.
If the debtor has paid at least two-thirds of the total amount of the secured obligation, the secured party may not seize the consumer good used as collateral (s 58(3)). However, the secured party may apply to court for an order that the “two-thirds rule” should not apply and the court will make a decision based on (s 58(4), (5)):
- the value of the collateral;
- the amount of the obligation that has been discharged;
- the reasons for default; and
- the current and future financial circumstances of the parties.
b) Disqualification from “Seize or Sue” and Leases
A secured party with a security interest in “consumer goods” may escape the seize or sue provisions where:
- the debtor has engaged in wilful or reckless acts or neglect that has caused substantial damage or more deterioration than would be reasonably expected; a court, on application, may order that subsections (1) to (7) or any one or more of them do not apply so as to limit the rights and remedies of the secured party (ss 67(9)); or
- the secured party discovers after s 58 seizure or bringing action to recover a judgment that an accession that was collateral has been removed and not replaced by other goods of equivalent value and free from prior security interests, a claim may be advanced notwithstanding ss 67(2), (5) and (6) against the debtor for the value of the accession (s 67(8)).
- 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 Daimler Chrysler Services Canada Inc v Cameron, 2007 BCCA 144.
13. Consequences of Electing to Proceed Against Collateral
Under s 67(2), an election to proceed against the collateral results in the extinguishment of the debtor’s obligations under the security agreement or any related agreement (with the exception of land mortgages executed before July 1, 1973), thereby automatically releasing any guarantor or indemnitor of the obligations contained in the security agreement. However, ss 67(3) and 67(4) contain exceptions.
Since proceeding against the collateral precludes the creditor from recovering the deficiency of the debt, the creditor is well advised to collect as much of the debt as possible, from other sources prior to seizing the goods. Remember, however, that if the creditor collects 2/3 or more of the debt, they lose the right to seize the goods.
14. Consequences of Electing to Sue
An election to sue results in the following consequences for the creditor:
- Under s 67(6), if the creditor gets a judgment against the debtor and seizes the collateral pursuant to a writ of seizure and sale, the right of recovery is limited to the gross amount realized from the sale of the collateral;
- Under s 67(10), commencement of proceedings against the debtor extinguishes the security interest of the creditor in the goods. The secured party must also discharge any registration relating to the security interest no later than one month after the exercise of their rights.
Therefore, the sale proceeds become subject to a bankruptcy stay; and the creditor may have to share the proceeds of the seizure and sale with other creditors as they will no longer have priority based on secured creditor status.
Exceptions include cases of fraud or cases where the stay is unjust. Where there is alleged fraud or the stay is unjust for other reasons, the creditor can apply to the court to have the stay removed against them specifically. Generally, the stay is removed so that litigants can continue their litigation.
B. Unsecured Creditors
A creditor initiates legal proceedings for one obvious and specific purpose: to permit that creditor to obtain a judgment and collect the debt owed. There may be cases where such action is not taken, for example, if the debtor has no assets and is not likely to ever have assets. There are also instances where a creditor may be legally prevented from initiating proceedings against a debtor, for example, if the debtor files an assignment in bankruptcy. These issues will be discovered when the debtor’s assets, if any, are identified at a Payment Hearing in Small Claims Court, or in the Examination in Aid of Execution or Subpoena to Debtor Hearing in Supreme Court (see Appendix B: Checklist for Examination in Aid of Execution). However, when a debtor has or may have assets, the creditor may wish to obtain a judgment on the debt to execute against assets of the debtor.
1. The Creditor Assistance Act
Before this Act, the common law position was that priorities among execution creditors were determined in relation to the time the writs were filed. 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 filed a writ 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.
Exceptions to this principle of pro rata distribution allow preference to sheriff’s costs, costs to the creditor at whose instance the seizure and levy were made, and wage claims that do not exceed three month’s wages, or salary. Further, the Family Maintenance Enforcement Act, RSBC 1996, c 127 provides that proceeds realized on execution under that Act are not subject to distribution under the Creditor Assistance Act. In addition, some statutory liens and charges may take priority over the rateable distribution under the Act.
- NOTE: Payments made pursuant to a foreclosure sale of land will be made in the order that judgments are registered at the Land Title Office, and not on a pro rata basis.
a) Money to be Levied by Execution
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. 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.
b) Contest of the Creditor’s Claim
Under s 14, on receiving an affidavit of claim 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.
Besides the debtor, another creditor may contest the claim (s 15). Grounds for filing include an allegation that there is no debt due in good faith from the debtor to the claimant, or an allegation that the claim is not one of debt as required by s 6 of the Creditor Assistance Act. A claimant whose claim is contested must make an application to the Supreme Court of British Columbia within eight days of being notified (s 16); otherwise, the claim will be deemed to have been abandoned.
Under s 12, if the amount levied does not satisfy all of the writs of execution and certificates of claim, the sheriff is authorized to make a further seizure of the execution debtor’s personal property to satisfy all writs and certificates of claim. In addition, the certificate, if issued, remains in force for three years and may be renewed similarly to a writ of execution (s 13(1) and (2)).
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.
3. Exemptions from Seizure
Section 71(1) of the COEA creates categories of exemptions for the personal property of debtors with the specific amounts set by regulation. Debtors are allowed:
- Necessary clothing, medical and dental aids that are required by the debtor and their dependents;
- $4,000 for household furnishings and appliances;
- $5,000 for one motor vehicle if the debtor is not a maintenance debtor;
- $2,000 for one motor vehicle if the debtor is a maintenance debtor; and
- $10,000 for tools and other personal property that the debtor uses in their occupation.
- NOTE: See the COEA Exemption Regulations.
In addition, s 71.1(1) of the COEA exempts the principal residence of the debtor; $12,000 is the prescribed amount of equity exemption if the debtor's principal residence is located within the boundaries of the Capital Regional District or the Greater Vancouver Regional District. If the debtor’s principal residence is located outside of these boundaries, $9,000 is the prescribed amount of equity exemption. These values are calculated using the net equity.
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 BC Reg 28/98 (Court Order Enforcement Exemption Regulations) 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 execution remedy is available to an unsecured creditor only after they have obtained judgment against the debtor.
- NOTE: The B.C. Court of Appeal decision in 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; Peligren v Ajac’s Equipment (1982) Inc (1984), 56 BCLR 17,  5 WWR 563 (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.
The secured creditor takes the secured goods subject to the security interest of the conditional seller or chattel mortgagee. Where the debtor is a conditional buyer or a chattel mortgagor, a sheriff or bailiff may seize secured goods. Sheriffs, however, are usually reluctant to seize collateral unless there is clearly equity in it. In such cases, the secured creditor cannot seize a greater interest than the debtor has.
Sections 71(23) and (34) set out three exceptions to the personal property exemptions provided in s 71(1) of the COEA:
- a) the debtor cannot exempt goods identical to the goods that were the subject of the contract in question;
- b) a trader cannot claim any goods that are part of their stock-in-trades; and
- c) Corporate debtors cannot avail themselves of the personal property exemption.
In addition, s 65 of the "Insurance Act", RSBC 1996, c 226 allows for the exemption of certain insurance policies. Under s 65(1), if a beneficiary is designated, the insurance money, from the time of the happening of the event on which the insurance money becomes payable, it is not part of the estate of the insured and not subject to creditors of the insured. Under s 65(2), while there is in effect a designation in favour of a spouse, child, grandchild or parent of the insured, the insurance money and rights or interests of the insured in the money and in the contract are exempt from execution or seizure.
The Bankruptcy and Insolvency Act, 1985, s 67(1)(b.3) now shields all RRSP contributions from seizure in a bankruptcy, except those made in the 12 months prior to bankruptcy.
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”. Thus, monies in court and debts or wages being garnished cannot form part of the judgment debtor’s exemption under the COEA.
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 and 65; see also Peligren v Ajac's Equipment (1982) Inc (1984), 56 BCLR 17,  5 WWR 563 (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 Supreme Auto Body v. British Columbia (1987), 21 BCLR (2d) 101 (CA).
b) Execution Procedure: Land
- NOTE: Issues relating to land should be referred to a lawyer.
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).
- NOTE: Where there is a conflict between the PPSA and the Land Title Act, the Land Title Act prevails (PPSA, s 74) except in regards to ss 36, 37, and 49 of the PPSA.
c) Legal Advice on Execution Orders
Once the execution process has begun, the debtor usually has one final opportunity to pay. In the case of land, the sheriff may not sell until one month after receiving the order for sale (COEA s 100). The debtor should be advised to pay if possible because the amount recovered on a forced sale may not be as high as otherwise obtained on a normal sale of property.
Garnishment is a judicial proceeding in which a creditor asks the court to order a third party who is indebted to the debtor to turn over to the creditor any of the debtor’s property. 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.
5. Garnishment of Bank Accounts and other Accounts Receivable
a) Garnishment 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 debtors 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 Ocean Floors Ltd v Crocan Construction Ltd (2010), 2010 BCSC 409). A definition of liquidated sum is found in Steele v Riverside Forest Products Ltd (2005), 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 will generally swear an affidavit in support of a pre-judgment garnishing order by themself.
A creditor who begins an action for a liquidated sum may seek to garnish a debt owed to the debtor to have the money paid into court to “ensure” payment if the creditor is successful in court. However, remember other judgment creditors may also be trying to ensure payment.
If the order has not yet been made and the debt is valid, it may be in the debtor’s best interest to pay the creditor if possible, since the debtor is liable for payment of the costs of the garnishing proceedings.
Typically, it is the debtor who applies for a release of a garnishment order to substitute for an order for payment by instalments. However, if the order has already been made, the creditor should examine the possibility of having the garnishment released and an order for payment by instalments substituted under s 5. The creditor can also seek to have exemptions lowered in the case of garnishment of wages under s 4, resulting in the debt being repaid faster. The creditor should be advised that hardship may be used as a defence.
A garnishee who wishes to dispute indebtedness to the defendant or judgment debtor, should file a dispute notice as soon as possible with the court. If they do not dispute it, a second order, called an order absolute may be issued (see Appendix A: List of Relevant Documents: Affidavit in Support of Garnishing Order After Judgment). This order operates as a judgment and execution may be taken against the garnishee. Inactivity could render a garnishee liable even if they never owed the money to the defendant/judgment debtor.
b) Which Debts Can be Garnished?
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. For example, a creditor bank may garnish a debtor’s personal account, including a joint account, to offset the debtor’s debts to that bank after a determination of how much of the account’s value each joint account holder is entitled to. 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.
Registered plans such as RRSPs and RRIFs are exempt from enforcement processes under s 71.3 of the COEA. However, contributions made in the 12 months preceding the date of judgment may be enforced on. Also, many pension plan payments are exempt pursuant to s 63 of the Pension Benefits Standards Act. Section 15 of the COEA provides that a creditor may seek a garnishing order that will attach a debt maturing in the future. This form of garnishing order may be useful in attaching monthly payments, since all future monthly payments can be attached by one order rather than issuing a garnishing order for each payment.
c) Procedure for Pre-Judgment Garnishing Order
In order to obtain a pre-judgment garnishing order, a civil action must first be commenced by a creditor for the amount of the debt.
The creditor must swear in an affidavit that an action on the debt is pending, provide the date of its commencement, the nature of the cause of action, and the actual amount (i.e. liquidated or ascertained sum) of the debt, claim or demand, and that the same is justly due and owing. The affidavit may be sworn before or after the action is commenced (although the form of the affidavit will differ). The affidavit must also state that another person, the garnishee, is indebted to the debtor, and provide the garnishee’s address (COEA, ss 3(2)(e) and (f)).
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 claim 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 Caribou Construction v Cementation Co (Canada) (1987), 11 BCLR (2d) 122 (SC); Trade Fortune Inc v Amalgamated Mill Supplies (1994), 89 BCLR (2d) 132 (SC)), 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.
d) Procedure for Post-Judgment Garnishing Order
Post-judgment garnishing orders are not held to the same level of scrutiny as pre-judgment garnishing orders.
In order to obtain a post-judgement garnishing order, a judgment creditor or their solicitor must swear an affidavit stating:
- a) that a judgment has been recovered;
- b) the amount that is unsatisfied;
- c) that another person, the garnishee, is indebted to the judgment debtor; and
- d) the address of the garnishee’s residence in the jurisdiction (s 3(2)).
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 Skybound Developments Ltd. v. Hughes Properties Ltd. (1985), 1985 CarswellBC 219, 65 BCLR 79 (CA) 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 238344 BC Ltd v Patriquin et al (1984), 57 BCLR 224. 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.
e) Payment by Instalments
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 Bank of Montreal v Monsell (1994), 58 BCLR 11 (SC)). The creditor may apply to have the order varied if new evidence of the debtor’s finances comes to light.
6. Garnishment of Wages
a) Judgment Required
Garnishment of wages can only occur after a judgment (s 3(4)).
b) Deductions and Exempt Wages
70 percent of any wages due by an employer to an employee is exempt from seizure or attachment under a garnishing order. Therefore, only 30 percent of wages after statutory deductions (i.e. Employment Insurance premiums, Canada Pension Plan, Income Tax, etc.) can be garnished (s 3(5)). However, a single person cannot be left with less than $100 per month (or calculated pro rata for a shorter period), and a person with dependents cannot be left with less than $200 per month (or calculated pro rata for a shorter period) (s 3(5)). However, where wages are garnished to pay maintenance or support for the debtor’s family, the exemptions allowed to that person are 50 percent of wages not exceeding $600 per month or 33 and 1/3 percent of wages exceeding $600 per month (COEA s.3(7)). These exemptions must not be less than $100 per month (s 3(7)).
Garnishment by the Family Maintenance Enforcement Program is called a Notice of Attachment. The Family Maintenance Enforcement Act Regulation, BC Reg 346/88 contains rules about exemptions from attachment. These rules are different than those found in the COEA.
c) Variation of Exemption
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.
With respect to maintenance orders, under s 18(2) of the Family Maintenance Enforcement Act, upon application by a creditor, the court can issue a garnishing order against the debtor without giving notice.
A separate garnishing order must be sworn and issued for each payment of wages to the debtor, since one garnishing order is good for only one debt that is owed to the debtor.
d) Employer’s Liability for Firing Employee
No employer may fire or demote an employee because that employee has their wages garnished. An employer who does so is liable on summary conviction to a fine of up to $500 or up to three months in jail or both, and an employee must be reinstated with back pay if they are fired for garnishment of wages (s 27). One should consider the fact that the garnishment may have been the final reason among others for termination, and may be difficult to prove.
7. Garnishment of Statutory Benefits
Benefits including Employment Insurance, Canada Pension Plan, Old Age Security, workers compensation, social assistance and provincial disability benefits are usually exempt from garnishment, seizure or attachment. The exemptions are found in the statutes that govern these respective benefit programs.
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. Canada Revenue Agency is now routinely offsetting CPP 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.
8. Enforcing a Judgment Outside of BC
It is possible to register a B.C. judgment in many foreign jurisdictions, including other Canadian provinces. The requirements for registration may differ from jurisdiction to jurisdiction, so the judgment creditor should consult with counsel in the destination jurisdiction to determine the specific requirements. A s 30 application to B.C. courts gives the court jurisdiction to issue a certificate in a reciprocating jurisdiction.
It is also possible, and sometimes more efficient, to sue on the judgment in the province or country where the judgment debtor’s assets are located. Normally the foreign court requires a certificate. A s 30 application to B.C. courts gives the court jurisdiction to issue a certificate in a reciprocating jurisdiction.
C. Unsecured Creditors: Remedies and Options Before Judgment (Liens)
A lien is a claim, encumbrance, or charge on property (real or personal) for payment of a debt, obligation, or duty. In many cases, a creditor is entitled to place a hold or lien over specific property that has benefitted from the individual’s material or labour. It acts as security from the individual’s material or labour and as security for the payment to the creditor. Property liens are complicated and potentially serious. Please refer to a lawyer. The most common liens are listed below.
1. Liens on Land (Builder’s Liens)
- NOTE: Builder’s lien issues involve limitation periods and real property registrations and filings. The time limitations are extremely strict; solicitors have been known to lose suits because they filed a day late. All cases should be immediately referred to a lawyer. Refer to: Builder’s Lien Act, SBC 1997, c 45.
Under the current Builder’s Lien Act, a worker, material supplier, contractor, or sub-contractor who does or causes to be done any work upon, or supplies material, or both, for an improvement, has a lien for the price of the work and material, upon the interest of the owner in the improvement, upon the improvement itself, upon the material delivered to the land, and upon the land itself (s 2). “Price” does not include interest on outstanding accounts or court-ordered interest: see Horseman Bros. Holdings Ltd v Lee (1985), 12 CLR 145 (BCCA).
After a claim of lien is filed against land, the lien-holder may enforce their claim by obtaining a court order for the land to be sold (s 31). When a writ is issued, the lien holder must register a certificate of pending litigation against the land within one year of the date of its filing (s 33(1)), which prevents any dealings with the title to the land until after the court determines the validity of the claim. No claim of lien can be filed if the claim is for less than $200 (s 17).
A claim of lien on land is filed in the Land Title Office (s 33(1)). A claim of lien must be in the prescribed form or it is extinguished (s 22). It takes effect from the time when work began, or when the first material was supplied for which the lien is claimed. A claim of lien has priority over all judgments, executions, attachments, and receiving orders recovered, issued, or made after that date (s 21).
b) Limitation Period
The time for filing a claim of lien is governed by s 20 and the time limitations are strict. If a certificate of completion has been issued for a contract or subcontract, the claims of lien of the contractor, subcontractor, or any person engaged by or under the contractor or subcontractor must be filed no later than 45 days after the date on which the certificate of completion was issued. If there is no certificate of completion, a claim of lien may be filed no later than 45 days after the head contract or improvement has been completed, abandoned, or terminated.
Under s 4, if a person agrees to have repairs done, they must withhold 10 percent of the value of the work or material as they are actually provided under the contract or subcontract, or the amount of any payment made on account of the contract or subcontract price, whichever is greater, from the contractor for a period of 55 days after the certificate of completion is issued. This covers the possibility of having to pay workers, subcontractors, and suppliers who were not paid for their services by the contractor. This holdback must not be retained from a worker, material supplier, architect, or engineer (s 4(6)). These funds are to be paid into a separate trust account at the time of payment.
In addition, all improvements done with the knowledge, but not at the request, of the owner will be held to be done at the request of the owner (s 3(1)). This rule does not apply to improvements made after the owner files a notice of interest in the Land Title Office. A notice of interest is a prescribed form warning other persons that the owner’s interest in the land is not bound by a lien claimed under the Act for an improvement on the land unless that improvement is undertaken at the express request of the owner (s 1).
Unless an action to enforce a claim of lien is started and a certificate of pending litigation is registered in a Land Title Office within one year, the lien is extinguished (s 33(5)). Note that the owner may require the lien-holder to commence an action within 21 days, by sending the holder of a claim of lien notice in writing (s 33(2)).
2. Liens on Chattels (Repairer’s Liens)
a) Possessory Lien and Right to Sell
Under the Repairer’s Lien Act [RLA] RSBC 1996, c 404 [RLA] every mechanic or other person who has bestowed money, skill or materials upon any chattel for its improvement, has a common-law possessory lien on the chattel while it remains in their possession. The lienholder may keep the chattel until paid. Where the person holds the chattel for 90 days, they may sell it upon compliance with statutory provisions (s 2). If the lienholder gives up possession prior to filing a lien, they lose the lien (except with liens on automobiles and aircraft, etc.) and are restricted to ordinary remedies in court.
3. Liens on Automobiles, Aircrafts, Boats and Outboard Motors
If a garage keeper relinquishes possession of an automobile, aircraft, boat or outboard motor, they do not lose the lien, provided that the debtor, before giving up possession, signed an acknowledgement of indebtedness (e.g. invoice, statement of account, etc.) (s 3(1)).
Where a garage keeper gives up possession of an automobile, etc., and afterwards files a financing statement with the Personal Property Registry to register the lien, the lien is not lost notwithstanding the surrender of possession and the garage keeper may enforce the lien by issuing a warrant for seizure to a licensed bailiff or the sheriff (s 11). The automobile or aircraft may then be sold by following the procedures for the sale of chattels set out in s 2 (s 12). A warrant may only be issued within 180 days of filing the lien (s 11).
b) Limitation Period
The garage keeper has, pursuant to s 3 of the RLA, 21 days to register a lien once they have given up possession.
On the registration of a financing statement, the lien will expire after 180 days, unless the automobile, etc., has been seized within that period (s 4).
4. Buyer’s Lien
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 In the Bankruptcy of Ian Gregory Thow, 2006 BCSC, 1414 and In the Matter of the Bankruptcy of Anderson's Engineering Ltd. 2001 BCSC 1476.
The seller can discharge the lien by handing over the good or returning the buyer’s deposit, but the latter will not relieve the seller from the possibility of suit for breach of contract. The buyer’s lien permits the buyer, upon application to court, to have goods seized and sold and have the proceeds delivered, or just have the goods delivered.
5. Liens for Storage
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 Re Dutton Pacific Forest Products Ltd. (1980), 117 DLR (3d) 507 (SC), sub nom Squamish Terminals Ltd. v Price-Waterhouse Limited. After the warehouser gives the appropriate notices, the goods may be sold to collect the charges (ss 3 and 4).
6. Legal Advice on Liens
If the lien is valid pursuant to the "Builders Liens Act" and the debtor wishes to discharge the lien, but disputes the amount of the claim, the debtor may wish to make the payment to the court by application under s 23(1) of the Builder’s 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.
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