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

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Creditors' Remedies against Debtors (10:III) (view source)

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{{REVIEWED LSLAP | date= July 8, 2022}}
{{REVIEWED LSLAP | date= July 8, 2023}}
{{LSLAP Manual TOC|expanded = creditors}}
{{LSLAP Manual TOC|expanded = creditors}}


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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:
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;         
: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;         
: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; and       
:c) That the act or omission was that of the person against whom the claim is or may be made; and       
: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.
: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.   
:'''NOTE:''' The limitation period does not apply to court proceedings and claims exempted under sections 2 or 3.   
:'''NOTE:''' On March 18, 2020, the Supreme Court of British Columbia suspended regular court operaions due to COVID-19. Limitation periods that overlapped with the suspension of court operation were not affected. However, parties who experienced delays due to the suspension of operations may apply to extend their limitation period, which the Court will determine on a case-by-case basis.


== A. Secured Creditors ==
== A. Secured Creditors ==
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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”:  
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  
: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).  
: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.  
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:  
“Attachment”: Section 12 states that a security interest attaches to the good when:  
:i) value is given;  
:i) Value is given;  
:ii) the debtor has rights in the collateral; and  
: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).
: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 ===
=== a) Methods of Perfection ===


:i) '''perfection by possession of collateral applies to all forms of security interests (s 24)''';  
: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
: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).
:iii) '''Temporary perfection''' (See ss 5(3), 7(3), 26, 28(3), 29(4) and 51).


=== 5. Remedies ===
=== 5. Remedies ===
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Section 59(2) provides a priority scheme regarding application of the proceeds of sale:  
Section 59(2) provides a priority scheme regarding application of the proceeds of sale:  
*first, toward the reasonable expenses of seizing, repairing, etc.;  
*First, toward the reasonable expenses of seizing, repairing, etc.;  
*second, toward the satisfaction of the obligations owed to the secured party; and  
*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)).  
*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)).
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)).
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'''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)):'''
'''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;  
: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);
: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  
: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.  
: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)):'''
'''The secured party is required to include specific information in the notice (see s 59(7)):'''
:i) a description of the collateral;  
:i) A description of the collateral;  
:ii) the amount required to satisfy the obligation secured by the security interest;  
: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);  
:iii) The arrears owing (exclusive of the operation of an acceleration clause);  
:iv) the expenses associated with seizure and repossession; and  
:iv) The expenses associated with seizure and repossession; and  
:v) the date, time and place of disposition.  
: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 s 60(2)):'''
'''In the case of a receiver attending to the disposition of the collateral, the receiver must give notice to (see s 59(10) and s 60(2)):'''
:i) the debtor;  
:i) The debtor;  
:ii) any other person known by the secured party to be an owner of the collateral;  
: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  
: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.  
: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)):'''
'''The notice that the receiver must provide need contain only (see s 59(11)):'''
:i) a description of the collateral;  
:i) A description of the collateral;  
:ii) a statement that unless the collateral is redeemed it will be disposed of; and  
: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
: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 ===
=== 9. Surplus or Deficiency ===
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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:
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  
: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.
: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 ===
=== 11. Restrictions on Realization ===
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Under s 20(a), an unperfected security interest is subordinate to the interest of:  
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 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 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''.  
*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).
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).
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Section 67(1) lists the options available to a secured party. The secured party may elect to pursue one of the following 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);   
*Seize or repossess the goods (s 58);   
*enact the voluntary foreclosure remedy (s 61) (discussed above);  
*Enact the voluntary foreclosure remedy (s 61) (discussed above);  
*accept the surrender of the goods by the debtor; or  
*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.  
*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.  
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)):   
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 value of the collateral;  
*the amount of the obligation that has been discharged;
*The amount of the obligation that has been discharged;
*the reasons for default; and  
*The reasons for default; and  
*the current and future financial circumstances of the parties.
*The current and future financial circumstances of the parties.


==== b) Disqualification from “Seize or Sue” and Leases ====
==== 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:'''  
'''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 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)).
*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 ''[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 Daimler Chrysler Services Canada Inc v Cameron'', 2007 BCCA 144].
:'''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 Daimler Chrysler Services Canada Inc v Cameron'', 2007 BCCA 144].
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'''Sections 71(3) and (4) set out three exceptions to the personal property exemptions provided in s 71(1) of the ''COEA'':'''  
'''Sections 71(3) and (4) 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;  
: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  
: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.  
: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.
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.
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In order to obtain a post-judgement garnishing order, a judgment creditor or their solicitor must swear an affidavit stating:  
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;  
:a) That a judgment has been recovered;  
:b) the amount that is unsatisfied;  
:b) The amount that is unsatisfied;  
:c) that another person, the garnishee, is indebted to the judgment debtor; and  
: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)).  
: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 ''[https://www.canlii.org/en/bc/bcca/doc/1985/1985canlii539/1985canlii539.html?autocompleteStr=Skybound%20&autocompletePos=2 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.
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 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.
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==== b) Limitation Period ====
==== 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.  
The time for filing a claim of lien is governed by s 20 and the time limitations are strict. The following limitation periods apply:
*'''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.
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.
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==== b) Limitation Period ====
==== 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.'''
'''The garage keeper has, pursuant to s 3 of the ''Repairers Lian Act'', 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).'''
'''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).'''
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