Debt Collection in Canada

• In Canada, the payment behaviour of companies is balanced, however, the legislation does not provide standard payment conditions and does not encourage the debt collection mechanism, which ensures the late payment provisions (delays, interest rates, recovery costs) are left to the contractual parties.

• Canada has an effective judicial system in terms of its complexities, insofar as specific federal and local rules apply. Mechanisms for the protection of contractual ownership, such as title retention, are recognized as a security interest and governed by the Personal Property Security Act (PPSA). Enforcement, though, is rare, complicated, and expensive.

• Insolvency law provides complex mechanisms, but their usefulness in retrieving unsecured debt is very limited, and pre-legal action should be seen as the best opportunity to reclaim debt.

1. Summary

1.1. General financial information

1.1.1. Relevant financial information may be collected by government registries and specialist services on publicly traded domestic companies, but private companies have no duty to report their financials and the information available is often obsolete.

1.2. Key legal structures

1.2.1. Corporate debt obligation is defined by legal structures, which are listed as follows:

• Mutual ownership is generally depended on for small-scale businesses as it is focused on the qualifications of the sole proprietor who holds the business assets directly. The proprietor is therefore fully liable for the actions and expenses of the company.

• Alliance is another way of doing business without incorporation: members pool capital and share profits but are also fully liable for the obligations of the alliance. Additionally, limited partnerships allow liability relief where a spouse is not willing to run the company.

• Ultimately, Incorporation establishes a legal entity independent from the owners and shareholders who can not be found liable for the actions and obligations of the undertaking unless there are irregularities or neglect. Therefore, if the business does not remain in good faith, the legal title is set aside, and the firm becomes a single proprietorship, thereby allowing the trustee the ability to go straight after the owners.

1.3. Regulatory framework

1.3.1. Canada provides an efficient and reliable judicial system, while being diverse insofar as different rules are enforced in the ten provinces and three territories of which the nation is composed: as a general rule, civil law exists in Quebec under the 1994 de Civil Code, while common law is otherwise implemented.

1.3.2. The Constitution Act of 1867 (as revised in 1982) separates the judicial authority at the federal and provincial levels. When grappling with civil lawsuits, regulatory disputes, intellectual property, insolvency or maritime law, Federal Courts have jurisdiction. The government is responsible for the administration of justice and civil cases shall be dealt with as a matter of general law before Provincial Courts (small lawsuits up to CAD 25,000) or Superior Courts based on the amounts involved. The Court of Quebec is comprised of several parts, which have authority over various matters.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. The payout system in Canada is great, and although the legislation does not provide standard payment dates, payments are made on average within 30 days, while extensions are brief (5 to 10 days) and rare. The DSO is slightly higher for listed companies, at 54 days.

2.2. Late interests

2.2.1. Late payment penalty can not be paid arbitrarily to the claimant, and when reimbursement is not obtained on time, the law provides no valid interest rate. Therefore it is important the contractual terms include a clause expressly authorizing late payment interest to be applied to the unpaid debt and settlement costs. Such charges would seem, in fact, to be imposed as a tactic to force debtors to settle sooner rather than later.

2.3. Costs of debt collection

2.3.1. Costs on raising debt See above.

2.4. Protecting ownership

2.4.1. Title retention (RoT) provisions aimed at retaining ownership of traded goods as long as the debt has not been paid in full is very rare in Canada, as it is not a straightforward process. In addition to an arrangement between the debtor and the borrower, filing of a funding document is required under the Provincial Property Protection Registry (PPSR) program. Although ROT is known as a security interest, the Personal Property Protection Act (PPSA) dictates which ranks secured creditors ahead of unsecured creditors. The borrower would then have the ability to repossess the products to receive payment, although this is rare, complicated, and expensive to implement.

2.5. Payments

2.5.1. The most common methods of payment are as follows: Swift, EFT or ACH bank transfers are among the most prevalent methods of payment, as they are quick, safe and supported by an increasingly integrated banking network internationally and at home. Export contracts are usually guaranteed by Standby Letters of Credit (a bank guarantees the creditworthiness and recovery capacity of the debtor) which are valid assurances to be interpreted as a sign of good faith, as they can be enforced as a' payment of last resort' if the borrower fails to fulfill a contractual obligation.

2.5.2. Additionally, it may be known that Documentary Letters of Credit (a debtor promises that a certain amount of money will be made available to a creditor through a bank once certain conditions specifically agreed upon by the parties have been met). In the manufacturing industry, down payments may be received, depending on the amount that is involved. Free words are the most common terms to allow buyers to buy the goods and boost sales for sellers.

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3. Collecting payments

3.1. Amicable action

3.1.1. Canadian courts are effective yet welcoming mediation options should still be seen as an alternative to structured trials.

Before initiating legal proceedings against a debtor, asset assessment is important as it allows verification of whether the company is still active and whether chances of recovery are at best. Moreover, it is essential to be aware of the solvency status of the debtor: if insolvency proceedings have been initiated, the enforcement of a debt (see below) is indeed impossible.

3.2. Legal proceedings

3.2.1. Ordinary litigation. Fast track trials (in their European form) do not occur in Canada, although cases for' small claims' are open, so that the case is certain and unquestioned. Specific rates vary but most regions are at CAD 25,000 or less (Saskatchewan is CAD 20,000, New Brunswick is CAD 12,500, Prince Edward Island is CAD 8,000, Manitoba CAD 10,000 and Quebec CAD 15,000, respectively). Rules as to whether an attorney should be assisting the parties would also vary from region to region.

3.2.2. If these efforts are ineffective, ordinary legal action will usually proceed once the debtor is issued with a Writ of Summons (bref d'assignation) summing up the claim and placing the debtor in default. If the debtor does not attend or fail to bring a defense (appearance) within 14 days, the court may consider the claim to be trustworthy and render a default judgment without trial, but if the debtor provides sufficient evidence that a counterclaim is legitimate, this default of the appearance judgment may be reversed. A conciliation process (amicable resolution conférence de règlement à l'amiable) would otherwise be set up by the court before undertaking a Review for Investigation (preliminary interrogation) period to examine the facts and meet the claimants (together with their witnesses) before taking a decision. Canadian courts usually grant cash injury restitution, concrete results, declaratory relief and punitive damages.

3.2.3. Required documents. All documents relevant to the action (such as credit application, purchase orders, invoices, proof of delivery, notices of default, account statement, and any possible document setting out the terms of the contract and default) must be provided before any action is commenced.

3.2.4. Time limits. The treatment terms vary from province to province, but cases will generally be brought to court within two years from the time the cause of action occurred (in Quebec, three years). In this respect, courts are becoming increasingly strict and failure to observe statutory limitations could prevent legal action. Many occurrences can prolong or extend the deadline, but evidence of debt acceptance and/or willingness to pay is usually sufficient to move / extend the limitation period.

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3.2.5. Provisional measures. Numerous temporary steps can help to protect the rights of the borrower until a final and enforceable decision is made. Nonetheless, a petition for immediate remedy may be brought ex parte (without the participation of both parties) to prevent irreparable damage (preservation of the status quo, rights protection). The borrower may also seek freezing orders (Mareva injunctions) and search commands (Anton Piller orders) in order to protect facts. The parties may also present protection motions on charges, motions to remove pleadings, motions to seek records or answers to questions and motions for summary judgment. This method of intervention is applied only to extreme circumstances, since it is difficult to prove and rather costly. Therefore, it would be activated only if there is proof that the debtor is permitted to abscond and/or transfer the products.

3.2.6. Appeal lodging. Appeal may typically be placed to Intermediate Appellate Courts against judgments made in the first instance by Superior Court. A challenge may then be taken before the Supreme Court of Canada, but a leave to appeal must then be sought. Appeals normally take time, are unpredictable and costly. In certain, but restricted, cases, lawsuits against arbitral awards are likely.

3.2.7. Enforcing court decisions. A verdict shall be enforceable as long as it becomes official (i.e. when all the areas of appeal are exhausted). Enforcement of final decisions in Canada is effective and relatively smooth, while the most difficult task may be to find the debtor's money. The courts may usually send forfeiture and auction notices, sequestration notices and garnishment notices if the defendant failed to execute the order. If appropriate, execution assist assessments may also help to identify the properties of a debtor. Judgments must be followed within 10 years of the ruling, because stringent restriction laws apply.

3.2.8. The duration of a judicial action. Default and summary decisions can be received on average within 90 to 120 days but an undefended case will normally take a year to be deemed final. Defended acts will take three years to complete.

3.2.9. Domestic courts would not differentiate between cases involving a foreign entity and cases involving domestic parties only but would often require more time than purely domestic disputes based on language requirements and scope.

3.2.10. The costs of the procedure. As a general rule, the successful party can allow the losing party to pay court fees as well as partial payments to account for their legal costs (usually one-third to one-half of the costs). Nonetheless, this is a personal matter for the courts to rule exclusively. Throughout general, legal fees throughout civil cases are seldom paid and the complainant will usually face the highest cost considerations (motion charging, bailiffs, resulting records, serving etc.). It is impossible to provide an estimation of costs as it would rely on the scope of the litigation and whether the lawsuit is being prosecuted, but on average costs beginning from CAD 1,000 and increasing to 30% of the argument can be anticipated.

3.2.11. Conditional contracts whereby lawyers are not paid in advance but rather earn a fixed sum on completion, and variable payments are usual whereby legal practitioners are entitled to receive a portion of the final contract.

3.3. Alternatives to legal action

3.3.1. Alternative dispute resolution methods (such as conciliation, arbitration, and mediation) are very popular in Canada for commercial conflicts, but the regulations can differ from province to province. In fact, conciliation has been increasingly frequent after 2003, since the Code of Civil Procedure was then revised to expand incentives for mediation outside the courts (Conférence de règlement à l'amiable). Arbitration is often seen as more effective than regular litigation, as it provides expeditious yet discreet hearings along with a full and binding damages grant. Alternatively, arbitrators can offer temporary relief.

3.3.2. The Provincial Courts must then accept arbitral awards through an exequatur case. Usually, an award may be left aside if the settlement deal is deemed invalid if the court finds the arbitrator to be biased or has no authority to resolve the case, if the plaintiffs have not benefited from a due process of law, or if the court believes the award to be unfair. Nonetheless, prizes can not be judged on criteria.

3.3.3. ADR regulations in Canada may vary from province to province but tend to be adapted to international Model Laws such as the United National Commission on International Trade Law (UNCITRAL) Model Law on International Trade Conciliation. In certain cases challenges can be regarded.

3.3.4. Foreign forums. The use of global platforms in debt-related litigation in Canada is rather rare, because domestic courts are effective in making prompt judgments. Nevertheless, international traders may decide to settle their commercial conflicts in a foreign venue (i.e. under foreign law or before a foreign court), since Canadian law allows for the implementation of foreign jurisdiction laws so long as compliance has no undue impact on public policy. It is necessary that the arrangement be distinguished by an external relation (e.g. one individual has chosen domicile in another country, or the place of execution is situated abroad), and that a provision of jurisdiction be drawn up expressly for this. It is recommended that legal advice be sought.

3.3.5. Awards enforcement. As mentioned above, it is rather unusual to use foreign forums to obtain enforceable decisions against domestic debtors as domestic courts are effective. Nonetheless, domestic courts may recognize and enforce foreign decisions issued against foreign debtors owning assets in Canada, provided that different criteria are met. Recognition and enforcement of foreign judgments (including judgments rendered in other provinces) is mostly organized according to common law principles although each province may have its own rules and conditions. In Quebec all enforcement proceedings are governed by the Civil Code.

3.3.6. As a general rule, Canadian courts may affirm international decisions by means of exequatur proceedings. In fact, we generally recognize international rulings and implementation of directives if the foreign judgment is definitive and enforceable in the issuing country and there is no infringement or incompatibility with the public order. Furthermore, the issuing court must have a' real and substantial relation' to the case, and some degree of reciprocity may be needed in compliance with the issuing government. Standard decisions would not necessarily be accepted.

3.3.7. Once an international judgment is recognised, compliance will typically occur by taking and selling the debtor's properties, or by garnishing debts owed to the debtor. Canada is a signatory of the 1958 New York Convention on the Recognition and Execution of Foreign Arbitral Awards. Domestic courts should therefore therefore accept and execute rulings made in international arbitration proceedings.

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4. Managing insolvent debtors

4.1. Insolvency in Canada

4.1.1. The management of insolvent debtors Insolvency in Canada is both a question of cash flow and balance sheet: a debtor is found to be insolvent if it is illiquid, i.e. if he is indefinitely unable to service his outstanding debts, or if the liquidated properties of the debtor can not meet both creditors.

4.1.2. The 1882 Winding-up and Restructuring Act was now substituted with the 1985 Bankruptcy and Insolvency Act (BIA) and the 1985 Creditors Arrangement Act (CCAA). In each jurisdiction, trials will typically take place in the Superior Courts.

4.1.3. The law provides for an opportunity to rescue viable firms to increase chances of repayment. Through fact, restructuring normally gives unsecured borrowers a chance to receive any payout in the future, but gains would often be very low–albeit better than through liquidation. Generally, odds of debt collection will remain extremely low when the debtor has become insolvent, so attempts to secure pre-legal action remain the best way to receive reimbursement.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. No out-of-court proceedings are provided for in law.

4.2.2. Restructuring the debt. A debtor facing temporary financial difficulties is entitled under the BIA to present the creditors with a restructuring proposal. After approval by the Superior Courts of the debtor's motion for reorganization, the company directors remain in control of the normal business operation and the court orders a pause in all civil proceedings for a limited duration of six months. The debtor has no alternative but to file for bankruptcy, unless each creditor class and the judge support the request.

4.2.3. Under the CCAA there is a similar procedure: a monitor is appointed to oversee the restructuring of the debtor, and from time to time report to the court. Unlike the BIA procedure, failure to reach an agreement does not result in automatic liquidation; hence the entire process can last for years.

4.2.4. Winding up prosecutions. There are two different cases for the recovery of debts from the disposal of debtor's estate. On the one side, the BIA can begin receivership proceedings for the purpose of implementing protection agreements. The borrowers are required to file lawsuits with the trustee but no restriction limits seem to be necessary to do so. Having said that, failure to file claims would prevent unknown creditors from participating in the Creditors ' Meetings and from receiving part of the proceeds after the debtor's assets were sold. A receiver shall be appointed by the court (Court Appointed Receivership) or the parties (Privately Appointed Receivership) to create a claim register, inspect the corporation, realize the debtor's properties and allocate the realization profits to the creditors in compliance with their respective rights.

4.2.5. A liquidation procedure may also be initiated, on the other hand. Unless the debtor registers with the Government Bankruptcy Office for a mutual bankruptcy, investors who own a loan of at least CAD 1000 may also appeal to the court for a bankruptcy decree. The sale / disposal of the assets is then entrusted to a trustee.

4.2.6. Priority rules. Generally, priority rules apply when transferring the profits to the creditors. Under the BIA, priority claims (such as government claims) are first considered, then preferential claims (such as administrative expenses) and unsecured creditors are considered. Under the CCAA, there are no clear guidelines, but unsecured creditors would be deemed equally until protected with complete payment by preferred creditors.

4.2.7. As mentioned earlier, RoT clauses in Canada have no effect, however creditors that require the return of unpaid products (shipped within 30 days) by submitting a notice to the BIA within 15 days of the declaration of bankruptcy. In fact, this is complicated as the products must have stayed discernible and as far as international buyers are involved, when they become informed of the case, the time limits have often expired.

4.2.8. Cancelation of suspicious transactions. In reorganization and liquidation proceedings, all administrators and liquidators may request the cancelation of any transaction completed before the insolvency proceedings against the interests of the estate. Therefore, although there is no' suspect era' under Canadian law, undervalued agreements, contracts benefiting one borrower over the others would most certainly be invalid, illegal dividends or unequal transactions of all sorts.

4.2.9. Duration of  insolvency procedure. In simple cases, insolvency litigation may take from one to three years however longer prosecutions can be required based on the scope of the argument.