Under Section 81.1 of the Bankruptcy and Insolvency Act (BIA), unpaid suppliers in Canada have a powerful “30-day right of repossession.” If a customer goes bankrupt, you can legally demand the return of your inventory, provided it was delivered within 30 days of the bankruptcy and has not yet been sold or altered.
Discovering that a major corporate client has filed for bankruptcy is a nightmare for any Canadian supplier. Whether you supplied lumber to a construction firm in British Columbia, auto parts to a manufacturer in Ontario, or retail goods to a store in Halifax, your immediate fear is that your unpaid inventory is lost forever. When a company goes bankrupt, a Licensed Insolvency Trustee (LIT) locks the doors and seizes everything inside to pay off secured creditors like banks.
However, Canadian insolvency law offers a unique lifeline to suppliers. Section 81.1 of the federal Bankruptcy and Insolvency Act (BIA) provides unpaid suppliers with a super-priority right to reclaim their specific goods. This means you can literally take your inventory back before the bank or the CRA can liquidate it. But this right is incredibly time-sensitive and requires strict adherence to legal procedures.
Step-by-Step Process for Repossessing Inventory
If you want your goods back, you cannot wait. The window of opportunity closes rapidly. Here is the step-by-step process most commercial lawyers use to enforce a supplier’s Section 81.1 rights.
Step 1: Confirm the Strict 30-Day Delivery Window
The very first thing you must do is check your shipping manifests. The right to repossess only applies to goods that were delivered to the bankrupt purchaser within the 30 days immediately preceding the date of the bankruptcy filing or receivership. Any inventory delivered on day 31 or earlier is trapped in the bankruptcy estate, and you become a standard unsecured creditor for those items.
Step 2: Verify the Condition of the Goods
Not all recent inventory can be taken back. To qualify under Section 81.1, the goods must still be in the exact same state they were delivered in. If you sold raw fabric and it was sewn into shirts, you cannot reclaim it. Furthermore, the goods must not have been resold to an innocent third party, and they must still be identifiable as your specific property.
Step 3: Draft and Serve the Prescribed Demand Form
You cannot simply drive a truck to the warehouse and load up your goods. You must prepare a formal, written “Demand for Repossession” in the prescribed legal format. This demand must be formally served to the purchaser, the Licensed Insolvency Trustee, or the Receiver within 15 days of the date of the bankruptcy or the appointment of the receiver. Missing this 15-day deadline permanently destroys your repossession rights.
Step 4: Coordinate with the Licensed Insolvency Trustee
Once the LIT receives your valid demand, they will review it. The Trustee must allow you to inspect the premises to identify your goods. If the LIT agrees that the goods meet the Section 81.1 criteria, they will release them to you. If the LIT already sold your goods after the bankruptcy date but before receiving your demand, you are entitled to the cash proceeds of that specific sale.
Section 81.1 Repossession Requirements
| Requirement | Explanation | Outcome if Not Met |
|---|---|---|
| Delivery Timeframe | Must be delivered within 30 days before bankruptcy. | Claim fails. You become a standard unsecured creditor. |
| Demand Deadline | Demand must be served within 15 days of the bankruptcy date. | Claim is permanently forfeited. |
| State of Goods | Goods must be unaltered and fully identifiable. | Repossession is denied by the Trustee. |
How Much Does it Cost in Canada?
Enforcing your right to repossess inventory requires immediate action and often involves minor legal expenses.
- Legal Fees: Having a commercial lawyer urgently draft and serve a Section 81.1 Demand generally costs between $1,000 and $3,000 CAD.
- Logistics and Shipping: You are entirely responsible for the cost of picking up and transporting your goods back from the bankrupt company’s warehouse.
- LIT Dispute Costs: If the Trustee disputes your claim (e.g., arguing the goods were altered), taking the matter to bankruptcy court can cost an additional $5,000 to $10,000 CAD in legal fees.
How Long Does the Process Take?
The timeline is aggressive by design. You only have 15 days from the date of bankruptcy to file your demand. Once filed, the Licensed Insolvency Trustee generally responds within 1 to 2 weeks. If your claim is straightforward and the goods are easily identifiable, you can often have your inventory loaded onto your trucks within 3 to 4 weeks of the bankruptcy announcement.
Frequently Asked Questions (FAQ)
Does Section 81.1 apply to companies in CCAA restructuring?
No. The 30-day repossession right specifically applies to bankruptcies and receiverships. If a large corporation is restructuring under the Companies’ Creditors Arrangement Act (CCAA), your right to repossess is generally stayed (frozen) by the court to allow the company to keep operating.
What if my goods are mixed in with a competitor’s identical goods?
To repossess your inventory, the goods must be clearly identifiable. If your goods are indistinguishable from another supplier’s goods (e.g., unmarked barrels of oil), the Trustee will likely reject the claim unless you have strict serial numbers or barcode tracking.
Can I just keep the client’s deposit instead of taking the goods?
If you hold a deposit from the bankrupt client, you can generally apply the legal concept of “set-off” to keep the deposit against the unpaid invoice. However, taking the physical goods back often recoups more value than a small initial deposit.
Should I register a PPSA charge instead?
Yes. Registering a Purchase Money Security Interest (PMSI) under your province’s Personal Property Security Act (PPSA) is a much stronger protection than the 30-day rule. A PMSI makes you a secured creditor for the inventory, regardless of when it was delivered.
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