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Protecting Your Business When a Customer Goes Insolvent
Faculty of LawDebt Collections and Creditor Rights
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A wholesale distributor of commercial kitchen equipment and supplies, operating from a warehouse facility in the Greater Toronto Area, had built a reliable revenue stream over 8 years by extending credit terms to restaurants, catering companies, and institutional food service operations across southern Ontario. The business model depended on relationships with repeat customers who ordered equipment and consumable supplies on 30-day or 60-day payment terms, accumulating receivables that typically turned over smoothly as payments arrived and new orders shipped.

One of the distributor's largest accounts was a regional catering company that had grown rapidly over the preceding 3 years, expanding from a single commercial kitchen to 4 production facilities serving corporate clients, event venues, and institutional contracts. The relationship had started modestly, with orders of a few thousand dollars at a time, but by the current year the catering company's outstanding balance regularly exceeded $180,000, representing roughly 12 percent of the distributor's total accounts receivable at any given time. The credit terms had been extended informally as the relationship deepened, moving from 30-day to 45-day and eventually to 60-day payment windows without formal amendment to the original supply agreement signed when the account was opened.

Over the past 6 months, the distributor's accounts receivable manager had noticed a pattern. Payments from the catering company that once arrived within the agreed window began slipping to 75 days, then 90 days. Partial payments replaced full settlements. Phone calls about invoice discrepancies became more frequent, with disputes raised over charges that had previously cleared without question. The catering company requested extended terms on 2 occasions, citing cash flow timing issues related to a large institutional contract that had allegedly delayed payment. The distributor continued shipping product, reasoning that the long-standing relationship and the size of the account justified patience.

The original supply agreement between the parties, drafted when the account was new and the credit exposure modest, contained standard payment terms and a basic retention of title clause but had never been updated to reflect the expanded credit relationship. No financing statement had been registered under provincial personal property security legislation when the agreement was signed or at any point afterward. The distributor held no personal guarantee from the catering company's principals and had not required financial statements or other ongoing disclosure of the customer's financial condition as a condition of continued credit.

The distributor now faces decisions about how to protect its position while the customer remains operational, what remedies may be available if formal insolvency proceedings commence, and how to maximize recovery from what has become its single largest credit exposure.

PPSA Registration: Securing Your Position as a Creditor Before a Default

When a business extends credit to a customer, whether by delivering goods before payment, providing services on account, or financing equipment purchases over time, it assumes a fundamental risk: the customer may not pay. This risk becomes dramatically more severe when the customer becomes insolvent, because at that moment the business owner finds themselves standing alongside every other creditor the customer owes, all competing for whatever assets remain. The difference between recovering most of what you are owed and recovering nothing often comes down to a single question: did you properly secure your position before the default occurred? In Canada, the primary mechanism for securing that position in commercial transactions involving personal property is registration under provincial personal property security legislation, commonly referred to as PPSA registration. Understanding how this system works, and acting on that understanding before problems arise, can mean the difference between business survival and catastrophic loss for Canadian entrepreneurs, operators, and non-profit leaders alike.

The concept of secured credit has ancient roots, but the modern Canadian framework for registering security interests in personal property emerged from a recognition that commercial lending and credit sales required a transparent, efficient system for determining who has priority claims against specific assets. Before the harmonized personal property security regimes were adopted across common law provinces, determining whether a creditor held valid security over collateral required navigating a confusing patchwork of different registration systems and legal doctrines. The Personal Property Security Act, enacted in various forms across British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, and the other common law provinces, created a unified system based on the principle of notice registration. Under this framework, a creditor who wishes to claim a security interest in personal property must register that interest in the provincial registry to make it effective against third parties, including other creditors and a trustee in bankruptcy. Quebec operates under a different but conceptually parallel system governed by the Civil Code of Quebec, which provides for the registration of hypothecs and other security rights through the Register of Personal and Movable Real Rights. While the terminology and certain procedural details differ, the fundamental purpose remains the same: to create a public record of claims against assets so that lenders, suppliers, and purchasers can determine what interests exist before extending credit or acquiring property.

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Collections Legislation Across Canada: The Provincial Framework
Collections Law: What Collectors Can and Cannot Do
Insolvency in Canada: The Federal Framework and the Options It Provides
Insolvency and Bankruptcy: What Happens to Your Debt
Enforcing a Judgment: The Tools Available and How They Work
Judgment Enforcement: Garnishment, Seizure, and Liens