You delivered the goods, sent the invoice, followed up again and again. Then the news lands: your client has just declared bankruptcy. For a supplier, it is one of the worst scenarios, but it is not necessarily the end of the story.
Here are the remedies still available to you, and above all how to better protect yourself going forward.
The moment bankruptcy hits, your individual lawsuits stop
Bankruptcy is governed by the Bankruptcy and Insolvency Act, a federal statute that applies across Canada. As soon as it occurs, a stay of proceedings takes effect: an ordinary creditor can no longer sue the bankrupt, seize their property or continue an action already under way without the court’s authorization.
The goal is to deal with all creditors through a collective process, administered by a Licensed Insolvency Trustee. The trustee takes possession of the bankrupt’s property, liquidates it and distributes the available funds according to the order established by the Act.
The order of priority: where do you stand?
Not all creditors are equal in a bankruptcy. The Act sets out an order of distribution:
- secured creditors, who hold security on specific property (a financial institution holding a hypothec, for example), are paid first out of that property;
- preferred creditors, whose claims are given priority by the Act, come next;
- ordinary creditors (including most unpaid suppliers) share what is left, in proportion to their claims.
It is the hardest reality to hear: the supplier who sold on credit without requiring security often comes last, and the dividend paid, when there is one, represents only a fraction of the claim.
File your proof of claim, without delay
To be entitled to a share of the distribution, you must file a proof of claim with the trustee, supported by your documentation: contract, invoices, statement of account.
The step looks administrative, but it is essential: a creditor who does not file a claim receives nothing, even if the debt is beyond dispute. It also keeps you informed of the file, lets you attend the meeting of creditors and, where applicable, vote.
The 30-day rule for repossessing your goods
The Act grants a specific remedy to suppliers of goods: the right to repossess goods delivered within the 30 days preceding the bankruptcy (section 81.1 of the Act). The conditions, however, are strict:
- the goods must be identifiable and in the same condition as at delivery;
- they must still be in the possession of the bankrupt or the trustee, and must not have been resold;
- the written demand must be made within a short time after the bankruptcy.
This remedy covers goods, not services. The unpaid service provider (consultant, carrier, subcontractor) cannot “take back” the services rendered and generally remains an ordinary creditor.
In practice, speed makes all the difference: the longer you wait, the greater the risk that your goods will be resold, transformed or incorporated into other property.
The proposal to creditors: often better than a bankruptcy
An insolvent client does not always go bankrupt. They may instead file a proposal to creditors: a settlement offer made to all of their creditors in order to keep operating while repaying part of their debts.
As a creditor, you are called upon to vote on that proposal. It is real leverage: an accepted proposal often delivers better recovery than a liquidation, which leaves little value for ordinary creditors. It is also the time to negotiate better terms.
Key takeaways
The order of priority
Secured creditors first, preferred creditors next, ordinary creditors last.
The supplier without security shares what is left, hence the importance of protecting yourself before extending credit.
The 30 days
A supplier of goods can repossess goods delivered within the 30 days preceding the bankruptcy.
Identifiable goods, still in the bankrupt’s possession, a written demand within the deadline: every condition counts.
Prevention
Written credit terms, deposits and progress payments, a reservation of ownership published in the RDPRM, a movable hypothec.
The best protections are put in place before the first unpaid invoice, not after.
Why consult before the situation deteriorates?
Remedies after a bankruptcy exist, but they are limited. Real protection is built ahead of time: written credit terms, a deposit or progress payments on major contracts, a reservation of ownership published in the Register of Personal and Movable Real Rights (RDPRM), or a movable hypothec on the goods sold.
Certain signals should also put you on alert: payment terms stretching out, postponed cheques, repeated promises with no payment. Acting at the first late payments (demand letter, payment agreement, negotiated security) is almost always better than filing a claim after the fact.
At Meka Avocat, we support businesses at both key moments: in prevention, to structure your credit terms and your security, and in response, to assert your rights quickly when a client becomes insolvent.
Frequently asked questions
What should you do as soon as a client goes bankrupt?
Stop all individual collection steps, which are stayed, then file a proof of claim with the trustee without delay. Also check immediately whether recently delivered goods can be repossessed.
Can goods delivered before the bankruptcy be recovered?
An unpaid supplier may repossess goods delivered within the thirty days before the bankruptcy, provided they are still identifiable and in the trustee's possession. The deadline is short and it cannot be made up.
Where does an ordinary supplier rank?
After secured creditors and after several preferred claims. The ordinary creditor receives what is left, often a fraction of the debt. That is what makes prevention, through security or a solvency check, more profitable than collection.
Is a proposal better than a bankruptcy?
Often yes, for creditors. It allows the business to continue and offers a partial payment that generally exceeds what a liquidation would yield. Creditors vote on the proposal, and that vote deserves analysis before it is cast.
A client who has stopped paying, or is already bankrupt?
Every file has its own deadlines and its own remedies. A consultation lets us quickly assess your position, file the required documents on time and better protect your future sales. Book an appointment with our team.
The best remedy is the one you never have to use. A demand letter sent at the right moment often changes the outcome, and how your assets are held, see the holding company, an underused tool for SMEs, determines what is exposed the day a client defaults, and our debt recovery practice.
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Lawyer, member of the Barreau du Québec since 2014, founder of MEKA AVOCAT. This text sets out general legal information: it describes rules that apply broadly, not the answer to one particular case, and does not replace advice on your situation.
