Anonymised, illustrative composite. For twenty-two years the target had bought inventory free of its suppliers' registered security. The buyer of the whole business could not, because PPSA s.28 protects a buyer in the ordinary course of the seller's business — and a going-concern sale is not that.
At a glance
A building-supply retailer in eastern Ontario had traded for twenty-two years from a single yard. Three of its dozen suppliers sold on terms secured by registered financing statements covering inventory, accounts and proceeds. Every day for twenty-two years, stock arrived and was sold to contractors and homeowners who took it free of those registrations.
The buyer, an established two-yard operator making its third acquisition, agreed to buy the assets for $5,400,000, of which $1,180,000 was inventory at cost.
The buyer's operations director had run yards for eighteen years and knew, correctly, that a buyer of goods in the ordinary course takes free of the seller's registered security. He applied the same logic to the transaction: the target sells inventory, we are buying its inventory, so we take it free. On that reasoning, chasing partial discharges looked like lawyers making work.
It is the one diligence error in this cluster that is a belief rather than an omission, and it inverts at the exact moment it matters. The protection the business had relied on every day for twenty-two years does not extend to the sale of the business itself, because the protection was never about what was being bought. It was about the seller's ordinary course.
Purchase price $5,400,000; inventory at cost $1,180,000. Three supplier registrations over inventory, accounts and proceeds, securing current trade balances of $214,000. Six delivery trucks classified as equipment and subject to a registered general security agreement, four with VINs in the designated place and two without. The gap is the exposure: $214,000 of debt enforceable against $1,180,000 of stock the buyer had paid for.
Section 28 of the Ontario Personal Property Security Act carries the marginal note Transactions in ordinary course of business, and subsection (1) reads: “A buyer of goods from a seller who sells the goods in the ordinary course of business takes them free from any security interest therein given by the seller even though it is perfected and the buyer knows of it, unless the buyer also knew that the sale constituted a breach of the security agreement.”
Read the qualifying words carefully. The ordinary course being described is the seller's. The protection is not a status the buyer holds; it is a characterisation of the transaction from the seller's side. The target sells lumber in the ordinary course of its business. It does not sell its entire inventory, its equipment, its customer list and its yard in the ordinary course — it does that once, at the end. The same goods are inside s.28(1) on Monday and outside it on the closing date, and nothing about the goods has changed.
Subsection (1.1) confirms how little else matters: s.28(1) applies whether or not the buyer took possession, the seller was ever in possession, title passed, or the seller took a security interest. The only real limits are in (1.2) and (1.3), which remove the protection where the goods were not identified to the contract of sale. None of that helps a bulk buyer, which fails at the threshold.
The one place a bulk buyer does take free. Subsection (5) runs the other way, because it is written for the transaction that is not in the ordinary course. Where a motor vehicle is sold other than in the ordinary course of business of the seller and is classified as equipment of the seller, “the buyer takes it free from any security interest therein given by the seller even though it is perfected by registration unless the vehicle identification number of the motor vehicle is set out in the designated place on a registered financing statement or financing change statement or unless the buyer knew that the sale constituted a breach of the security agreement.”
So the position on the six trucks was the reverse of the position on the inventory: four VIN-registered trucks taken subject to the general security agreement, two unregistered ones taken free. That is a different question from whether a registration is valid, which s.46(4), s.46.1 and s.46.2 decide — see a lien search run against the wrong corporate name.
What is not the answer. Buyers still reach for bulk-sales protection, and in Ontario there is none. The Bulk Sales Act, R.S.O. 1990, c. B.14 carries the note on e-Laws: “This Act was repealed on March 22, 2017.” The old creditor-notice regime is gone, and its repeal changed nothing about s.28, which was never part of it. Our own treatment is at the Bulk Sales Act repeal and what a buyer must now do.
The buyer obtained partial discharges from all three suppliers against payment of the $214,000 of current trade balances at closing, funded from the purchase price and deducted from the vendor's proceeds. Two signed within a week; the third wanted to convert the occasion into a new supply agreement and discharged eight days later once reminded the two conversations were separate.
On the trucks, the buyer did nothing at all with the two whose VINs were not registered, on the correct reading that s.28(5) had already dealt with them, and negotiated a discharge for the four that were registered as part of the vendor's general payout at closing.
Closing without the discharges would have left three suppliers with perfected security over inventory the buyer had paid $1,180,000 for. The exposure is the $214,000 the buyer would have paid a second time to keep stock it already owned, plus whatever a supplier charged for the discharge. A registrant asked before closing negotiates against a vendor who still holds the money; one asked afterwards negotiates against a buyer with a yard it cannot sell cleanly.
The tell is anyone in the room saying the business has always bought free of those registrations. That sentence is true and it is about the wrong transaction. The test to apply is a single question asked from the seller's side: is this sale in the ordinary course of the seller's business? For a going-concern sale the answer is no by definition, which is why an asset purchase agreement needs discharges that a purchase order never did. Compare what a buyer takes subject to security registered against the assets.
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