Anonymised, illustrative composite. The court-ordered assignment power runs in the buyer’s favour. The disclaimer power runs the other way, and the statute gives the buyer no seat at the table when it is used.
At a glance
A distributor of specialist hand and power tools to industrial and trade customers filed a notice of intention after a warehouse relocation went badly and working capital ran out.
Its position rested on an exclusive Canadian distribution agreement with a European manufacturer — 61% of gross margin, four years unexpired, with territory protection the buyer had modelled as the whole reason to be in the deal. A letter of intent was signed at $5,200,000, conditional on a sale approval order.
The manufacturer was owed $940,000 for product delivered before the filing and was pressing for a cure as the price of continuing.
The debtor, with the trustee’s approval, gave notice disclaiming the distribution agreement. From the estate’s point of view that is rational: it removes a large cure obligation and a continuing liability from a business that has to be made saleable inside a statutory clock.
From the buyer’s point of view it removed the asset it had priced. And when the buyer’s counsel looked for a way to stop it, the statute had nothing to offer — not because the buyer was late, but because of who the buyer was.
The letter of intent at $5,200,000 was built on run-rate gross margin of $2,240,000, of which about $1,366,000 came through the distribution agreement.
Without it, the buyer was acquiring a warehouse operation, a customer list, a sales team and four secondary supply lines. It re-priced to $3,100,000 and made closing conditional on signing a new direct distribution agreement with the manufacturer — on the manufacturer’s current terms, with no territory exclusivity in the first year and a 4% higher landed cost.
The manufacturer, for its part, filed a provable claim for $940,000 in the proposal and recovered a little over seven cents.
BIA s.65.11(1) gives the power: a debtor under a notice of intention or a filed proposal may, “on notice given in the prescribed form and manner to the other parties to the agreement and the trustee — disclaim or resiliate any agreement to which the debtor is a party on the day on which the notice of intention or proposal was filed”. The last sentence is the internal control: “The debtor may not give notice unless the trustee approves the proposed disclaimer or resiliation.” If the trustee refuses, s.65.11(4) lets the debtor go to court instead.
The timing is short and fixed. Under s.65.11(3), “Within 15 days after the day on which the debtor gives notice under subsection (1), a party to the agreement may, on notice to the other parties to the agreement and the trustee, apply to a court for an order that the agreement is not to be disclaimed or resiliated.” If no application is made, the agreement is disclaimed “on the day that is 30 days after the day on which the debtor gives notice under subsection (1)”.
Now read who those rights belong to. Both s.65.11(3) and the information right in s.65.11(9) — under which “A debtor shall, on request by a party to the agreement, provide in writing the reasons for the proposed disclaimer or resiliation within five days after the day on which the party requests them” — are given to “a party to the agreement”. A buyer under a letter of intent is not a party to the distribution agreement. It has no application to make and no reasons to demand.
The compensation right is drawn the same way. Section 65.11(8): “If an agreement is disclaimed or resiliated, a party to the agreement who suffers a loss in relation to the disclaimer or resiliation is considered to have a provable claim.” The manufacturer had a claim. The buyer, whose loss was $2,100,000 of value, had none — it had lost the benefit of a contract it was never party to.
That is the unit point, and it is the whole file: every right the section creates is attached to being a party to the disclaimed agreement, and a prospective purchaser is a party to nothing except its own letter of intent.
The section is not unlimited. Section 65.11(10) takes out an eligible financial contract, a lease referred to in s.65.2(1), a collective agreement, “a financing agreement if the debtor is the borrower”, and “a lease of real property or of an immovable if the debtor is the lessor”. A debtor cannot disclaim its own borrowing, and a landlord debtor cannot disclaim its tenant. CCAA s.32 is the same power in a CCAA proceeding, with the monitor in place of the trustee.
The buyer used the only lever it had, which was commercial rather than statutory: it went to the manufacturer directly, before the 30 days expired, and offered a clean start with a solvent counterparty.
The manufacturer preferred that to applying under s.65.11(3) to preserve an agreement with a debtor that owed it $940,000. It signed a new agreement conditional on the sale closing, without exclusivity in year one.
The sale closed at $3,100,000. The disclaimer had transferred about $2,100,000 of value from the buyer to the estate’s balance sheet and about $940,000 of the manufacturer’s claim into the unsecured pool. Nobody acted improperly; each party used the position the statute gave it.
$2,100,000, and it was avoidable at the letter of intent stage for nothing. What the buyer did not have was the one thing that would have helped: a direct conversation with the manufacturer before pricing, and a letter of intent that treated the distribution agreement as contingent rather than as an asset.
The second protection is structural. Where a target’s value sits in one contract with large arrears against it, the buyer’s money should be conditional on the counterparty’s signature, not on the seller’s continued willingness to keep an agreement it is paying to keep.
The tell is arithmetic: the counterparty owed the most is the counterparty most likely to be disclaimed, because disclaimer is how an estate sheds a cure cost. Rank the target’s key contracts by arrears and you have ranked them by disclaimer risk.
The second tell is the trustee’s incentive. The trustee must approve a disclaimer, and the trustee’s duty runs to the creditors, not to a prospective purchaser. A disclaimer that improves creditor recovery and destroys a buyer’s model is exactly the disclaimer a trustee should approve.
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