Ordinary course of business

How BC law treats it

In M&A, the seller usually promises to operate the business only in the ordinary course, consistent with past practice, between signing and closing. These interim covenants stop the seller from taking on unusual debt, changing salaries, selling key assets or signing major contracts without the buyer's consent. Breach can give the buyer a right to refuse to close or to claim damages. Under the Business Corporations Act, SBC 2002, c 57 (BCBCA), s. 301(5), a company must not sell, lease or otherwise dispose of all or substantially all of its undertaking, other than in the ordinary course of its business, unless authorized by special resolution. Shareholders may have dissent rights. BC has no bulk sales law; the old Bulk Sales Act was repealed. Under the Personal Property Security Act, RSBC 1996, c 359, s. 30(2), a buyer of goods sold in the ordinary course of the seller's business takes them free of a security interest the seller gave its lender, even if the buyer knows of it, unless the buyer also knows the sale breaches the security agreement. That is why retail customers do not need to search the Personal Property Registry. In insolvency, ordinary course dealing gives a supplier no priority. An unpaid supplier is unsecured unless it holds a perfected security interest or uses the 30 day goods repossession right under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, s. 81.1. Payments made in the ordinary course generally help rebut a claim that the debtor intended to prefer a creditor under s. 95.

What it means for your business

For a seller, ordinary course covenants mean the business cannot be run freely between signing and closing, so plans such as bonuses or new leases should be disclosed and carved out. For a buyer, they protect the value being purchased. Lenders and suppliers need to understand that ordinary course sales strip their security from inventory, and that only a sale outside the ordinary course of substantially all assets triggers a shareholder vote. Example: Between signing and closing, a seller of a Burnaby restaurant group signs a new 10-year lease without the buyer's consent. The buyer claims a breach of the ordinary course covenant in the share purchase agreement.

Risks and common mistakes

Signing major contracts or paying bonuses before closing without the buyer's consent. Leaving "ordinary course" undefined when the business has seasonal or unusual patterns. Assuming BC still has bulk sales rules for asset sales. Selling substantially all of a company's assets without a special resolution. Assuming a supplier's ordinary course dealings give it priority in a bankruptcy.