When a client goes bankrupt, an unpaid supplier is often left with few remedies. Generally speaking, the unpaid supplier's recovery is limited to their proportional share of what is left of the proceeds from the bankrupt's assets after the debts of secured creditors and trust claim have been satisfied. However, a few remedies are available to unpaid suppliers: the “thirty-day rule”, set off, express trusts and consignment.
Consignment refers to an arrangement whereby goods are placed in the hands of a party that will retain possession of the goods until they are sold. The party in possession of the goods acts as an agent for the supplier and is paid to sell them, but at all times title to the goods remains with the supplier until they are sold.
As with express trusts, the onus of establishing a consignment arrangement rests with the supplier. If an unpaid supplier can demonstrate that a consignment of goods exists, it will be entitled to possession of any goods that can be identified, proceeds from any of those goods sold by the trustee, or the amounts owing by customers of the consignee on credit. An unpaid supplier will also be able to claim proceeds of the sale of consigned goods if the proceeds have been used by the bankrupt, provided they can be traced to some identifiable, recoverable form.
To prove that a consignment agreement exists, the supplier must file a proof of claim that provides particulars of the property and evidence that the consigned goods belong to it. In addition, it must establish that the consignee is engaged in the business of selling goods and that it has possession of the goods and treats them as consigned goods, and that the relationship between the parties is such that the supplier is permitted to repossess the goods and the consignee obliged to return them. In addition to any written agreements confirming the consignment nature of the business dealings between the supplier and the purchaser, the conduct of the parties will also be considered by the court in determining if a consignment arrangement exists.
Readers are reminded that bankruptcy courts are typically solutions-oriented and that the application of the above-criteria is dependent on the facts of each case. It is recommended that readers consult an insolvency professional.