Thirty Day Rule: Recovering Goods or Proceeds from a Bankrupt Client

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.

An unpaid supplier who moves quickly may be able to take advantage of the thirty-day rule, as provided for in section 81.1 of the Bankruptcy and Insolvency Act. This “rule” grants an unpaid supplier a special type of security and allows it to reclaim from a bankrupt purchaser any unsold goods sold to the purchaser in the thirty days preceding the bankruptcy.

In order to satisfy the thirty-day rule and reclaim its goods, the unpaid supplier must satisfy certain criteria. These are:

1. The supplier must make a demand in writing as soon as possible after its customer becomes bankrupt, and at most within fifteen days of the bankruptcy or receivership.
2. The goods must actually have been delivered.
3. The goods, generally, must be in the possession of the purchaser or the trustee in bankruptcy, and not a third party.
4. The supplier must be able to prove the identity of the goods with document evidence, such as invoices, purchase orders and serial numbers.
5. The goods must be in the same state that they were in upon delivery to the purchaser, and not converted into some other form.
6. The goods must actually not have been paid for. Where partial payment has been made, the supplier may elect to repossess a portion of goods, or to repossess all of the goods upon payment to the trustee of any partial payments.
7. The goods must not have been resold or be subject to an arms' length agreement of sale.

A supplier whose demand for the return of its goods is denied by the trustee in bankruptcy may appeal to the courts pursuant to s. 81.1(9) of the Bankruptcy and Insolvency Act. It is important to note that the thirty-day rule does not apply to suppliers of services or lenders of money.

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.