Has the Pendulum Swung Too Far?

Are Canadian Laws Increasingly Favouring Debtors Over Creditors?

By Puru Grover | The Credit Manager's Corner

A perspective on Canadian credit management, commercial law, insolvency and the realities faced by creditors.

 

Every so often, after conducting a seminar on credit management or speaking with business owners, lenders, lawyers, credit professionals and landlords, I find myself asking the same question:

Has the legal pendulum in Canada gradually swung in favour of debtors at the expense of creditors?

It is a provocative question, and one that deserves careful thought rather than a quick answer.

I am not suggesting that Canadian law is inherently unfair. Nor am I advocating a return to an era in which debtors were treated harshly or denied an opportunity to rebuild their financial lives. Modern commercial law must balance competing interests, and Parliament and provincial legislatures have legitimate reasons for providing protections to debtors, tenants and financially distressed businesses.

Yet, from the perspective of many unsecured creditors, landlords, suppliers and small businesses, there is a growing perception that the scales are no longer evenly balanced.

Perhaps it is worth asking why.

 

The Unsecured Creditor's Reality

For many businesses, extending trade credit is not an act of generosity. It is an essential part of doing business.

A supplier delivers goods.

A consultant provides services.

A manufacturer ships products.

Payment is expected in thirty, sixty or ninety days.

Most of the time, everything works exactly as planned.

But when a customer becomes insolvent, reality changes dramatically.

Under Canada's Bankruptcy & Insolvency Act, unsecured creditors typically stand near the bottom of the priority ladder. After administration costs, secured creditors, employee claims and other statutory priorities have been satisfied, there may be very little remaining to distribute.

For many unsecured creditors, the final dividend is measured not in dollars but in pennies—or, in some cases, nothing at all.

Legally, the priority system is understandable.

Commercially, however, the outcome can feel profoundly inequitable.

The supplier delivered exactly what was promised. The services were rendered. The invoice was legitimate. Yet recovery may be virtually impossible.

From the creditor's perspective, commercial risk has suddenly transformed into commercial loss.

 

Restructuring: Saving Businesses—or Delaying the Inevitable?

The philosophy behind Canada's insolvency legislation has evolved considerably over the past several decades.

Rather than viewing insolvency simply as the end of a business, modern legislation increasingly views financial distress as an opportunity for rehabilitation.

The objective is understandable.

A successful restructuring may preserve hundreds of jobs, protect suppliers, maintain tax revenues and ultimately produce a better return for creditors than an immediate liquidation.

Few would argue against preserving a genuinely viable business.

Yet restructurings frequently require creditors to make sacrifices they never voluntarily agreed to make.

Collection actions are stayed.

Contractual rights may be suspended.

Payments may be deferred.

Lease obligations may be altered.

Suppliers may be required to continue doing business while waiting for the restructuring process to unfold.

Sometimes these efforts succeed spectacularly.

Sometimes they merely postpone an inevitable bankruptcy while unsecured creditors absorb additional losses.

The question is not whether restructuring should exist. It clearly should.

The more difficult question is whether the interests of creditors receive sufficient protection while the debtor is being given an opportunity to survive.

 

The Small Claims Court Paradox

Perhaps nowhere is the distinction between having a legal right and actually obtaining economic recovery more apparent than in Small Claims Court.

The concept behind Small Claims Court is admirable.

An individual or small business with a legitimate claim should not necessarily have to hire a lawyer, spend thousands of dollars on legal fees and enter a complicated superior court proceeding simply to recover a modest debt.

Small Claims Court is intended to provide an accessible, relatively inexpensive mechanism through which ordinary people and businesses can assert their legal rights.

And it does.

But there is an important catch.

Winning the lawsuit is not the same thing as collecting the judgment.

A creditor can spend considerable time preparing a claim, learning the procedural requirements, filing documents, serving the defendant, attending a settlement conference, preparing evidence and ultimately appearing at trial.

The creditor may eventually receive the piece of paper everyone wanted:

Judgment in favour of the creditor.

At that moment, one might reasonably assume that the battle has been won.

But has it?

Not necessarily.

A judgment establishes that the court has determined that money is legally owed.

It does not automatically put that money into the creditor's bank account.

And this is where the process can become considerably more complicated.

 

The Second Battle Begins After Judgment

Once judgment has been obtained, the judgment creditor may have to navigate the enforcement process.

Depending upon the circumstances, this can involve such things as examinations of the debtor, garnishment procedures, writs of seizure and sale, enforcement against assets and other post-judgment remedies.

For a lawyer or experienced paralegal, these mechanisms may be familiar.

For the ordinary small-business owner who decided to represent himself or herself in Small Claims Court precisely to avoid legal expense, they can seem like another legal labyrinth.

The creditor may suddenly discover that winning the case was merely Phase One.

Phase Two is figuring out how to convert the judgment into money.

And there is an uncomfortable reality:

A court cannot manufacture assets that do not exist.

If the debtor has no meaningful income, no readily identifiable assets, no bank balance worth garnishing and no property against which effective enforcement can proceed, the judgment may remain just that—a judgment.

A legally valid judgment can therefore coexist with an economically unsuccessful collection.

That distinction is rarely appreciated by someone who has never had to enforce a judgment.

 

The Judgment That Never Gets Paid

I have encountered many judgment creditors who ultimately find themselves in precisely this position.

They did everything the system asked them to do.

They proved their claim.

They obtained judgment.

They became, legally, a judgment creditor.

And yet they still did not receive their money.

This creates an interesting paradox.

The legal system has answered the question:

"Does the debtor owe the money?"

The answer is yes.

But the creditor is left with a second question:

"How do I actually get the money?"

The second question can sometimes be considerably more difficult than the first.

This is not necessarily a criticism of the courts. Courts determine legal rights; they are not designed to guarantee that every successful plaintiff will ultimately collect every dollar awarded.

But from the perspective of a small business owner, the distinction can be frustrating.

A judgment can feel like a victory in law and a defeat in economics.

 

Ontario's Residential Landlords: Another Familiar Frustration

The same concerns are frequently heard from residential landlords across Ontario.

Tenant protection legislation serves an important social purpose. Housing is not merely another commercial commodity; it is fundamental to personal dignity and social stability.

Accordingly, the law provides tenants with significant procedural safeguards before eviction can occur.

From a public-policy perspective, these protections are understandable.

From a landlord's perspective, however, the experience can be deeply frustrating.

Months of unpaid rent may accumulate.

Hearings may take considerable time.

An eviction order may eventually be obtained.

But recovering rent arrears can prove far more difficult than obtaining possession of the property itself.

Many landlords are left wondering whether the legal process sufficiently recognizes that they, too, have financial obligations—including mortgages, property taxes, insurance premiums, repairs and maintenance.

Once again, the challenge is balancing competing interests.

 

The Quiet Disappearance of the Bulk Sales Act

One legislative change that received relatively little public attention—but considerable interest among credit professionals—was Ontario's repeal of the Bulk Sales Act in 2017.

For decades, the legislation sought to prevent businesses from disposing of substantially all of their inventory or assets while leaving trade creditors unpaid.

Compliance could certainly be cumbersome.

Transactions required additional legal work.

Commercial deals sometimes proceeded more slowly.

Critics argued that the legislation imposed unnecessary costs on legitimate business transactions.

Supporters viewed it differently.

To them, the Act represented an important safeguard against a debtor selling a substantial portion of its assets and leaving trade creditors behind.

When the legislation was repealed under Ontario's Burden Reduction Act, many lawyers welcomed the reduction in regulatory burden.

Many credit professionals quietly mourned the loss of another layer of creditor protection.

Both perspectives had merit.

And that, perhaps, is the recurring theme.

 

Why Legislatures Often Choose Debtor Protection

To understand modern commercial law, one must also appreciate the policy objectives that guide legislators.

The purpose of insolvency legislation is not merely to maximize creditor recoveries.

It is also intended to preserve economic activity, encourage entrepreneurship, protect employment and provide honest but unfortunate debtors with an opportunity to begin again.

Similarly, residential tenancy legislation seeks to reduce homelessness and housing instability rather than simply facilitate efficient contract enforcement.

Small Claims Court seeks to provide ordinary citizens and businesses with access to justice without requiring them to spend disproportionate amounts on lawyers.

Viewed through this broader public-policy lens, many debtor protections become easier to understand.

Whether they always produce the fairest practical outcomes is another question entirely.

 

The Creditor's Perspective Deserves Equal Respect

There is one observation that deserves greater recognition:

Every unpaid invoice represents more than an accounting entry.

Behind that invoice may be a family-owned business.

A manufacturer that has already paid for raw materials.

A contractor who has already paid employees.

A wholesaler whose own suppliers expect payment.

A small business owner who has invested years of personal effort into building a company.

When an unsecured creditor absorbs a significant loss, that loss does not simply disappear.

It is transferred.

It affects cash flow.

It reduces investment.

It can limit hiring.

And in some cases, it creates additional financial distress further down the supply chain.

Creditors, too, are participants in the economy.

Their interests deserve thoughtful consideration.

 

The Difference Between Rights and Remedies

Perhaps the most important lesson for anyone involved in credit management is that a legal right and an effective remedy are not necessarily the same thing.

A contract may say that payment is due.

A court may confirm that payment is due.

A judgment may establish conclusively that payment is owed.

But none of those things necessarily guarantees that the creditor will receive the money.

This is why credit management cannot begin when the invoice becomes overdue.

By then, the most important decisions may already have been made.

Who was granted credit?

How much credit was extended?

What security was obtained?

Was a personal guarantee required?

Was a credit limit established?

Were warning signs ignored?

Was payment behaviour monitored?

Was action taken when the account first became delinquent?

The best collection strategy is often the credit decision made before the sale takes place.

 

Perhaps the Better Question

So, does Canadian law favour debtors over creditors?

I am not convinced that this is the right question.

A more meaningful question may be:

Has Canadian law increasingly prioritized rehabilitation, social policy, access to justice and economic stability over the strict enforcement of contractual rights?

If the answer is yes, then many of the concerns expressed by unsecured creditors become easier to understand.

This does not necessarily mean that the legal system is unfair.

Nor does it mean that debtor protections should be dismantled.

Rather, it reminds us that every legal system reflects policy choices—and every policy choice creates both beneficiaries and those who bear the cost.

Perhaps the challenge for legislators is not deciding whether debtors or creditors should prevail.

It is ensuring that the pendulum never swings so far in either direction that confidence in commercial fairness begins to erode.

Because when businesses lose confidence that legitimate debts can be collected within a reasonable legal framework, the natural response is predictable:

Credit becomes more expensive.

Credit limits become more conservative.

Security requirements become more demanding.

Small businesses become more reluctant to extend terms.

And ultimately, the cost of those additional precautions is passed along to everyone.

 

The Credit Manager's Reflection

There is an old saying in credit management:

"A sale is not a sale until the money is collected."

Perhaps the law teaches us a similar lesson.

A debt may be legally established.

A creditor may obtain judgment.

A court may recognize the creditor's rights.

But the ultimate measure of a credit transaction is not whether the creditor won the lawsuit.

It is whether the creditor was ultimately paid.

The law has an important role in determining rights and providing remedies. But perhaps we should periodically ask ourselves whether those remedies are sufficiently accessible, understandable and effective for the very people—particularly small businesses and individuals—the system was designed to help.

The pendulum need not favour creditors.

But neither should creditors be left holding a beautifully crafted legal judgment that is, for all practical purposes, worth very little.

That is a question worth debating.

The opinions expressed in this article are intended to encourage discussion on Canadian commercial law, credit management and public policy. They should not be construed as legal advice.