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DEALING WITH AN INSOLVENT LICENCEEThe insolvency of licencees is an occasional phenomenon in the province. Obviously that insolvency has a dramatic effect upon the harvesting sector supplying the licencee. Logging contractors dealing with a cash strapped licencee must do what they can to protect their interests, and should proceed with their eyes open. In my view, the three most important things for a logging contractor to consider are these. First, the contractor wants to ensure that it has extended the least amount of credit possible to the licencee. Second, it wants to protect its Bill 13 replaceable contract. Third, it wants to be hedging its bets by looking for work elsewhere. Typically an insolvent licencee will be put into receivership by its bank. Ultimately that receiver intends to sell the licencee's assets, including the mill and the forest licences. It may decide to continue operating the mill for the time being, although that usually does not happen. Once the mill grinds to a halt, the services of the contractor are no longer needed and the incentive to pay evaporates. Whatever is owed to the contractor becomes classified as an "unsecured debt", meaning that it ranks low on the totem pole beneath secured and preferred creditors. Usually there is not enough money to go around and the unsecured creditors receive nothing. If something is paid, the amount is small and is paid months or years later. Unfortunately, the Woodworker Lien Act is of no assistance to contractors, and is of limited assistance to single phase subcontractors. I have written previously about the problems associated with the Woodworker Lien Act. Among other things, the Act does not apply to contractors that employ several workers; inventory levels of unsawn logs are often so low that there is nothing for a lien to attach to; and, the federal and provincial governments often claim legal priorities that make any valid woodworker lien worthless. Leading up to the insolvency, contractors need to put their licencee on a strict credit leash. They should not allow their licencee to get behind in payments, even by a day. If the licencee does fall behind, the contractor is fully entitled to withhold further services. So, what can a contractor do if the licencee's payments are current, but insolvency appears imminent? In my view, there is value to protecting a Bill 13 replaceable contract, and the contractor is obligated to continue working under it. A failure to do that may result in the licencee terminating the contract for "just cause". On the other hand, this is less of a worry for a non-replaceable contract and/or a BC timber sale, and the contractor may look for an opportunity to stop work under such an agreement. Those contractors who start their logging year harvesting replaceable volume, and finish harvesting non-replaceable volume, might ask themselves whether they are presently working on the non-replaceable volume, and whether they ought to stop. By the way, BC Timber Sales create special issues for consideration. If a sale is in the name of the contractor, with the licencee committing to pay the stumpage, then the contractor must ensure that the licencee is doing that. Also, the opportunity for a timber sale holder to surrender his sale, with minimal penalty, is much better before the first tree has been felled on the sale. After that first tree has been felled, the law applies differently and take-or-pay applies. Ultimately the licencee, through its receiver or trustee in bankruptcy, is going to sell the licencee's forest licences to some new party. Many people in the industry mistakenly think that the new licencee becomes obligated to pay for all consultants' work, development work, silviculture work, past harvesting, etc., associated with the licence. That is not true. The only party obtaining some protection here is the Bill 13 replaceable contractor. Under provincial law, when the forest licence is transferred to the new licencee, the Bill 13 replaceable contractors go with the transfer. Be aware, however, that there are other laws dealing with insolvency that may effectively overrule this provincial law, and quite possibly the new licencee will receive the forest licences without any replaceable contracts attached to it. There is case precedent to this effect out of the BC Court of Appeal concerning the Skeena Cellulose situation. While I do not predict that this will happen in every insolvency, replaceable contractors should be aware of this risk. As I mentioned at the beginning of this article, contractors should be looking for replacement work elsewhere. In my experience, the financial stresses suffered by a licencee that is approaching insolvency find themselves downloaded onto the contractor, with it becoming more difficult to negotiate profitable rates. And, once the insolvency occurs, things only get worse. Contractors that do not keep all of their eggs in one basket usually fair better in these situations. Of course, the insolvency of the licencee can lead to the insolvency of the contractors that rely upon it. The insolvency of the contractor is beyond the scope of this article, but any contractor with a concern like that may want to consult with suitable professionals. John Drayton is a Kamloops lawyer practicing in the areas of motor transport and forestry law. Back to Articles Index
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