Litigation and Lien Searches Before Buying an Ontario Business

Before you pay for a business, you want to know whether someone else already has a claim on it. A lender may hold security over the equipment, a creditor may have a judgment, or the business may be facing a lawsuit. Searches are how you find these claims before closing instead of after.

This article walks through the main searches an Ontario buyer considers, what each is for, and what they cannot show. It is general information. Which searches you need depends on the business, and a lawyer can run them and interpret the results.

Why one search is never enough

Different claims are recorded in different places. Security interests sit in one database, bankruptcy records in another, and enforcement documents are handled by sheriff-level offices. Some claims are not recorded publicly at all. The CRA's claim over source deductions and GST/HST is secured over all of the business's assets, including sale proceeds, regardless of security given to other creditors, and it does not need to be publicly registered, so a PPSA search will not reveal it.

That is why searches are one layer of protection, alongside the seller's disclosure, CRA account information and the terms of the purchase agreement.

The main searches and what each one covers

Search the right names. Run enquiries against the business, the seller as an individual if they are the owner, and any previous or alternate names the business has used. For vehicles, the database supports a motor vehicle search.

Bank Act security and bankruptcy priority

Banks can take a special kind of security over inventory. Under Bank Act s. 427, a bank can take security over inventory and goods held by wholesalers, retailers, manufacturers, farmers and others, given by signing and delivering a document to the bank, and it covers goods owned now and acquired later. The security is void against the giver's creditors and later good-faith purchasers unless a notice of intention was registered in the appropriate agency, and that registration must be made no more than three years before the security was given.

If you are buying inventory-heavy assets, ask whether the seller has given this kind of security and check the registration. Priorities also shift in bankruptcy: if the giver goes bankrupt or makes an assignment, some claims rank ahead of the bank's s. 427 security, including unpaid wages for the three months before the order or assignment, and certain grower and producer claims for products delivered in the prior six months, up to a prescribed amount.

Litigation searches and what searches miss

Lawsuits against the business, or judgments that have not yet been enforced, may not appear in a security database. Which court records to check and how to search them depends on where the business operates and which courts could be involved, so this is a point to confirm with a lawyer. Also ask the seller directly, and in writing, about any threatened or pending claims, and have the agreement require disclosure.

• Searches do not show unregistered tax claims such as payroll and HST deemed trusts
• A person who acquires an employer's business can be liable for amounts the employer owed the WSIB immediately before the disposition
• In a share purchase, the buyer inherits the company's liabilities, including its WSIB history
• Searches show a moment in time, so a result can change before closing

For these reasons, many buyers pair searches with CRA account statements, a purchase agreement that includes seller representations, and sometimes an indemnity or holdback. Those are practice points, and a lawyer can tailor them to your deal.

What to do next

• List every name the business and the seller have used, plus any vehicles that are part of the deal
• Have a lawyer run personal property security searches against those names
• Check the Ontario Business Registry for the corporation's status and filings
• Run a federal bankruptcy and insolvency records search and confirm the current fee
• Ask about writs and enforcement against the seller through the appropriate enforcement offices
• If inventory is financed by a bank, ask about Bank Act security and any registered notice of intention
• Repeat key searches shortly before closing

If a search turns up a security interest or claim, the usual next step is to deal with it in the agreement, for example by requiring payment and a release at closing. A lawyer can explain the options.

Frequently asked questions