Forestry Service Providers Protection Act - Charges, Mortgages, Indemnities

Following up on our bulletin of May 2010, the government brought into force the remaining provisions of the Forestry Service Providers Protection Act ("FSPPA" or "Act") on April 1, 2013. These, together with amendments to the Personal Property Security Act ("PPSA") that came into force March 25, 2013 make the FSPPA functional as of April 1, 2013. Section references herein are to the FSPPA.

The Act is of interest to contractors, subcontractors, timber owners and lenders in the forest industry.

The Act does three things for those who provide services to the forest industry in BC:

it creates lien rights over forest products in favour of contractors in the forest industry;
it establishes charges in favour of both contractors and subcontractors over accounts receivable of the person they contracted with for unpaid amounts under the contracts or subcontracts;
it enables the creation of a trust fund to assist contractors ("Forestry Service Providers") who are victims in the insolvency of persons to whom they have provided services.

Any agreement to waive, surrender or modify the rights of a contractor or subcontractor under the Act is void (s .22).

The Act does not alter or repeal the Woodworker Lien Act.

Contractor's Lien

Creation of the Lien

The Act creates a lien over "forest products" in favour of a "contractor" who has a contract for "services" with a "forest products owner" (s. 2). The Act does not create a similar lien in favour of a "subcontractor." The details are in the definitions (s. 1(1)):

"forest products" means:

(a) timber, whether limbed, bucked or peeled, and

(b) prescribed products manufactured from timber

owned by a forest products owner, or in which a forest products owner has given a security or has transferred ownership for security purposes;
"services," in respect of forest products, means felling, bucking, yarding, skidding, processing, chipping, grinding, decking, loading, hauling, unloading, dryland sorting, logging road construction and maintenance, and any other prescribed activity;
"forest products owner" means a person who has entered into a contract with a contractor under which services are provided by the contractor or subcontractor. Conspicuously absent are forestry consulting services and silviculture;
"contractor" means a person who has entered into a contract with a forest products owner under which services are provided to the forest products owner. Interestingly, under Section 1(2) of the Act, where a forest products owner contracts with an affiliate for services, which affiliate then contracts with a subcontractor for those services, the subcontractor is deemed to be a contractor for the purposes of the Act;
"subcontractor" means a person who has entered into a contract with a contractor under which services are provided to or on behalf of the contractor;
"registrar" and "registry" have the same meaning as under the PPSA.

The lien is automatically created when the services begin regardless of whether the contractor registers the lien, but the security provided under the lien is limited to the fair market value of those services, as opposed to "an amount due" (s. 2(2)).

Registration and Priority

The lien is registerable under the PPSA, but not until the forest products owner is delinquent in payments under the contract. Any registration before that time is not valid and may be challenged by the forest products owner (s. 4(2)). Until the lien is registered, it ranks behind any registered charge holder in the Personal Property Registry who has a charge over the forest products of the forest products owner. Once registered (after the forest products owner has defaulted in payment under the contract), the lien will rank in priority to charges that are registered after it (s. 5).

Persons who have prior registered security interests over the inventory and other assets of the forest products owner will rank ahead of the lien holder, even for advances made after the lien is registered (s. 5(3)). There is no priority as between two or more registered lien holders under the FSPPA (s.5(5)).

A purchaser of forest products, who purchases in the ordinary course of business, will take title free of any lien. (s.5(4)).

To register a lien, a financing statement is filed in the Personal Property Registry. This is a relatively straight-forward process and requires no input from the forest products owner or the courts.

The contractor must give prompt notice of the lien registration to the forest products owner (s.23(1)). At any time the court may be called upon to determine the validity of the lien claim and other issues relating to the lien claim (s.21).

Where a lien is invalid or has been discharged, the forest products owner, or any person with an interest in the forest products, may demand that lien holder discharge the registration (s.16(2)). Where, within 20 days of the demand, the lien holder fails to discharge the lien or obtain a court order that the lien be maintained, the person making the demand may cause the lien to be discharged by filing a form for that purpose with the registrar under the PPSA (s. 16(3)).

Seizure Under a Lien

Where a forest products owner is in default, a lien holder may apply to court to have forest products seized (ss. 2(5), 17(1)). The court may deal with any issues about the validity of the lien or its priority, order that persons be notified of the application, order a trial of any issue, make an order with respect to costs and may order the Sheriff to seize and sell the forest products (s. 17).

Once forest products have been seized and sold, the lien holder must apply to court for payment out from the lien fund (s. 18(3)). The court may determine who is entitled to the lien funds, determine who is to receive notice of the application for payment out, deal with any issues of validity or priority, or order a trial of any issue (s. 18(3), (4)). After 30 days following a court order determining entitlement to lien funds, the Sheriff must pay out the lien funds, net of the Sheriff's costs (s. 18(2)), to the claimants, unless the Sheriff receives notice that additional lien holders have made application to court in respect of the funds (s. 18(5), (6)). If there are insufficient funds to discharge the amounts owing to lien holders, the funds will be distributed to the lien holders in proportion to their claims, after allowing for third party claims that rank in priority to the liens (s. 18(7)).

Charges

The Act creates a charge in favour of a contractor or subcontractor for any monies due to them under a contract or subcontract for the provision of services (ss. 6, 11). The security provided under a charge is not limited to the fair market value of the services (as is the case with a lien under the Act), but secures "the amount due". A charge in favour of a contractor attaches the accounts receivable of a forest products owner (s. 6). A charge in favour of a subcontractor attaches the accounts receivable of a contractor and would include any amounts payable by the forest products owner to the contractor (s. 11).

Contractor's Charge: Creation and Registration

The charge in favour of a contractor on accounts receivable of a forest products owner attaches immediately upon an amount being due under the contract for services, and not when the forest products owner is in default (s. 6). However, like the lien over forest products, the charge on accounts receivable ranks behind security interests already registered in the Personal Property Registry, even for advances made after registration of the charge (s. 9).

The charge may be registered in the Personal Property Registry only after the forest products owner is in default in payment under the contract (s. 8). Once registered, the charge will rank ahead of subsequent registrations purporting to create a security interest in the accounts receivable. There is no priority as between two or more registered charge holders (s. 9).

As with lien registrations, a charge holder must give notice of the registration to the forest products owner (s. 23) and the forest products owner, or any person with an interest in the forest products, can demand that an invalid or discharged registration be removed (s.16(2)). The charge holder then has 20 days to remove the charge registration or obtain a court order maintaining it, failing which the person making the demand can file a notice with the registrar under the PPSA causing the registration to be discharged (s. 16(3)).

Notice to Account Debtor (Customer)

Once a forest products owner defaults in payment to a contractor, the contractor may notify persons who owe money to the defaulting forest products owner of the default and of the amount of the default (s. 10(1)). Where a customer of the forest products owner receives such notice, the customer may pay the amount payable to the sheriff in discharge of the payment obligation to the forest products owner (s.10(2)). Where the customer pays the forest products owner instead, the payment does not discharge the debt to the forest products owner to the extent of the charge (s. 10(3)). In other words, the customer is still deemed to owe the amount to the forest products owner, despite the payment, and may be required to pay the amount to the Sheriff. The Act is unclear as to what rights or remedies a charge holder may have if a customer simply fails or refuses to pay either the forest products owner or the Sheriff.

Distribution of Charge Fund

Where monies have been paid to a Sheriff in respect of a charge by a contractor over accounts receivable, the Sheriff will deposit the monies (again, net of the Sherriff's costs as with the distribution of a lien fund) into a separate account (s. 19(1), (2)). The charge holder may apply to court for entitlement to the funds. The court may then determine who is entitled to payment from the fund, determine what persons should receive notice of the application, deal with questions of validity and priority, make an order with respect to costs and order a trial of any issue (s. 19(3), (4)). After 30 days after a court has determined entitlement, the Sheriff must pay to the charge holders the amounts secured by the charge, unless the Sheriff receives notice that additional charge holders have applied to the court in respect of the fund (s. 19(5), (6)). If there is insufficient money in the fund to discharge the amounts owing to all charge holders, after allowing for third party claims that rank in priority to the charges, the funds will be distributed to the charge holders in proportion to their claims (s. 19(7)).

Subcontractors Charge

A subcontractor who provides services to a contractor who in turn provides services to a forest products owner has a charge over the accounts receivable of the contractor for amounts owing to the subcontractor under the subcontract (s. 11). The rules with respect to creation, registration, priority, discharge and payment out are identical to those for the contractor's charge.

Forestry Service Providers Compensation Fund

Part 2 of the FSPPA deals with the establishment of a fund to be called the Forestry Service Providers Compensation Fund (the "Fund"). This Part, and the Fund, are not related to the lien and charge provisions of the Act.

Purpose of the Fund

The purpose of the Fund is to provide compensation to "forestry service providers" who have suffered financial losses as a result of the insolvency of persons to whom they have provided services (BC Reg. 3/2013, s. 3). "Services" has the same meaning as in the context of liens and charges. "Forestry service provider" for the purposes of Part 2 of the FSPPA is limited by BC Reg. 3/2013 to persons who provided services to tenure holders under the Forest Act.

Creation of the Fund and the Authority

Part 2 of the Act does not create the fund, it enables the creation of the fund and of the institutions that will administer it. The fund was created on March 30, 2012 by the Forestry Services Providers Compensation Fund Regulation (BC Reg. 64/2012) and was seeded with a contribution of $5,000,000 provided by the government. The fund is to be administered by an "Authority" appointed by the Minister of Forests, Lands and Natural Resource Operations (s. 31) pursuant to an "Administrative Agreement" between the Authority and government. Eric van Soeren was initially appointed as the Authority on March 30, 2012 and an Administrative Agreement was entered into on February 1, 2013. The Authority is not an agent of the government for the purposes of the Act or the regulations under it (s. 33).

Sources of Funds for the Fund

In addition to the $5,000,000 seed money provided by the government, the Act contemplates other sources of funding. Part 2 of the Act refers to "contributors" who will be identified by regulation and who will make contributions to the fund in accordance with the regulations (s.27(1)). Additionally, Cabinet may, by regulation, impose a levy on stumpage bearing timber that must be paid into the Fund (s. 27(2)). Finally, any amounts received by a person in respect of a financial loss for which that person has applied for and received monies from the Fund, must be paid to the Fund (s. 29(4)). This is to prevent double dipping. To date no additional contributors have been identified or stumpage levy created.

Administration of the Fund

Details with respect to the administration of the Fund are to be found in the Act, Regulations and the Administrative Agreement. Other than BC Reg. 64/2012, which creates the fund and defines who is eligible for compensation from the fund, there are no further regulations at the date of this bulletin. In summary the fund will work as follows:

the Authority holds the fund in trust;
monies in the fund may not be garnished, attached or seized;
the Authority will invest monies in the fund in accordance with the Trustee Act;
an "Advisory Board" will be established under the Administration Agreement which Advisory Board will assist the Authority with the development of policies and any suggestions for changes to the Act;
the Authority will receive and adjudicate compensation claims from contractors and subcontractors;
a compensation claim must show:
- the amount of the claim,
- evidence of financial loss,
- a list of any affected subcontractors and amounts owing to each,
- other information required under policies of the Authority;
the Authority has very broad discretion to evaluate the merits of a compensation claim;
limitations on compensation include:
- only for losses incurred after February 1, 2013,
- only for a financial loss resulting from a failure of a licensee of a forest tenure to pay for services, not for other claims;
- the licence holder must be insolvent;
- only for services provided in the pay period immediately preceding default and 30 days thereafter,
- maximum 60 days services,
- will be prorated if there are insufficient monies in the Fund;
the recipient of compensation from the fund will be required to enter a "Compensation Agreement" with the Authority whereby the recipient will assign to the Authority any accounts due to the recipient which gave rise to the compensation claim;
the Administration Agreement includes reporting requirements to government.

Woodworker Lien Act

Despite the earlier intention that it do so, the Act does not repeal the Woodworker Lien Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: Forestry Service Providers Protection Act