In 2019, a number of judicial decisions were rendered across Canada, including by the Supreme Court of Canada (SCC), that will be of interest to commercial lenders and restructuring professionals. This article summarizes the core issues of importance in each of these cases. It also provides status updates on the cases reported in our January 2019 Blakes Whitepaper: 2018 Developments in Canadian Insolvency Case Law: What Lenders Need to Know, and includes a summary of any appellate decision rendered in 2019 in respect of those cases.
COMPETING CCAA AND RECEIVERSHIP APPLICATIONS
Romspen Investment Corporation v Atlas Healthcare (Richmond Hill) Ltd. et al
Date of Decision: December 10, 2018
The Ontario Superior Court of Justice (ONSC) set out the applicable factors a court should consider when deciding between competing applications for the appointment of a receiver brought by a secured lender and an application for relief under the Companies' Creditors Arrangement Act (Canada) (CCAA) brought by the debtor company. The ONSC found that there is no priority of consideration between the two competing applications and that each must be judged on its own merits, taking into account the following factors, among others:
- Operational issues pertaining to the competing applications and the feasibility of each restructuring plan
- The nature of the property at issue, which in these circumstances was real property
- The legal rights and interests of the secured creditors
- The interests of other stakeholders
Ultimately, the ONSC granted the receivership application over the CCAA application, noting that a CCAA proceeding—which benefits junior ranking creditors and equity holders but results in prejudice to senior ranking creditors—can only be justified on the basis that wider societal interests will be served. Such broader societal interests were not present in this case.
Status
The time period for appeal of this decision has expired and this decision is now final. In a similar case, in December 2019, the Court of Queen's Bench of Alberta (ABQB) sided with secured creditors in the CCAA proceedings of Re IEC Ltd. et al (Strategic Group) and terminated CCAA proceedings 10 days after commencement, thereby permitting the appointment of an interim receiver on the application of those secured creditors. A similar decision favouring receivership was also reached in Norcon Marine Services Ltd., (Re), 2019 NLSC 238 in December 2019 by the Supreme Court of Newfoundland and Labrador.
Takeaway
Courts continue to be mindful of the rights and interests of senior secured creditors as principal economic stakeholders when evaluating the appropriateness of competing insolvency proceedings.
VALIDITY OF STATUTORY LIENS AFTER BANKRUPTCY IN ONTARIO
The Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9
Date of Decision: January 14, 2019
In this decision, the Court of Appeal for Ontario (ONCA) considered whether funds held in trust pursuant to section 8 of the Construction Lien Act (Ontario) (CLA) are trust funds pursuant to section 67(1)(a) of the Bankruptcy and Insolvency Act (Canada) (BIA), and are therefore excluded from the debtor's estate and not available for distribution to creditors. Section 67(1)(a) provides that the debtor's estate does not include property held by it in trust, but there is a body of caselaw which establishes that provincially-created statutory deemed trusts are not captured by this exclusion.
The ONCA determined that provincially created statutory trusts will survive bankruptcy where the statutory trust satisfies principles of ordinary trust law: certainty of intention, certainty of subject matter and certainty of object.
The ONCA went on to hold that, in the circumstances of this case, the statutory trust and overall framework of the CLA creates the required element of certainty of intention to create a trust over the debt owed by the debtor company to a contractor. The ONCA also noted that the trust does not need to attach to specific funds earmarked for satisfaction of the debt and that, in this case, certainty of subject matter was satisfied as funds paid for each project were ascertainable and traceable.
Status
The time period for appeal of this decision has expired and this decision is now final.
Takeaway
This case should not be read to mean that provincial deemed trusts will always continue to operate in bankruptcy. Ordinary principles of trust law must still be satisfied—including certainty of intention, subject matter and object—in order for trust funds to be exempt from distribution under section 67(1)(a) of the BIA. We note that, although the CLA was amended and renamed in 2019 as the Construction Act (Ontario)—which came into force in parts on July 1, 2018, and on October 1, 2019—the deemed trust provisions remain unchanged.
ENFORCEABILITY OF MONETARY CONSEQUENCES FOR INSOLVENCY IN CONTRACT
Capital Steel Inc v Chandos Construction Ltd, 2019 ABCA 32
Date of Decision: January 29, 2019
A contract between a contractor and subcontractor contained a clause (Insolvency Clause) stating that the subcontractor would forfeit 10 per cent of the total contract price in the event that it committed an act of insolvency. The subcontractor ultimately became insolvent and assigned itself into bankruptcy, engaging the Insolvency Clause. At the time of bankruptcy, the contractor owed the subcontractor C$150,000. The contractor argued that this amount should be reduced as a result of the Insolvency Clause.
Clauses such as these, known as ipso facto clauses, were rendered unenforceable by legislation in BIA proposals and CCAA proceedings. However, the legislation does not address the enforceability of these clauses in commercial bankruptcies or receiverships and accordingly, the Court of Appeal of Alberta (ABCA) had to consider whether the anti-deprivation rule forms part of Canadian common law.
The majority of the ABCA found that there is a common law anti-deprivation rule, and that notwithstanding the absence of a clear legislative directive in circumstances involving commercial bankruptcies, a provision in an agreement is void if it provides that upon an insolvency, value is removed from the reach of the insolvent person's creditors and placed in the hands of others. Such contractual clauses prejudice creditors and offend the common law anti-deprivation rule by conflicting with the BIA's scheme of distribution. In contrast, the dissenting judge found that the anti-deprivation rule does not form part of the common law of Canada and, even if it did, the courts must assess whether the purpose of the contractual provision, not the effect, was to prejudice creditors.
Status
On July 11, 2019, the SCC granted leave to appeal this decision and the appeal was heard on January 20, 2020. A decision is pending.
Takeaway
Pending a decision from the SCC, the common law of Canada includes an anti-deprivation rule which applies in commercial bankruptcies.
PAYMENT OF SUPERINTENDENT'S LEVY
Superintendent of Bankruptcy v Business Development Bank of Canada, 2019 MBCA 72
Date of Decision: June 14, 2019
Pursuant to section 147 of the BIA, a levy is payable to the Superintendent of Bankruptcy (Superintendent) on all payments made to creditors by a licensed insolvency trustee. Typically, the amount of this levy is held back by a licensed insolvency trustee from distributions to creditors for remittance to the Superintendent. In this case, the debtor filed a notice of intention to make a proposal and proceeded to dispose of its assets during the proposal proceedings pursuant to approval and vesting orders, which provided that the net sale proceeds were to be held by the trustee in the proposal proceedings, pending a determination of entitlement to such proceeds. Subsequent to the sale transactions, the debtor failed to make a proposal within the requisite time—six months—and was deemed to have made an assignment into bankruptcy. The trustee continued to hold the sale proceeds following the bankruptcy.
A secured creditor moved for a declaration that the levy was not payable because the funds were received as proceeds of sale pursuant to approval and vesting orders, which vested the interest that secured creditors had in the collateral into the proceeds of sale, with the same priority that was enjoyed prior to the sale.
The Court of Appeal of Manitoba (MCA) held that the key consideration in determining whether the levy is payable with respect to a distribution by a trustee from proceeds of sale is whether the proceeds are derived from a secured creditor realizing on its security. In this case, the MCA held that the notice of intention to file a proposal stayed all secured creditors and that the proceeds were held by the trustee in its capacity as a licensed insolvency trustee, rather than an escrow agent. Accordingly, it was found that the sale was not derived from a secured creditor realizing on its security, and that the trustee was acting in its capacity as a licensed insolvency trustee administering the estate of the bankrupt when it distributed funds to the secured creditors. Accordingly, the distribution would be subject to the levy.
Status
The time period for appeal of this decision has expired and this decision is now final.
Takeaway
In bankruptcy or proposal proceedings, secured creditors should carefully consider the mode of realization of assets subject to their security and the manner in which proceeds are held and distributed, so as to avoid the risk that such distributions will be subject to the Superintendent's levy.
UPDATE ON 2018 CASE LAW BULLETIN
Priority of Environmental Reclamation Obligations
Orphan Well Association v. Grant Thornton Limited (also known as Redwater)
Date of Decision: January 31, 2019
In this important decision, the SCC overturned the decision of the ABCA and found that certain sections of the Oil and Gas Conservation Act (Alberta) and Pipeline Act (Alberta) do not conflict with the scheme of distribution set out in the BIA. In the majority's view, section 14.06 of the BIA is concerned only with personal liability of trustees and receivers and does not permit a trustee or receiver to walk away from environmental liabilities of the estate it is administering. A trustee or receiver may be required to satisfy certain environmental claims in priority to the claims of secured creditors, out of estate proceeds.
For more information, please see our January 2019 Blakes Bulletin: Supreme Court of Canada Overturns Alberta Court of Appeal in Redwater Decision.
Approval of Litigation Funding Agreements and Lender Sponsored CCAA Plans
Date of Decision: February 4, 2019
The Québec Court of Appeal (QCA) reversed the decision of the Québec Superior Court (QSC) rendered on March 16, 2018. The lower court held that, in appropriate circumstances, it is possible for a creditor to bring forward a CCAA plan and vote on it, but that in this particular case, the creditor was using the CCAA plan for improper purposes—in part because the debtor had significant litigation claims against the creditor which were proposed to be released as part of the creditor's plan—and should therefore not be permitted to vote on it. The QSC also granted the debtor's application for approval of a litigation funding agreement (LFA) to fund a lawsuit against the same creditor.
The QCA found that there was nothing improper about a creditor proposing a plan it stands to gain from in exchange for valuable consideration and that there was no justification, on the facts of this case, to deny the creditor its right to vote.
The QCA also reversed the QSC's decision on approval of the LFA, finding that, in these circumstances, the LFA impacted creditors' rights and, as such, constituted a plan of arrangement that should have been submitted to creditors for approval.
Status
Leave to appeal to the SCC was granted on August 15, 2019, and the appeal was heard on January 23, 2020. In uncommon fashion, the SCC issued a decision from the bench allowing the appeal of the QCA's decision—with reasons to follow.
Takeaway
We will prepare a full summary of the SCC's decision following its release.
For more information, please see our February 2019 Blakes Bulletin: Improper Purpose by a Creditor? The Quebec Court of Appeal Weighs In.
Can a Court Vest Out a Third-Party Interest in Land?
Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508
Date of Decision: June 19, 2019
There were three main issues before the ONCA in connection with receivership proceedings of Dianor Resources Inc.:
- Whether a gross overriding royalty (GOR), a royalty interest attached to the lease or license issued by the Crown and paid out of the revenue from the production of oil and gas, can be considered an interest in land
- If so, whether an interest in land can be vested out in an insolvency proceeding so that the purchaser would acquire the land free and clear of the GOR
- As the receiver was appointed under both the Courts of Justice Act (Ontario) and the BIA, the ONCA had to consider which statute governed the timeframe regarding appeals
The first issue was decided on March 15, 2018, with the ONCA deciding that GORs can constitute interests in land.
The subsequent appeal decision with respect to vesting orders was issued on June 19, 2019, and the ONCA found that section 243 of the BIA provides the court with the jurisdiction to vest out interests in land, including GORs, but that such jurisdiction is not unbounded and should only be exercised in appropriate cases. In deciding whether it is appropriate to extinguish a third-party interest in land, the primary consideration is whether the interest in land is more akin to a fixed monetary interest or a fee simple that is, in substance, an ownership interest. The ONCA found that the following additional factors should also be considered when deciding whether to extinguish an interest in land: (i) whether the owner had a reasonable expectation that the interest would be of a continuing nature and could not be extinguished in the ordinary course through payment in lieu, (ii) whether the interest holder consented to the vesting out of their interest either at the time of or prior to the sale, and (iii) the equities of the case (e.g. prejudice to the GOR holder, whether the parties were acting in good faith, etc.).
The appeal by the holder of the GOR seeking to set aside the vesting order was ultimately dismissed as the ONCA concluded that the BIA governed the timeframe relating to appeals and the appeal was not brought within the time period prescribed by the BIA rules.
Status
The time period for appeal of this decision has expired and this decision is now final.
Takeaway
An interest in land, including a GOR, can be vested out in an insolvency proceeding in appropriate circumstances based on factors set out by the ONCA. However, the analysis will be very fact specific.
For more information, please see our July 2019 Blakes Bulletin: Long May You Run: Ontario Court of Appeal Clarifies the Treatment of Mineral Royalties in Insolvency Proceedings.
No Special Lien for Unpaid Linear Property Taxes
Northern Sunrise County v Virginia Hills Oil Corp, 2019 ABCA 61
Date of Decision: August 29, 2019
The issue on appeal before the ABCA in the receivership proceedings of Virginia Hills Oil Corp. was whether the claims of certain municipalities for "linear property tax" arrears—taxes levied against linear properties such as electric power systems, street lighting, pipelines and telecommunications systems—granted the municipalities a special lien, pursuant to the Municipal Government Act (Alberta) (MGA). If so, municipalities would have priority over all creditors, including secured creditors, other than the Crown, in a receivership proceeding. Linear property taxes are payable by operators of the "linear property." The ABCA held that the term "property tax" in the MGA does not include linear property taxes and accordingly the MGA does not create any special lien in favour of municipalities for arrears of linear taxes. In arriving at this conclusion, the ABCA noted that an interpretation otherwise could result in a manifestly unjust outcome where linear property taxes attach to linear property and are borne by the owner thereof, rather than the operator of the linear property—the party liable for the linear property tax.
Status
Leave to appeal was sought and denied by the SCC and this decision is now final.
Takeaway
Municipalities are not granted a special lien for unpaid linear property taxes pursuant to the MGA.
For more information, please see our February 2019 Blakes Bulletin: Priority Denied: Alberta Court of Appeal Determines Linear Property Tax Arrears Are Not Subject to a Special Lien.
Discretionary Nature of The Priority of the Receiver's Charge
Edmonton (City) v Alvarez & Marsal Canada Inc, 2019 ABCA 109
Date of Decision: March 25, 2019
In a 2018 judgment, the ABQB refused to exercise its jurisdiction to grant priority to the receiver's charge—which secures the fees and disbursements of a receiver and its counsel—over municipal tax claims, on the basis that the case involved a liquidation process and there was no apparent benefit to the municipality out of the liquidating receivership.
On appeal, the ABCA noted that there was nothing on the record to suggest that the municipality would receive no benefit from the process undertaken by the receiver for the benefit of all creditors. The ABCA went on to hold that, while the court can exercise its discretion in respect of the priority afforded to a receiver's charge, such discretion should be exercised on a principled basis and ought not be exercised solely on the basis that a receivership is a liquidation. Accordingly, the appeal was allowed and the lower court's decision was reversed.
Status
Leave to appeal this decision to the SCC was denied on October 10, 2019, and the decision is now final.
Takeaway
This decision illustrates the discretionary nature of the priority of court-ordered charges in insolvency proceedings and provides guidance on the circumstances in which such discretion may be exercised.
Distributions to Creditors of Proceeds Impressed with a Deemed Trust Under the Excise Tax Act (Canada)
Canada v. Toronto-Dominion Bank, 2018 FC 538
Date of Decision: May 25, 2018
In this decision, the Federal Court found that, absent a bankruptcy, the Excise Tax Act (Canada) (ETA) imposes an obligation on secured creditors to repay money received out of proceeds of sale, which are otherwise subject to a deemed trust for unremitted HST/GST (i.e. federal/provincial sales tax) under the ETA. Accordingly, the secured creditor was ordered to remit funds to the Canada Revenue Agency (CRA) from its proceeds of realization to satisfy the CRA's deemed trust claim.
Updated Status
The secured creditor appealed the decision and the appeal was heard by the Federal Court of Appeal on October 8, 2019. No decision has been rendered at this time.
Priority of DIP Charges
Canada v. Canada North Group Inc., 2019 ABCA 314
Date of Decision: August 29, 2019
The majority of the ABCA upheld the lower court's decision, ruling that the Crown's interests under the statutory deemed trust provisions of the Income Tax Act (Canada), Canada Pension Plan (Canada) and Employment Insurance Act (Canada) for unremitted source deductions are not proprietary interests, and are instead akin to a secured interest. The ABCA went on to hold that, as the CCAA permits security interests to be primed, a CCAA court can order that charges rank ahead of these deemed trust interests.
Status
Application for leave to appeal to the SCC was filed on October 24, 2019. No decision on leave to appeal has been rendered.
Takeaway
Subject to further appellate review, this decision provides comfort to insolvency practitioners, court officers and other parties that rely on court-ordered priority charges that courts do have the jurisdiction to order that such charges rank in priority to deemed trusts in favour of the Crown for unremitted source deductions.
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