Bankruptcy and Insolvency – Companies'
Creditors Arrangement Act – Priorities
In the first decision of the Supreme Court of Canada considering
the Companies' Creditors Arrangement Act
("CCAA"), the court discusses the principles of
interpretation for the CCAA. Apart from its importance in that
respect, the decision is also of interest for its discussion of
statutory interpretation, particularly with respect to statutory
In Century Services, the issue was the relationship between s.
222(3) of the Excise Tax Act ("ETA"), which
creates a statutory deemed trust over unremitted GST, and s.
18.3(1) of the CCAA, which provided that any statutory deemed
trusts in favour of the Crown did not operate under the CCAA,
subject to certain exceptions (none of which include GST). An order
made in the CCAA proceedings allowed a payment to the debtor
company's main creditor, Century Services Inc.; however, the
debtor company was also ordered to hold back an amount equal to its
unremitted GST, and segregate it in the Monitor's trust
account. The debtor company's restructuring efforts failed, and
it moved for a partial lift of the stay of proceedings to allow it
to make an assignment in bankruptcy under the Bankruptcy and
Insolvency Act ("BIA"). The Crown moved for an order
requiring the immediate payment of unremitted GST.
The motion was denied by the CCAA chambers judge, but the Court
of Appeal for British Columbia allowed the appeal. The Court of
Appeal held that the chambers judge had no discretion under s. 11
of the CCAA (which permits orders, inter alia, staying claims
against the debtor) to continue the stay of the Crown's claim,
and that the order that funds be segregated in the Monitor's
account in the amount of the GST payments created an express trust
in favour of the Crown.
The Supreme Court of Canada allowed the appeal. The reasons of
the majority emphasized the flexibility of the CCAA. Its general
language should not be read restrictively, and the requirements of
appropriateness, good faith and due diligence should be considered
by the court whenever exercising CCAA authority. The purpose of
orders made under the CCAA, and the means they employ, should be
focused on furthering efforts to avoid social and economic losses
resulting from liquidation of an insolvent company. There should
also be regard to a harmonious transition from the CCAA to the BIA,
with the objective of a single proceeding common to both statutes.
The court held there is no "gap" between the CCAA and the
BIA; they operate in tandem. Thus, the chambers judge had the
discretion under the CCAA to effectively construct a
"bridge" between the CCAA proceedings and liquidation
under the BIA, by staying the Crown's claim for payment of the
GST monies. On the question of the express trust, the majority
found that no express trust was created by the chamber judge's
order; the funds were not sufficiently segregated to have a clear
beneficiary, and the uncertainty of the outcome of the CCAA
restructuring eliminated any certainty respecting the vesting of a
beneficial interest in these funds in the Crown.
Justice Abella dissented and took the view that the ETA gave
priority during CCAA proceedings to the Crown's deemed trust
over unremitted GST, and that the court's discretion under s.
11 of the CCAA was circumscribed accordingly. Justice Abella
examined the various amendments to the ETA, the BIA and the CCAA
over the years, and concluded there was a clear inference of a
legislative decision to protect the deemed trust over GST in the
ETA from the operation of s. 18.3(1) of the CCAA. The chambers
judge was therefore required to respect the priority scheme set out
in s. 222(3) of the ETA, and neither ss. 11 or 18.3(1) of the CCAA
would give him authority to deny the Crown's request of the
payment of GST funds during the CCAA proceedings. Due to this
finding, Abella J. held it was unnecessary to consider whether
there was an express trust.
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.
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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