Canada: What´s New In Bankruptcy

Last Updated: July 25 2001

1. The "Château d'Amos" Case

On October 19, 1999, the Quebec Court of Appeal rendered a decision in the Château d'Amos case, on the issue of unpaid municipal and school taxes when the owner of an immovable property became bankrupt, in view of the new provisions of the Civil Code of Québec (the "CCQ").

Before the CCQ came into force on January 1, 1994, the provisions of the Civil Code of Lower Canada granted municipalities, cities and school boards a privilege on the immovable property in question to guarantee the payment of property taxes which included a "droit de suite" (i.e: the right to follow the property in whosever hands it may pass). As a result, municipalities, cities and school boards were secured creditors within the meaning of the Bankruptcy and Insolvency Act (the "BIA"). In 1994, with the coming into force of the CCQ, the rules governing securities were amended to replace the concept of "privilege" by the concept of "prior claim", which do not constitute real rights which would include a "droit de suite", but simply the right to be paid before the hypothecary creditors registered against the property when the immovable property is sold by court order other than in a bankruptcy situation.

Furthermore, the following not simplifying the issue, the Quebec legislator also granted these organizations the power to register a legal hypothec, which constitutes a real right, on an immovable property to guarantee the payment of unpaid taxes.

In the Château d'Amos case, the trustee in bankruptcy asked the Court for permission to sell the bankrupt's hotel complex and to distribute the proceeds from the sale among the hypothecary creditors registered against the immovable property, without paying the tax arrears. The trustee also asked the Court to declare that the municipality and the school board did not have a "droit de suite" on the immovable property against the new purchaser under the Cities and Towns Act ("CTA").

The majority of the Court of Appeal upheld the principle that a prior claim within the meaning of the CCQ does not constitute a real right with a "droit de suite" on the immovable property and therefore is not a secured claim within the meaning of the BIA. As a result, when an immovable property is sold by a trustee in bankruptcy, the hypothecary creditors duly registered against the immovable property will be paid first out of the proceeds of sale, before any other claimants under the BIA, including cities, municipalities and school boards. The Court of Appeal's decision was good news for financial institutions and trustees in bankruptcy, who thought they would be able to take advantage of their debtors' bankruptcy to make real estate tax arrears "disappear".

The celebrations were short-lived. On December 20, 1999, the Québec National Assembly amended the CCQ and the CTA to provide that the prior claims of municipalities, cities and school boards for property taxes would henceforth constitute a real right and give their holders the "droit de suite" on the property in whosever hands it may be. As a result, these organizations now meet the criteria to be considered secured creditors within the meaning of the BIA. In the event the owner of an immovable property goes bankrupt, they will therefore be paid before the hypothecary creditors who registered their rights in the land register before the claim of these organizations came into existence.

2. Proposed Amendments To The Bankruptcy And Insolvency Act

The federal government is currently considering modifying several laws as part of a harmonization programme intended to ensure that federal laws have the same scope in both common law and civil law.

Bill C-50, which was first read in the House of Commons on June 12, 1998, contains changes to the BIA. As these amendments are not yet in force, the following comments are merely an overview of the impact of Bill C-50 on the BIA should the former be adopted in its current form.

The federal government is proposing to change the concept of secured creditor contained in the BIA to include any person holding a right of retention or prior claim within the meaning of the CCQ or any other law of the Province of Quebec.

As a result, in the event a tax debtor goes bankrupt, it is clear that claims of the government of Quebec will receive favourable treatment compared to claims of the government of other provinces. All civil law authors agree that the holder of a prior claim within the meaning of Articles 2650 and following of the CCQ does not hold a real right on the property and does not have the status of secured creditor within the meaning of the BIA.

However, if the proposed changes are adopted, the federal legislator will give the government of Quebec the status of secured creditor within the meaning of the BIA with all the rights and powers that such status entails. Hopefully, the federal legislator will reconsider his position. Otherwise, Bill C-50 would grant Quebec a special status vis-à-vis the other provinces which would be contrary to the objective of these changes: the harmonization of the law throughout the country.

In light of the foregoing, we will follow the evolution of this Bill with great interest.

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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