The Supreme Court of Canada decision in Century Services Inc. v. Canada (Attorney General), which arose from the restructuring proceedings of Ted LeRoy Trucking Ltd. and was released on December 6, 2010, is a landmark decision in Canadian insolvency law.
Not only did the Supreme Court overrule the Ontario Court of Appeal decision in Ottawa Senators on the issue of Crown priorities but also, for the first time, the Supreme Court considered and explained (i) the interpretative approach courts should employ when applying the Companies' Creditors Arrangement Act (CCAA), the legislation of choice for large corporate restructurings; and (ii) the interaction among Canada's multiple insolvency-related statutes, particularly when the debtor's attempt to restructure fails.
In Ted LeRoy, the debtor had commenced proceedings under the CCAA. Among its outstanding debts was a debt for GST that had been collected by the company, but not remitted. The Excise Tax Act (ETA) creates a trust for unremitted GST, which, according to the ETA, ranks in priority over all security interests. The ETA states that it takes precedence over any other enactment of Canada or a province other than the Bankruptcy and Insolvency Act (BIA). While the ETA only provides an exception for the BIA, both the BIA and the CCAA contain provisions nullifying deemed trusts in favour of the Crown. Accordingly, the BIA and ETA accord with each other: the ETA explicitly respects the BIA provision nullifying the deemed trust for unremitted GST. However, the ETA and the CCAA were in apparent discord, with each purporting to nullify the other.
In a case arising out of the CCAA proceedings of the Ottawa Senators hockey club, the Ontario Court of Appeal had considered this issue and concluded that the ETA, which had been enacted later in time, "repealed" the prior-enacted CCAA provision nullifying the GST priority. This created an inconsistency of treatment of GST between a BIA proceeding (reorganization or liquidation), in which the ETA deemed trust would be nullified, and a CCAA reorganization, in which the trust would remain enforceable.
The issue arose again in Ted LeRoy. In that case, assets of the debtor's business were sold in the CCAA proceedings, giving rise to proceeds. When reorganization under the CCAA failed, the debtor sought leave to make an assignment under the BIA. In response, the Crown sought to have a portion of the sale proceeds paid to it before any assignment under the BIA was made. The Crown argued that it would be prejudiced if the debtor became bankrupt before the amounts were paid because it would lose priority for its deemed trust under the BIA. The supervising judge dismissed the Crown's motion and continued the CCAA stay preventing enforcement of the Crown's claim pending the bankruptcy. The Crown appealed.
The Crown's appeal was allowed by the British Columbia Court of Appeal, which found that since the ETA deemed trust had priority under the CCAA (following Ottawa Senators), the CCAA court should not stay enforcement of the Crown's claim once restructuring was no longer a possibility. In essence, the court found that the only legitimate purpose of the CCAA stay was to facilitate reorganization, and once that was no longer possible, the Crown's rights under the ETA should not be stayed.
The Supreme Court of Canada allowed the appeal. In dealing with the statutory interpretation issue, the Supreme Court explicitly overturned the Ottawa Senators case, holding that the Ontario Court of Appeal had misinterpreted the CCAA by misapplying the principle of "deemed repeal." The majority decision found that, when one properly considers the history of the CCAA and Canada's insolvency regime as a whole, the ETA deemed trust for GST should be viewed as nullified under both the BIA and the CCAA.
In an insightful review of Canada's multi-statute insolvency regime, the Supreme Court notes that the BIA provides a codified regime for both reorganization and liquidation while the CCAA (which provides a more flexible court-directed restructuring regime for larger companies) provides only for reorganization. However, while the CCAA does not have its own liquidation provisions, the court held that "the BIA scheme of liquidation and distribution necessarily supplies the backdrop for what will happen if a CCAA reorganization is ultimately unsuccessful."
In its review of the history of Canada's insolvency regime, the Supreme Court notes the policy benefits and legislative wisdom of permitting the reorganization provisions of the BIA and CCAA to exist in parallel. The CCAA was enacted in 1933 to provide a creative, court-supervised process for companies to be reorganized to avoid the social and economic costs of mass liquidations. When the BIA was enacted in 1992 (replacing the former Bankruptcy Act), it included broader provisions for reorganizing insolvent debtors. Some commentators then speculated that the BIA's new reorganization mechanism would supplant the CCAA. However, the court notes that such conjecture was "out of step with reality" and "overlooked the renewed vitality the CCAA enjoyed." In particular, the flexible CCAA process — in which life is given to the "skeletal" CCAA by the exercise of judicial discretion — was seen as a great benefit to complex reorganizations when compared to the more rigid, codified scheme in the BIA. Thus, even after the BIA was enacted in 1992, the CCAA continued to be used, particularly for complex corporate reorganizations.
In keeping with the similar purpose, but different methods, of the BIA and CCAA restructuring mechanisms, the Supreme Court overruled Ottawa Senators and the "strange asymmetry" it had created in the treatment of GST deemed trusts. The court was critical that such asymmetry could give creditors incentive to favour the BIA and "deprive companies of the option to restructure under the more flexible and responsive CCAA regime, which has been the statute of choice for complex reorganizations."
The profound implications of the Supreme Court's approach to interpreting the CCAA are illuminated in the balance of its judgment. As liquidation under the BIA is the backdrop of both CCAA and BIA restructuring proceedings, the Supreme Court agreed with the trial judge that no "gap" should exist between the end of a failed CCAA reorganization and the start of liquidation under the BIA that would allow enforcement of interests at the conclusion of the CCAA that would be lost in bankruptcy. Rather, the Supreme Court explained that the two statutes form part of "an integrated body of insolvency law" and, while the CCAA does not explicitly provide for an automatic transition to the liquidation provisions of the BIA, "the breadth of the court's discretion under the Act is sufficient to construct a bridge [from a failed CCAA reorganization] to liquidation under the BIA."
While this decision arose in the context of a specific priority dispute between secured creditors and the Crown with respect to the Crown's claim for GST, the Supreme Court took this opportunity to correct deeply held but erroneous views about the relationship among Canada's insolvency statutes and how they should be interpreted. The Supreme Court rejected the notion that the BIA and CCAA are distinct regimes, and instead held that the two are part of an integrated whole. As a result, the Supreme Court empowered CCAA Courts to facilitate a smooth transition from a failed CCAA restructuring to liquidation proceedings under the BIA. This approach promotes restructuring under the regime most appropriate for each debtor company, and puts to rest technical arguments suggesting parties could obtain some advantage at the end of a failed CCAA restructuring that would not be available had the debtor employed the BIA restructuring regime.
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