In his recent decision in Royal Bank of Canada v. Atlas
Block Co. Limited, 2014 ONSC 3062 ("Atlas
Block"), Justice Penny of the Ontario Superior Court of
Justice (Commercial List) held that trust claims pursuant to
section 8 of the Construction Lien Act (Ontario) (the
"CLA") do not survive the bankruptcy of the would-be
trustee debtor. Justice Penny held that the CLA deemed trust
provisions are not an exception to the general
rule, laid down by the Supreme Court of Canada a quarter century
ago, that a statutory trust is not preserved in bankruptcy by
operation of paragraph 67(1)(a) of the Bankruptcy and
Insolvency Act (the "BIA") unless all marks of a
common law trust are also present. In particular, any commingling
of funds destroys the required certainty of a valid trust, even
where tracing is possible.
Although there was little helpful case law on this point in
Ontario, it appears that general practice among Ontario trustees in
bankruptcy has been to accept proofs of claims for CLA trust
claims. This practice could be explained by reliance on the most
popular BIA commentary's annotation to paragraph 67(1)(a),
which erroneously suggests statutory construction trusts do survive
Justice Penny also held that the CLA does not impose any
obligation on a court-appointed receiver to place post-receivership
collections (of pre-receivership accounts receivable) into a trust
that would survive the debtor's subsequent bankruptcy. He
rejected the would-be-trust claimant's attempt to rely on the
line of load broker's cases starting with GMAC Commercial
Credit Corp. Canada v. TCT Logistics Inc. (2005) 7 C. B. R.
(5th) 202 (Ont. C.A.), which held that a court officer steps into
the shoes of debtor, including any obligation to create and
maintain a trust under provisions now found in the Highway
Traffic Act (Ontario). Citing the Pension Benefits
Act (Ontario) deemed trust case, Ivaco Inc. (Re),
(2006) 25 C.B.R. (5th) 176 (Ont. C.A.), and the Employment
Standards Act deemed trust case, Textron Financial Canada
Ltd. v. Beta Ltee/Beta Brands Ltd., (2007) 37 C.B.R. (5th) 107
(Ont. S.C.J.), Justice Penny held that, unlike the statutory (and
formerly regulatory) obligations imposed on load brokers, the
deemed trust provision of the CLA only deemed a trust into
existence, but did not impose a positive duty to create a trust.
The receiver in Atlas Block had not segregated would-be
CLA trust funds, believing, correctly, that it was not under any
statutory duty to do so.
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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