Section 54 of an Act respecting labor relations, vocational training and manpower management in the construction industry (Quebec) and section 316 of the an Act respecting industrial accidents and occupational diseases (Quebec) are infamous among general contractor and property owners in the Quebec construction industry. These sections hold the general contractor and occasionally the property owner solidairily liable with their sub-contractors for the salaries and CSST assets payable by the latter. These sections, or the Civil Code of Quebec, also allow the general contractor who has paid that salary or that assessment in lieu of the subcontractor to hold back or offset an equivalent amount from the sums that he may owe to the affected subcontractor. Since insolvent contractors generally neglect to make those payments, the trustee to their bankruptcy will generally be faced with this hold back claim when he seeks to collect the bankrupt’s accounts of the bankrupt’s. Practically speaking, the general contractor will ensure that the amounts owed on account of salary or CSST assessments are paid from the amounts that he may actually owe to the bankrupt, and will only remit the balance to the trustee so as to avoid triggering his own personal liability.
In D.I.M.S. Construction inc. (Trustee of) the Court of appeal declared those sections to be inoperative in bankruptcy as they confer a preference on the CCQ, the governmental body charged with collecting the salaries of employees in the construction industry, and on the CSST, who receive full payment of their claims, despite their rank as unsecured creditors. However, as this description of the scheme of distribution will occur to the extent that the general contractor is truly indebted towards the bankrupt at the date of bankruptcy, the Court refused to declare that those sections would always be inoperative in bankruptcy. The Court specifically refused to decide whether the general contractor or property owner who paid the bankrupt without ensuring that employees’ salaries and CSST assessments had been paid was discharged from his obligations towards the CSST or CCQ as a result of the sub-contractor’s bankruptcy.
In its much anticipated decision, the Supreme Court of Canada quashed the Court of appeal and declared that the sections do not disturb the scheme of distribution in bankruptcy. In the Court’s view, the hold back is nothing more than the right of compensation recognized by Quebec Civil law. The general contractor’s claim and his right of retention are not created until he has actually paid the CCQ’s and CSST’s claims. As long as the claims of the general contractor and the bankrupt are liquid and exigible at the date of bankruptcy, they will be compensated as allowed under the Bankruptcy and Insolvency Act. However, compensation cannot occur to the detriment of third parties. Upon bankruptcy, the assets of the bankrupt including his claims vest in the trustee to the benefit of the creditors. A debt created after the bankruptcy cannot therefore compensate a claim owed to the bankrupt, as it would be a subsequent reduction of the estate. Therefore, a payment of CCQ’s or CSST’s claims made subsequent to the bankruptcy, which is generally the case, cannot be offset, or give rise to a hold back. The general contractor, or property owner as the case may be, will not only be required to pay the amounts claimed by the CCQ and the CSST, but also to pay the full contractual balance owing to the bankrupt, though he will be able to file an ordinary proof of claim for the amounts paid "twice".
This judgement will have a considerable impact on current practice in the construction industry. It shall also impact many provincial and federal statutes which create similar regimes of solidairily liability and hold back mechanisms. Finally, the limits of civil law compensation in bankruptcy will need to be rethought.
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