Canada: Construction Liens and Bankruptcy: How Contractors Can Protect Themselves

It is an unfortunate reality in the construction industry that bankruptcies can, and do, occur. An owner, general contractor or subcontractor may become insolvent and be unable to meet its financial obligations. In those circumstances, contractors need to know how you can best protect your rights and minimize potential losses. This article explains some of the rights and remedies available to contractors under insolvency legislation and under the Construction Lien Act of Ontario when you are confronted with the troublesome situation of a bankruptcy of someone in the construction pyramid.

Don’t Abandon Your Lien Rights

Lien rights as set out in the Construction Lien Act are strictly interpreted and enforced by the courts. Even in the face of an insolvency, you should be aware that the time periods for preserving and perfecting a claim for lien are not suspended, nor are they extended. A contractor should preserve its lien within 45 days of its last supply to the project. Failing to do so will mean that your lien rights will expire and they cannot be revived. Failing to preserve its lien may also mean losing your right to receive a portion of the holdback funds being held for your benefit. These may be the only funds available to you in a bankruptcy-type of situation.

Typically in a bankruptcy or insolvency proceeding, the court will grant the insolvent company a form of protection by putting in place a "stay of proceedings." This means that creditors of the bankrupt company are forbidden by court order from commencing or continuing with a lawsuit against the insolvent party. Provisions of these orders may also indicate that construction liens are not to be registered. However, the courts have, on more than one occasion, amended their initial orders and lifted the stay on a limited basis. In these cases, they will permit lien rights to be preserved or perfected through the bringing of a motion or by getting the consent of the Trustee in Bankruptcy. However, the courts cannot bring back to life lien rights that have been lost by inaction or by the failure to enforce them.

Get the Information You’re Entitled To

Under Section 39 of the Construction Lien Act, a contractor is entitled to make a request for information and to receive it from the owner, general contractor or mortgagee. This information will set out the state of accounts, indicate the amount of the holdback fund, help to determine if a lien has priority over a building mortgage and will identify the existence of any labour and material payment bond. This information can prove very valuable in determining what course of action should be pursued. Knowing that a bond is in place can mean that recovery can be sought against the surety.

Contractors are also urged to contact the receiver or Trustee In Bankruptcy. Very often, this will provide you with some information on the insolvency of the debtor company and will get you on the list of people who are entitled to be notified of further proceedings that may affect your rights.

Consider Bringing an Action for Breach of Trust

Sections 7 and 8 of the Construction Lien Act impose a trust on funds received by owners and contractors for the benefit of those who have supplied labour, services and materials on the project. If an owner or contractor uses the funds in a manner inconsistent with the trust (i.e., they have paid money to themselves and not to contractors, they have made a preferential payment to a creditor unrelated to the project, etc.), they may be guilty of a breach of trust. Section 13 of the Construction Lien Act empowers a claimant to personally sue the officers and directors of the insolvent company and can make them personally liable for the misused funds. The spectre of personal liability is a powerful tool in the contractor’s arsenal and should not be forgotten in situations involving an insolvent payor.

Request the Appointment of a Construction Lien Trustee

If an owner or general contractor has gone bankrupt, there is a danger that the value of the project could deteriorate if the work stops or is abandoned. Consider, for example, an unfinished subdivision project where only a portion of the underground services have been installed and several of the houses remain unfinished. Exposure to the elements, the risk of vandalism and general deterioration of the work are likely if the project comes to a standstill for a prolonged period.

Section 68 of the Construction Lien Act allows a lien claimant or person with an interest in the premises to apply to the court and request that a construction lien trustee be appointed to:

  • Manage, mortgage or sell the property;
  • Complete the improvement;
  • Reserve the premises and do other things such as realize on the project assets, administer the trust funds and distribute the monies to entitled contractors and suppliers.

A lien trustee is a court officer who must act in a fair and equitable manner for the benefit of all affected parties.

Investigate Possible Remedies Against the Mortgagee

If a mortgage was taken with the intention of financing the construction project, the mortgagee (i.e., the lender) may be liable for any deficiency in the holdback. If an owner has failed to maintain the 10% holdback fund, the mortgagee may be responsible to the contractors for any shortfall in the fund.

Negotiate with the Canada Revenue Agency (CRA)

Under the Income Tax Act, the CRA asserts a "super priority" over the assets of the debtor company. The CRA’s claim arguably trumps the interest of lien claimants and other secured creditors. CRA even maintains its priority over the holdback fund.

Notwithstanding this priority, CRA will, in many instances, negotiate a sharing of the holdback monies with the valid lien claimants. This is especially true if it can be demonstrated that hardship would result to the lien claimants if CRA kept all of the money for itself in order to satisfy its claim for unpaid source deductions and GST.

Take Action to Maximize Recovery

A bankruptcy situation is often one where a contractor will not entirely recoup all you are owed. Knowing what remedies are available and initiating actions to preserve and protect your rights will ensure that you are putting yourself in the best position possible to maximize your potential recovery.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.