Canada: Intercorporate Debt And Equitable Subordination One Case Forward And One Case Back

Last Updated: February 25 2016
Article by Jeremy Opolsky

This article explores the perplexing status of the doctrine of equitable subordination in Canada. Equitable subordination — the subordination of a claim on the basis of a creditor's misconduct—has an uncertain place in Canadian insolvency law. More than 30 years after Canadian courts first considered whether the United States ("US") doctrine of equitable subordination has a home in Canada, there is no clear answer. This question has come before the Supreme Court of Canada twice. Both times the high Court has passed on answering. Recent cases have gone both ways on whether the doctrine exists inCanada.If the doctrine is available, even fewer cases have examined the conditions for its application.

Yet, answers on equitable subordination are increasingly relevant, especially in the context of intercorporate group debt. In two recent Canadian cases, Target and US Steel, creditors have sought to equitably subordinate the debts of the Canadian subsidiary's US parent or affiliates.1 Because of the continuing uncertainty surrounding the doctrine, creditors continue to seek to subordinate the claims of corporate affiliates. This uncertainty is the focus of this article.

The first section of this article looks broadly at the use of equitable subordination to challenge intercorporate debt, highlighting the Target and US Steel cases. The second section looks at the law of equitable subordination, providing a summary of the doctrine in the US and its origins in Canada. The third section looks at recent cases, ie, those cases in the past 10 years, of equitable subordination inCanadaand the relevant issues raised therein. These issues include whether the doctrine of equitable subordination is available in Canada at all, whether it requires a showing of inequitable conduct, and, if so, what is sufficient misconduct to warrant an application of the doctrine. This section draws on comparable US case law to explore the relevant issues.


Intercorporate debt is a reality of modern corporate groups. Corporations lend to their subsidiaries and affiliates to help these businesses begin, in the ordinary course, as intercompany loans and cash management, or when such corporations are in financial distress. The latter situation is not unusual. As theUS Court of Appeals for the Seventh Circuit's apt narrative describes:

[a] business is ailing. Revenues are down, profits gone. Rather than let it die, the owners decide to try reviving it. Doing so will require an infusion of new funds. The owners drum up the needed funds but face a choice: which legal form should the owners use, equity or debt?2

As the Seventh Circuit went on to note, a company will often choose to finance its subsidiary or affiliate in the form of debt. This decision "will provide the firm with needed funds while limiting the owners' risk that the company will go bankrupt and the new funds will end up in the wallets of the unsecured creditors".3 This question can become highly relevant if the debtor company becomes insolvent and files for creditor protection. Instead of holding solely equity interests, which recover at the end of the queue only after all of the creditors have been paid in full, the debtor's parent or affiliate may hold large debt claims that could share with, or if secured take precedence over, the claims of arm's length creditors.

Unsecured creditors of the debtor can object to the idea of the debtor's estate being distributed, in whole or in part, to its parent corporation as a result of its debt claims. Such creditors often seek to challenge the debt of these insiders utilizing two different, but related, doctrines. The first is the doctrine of recharacterization, which looks to ascertain the "true nature" of the claim and whether a debt claim should be recharacterized as equity.4 This doctrine has been widely adopted not only in relation to insolvency, but also in relation to tax and criminal law.5 It is now effectively embedded in Canada's insolvency statutes.6

The second doctrine is equitable subordination. Under this doctrine, the otherwise valid debt claims of a creditor may be subordinated to the claims of a debtor's other creditors.7 For the claim to be subordinated, it must have arisen from some inequitable conduct of the creditor that has resulted in loss to the debtor's other creditors or that has conferred an unfair advantage on the impugned creditor. This doctrine originated in the United States under the common law and then was codified into the United States Bankruptcy Code.8

In the context of challenges to intercorporate debt, recharacterization and equitable subordination often arise in similar circumstances. However, the differences between the doctrines are important. Recharacterization looks at whether a claim is indeed founded in debt and, if a challenge is successful, will treat a claim as equity. It requires no inequitable conduct or proof of harm by the claimant—it is a doctrine of interpretation and not based on equitable principles. Equitable subordination takes the claim's status as debt or secured debt as given and then, based on equitable principles, seeks to subordinate it to other unsecured claims.9 Equitable subordination is inherently a doctrine of "simple fairness"10 and is intended to be used "sparingly".11

In Target and US Steel, creditors raised both recharacterization and equitable subordination in their challenges to the claims submitted by the debtors' affiliate and parent respectively.

To continue reading this article, please click here


* Jeremy Opolsky is an associate at Torys LLP. The author is admitted to the bars of Ontario and New York. The views expressed in this article are those of the author only and do not necessarily represent the views of his firm or his firm's clients. Many thanks to Jonathan Silver and Winston Gee, student-at-law and summer student respectively, for their invaluable research and editing assistance. Thank you also to Scott Bomhof, Andrew Gray and Alison Bauer for their thoughtful and probative edits to this article. Any errors remain, of course, those of the author alone.

1 Re US Steel Canada Inc, Court File No CV-14-10695-00CL (Ont SCJ) [US Steel]; Re Target Canada Co, Court File No CV-15-10832- 00CL (Ont SCJ) [Target].

2 In re Lifschultz Fast Freight, 132 F 3d 339 at 341 (7th Cir 1997) [Lifschultz Fast Freight].

3 Ibid at 342-43.

4 Canada Deposit Insurance Corp v Canadian Commercial Bank, [1992] 3 SCR 558, 1992 CarswellAlta 298 [CCB cited to CarswellAlta]; Re Central Capital Corp (1996), 132 DLR (4th) 223 (Ont CA).

5 See, eg, Bimman v Neiman, 2015 ONSC 2313; Joy Estate v 1156653 Ontario Ltd (2007), 38 BLR (4th) 69 (Ont SCJ); Big Comfy Corp v R, [2002] 3 CTC 2151 (TCC [General Procedure]).

6 Companies' Creditors Arrangement Act, RSC 1985, c C-36 s. 45 [CCAA]; Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA].

7 CCB, supra note 4 at para 89.

8 US Bankruptcy Code,11 USC § 101 et sesqui.

9 Matter of Mobile Steel C, 563 F 2d 692 at 702 (5th Cir 1977) [Mobile Steel]. "It is important to remember that the issue is not whether the advances 'actually' were loans, but whether equity requires that they be regarded as if they were something else." See also, Janis P Sarra, "Corporate Group Insolvencies: Seeing the Forest and the Trees" (2008) 24 BFLR 63, explaining the difference between equitable subordination, piercing the corporate veil and recharacterization.

10 Re General Chemical Canada Ltd, (2006), 22 CBR (5th) 298, 2006 CarswellOnt 4675 (Ont SCJ [Commercial List]) at para 92 [General Chemical].

11 Ibid. See also, Lifschultz Fast Freight, supra note 2 at 341 ("Equitable subordination is a 'drastic' and 'unusual' remedy.")

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.

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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

    By clicking Register you state you have read and agree to our Terms and Conditions