There has long been contention around the characterization of monies received where an owner of a construction project pays a contractor who subsequently enters insolvency proceedings. The question is whether the funds received properly belong to subcontractors under provincial lien legislation or are distributable in accordance with the priorities determined under the federal bankruptcy regime. Recently, the Alberta Court of Appeal offered guidance on the issue in the Iona Contractors case.1
Distinguishing Statutory Liens & Trusts
Provincial legislation is clear that it is of fundamental importance for the construction industry that contractors, subcontractors and suppliers receive payment for their contributions, being typically either work performed or materials furnished. 2 Liens are an effective tool in this regard, since these parties gain a right similar to that of a creditor, over an owner's property where there would otherwise be no privity of contract. 3 Liens allow qualified parties to register a claim against property related to their contributions and even to sell such collateral property.
In addition to the general lien and its creation, there is also the statutory creation of a deemed trust for certain funds provided that the preconditions are met (a "BLA Trust").4 The prerequisites include the issuance of a certificate of substantial performance and payment by the owner to a person. If this person (e.g. the general contractor), owes money to other parties (e.g. subcontractors and suppliers) that provided work or furnished materials, it then holds the owed amounts in trust for the benefit of those other parties. These trust obligations apply to any funds received from the owner, until the beneficiaries are paid out.
In Stuart Olson, the Supreme Court of Canada ("SCC") affirmed that in such instances, the right to file lien claims is a separate and distinct remedy from the statutorily-created BLA Trust. 5 These are additional remedies to the still existing cause of action for breach of contract. As a result, the SCC held that parties may pursue both lien and trust claims concurrently. The Court also noted how payment of a lien bond does not satisfy the trust obligations, whereas payment of security of the trust satisfies both claims.
As to funds rightfully within a BLA Trust, a question arises over the treatment of these funds in bankruptcy.
Timely registration of liens is important to maintain priority in the event of insolvency.
The finding of a trust means that trust funds are exempt from the property within the insolvent party's estate and not available to secured creditors pursuant to section 67(1) of the Bankruptcy and Insolvency Act.6 The tension is thus whether these funds remain part of the estate and are dispersed in the usual manner with priority to secured creditors in insolvency proceedings, or whether the funds are exempt from the estate's property and are paid to the benefit of any qualifying subcontractors and suppliers.
Treatment Of BLA Trusts In Insolvency
According to the courts, it is clear that to impress funds within a BLA Trust and create an exemption under the BIA, the impugned funds must meet the common law test for a trust. 7 This avoids the question of paramountcy and constitutional issues. The common law requirements are (a) certainty of intention, whether a sufficient basis and structure for a trust is set out; (b) certainty of subject matter, whether the trust property or funds can be identified; and (c) certainty of object, whether the beneficiaries of the trust are ascertainable. 8
In these types of scenarios, the most significant hurdle is the certainty of subject matter. A statute such as the BLA clearly intends to create a trust, and the subcontractors and suppliers seeking payment are typically ascertainable. However, where the funds received from an owner are deposited in a general account, the challenge becomes whether it is sufficiently possible to trace the origin of the alleged trust funds. Increasingly, so long as the comingling of funds is between different trust funds and not funds used for other purposes entirely, BLA Trusts have been found to exist:
- The leading case in Alberta is Iona Contractors, where there were holdback funds relating to the work of a bankrupt contractor. The majority of the Court of Appeal held that a BLA Trust existed in the circumstances, meaning that the subcontractors were entitled to the holdback funds. Under the test, there was certainty of subject matter since there were discreet funds impressed by a BLA Trust and no issue of a general floating charge over the assets of the bankrupt party. 9 The SCC dismissed the appeal.
- In 0409725, the British Columbia Supreme Court found that a BLA Trust existed and that such funds were exempt from the insolvent's estate. However, the bankrupt contractor had been breaching its trust obligations by using funds received from projects to pay costs on other projects, resulting in comingling. For the funds remaining, the Court ruled that the proper approach was to distribute the trust funds pro rata between trust claimants, rather than the "first in, first out" approach. 10
- In Kel-Greg, a decision of the Nova Scotia Supreme Court, the contractor had been using a single account for trust funds and non-trust funds. Nevertheless, while the trust funds were not quite traceable with reasonable certainty, the Court accepted the presumption (also discussed in 0409725) that where trustees co-mingle trust and non-trust funds, they are presumed to have spent the non-trust funds first. 11
- In Atlas-Block, the Ontario Supreme Court did not find sufficient certainty for the creation of a trust. It held that due to the unique nature of the bankrupt's business as a retailer and supplier of construction goods related to construction projects, monies that were properly trust funds could not be determined. 12 The decision can be distinguished from the other cases since only part of the bankrupt's business was subject to liens and BLA Trusts, meaning that there was no certainty in subject matter.
As to practical actions for a subcontractor or supplier to take, it is clear that parties should pursue a lien claim and a trust claim concurrently. Timely registration of liens is important to maintain priority in the event of insolvency. As always, parties should maintain rigorous and comprehensive invoicing for all contributions to each project. Additionally, parties should request general contractors to provide proof of proper accounting of potential trust funds or negotiate to add such terms into the underlying agreements. However, even lacking such certainty from the general contractor, parties can take a measure of solace that BLA Trusts are progressively more accepted across a wide variety of situations.
The jurisprudence shows that courts will attempt to trace comingled trust funds where possible to accept the existence of a BLA Trust. This applies even in the context of insolvency proceedings where secured creditors are expecting to receive priority. Courts will thus work to protect subcontractors where the preconditions for a BLA Trust exist and the three certainties are present.
1 Iona Contractors Ltd. (Receiver of) v Guarantee Co. of North America, 2015 ABCA 240 [Iona Contractors], leave to appeal denied, 2016 CarswellAlta 660.
2 Builders' Lien Act, RSA 2000, c B-7 [BLA], s. 6. While other types of liens exist and the legislation is generally similar across the provinces, the Alberta BLA is used throughout for simplicity.
3 Iona Contractors, at para 20.
4 BLA, s. 22.
5 Stuart Olson Dominion Construction Ltd. v Structal Heavy Steel, 2015 SCC 43 [Stuart Olson], at para 14, 38.
6 Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA]
7 Iona Contractors, at para 26; British Columbia v Henfrey Samson Belair Ltd.,  2 SCR 24 [Henfrey Samson], at para 42; Husky Oil Operations Ltd. v Minister of National Revenue,  3 SCR 453, at para 32, 39; John M.M. Troup Ltd. v Royal Bank,  SCR 487, at para 10, 63.
8 Iona Contractors, at para 34; Henfrey Samson, at para 19.
9 Iona Contractors, at para 37-38.
10 0409725 B.C. Ltd., Re, 2015 BCSC 1221 , at para 21.
11 Kel-Greg Homes Inc., Re, 2015 NSSC 274 [Kel-Greg], at para 72, 75.
12 Royal Bank of Canada v Atlas Block Co., 2014 ONSC 3062 [Atlas Block], at para 45-48.
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