Canada: Saskatchewan Court Of Appeal Clarifies Priority Rules For Builders' Liens Arising In Connection With The Recovery Of Minerals

Last Updated: August 23 2017
Article by Isabel Langlois

The Saskatchewan Court of Appeal recently released a landmark decision National Bank of Canada v KNC Holdings Ltd, 2017 SKCA 57 (National Bank) which will significantly affect the priority ranking of certain Saskatchewan builders' lien claims in insolvency proceedings. In a unanimous decision, the Court overruled a long line of authorities which had held that builders' liens arising in connection with the recovery of minerals could defeat prior-registered security interests. The Court held that the order of priority for all types of builders' liens must be determined solely on the order of registration.

In National Bank, the debtor company operated oil and gas properties in Saskatchewan. The debtor defaulted on its loans and the secured lender successfully sought the appointment of a receiver and manager over the debtor's assets. Several builders' liens had been registered against the debtor's oil and gas assets pursuant to subsection 22(2) of the Builders Lien Act, SS 1984-85-86, c B-7.1 (the BLA). The receiver and its counsel determined that the liens were valid but had been registered after the lender's security. The receiver sold the debtor company's assets, but held back an amount equal to the liens pending the determination of priority between the lender's security and the builders' liens.

The lien claimants relied on Canada Trust Co v Cenex Ltd, [1982] 2 WWR 361 (Sask CA) (Cenex) and argued that, because their liens arose in connection with the recovery of minerals, the liens took priority over the lender's security interest notwithstanding the lender's prior registration.

In Cenex, the Court of Appeal found that subsection 12(1) of the Mechanics' Lien Act, RSS 1978 c M-7 (the equivalent of subsection 22(1) of the BLA) created general liens subject to the normal priority rules, but carved out an exception for liens arising in connection with the recovery of minerals under subsection 12(2) (the equivalent of subsection 22(2)). According to the Court, when work was performed in connection with the recovery of a mineral, the lien not only attached to all the estates or interests in the mineral recovered, but the lien had priority over all other estates or interests in the mineral, including secured interests. Specifically, the Court held that the phrase "all the estates or interests in the mineral concerned" in subsection 12(2) was sufficiently broad to include secured interests. More recently, in Boomer Transport Ltd v Prevail Energy Canada Ltd, 2014 SKQB 368, the Saskatchewan Court of Queen's Bench expanded the Cenex exception further by allowing the super-priority not only against the debtor's recovered oil and gas or proceeds of sale, but also against the debtor's mineral interests and well assets.

The secured lender, on the other hand, argued that Cenex had been incorrectly decided and that the scope of the phrase "all the estates or interests in the mineral concerned" should be limited to ownership interests and should not extend to security interests.

Justice Labach for the Saskatchewan Court of Queen's Bench considered himself bound by the doctrine of stare decisis and followed Cenex. On appeal by the lender, however, the Saskatchewan Court of Appeal undertook an extensive historical review of the BLA and concluded that Cenex had been wrongly decided. The Court held that the phrase "all the estates or interests in the mineral concerned" was limited to arrangements such as farm-ins and joint ownerships common in the oil and gas industry. The Court held that section 22 of the BLA prescribed the circumstances under which liens arose but did not prescribe priorities, and that both subsections 22(1) and 22(2) were subject to the same priority rules under section 71 of the BLA. Section 71 provides that a lien has priority over all mortgages, conveyances or other agreements registered after the claim of lien is registered. Accordingly, the Court held that the order of priority for all types of liens must be determined solely on the order of registration.

In Alberta, the leading case on this issue is Smoky River Coal Ltd, Re, 1999 ABQB 204, in which Justice LoVecchio of the Alberta Court of Queen's Bench expressly refused to follow Cenex. In Alberta, it has always been the law and the practice among insolvency professionals to determine the priority of all types of builders' liens according to the order of registration.

In light of the Court's decision in National Bank, builders' liens arising in connection with the recovery of minerals have lost their super-priority status, and accordingly, companies providing services or materials in connection with the recovery of minerals should register their builders' liens as quickly as possible. As for lenders, National Bank confirms that security interests registered against a debtor's oil and gas assets will maintain priority, so long as lenders have registered their security interests in priority to any builders' liens.

Receivers will now be able to treat Alberta and Saskatchewan builders' lien claims in the same fashion and determine priorities according to the order of registration. Previous Saskatchewan decisions required receivers to keep a cumbersome accounting of the oil and gas inventory and assets of the debtor subject to builders' lien claims under subsection 22(2) of the BLA. This is no longer necessary pursuant to National Bank.

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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