Canada: The Interest Stops Rule Comes Full Circle In National Bank Of Canada V. Twin Butte Energy Ltd.

Last Updated: October 2 2018
Article by Melody Burke

Introduction

While the interest stops rule has been codified in the Bankruptcy and Insolvency Act2 and the Winding-Up and Restructuring Act,3 its application to other insolvency proceedings has created considerable debate in Canadian courts. The Ontario Court of Appeal recently considered and articulated the rule's specific applicability to Companies' Creditor Arrangement Act4 proceedings, despite the fact that it is not explicitly in the statute. Then, on October 11, 2017, the Alberta Court of Queen's Bench provided clarity about the application of the rule to another form of insolvency proceeding: the receivership context.

This article explores the reasoning behind the interest stops rule, and how its purpose and effect expanded from being narrowly applied to bankruptcy and winding-up proceedings to being applied to all insolvency proceedings, including those in the CCAA and receivership contexts.

The Interest Stops Rule

i. Overview

The interest stops rule is "judge-made" law5 that effectively asserts that interest on provable claims stops accruing as at the commencement of certain proceedings in the bankruptcy and insolvency context.6 The rationale for this rule stems from the fundamental principle of insolvency law that "in the case of an insolvent estate, all the money being realized as speedily as possible, should be applied equally and ratably in payment of the debts as they existed at the date of the winding-up."7 Thus, the primary purpose behind the rule is fairness to creditors.8 Another goal is to ensure the orderly administration of an insolvent estate.9

While this common law rule has consistently been applied in bankruptcy and winding-up proceedings,10 its application to proceedings under the CCAA and in the context of receiverships was, until recently, unclear. However, in its 2015 decision of Re Nortel Networks Corp., the Ontario Court of Appeal confirmed the applicability of the interest stops rule to CCAA proceedings and, just this past year, the Alberta Court of Queen's Bench shed light on the rule's application in the receivership context.

ii. Proceedings under the BIA and the Winding-Up and Restructuring Act

The legislation that applies to bankruptcy and winding-up proceedings both include the interest stops rule. The BIA adopts the rule in section 122(2):

122 (2) If interest on any debt or sum certain is provable under this Act but the rate of interest has not been agreed on, the creditor may prove interest at a rate not exceeding five per cent per annum to the date of the bankruptcy from the time the debt or sum was payable, if evidenced by a written document, or, if not so evidenced, from the time notice has been given the debtor of the interest claimed.11

Similarly, section 71(1) of the Winding-Up and Restructuring Act provides as follows:

71 (1) When the business of a company is being wound up under this Act, all debts and all other claims against the company in existence at the commencement of the winding-up, certain or contingent, matured or not, and liquidated or unliquidated, are admissible to proof against the company and, subject to subsection (2), the amount of any claim admissible to proof is the unpaid debt or other liability of the company outstanding or accrued at the commencement of the winding-up.12

The court in Confederation noted that even when the language of these provisions has previously been ambiguous or suggested the contrary, the interest stops rule has still applied.13

iii. Proceedings under the CCAA

The interest stops rule is not codified in the CCAA. However, in dismissing the Ad Hoc Group of Bondholders' appeal from the decision of the Ontario Superior Court of Justice in Re Nortel Networks Corp.,14 the Ontario Court of Appeal confirmed that the interest stops rule does indeed apply to CCAA proceedings. The appellant submitted that CCAA proceedings were different from other insolvency proceedings in that they do not immediately or permanently alter the rights of creditors. Thus, since the CCAA filing is intended to give the debtor breathing space to prepare a plan, the appellant's submission was that until such a plan is negotiated or the proceeding is converted to bankruptcy or winding-up, the rights of creditors are not altered and should not be subject to the interest stops rule. Further, the appellant argued that the established CCAA practice did not adhere to the interest stops rule, since a CCAA plan may, and often does, provide for the recovery of post-filing interest. Yet, the Court of Appeal found that there were valid legal and policy reasons for applying the interest stops rule in the CCAA context. The overarching view was that the policy reasons for the interest stops rule that related to bankruptcy and winding-up proceedings – the fair treatment of creditors and the orderly administration of an insolvent debtor's assets – necessarily applied to CCAA proceedings. First, because the Supreme Court of Canada in Century Services Inc. v. Canada (Attorney General) emphasized the need for harmonization and coherence in enforcing property interests under the CCAA and the BIA.15 Second, because if the interest stops rule did not apply in CCAA proceedings, creditors would have reasons not to reorganize under the CCAA, thus undermining the regime's objectives. Further, the court noted that if post-filing interest was available to one set of creditors while other creditors were prevented from asserting their rights to sue the debtor and obtain a judgment that bears interest, the status quo would not be preserved as the CCAA intends. The court also recognized that a key objective of the CCAA is to facilitate the restructuring of corporations through flexibility and creativity. If the interest stops rule did not apply, this would create an asymmetrical entitlement to interest, thus undermining that objective. Lastly, the court deemed that the principle of fairness supported the application of the interest stops rule.

The Court of Appeal did note the appellant's position that other cases, namely Re Canada 3000 Inc.16 and Re Stelco Inc.,17 seemed to suggest that the interest stops rule should not apply in the CCAA context. However, the court distinguished these cases, highlighting that the factual and statutory context in Canada 3000 and the fact that Stelco addressed claims between creditors rather than claims by creditors against the debtor precluded both cases as being binding authorities for the proposition that the rule does not apply to CCAA proceedings. In short, unless there is applicable legislation explicitly to the contrary, the interest stops rule applies to CCAA proceedings.

iv. Receivership

Another common form of insolvency proceeding is a receivership. Until the court's decision in National Bank of Canada v. Twin Butte Energy Ltd., the question regarding whether the interest stops rule applied in the receivership context was up in the air.

National Bank of Canada v. Twin Butte Energy Ltd.

This was an application for direction by FTI Consulting Canada Inc. (the "Receiver"), receiver and manager of the assets, property and undertaking of Twin Butte Energy Ltd. The Receiver applied for an interim distribution and holdback of certain funds that resulted from the sale of Twin Butte Energy Ltd.'s assets. Two issues arose before the court. The first, regarding whether a former employee was entitled to compensation for his alleged constructive dismissal resulting from the Receiver's appointment, was answered in the negative and is irrelevant to this analysis. The second issue was whether the Canada Revenue Agency ("CRA") and Alberta Treasury were entitled to post-receivership interest.18

Both CRA and Alberta Treasury submitted claims in the Twin Butte Energy Ltd. claims process that included claims for penalties and interest. CRA argued that the interest should stop accruing at the time when the court approves the claims procedure.19 The Receiver argued that interest should stop accruing on the date the Receiver was appointed.20

The court considered Blair J's general comment about insolvencies in Confederation, focusing on his overview of the governing principles of insolvency law: that "the assets of the insolvent debtor are to be distributed amongst classes of creditors rateably and equally, as those assets are found at the date of the insolvency... [leading] to the development of the 'interest stops rule', i.e. that no interest is payable on a debt from the date of the winding-up or bankruptcy."21

The court also noted that the interest stops rule applies to proceedings under the CCAA, citing Nortel, and is adopted in section 122(2) of the BIA. In considering whether the rule should apply differently in the receivership context, the court found that "it would be highly unusual to give interest in a receivership situation any different treatment than the courts have given in winding-up and arrangement scenarios."22 The court noted how Blair J. did not identify only winding-up scenarios in his analysis, but rather that the rule applied to any situation where the parties are dealing with an insolvent debtor. The court also referenced that in Redstone Investment Corporation,23 Morewtz R.S.J. granted a distribution order in receivership proceedings before him based on the receiver's report, which argued in favour of the interest stops rule, as it related to certain creditors.24

The court rejected CRA's argument that interest should accrue until the date of issuance of a claims order, finding that this would contradict the interest stops rule since the creditors would not be treated rateably. The court surmised, "The date on which the receivership order is granted fixes those claims at a time certain; as the tree falls, so it must lie."25 As such, the court declared that the interest stops rule applied to claims for interest post-receivership order.

Conclusion

The court in National Bank of Canada v. Twin Butte Energy Ltd. ultimately determined that coverage of the interest stops rule extends to receiverships. However, this case went beyond just confirming the applicability of the rule in receiverships. This case is significant because it resolved the broad application of the interest stops rule to all insolvency proceedings.

Footnotes

1 2017 ABQB 608 [National Bank of Canada v. Twin Butte Energy Ltd.].

2 R.S.C., 1985, c. B-3, s. 122(2) ["BIA"].

3 R.S.C., 1985, c. W-11, s. 71(1).

4 R.S.C., 1985, c. C-36.

5 Humber Ironworks & Shipbuilding Co., Re (1869), 4 Ch. App. 643 (Eng. Ch. Div.) at 647.

6 Canada (Attorney General) v. Reliance Insurance Co., 179 A.C.W.S. (3d) 347 at para. 42.

7 Shoppers Trust Co. (Liquidator of) v. Shoppers Trust Co., ONCA at para. 25.

8 Re Nortel Networks Corp., 2015 ONCA 681 at para. 27 [Nortel].

9 Ibid.

10 Canada (Attorney General) v. Confederation Life Insurance Co., [2001] O.J. No. 2610 at para. 22 [Confederation].

11 Emphasis added.

12 Emphasis added.

13 Nortel at para. 28, citing Confederation at paras. 22-23.

14 2014 ONSC 4777.

15 Nortel at paras. 35-36, citing Century Services Inc. v. Canada (Attorney General), [2010] 3 S.C.R. 379 at paras. 24, 78.

16 33 C.B.R. (4th) 184 [Canada 3000].

17 2007 ONCA 483 [Stelco].

18 National Bank of Canada v. Twin Butte Energy Ltd. at paras. 1-2.

19 Alberta Treasury was not present at the hearing.

20 Ibid at para. 31.

21 Ibid at para. 32.

22 Ibid at para. 35

23 (8 March 2017), Toronto CV-14-10496-00CL (Ont. S.C.J.).

24 National Bank of Canada v. Twin Butte Energy Ltd. at para. 35.

25 Ibid at para. 36.

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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