In the recent decision of Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, the Supreme Court of Canada has, for the first time, interpreted key provisions of the Companies' Creditors Arrangement Act ("CCAA").

The judgment of the Court, which was pronounced December 16, 2010, overrules appellate authority from Ontario and British Columbia that previously conferred a priority for unremitted GST on the Crown in CCAA proceedings, and endorses the broad discretionary power of a CCAA court.

The debtor in the case owed the Crown approximately $300,000 in GST that had been collected from third parties but not yet remitted to the Crown. When it became apparent that an attempted restructuring under the CCAA was doomed to fail and the debtor sought leave to assign itself into bankruptcy under the Bankruptcy and Insolvency Act ("BIA"), the Crown sought to lift the CCAA stay of proceedings so it could collect the GST proceeds. Under the BIA, the Crown would lose the priority it argued was recognized under the CCAA, and rank as an unsecured creditor for unremitted GST.

The chambers judge dismissed the Crown's application to lift the stay on the reasoning that the priority scheme under the BIA should ultimately govern the distribution of the debtor's assets. The British Columbia Court of Appeal disagreed, and held that the chambers judge was precluded from staying the Crown's enforcement of its GST priority. In so doing, the Court adopted the reasoning in a line of cases culminating in Ottawa Senators, which held that the statutory deemed trust for GST created under the Excise Tax Act remains enforceable during a CCAA reorganization despite language in the CCAA that suggests otherwise.

The Supreme Court of Canada, in a majority decision of seven justices, allowed the appeal of the secured creditor, who was next in line for the funds in question.

The Court engaged in a historical review of the CCAA and noted its remedial purpose. It held that allowing the Crown access to the GST funds in a CCAA, while recognizing that the Crown lost priority in a bankruptcy, would encourage statute shopping by secured creditors and skew the incentives against reorganizing under the CCAA, which would undermine the CCAA's objectives. The Court concluded that the British Columbia Court of Appeal, and other appellate courts before it, had erred in concluding that the statutory deemed trust trumped the CCAA. In the result, it held that the Crown does not enjoy a priority for unremitted GST under the CCAA.

The Supreme Court of Canada also provided guidance on the discretionary powers of a court supervising a CCAA reorganization. The Supreme Court noted the broad authority conferred on a court under the CCAA, and went on to hold that the requirements of appropriateness, good faith and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority. In determining what orders should be made in the course of a CCAA restructuring, the key question for the court is whether the order sought will usefully further efforts to achieve the remedial purpose of the CCAA, which is to avoid the social and economic losses resulting from liquidation of an insolvent company.

Applying those guiding principles to the chambers judge's order, the Court held that the chambers judge did not err, as his order to stay the effect of the Crown's enforcement of the GST claim was in furtherance of the CCAA objectives. The order ensured that creditors would not be disadvantaged by an attempted reorganization under the CCAA.

Fraser Milner Casgrain LLP was counsel to the successful appellant.

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