Recent teachings of the Supreme Court of Canada court in Canada v Canada North Group Inc., 2021 SCC 30 [Canada North] had confirmed that the Companies' Creditors Arrangement Act ('CCAA') courts could grant super-priority charges (e.g. interim financing, administration charge, or directors' and officers' charges) ranking in priority to s. 227(4.1) Income Tax Act ('ITA') deemed trusts in favor of the Crown.
Until now, however, whether this could occur under the Bankruptcy and Insolvency Act ('BIA') was still undetermined but has been confirmed in the decision of Attorney General of Canada c. Richter Advisory Group Inc., 2023 QCCA 1295.
The Superior Court has jurisdiction to grant super priority charges ahead of ITA deemed trusts
The court relied heavily on the Supreme Court of Canada's decision in Canada North. As stated previously, this decision found that within the context of a CCAA proceeding, that a super priority charge can rank ahead of a deemed trust.
The proposal provisions within the BIA appear to serve the same remedial purpose as the CCAA, which is the financial rehabilitation of an insolvent corporate debtor. The court stated further that the CCAA and BIA should be treated in a "harmonious fashion".
The court stated that the 5 judges in Canada North all found that section 11 of the CCAA confers the power on the court to grant an order priming a charge in favour of the interim lender over the deemed trust under the ITA.
Furthermore, the court noted that section 11 of the CCAA grants the court jurisdiction to make an order subordinating a deemed trust. This led to the court discussing the similarities between section 11.2(2) of the CCAA and section 50.6(3) BIA:
- 11.2 (2) of the CCAA: "The court may order that the security or charge rank in priority over the claim of any secured creditor of the company."
- 50.6(3) of the BIA: "The court may order that the security or charge rank in priority over the claim of any secured creditor of the debtor."
The court stated that "the judge has all the powers ancillary and necessarily incidental to the power under s. 50.6 BIA. This should include subordinating the ITA Deemed Trust [...]. The creation of a charge without a determination of its rank is useless."
Where this exercise of statutory interpretation is incorrect, the court referenced its inherent jurisdiction as the basis on which it can prime charges in a BIA proceeding. Where there is a gap in the legislation, the court stated that like the CCAA, the BIA allows it to remedy or fill that statutory gap.
Conclusion
This decision confirms that court ordered charges may also be given super priority status beyond statutory deemed charges in a BIA context, and there is now further recognition from appellate courts of the great degree of deference owed to insolvency judges. This decision will likely be of comfort to interim lenders involved in these proceedings.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2021
