In Easy Legal Finance Inc. v. Law Society of Alberta, 2025 ABCA 112 (Easy Legal Finance), the Alberta Court of Appeal overturned a Chambers decision and confirmed that the interest stops rule, applied discretionarily by courts in certain insolvency processes, does not apply to a secured claim. The decision reaffirmed that the interest stops rule is a corollary of the pari passu principle, which seeks to ensure equal treatment of creditors within a class, but does not go so far as to remove class distinction and disrupt secured creditor priorities.
History of the interest stops rule
The interest stops rule has developed historically as "judge-made" law, applied initially in bankruptcy proceedings and expanded into other insolvency and liquidation scenarios. In the early case of Re Humber Ironworks & Shipbuilding Co (Humber), concerning a winding up, the Court of Appeal in Chancery found little judicial consideration, at the time, for how interest should be treated in insolvencies, outside of bankruptcy.1 The Court in Humber found the rule for interest stoppage to be fair and proper in its application, where the rateable creditors in that case were facing a liquidation shortfall. In the more than 150 years following Humber, the interest stops rule has seen various similar applications, including in bankruptcy, proceedings under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (CCAA) and, in limited cases, in receiverships.
In bankruptcy cases, the rule has statutory recognition under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the BIA), including by operation of section 122, concerning interest accrual on certain pre-bankruptcy indebtedness and section 143, regarding payment of stipulated post-bankruptcy interest upon claims (in cases where a surplus of funds from realization is available). More generally, the BIA scheme of liquidation of assets, assessment of claims and rateable distribution of proceeds among unsecured creditors reflects, as a fundamental tenet, the pari passu principle.
The expansion of the rule into CCAA proceedings has been more recent; for example, see Nortel Network Corporation (Re) where, in the course of the restructuring process for those entities, the Court ordered stoppage of interest in respect of the claims of unsecured creditors, so as to ensure fair distribution among rateable claims.2
In National Bank of Canada v. Twin Butte Energy Ltd., the Alberta Court made a similar order in a receivership, stopping the interest rates of unsecured creditors in a liquidation scenario.3
It should be noted that, as a constant factor in all of the cases in which the rule had been applied, the application of the rule has only been in insolvencies, and only in respect of unsecured claims.
The application of the rule to a secured claim
In the case of Easy Legal Finance, the interest stops rule became a material point of contention. The matter originated upon the appointment of a legal custodian, following application by the Alberta Law Society (Society), in respect of "Higgerty Law" (the Firm), which had reported a potential trust shortfall. The custodian sought orders for the appointment of a receiver of specified Firm property (essentially, the financial entitlements associated with certain of the Firm's contingency files), and the stoppage of interest accrual for creditors with claims against the property that was being placed into receivership. This included the Firm's senior secured creditor, Easy Legal Finance Inc. (ELFCo), who objected to the stoppage of interest. ELFCo argued this would be a novel and prejudicial order, having the effect of reordering creditor priorities. The Order was granted in Chambers and ELFCo filed its appeal.
The Court of Appeal's analysis
The Alberta Court of Appeal observed the applicability of the interest stops rule in various insolvency proceedings, including bankruptcies, winding ups, CCAA proceedings and receiverships. The Court observed the rule applies particularly in insolvencies and the Firm, in this case, was not necessarily insolvent (at least not on a balance sheet basis, that being yet indeterminate). The Court of Appeal noted the rule is premised upon the pari passu principle, which ensures rateable and equal treatment of creditors within a class. The Court observed the rule has not previously been applied to secured creditor claims.
Whereas the Justice in Chambers had favoured the need to balance the equities of all creditors and avoid skewing equity to the secured creditor, the Court of Appeal rejected that view and found the interest stops rule should not apply to the secured creditor's claim, there being no legal basis or supporting authority for expanding the rule to include secured claims.
The Court of Appeal also noted there are practical implications of applying the rule in a receivership, where the receiver's mandate only encompasses a portion of a debtor's property, rather than all of the assets and undertaking to which the secured claims may attach.
Conclusion
The secured creditor was successful in its appeal, overturning the order for stoppage of its interest rate, which would have otherwise allowed repayment of subordinate claims out of normal order of priority.
Footnotes
1 Re Humber Ironworks & Shipbuilding Co, (1869), 4 Ch App 643 (Eng Ch Div).
2 Nortel Network Corporation (Re), 2015 ONCA 681.
3 National Bank of Canada v Twin Butte Energy Ltd, 2017 ABQB 608.
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