Provincial Insolvency Decision Hangs in Balance

Written by Daniel Standing LL.B., Editor, First Reference Inc.

On March 26, 2020, the Supreme Court of Canada granted leave to appeal the decision of the Alberta Court of Appeal in Canada v. Canada North Group Inc., 2019 ABCA 314 (CanLII). The decision canvasses the priority that attaches to money that is borrowed in restructuring proceedings to preserve value in an insolvent company. The decision considered whether these charges rank ahead of other claims that are also granted priority under federal legislation. The issue, therefore, was the relative ranking of “super-priority” court-ordered charges in proceedings under the Companies’ Creditors Arrangement Act and certain other claims of the Crown in relation to deemed trusts.


This case, which is essentially one about statutory interpretation, can be traced to the Alberta Court of Queen’s Bench decision in 2017 in which an initial order was issued granting several insolvent corporations protection under the federal Companies’ Creditors Arrangement Act (the CCAA). The Court provided charges in favour of the court-appointed Monitor, the interim financier and the corporate directors were to take priority over the claims of secured creditors and provided that they were not to be limited or impaired by the federal or provincial statutes.

The Crown applied to vary the priority of the charges. It argued that despite any other federal legislation, the Income Tax Act and other statutes give the Crown’s claims for unremitted source deductions priority over all other creditors’ claims. It also argued that the relevant deemed trust provisions created a proprietary interest, not a security interest. The chambers judge rejected this position and instead ruled that the definition of “security interest” in the Income Tax Act includes a deemed trust, which could be subordinated to court-ordered super-priority charges under the CCAA. In other words, she found that the CCAA gives the court the ability to rank court-ordered priority charges ahead of the Crown’s interest in deemed trusts created by the Income Tax Act. To reach this conclusion, she interpreted the legislation harmoniously to avoid conflicting legislative interpretations.

When the Crown sought leave to appeal, leave was granted on a single issue: whether the chambers judge erred in law in determining that the “super-priority” charges made in favour of the interim financier, the directors of the debtor companies, and the Monitor and its counsel (the “Priority Charges” or “Priming Charges”) have priority over statutory deemed trusts in favour of the Crown for unremitted source deductions as created by the Income Tax Act, the Canada Pension Plan and the Employment Insurance Act (collectively, the “Fiscal Statutes”).

Decision of the Court of Appeal

The Alberta Court of Appeal dismissed the appeal, holding that a deemed trust is not a proprietary interest. It decided that sections 11.2, 11.51 and 11.52 of the CCAA gave a court discretion to grant charges in favour of the Crown relating to claims for debtor-in-possession financing, directors’ indemnification and professional fees in priority to the statutory deemed trusts for unremitted source deductions created by the Fiscal Statutes. The above provisions of the CCAA each state that a court may order that the charges “rank in priority over the claim of any secured creditor of the company.” Following Supreme Court jurisprudence, the Alberta Court of Appeal held that the statutory deemed trusts were essentially security interests and not true trusts creating proprietary interests.

To reach this conclusion, the Court of Appeal applied fundamental principles of statutory interpretation, which require that legislation be read using the ordinary meaning of words in their context, while considering the purpose and aim of the legislation and the overall scheme of the legislation. The Court was also guided by the presumption of coherence which presumes that Parliament passes only coherent and consistent legislation which operate harmoniously in relation to each other.

The Court of Appeal rejected the Crown’s argument that allowing the CCAA charges to prime the statutory deemed trusts would defeat the purpose of the Fiscal Statutes. The Court determined that the Priming Charges allowed the CCAA companies to continue to operate their business, and in so doing, raise enough money to satisfy both the Priming Charges and the Crown’s claims. The position taken by the Crown was untenable because it would have negatively impacted future restructuring, resulting in reduced tax revenue. The Court stated that the “Crown’s position ignores that CCAA restructurings facilitate the survival of companies, the production of goods and services, and ultimately jobs, all of which serve as fuel for the fiscal base.” The Court of Appeal determined that its conclusion was consistent with legislative intent, in that Parliament must not have intended that a statutory deemed trust would attach to particular assets, since a freezing of the assets would inhibit the debtor from doing business, which would go against the overall scheme of the CCAA.

As a matter of interpretation, the Court of Appeal noted that the harmonious interpretation of legislation presumes that the legislature does not intend absurd consequences. The Court found that if the Crown’s position were to prevail, absurd consequences could follow. It stated that interim financing of CCAA restructurings would simply end, and this is problematic because interim financing is necessary to achieve the purposes of the CCAA since approximately 75 percent of restructurings require the aid of interim lenders.

Additionally, the Court relied on the interpretive principle that “the legislature avoids tautology.” This means that every provision serves a purpose. On this point, the Court noted that if the Crown’s statutory deemed trusts had absolute priority, s.6(3) of the CCAA would be rendered redundant. That provision prohibits a court from sanctioning a compromise or arrangement unless the plan of compromise or arrangement provides for payment in full to the Crown, within six months of the sanction of the plan, of all amounts that could be subject to a demand under the Fiscal Statutes. Under the Crown’s interpretation, the Crown would always be paid first.

In the end, the Crown’s appeal was dismissed and the chambers judge’s ruling was upheld: sections 11.2, 11.51 and 11.52 of the CCAA give the court the ability to grant priority to charges necessary for restructuring ahead of the Crown’s security interest arising out of the statutory deemed trusts under the Fiscal Statutes.

The impact of the decision

The majority decision recognizes the importance of the Companies’ Creditors Arrangement Act to the national economy, and the decision is hailed as providing critical protection for the participants in insolvency proceedings who frequently rely on Priming Charges for protection. The fact that it has now been granted leave to appeal to the Supreme Court of Canada means that this result hangs in the balance. This case is one that interested parties and those who frequently deal with insolvency matters will keep a close eye on.

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