Alberta Court of Appeal overturns lower court decision in Reid-Built

In a 2018 judgment discussed here, the Alberta Court of Queen’s Bench held that, by virtue of s. 348 of the Municipal Government Act, municipal tax claims could take priority over a Receiver’s charge granted pursuant to section 243(6) of the Bankruptcy and Insolvency Act. The decision in Royal Bank of Canada v Reid-Built Homes Ltd., which turned on the fact that the case was a liquidating receivership, came as a surprise to insolvency practitioners who had generally operated with the belief that their federal “super priority” status would trump liens created by provincial legislation.  The Alberta Court of Appeal has now reversed the lower-court decision in the subsequent case of Edmonton (City) v Alvarez & Marsal Canada Inc., holding that while there is judicial discretion to subordinate a court-officer’s priority under section 243(6) of the BIA, it was inappropriate for the priority re-arrangement to occur on the basis that the insolvency process involved a liquidation of the debtor’s assets. 

The amendments enacted into both the BIA and the Companies’ Creditors Arrangement Act in 2009 included a legislative priority for the fees and disbursements of professional advisors engaged to work on the insolvency proceeding.  Although such priority was common in cases commenced before 2009, the charges were generally granted through the inherent jurisdiction of the court and not through a specific statutory provision.  Prior to this case, there does not appear to have been any written judicial consideration involving a priority contest between charges granted under federal insolvency legislation and those arising under validly enacted provincial law.

The Court of Appeal accepted the conclusion of the Queen’s Bench that the priority arising under section 243(6) is not absolute and may be subject to subordination.  This point was never subject to dispute as both the BIA and the CCAA use the term “may”, which effectively confirms the discretionary nature of the charge and related priority ranking.  Alberta’s highest court then went on to discuss the significance of the template order, recognized that the elevated priority was provided for therein and stated that any decision regarding the priority of a receiver’s charge involved a principled exercise of discretion.  In this particular case, the decision to subordinate a charge due to the liquidating nature of the proceeding, constituted an error.  In respect of liquidating receiverships, the court stated the following:

We agree with the Receiver that the chambers judge’s conclusion that “there is a less convincing case for secured creditors to participate in the Receiver’s costs when the intent is to liquidate” is not supported by the law. The use of the term “liquidating receivership” suggests that there is some other type of receivership with a different intent. As is stated in Bennett on Receivership, “the purpose of the receivership is to enhance and facilitate the preservation and realization, if necessary, of the debtor’s assets for the benefit of all creditors”.

The policy behind receiverships is that collective action is preferable to unilateral action. The receiver maximizes the returns for the benefit of all creditors and streamlines the process of liquidation.

The template order further provides that interested persons may apply to allocate the priority charges, and this provision was also recognized by the court.  A creditor who feels that it has not derived benefit from a proceeding, or alternatively that it has borne a disproportionate share of the cost of a proceeding, is still entitled to seek relief through cost allocation at any time prior to discharge.  The Court of Appeal’s decision, which is generally consistent with the existing case law on the priority of charges granted in an insolvency proceeding, is a welcome clarification for receivers, monitors and their legal advisors in all receivership proceedings, including those that are anticipated to involve the liquidation of a debtor’s assets at the commencement of the case.

Municipal Government Act Bankruptcy and Insolvency Act Companies' Creditors Arrangement Act Municipal Tax Receivership Charges

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