Court-ordered charges under the Bankruptcy and Insolvency Act may rank before deemed trusts
On October 18, 2023, the Québec Court of Appeal confirmed the Superior Court’s authority to declare that court-ordered charges under the Bankruptcy and Insolvency Act (BIA) rank before deemed trusts in favour of the Crown for deductions at source. In an unanimous decision, the Court held that the principles laid out in the Supreme Court of Canada’s decision Canada v Canada North Group Inc (Canada North), which found that the Superior Court had the authority to order super-priority charges under the Companies’ Creditors Arrangement Act (the CCAA), extend to orders made under the BIA.
Context: Chronométriq obtains priority charges
Chronométriq filed a notice of intention to file a proposal under the BIA with the objective of implementing a sale and investment solicitation process, with Richter acting as trustee to the notice of intention. On the same date, Chronométriq filed a motion before the Superior Court of Québec to obtain an interim financing secured by an interim lender’s charge, which was granted. The Superior Court found that granting the charge was necessary to enable the restructuring proceedings under the BIA given the Debtors’ inability to continue their operations without additional funding.
Furthermore, relying on ss. 50.6, 64.1, 64.2 and 183 of the BIA, the judge ordered that the charge rank in priority over all other interests, including the deemed trust in favour of the Crown created by the Income Tax Act and equivalent provincial legislation for unremitted or unpaid deductions at source (the Deemed Trusts).
The Attorney General of Canada, on behalf of the Canada Revenue Agency, and the Agence du revenu du Québec, to whom more than $3 million was owed in unremitted source deductions, appealed the decision.
The Parties’ Positions
The tax authorities argued that the Deemed Trusts were in place to protect unremitted amounts, in this case unremitted source deductions, and gave them absolute priority for these amounts. They submitted that the Superior Court did not have the authority to order super-priority charges that rank ahead of the Deemed Trusts. Additionally, according to the Appellants, the principles of Canada North are not applicable to a proposal made under the BIA since, among other things, the BIA does not contain a provision similar to section 11 of the CCAA providing broad discretion to the supervising judge.
Richter, in continuance of the proceedings of Chronometriq, argued that the judge had jurisdiction to order the super-priority charges pursuant to the BIA and its inherent jurisdiction. The restructuring scheme of the BIA is akin to a restructuring under the CCAA, such that both legislations pursue the same array of overarching remedial objectives. Further, the legal framework regarding the granting of court-ordered priority charges is quasi-identical under both the BIA and the CCAA, and allows virtually the same mechanisms to protect the Crown's rights in respect of unremitted employee source deductions. According to Richter, the Supreme Court of Canada confirmed in Canada North that ranking priority charges ahead of the Deemed Trusts did not conflict with the provisions of the Income Tax Act.
The Court of Appeal dismissed the appeal, holding that the Superior Court supervising a restructuring under the BIA had the authority to order that the interim financing charge rank in priority to the Deemed Trusts.
The Court recognized that the outcome of the case largely depended on the interpretation given to the Canada North decision, which had four sets of reasons: two for the majority (Justice Côté, with Chief Justice Wagner and Justice Kasirer concurring; and Justice Karakatsanis, with Justice Martin concurring) and two for the dissent (Justices Brown and Rowe, with Justice Abella concurring, as well as the separate reasons of Justice Moldaver).
At the hearing, the Appellants attempted to identify binding principles favourable to their position from the comments of a majority of the judges, including those who dissented in the result. They argued that Justices Karaktsanis, Brown and Rowe held that the Income Tax Act creates a beneficial interest in favour of the Crown, such that the opinion of Justice Côté to the effect that the provision does not create a proprietary interest is a minority view.
Richter argued that stare decisis, or the binding nature of a decision, attaches to the result of Canada North, and not to all of the comments made by the judges of the court. The Court of Appeal concluded that the Appellants’ argument did not change the fact that the majority found that the CCAA conferred the power on a court to order that the Deemed Trusts be subject to a priority charge in favour of an interim lender.
The Court of Appeal explained that without the ability to establish a super priority, financiers would not offer interim loans, which are an essential ingredient of the restructuring process. In other words, were the tax authorities to succeed, this would mean that interim financing under the BIA would be unavailable to insolvent companies when amounts are owed to the tax authorities. This would negate the practical effect of the provision of the BIA providing for interim financing.
The Court of Appeal also confirmed that the Superior Court could has ordered the interim lender charge on the basis of its inherent jurisdiction, which has been acknowledged by the courts in regards to the BIA. Indeed, in matters of insolvency, the courts have previously held that, as pragmatic problem solvers, they can exercise their inherent jurisdiction to effect a remedy or fill statutory gaps.
This is a significant decision in bankruptcy and insolvency law, especially in the case of companies with a total indebtedness of less than $5 million and who would therefore have no choice but to seek to restructure under the BIA, since indebtedness of at least $5 million is the threshold for the CCAA to be available to an insolvent person. In those cases, as well as all other situations in which companies seek to restructure under the BIA, this decision will enable companies to obtain interim financing to complete their restructuring.
McCarthy Tétrault acted on behalf of Richter, in continuance of proceedings of Chronométriq.