Receivership Charges and Municipal Tax Claims: The Priority Debate Continues
Over the last year, several court decisions have touched on the legislative conflict between taxation authorities and secured creditors in insolvency situations. These include Crown priority under the Excise Tax Act (discussed here), the ranking of DIP financing in restructuring proceedings (discussed here and here) and the nature of municipal claims for linear property taxes in bankruptcy (discussed here). In the recent case of Royal Bank of Canada v Reid-Built Homes Ltd., Justice R. Graesser of the Court of Queen’s Bench of Alberta held that section 243 of the Bankruptcy and Insolvency Act provided the discretion, but not the obligation, to grant receivership order charges in priority over the claims of all other secured creditors. The priority of the charges securing (i) the Receiver’s and its counsel’s fees and disbursements; and, (ii) the Receiver’s borrowings has been, for the most part, standardized under the Alberta Template Receivership Order and the super-priority of such charges may now face some debate. The Alberta Court of Appeal has now reversed the lower-court decision (as discussed here).
On November 2, 2017, the Reid-Built group of companies were placed into receivership by the entry of a consent receivership order based on the Alberta Template Receivership Order. Very shortly thereafter the City of Edmonton brought an application seeking to clarify that municipal tax claims had priority over the receivership charges by operation of section 348 of the Municipal Government Act, which provides a special lien against as security for any unpaid municipal property tax arrears that purports to rank in “…priority over the claims of every person except the Crown.” This provision may conflict with section 243(6) of the Bankruptcy and Insolvency Act, wherein the Court has authority to make an order respecting the payment of fees and disbursements of a court-appointed receiver “…including one that gives the receiver a charge, ranking ahead of any or all of the secured creditors.”
In holding that the tax claims had priority over the receivership charges, Justice Grasser stressed that the priority status of the charges was ultimately at the discretion of the Court and that such discretion was to be exercised equitably, having regard to the purpose of both the legislation and the given proceedings. In working though his analysis, Justice Grasser focused on, among others, the following considerations:
- are the given proceedings liquidating or restructuring in nature;
- will the objecting secured creditor received any benefit from the given proceedings;
- what prejudice will the objecting secured creditor face, should its security be subject to the proceedings and subordinate to the Charges (i.e. is such prejudice simply limited to a delay in a creditor’s realizations or is it expected to diminish such creditor’s actual recovery); and,
- what effect will allowing the objecting creditor to seize its property have on the proceedings and stakeholders.
In examining certain of the above considerations, in connection with the specific facts surrounding the receivership proceedings and the priority of the tax claims, the Court held that the receivership order must fit the circumstances of the case. The fact that the case involved a liquidating process with no ongoing business and limited employees was, in the view of the Court, highly relevant to how the discretion should be exercised. The Court’s finding was that, in a liquidating receivership, the potential delay in a municipality receiving payment of outstanding taxes, penalties, and interest was a sufficient and appropriate contribution by the taxing authority to the receivership. On the specific priority issue, the Court did confirm that it had the appropriate jurisdiction to determine otherwise:
"My conclusion is that while the Court has the power to subordinate municipal tax claims to the costs of the receivership (as they may be apportioned to the municipality), this is not an appropriate case in which to do so. In this case, the Receiver’s charge and the Borrowing Power do not rank ahead of Edmonton’s property tax claims."
In conclusion, albeit limited to the instant facts, the Court in Reid-Built focused on the potential benefits a given creditor, the City, would likely obtain from the Debtors’ receivership proceedings. This “potential benefit” analysis may be viewed as being similar to that which is typically used in connection with determining whether a cost allocation is equitable and whether it should be approved as articulated in cases such as Medican Holdings Ltd. While Reid-Built is currently under appeal, it will be interesting to see if future decisions will continue to carry over any of the principles and case law dealing with the approval of a cost allocation when determining the priority of the charges.