Supreme Court of Canada recognizes the anti-deprivation rule in bankruptcy and insolvency proceedings

Date Closed

October 02, 2020

Lead Office

Calgary

On October 2, 2020, the Supreme Court of Canada released its decision in Chandos Construction Ltd. v. Deloitte Restructuring Inc. This case centered on a subcontract between Chandos Construction and its subcontractor, Capital Steel, valued at almost C$1.4 million. The contract provided that if Capital Steel became insolvent or bankrupt, it would pay Chandos 10% of the subcontract price.

When Capital Steel filed for bankruptcy, its trustee in bankruptcy (Deloitte) sought to recover unpaid amounts under the subcontract from Chandos, and Chandos purported to set off those amounts against the 10% owing by Capital Steel under the bankruptcy/insolvency clause. Deloitte applied to the Court for advice and directions on whether the insolvency clause was invalid based on the common law anti-deprivation rule, which prohibits contractual provisions that remove value from an insolvent person’s creditors upon its insolvency or bankruptcy.

After conflicting decisions from the application judge and the Alberta Court of appeal, the Supreme Court held the clause to be invalid. In doing so, it recognized the anti-deprivation rule in bankruptcy and insolvency proceedings for the first time, and established an effects-based test for when it applies.

This decision sits at the intersection of contracts and insolvency law and will be important in future commercial disputes. The Court’s recognition of the anti-deprivation rule confirms that attempts to contract around creditor protection regimes in insolvency statutes may be ineffective, and the effects-based test the Court established for this suggests the rule may be applied in a number of disputes.

The Insolvency Institute of Canada (IIC) acted as intervenor in the appeal. The IIC is a non-profit with the goal of improving the insolvency process in Canada by supporting research studies, improving legislation, and maintaining dialogue with government officials and the judiciary.  

McCarthy Tétrault acted for the Insolvency Institute of Canada, as intervenors, with a team led by Sean Collins that included Brandon Kain and Cassidy Thomson.

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