Will Your Companies' Creditors Arrangement Act Superpriority Still Be that Super once the Scheme of Collocation is Drawn Up?

In the context of an arrangement plan pursuant to the Companies’ Creditors Arrangement Act, a financial institution was granted a superpriority on all moveable and immoveable debtors’ assets following an additional $2,150,000 loan to the debtor, in order to allow it to complete some construction projects it had already started and for which it already owed $720,000 to construction subcontractors and providers.

The same financial institution was already a creditor for more than $4,000,000 guaranteed by hypothecs on various immoveable properties belonging to the debtor.

Unfortunately, notwithstanding this new $2,150,000 loan, the debtor filed an assignment for bankruptcy a few months later.

Once all debtors’ assets were sold, there were, of course, not enough funds to pay all creditors. The scheme of collocation drawn up by the Trustee in Bankruptcy provided that the financial institution be reimbursed for the entirety of its debt (including past loans), since the superpriority awarded by the Court provided it would precede all legal hypothecs from persons having taken part in the construction or renovation of an immoveable.

Of course, the person who had taken part in the construction or renovation of an immoveable disagreed with the Trustee in Bankruptcy, which gave rise to a hearing in front of the Superior Court.

Decision Below

In a judgment rendered on April 14, 2010, the Superior Court finally decided to modify the scheme of collocation to favour the persons having taken part in the construction of an immoveable based on the following principles:

  • unless a Court decides to modify the scheme of collocation, the way the Trustee in Bankruptcy had drawn up the scheme of collocation in giving priority to the superpriority was correct;
  • a Court can nevertheless intervene in the present context because the order rendered pursuant to the Companies’ Creditors Arrangement Act specifically provided that any interested party could request that the Court modify such order;
  • in this particular case, it is fair to give priority to the person having taken part in the construction or renovation of an immoveable instead of the financial institution because, if the Court does not modify the original order pursuant to the Companies’ Creditors Arrangement Act, it would allow the financial institution to be reimbursed, not only on the additional loan of $2,150,000, but also on the first loans that were given pursuant to regular hypothecs, before the debtor was even in financial difficulties.

The Court of Appeal will decide whether or not the Superior Court was right to modify the scheme of collocation as it did, following a hearing that will take place on November 8, 2011 at the Quebec Court of Appeal in Quebec City.

Potential Significance

Before lending additional money to a debtor under the Companies’ Creditors Arrangement Act, a financial institution should know that the superpriority given in an order rendered according to this law might be reviewed.

Case Information

Maisons Marcoux inc. (Syndic de)

QCA Docket Number:  200-09-007026-104

Hearing Date: November 8, 2011

assets assignment in bankruptcy collocation Companies' Creditors Arrangement Act construction creditors debtor financial institution hypothecs Quebec Court of Appeal superpriority Trustee in Bankruptcy

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