This fall, the NDP and the Bloc Québécois (“Bloc”) have both introduced private member’s bills seeking to amend the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”). Both bills aim to provide greater protection to employees’ pension and group insurance plans and their severance and termination pay when their employer becomes subject to BIA or CCAA proceedings.
We have recently profiled conflicting cases (available here and here) dealing with a priority contest between super-priority charges granted pursuant to creditor protection legislation and deemed trusts arising under the Income Tax Act. This is not the only instance where creditors and tax authorities will clash over statutory trusts in the insolvency context. In Canada v Callidus Capital Corporation, the Federal Court of Appeal interpreted section 222(3) of the Excise Tax Act, which creates a trust over GST collected but not remitted to the receiver general. The decision in Canada v Callidus is a win for the CRA as it provides the Crown with priority to sale proceeds paid by a tax debtor to a secured creditor notwithstanding the subsequent bankruptcy of the debtor.
This blog’s most recent post considered the Supreme Court of Nova Scotia’s June 2017 decision of Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re) (“Rosedale”) where the Court held that a deemed trust for unremitted withholdings under sections 227(4) and 227(4.1) of the Income Tax Act (Canada) (the “ITA”) had priority over a charge for interim financing granted by a court pursuant to section 50.6 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). In Rosedale, the interim financing lender relied on the 2007 Alberta Court of Queen’s Bench decision in Temple City Housing Inc. (Companies’ Creditors Arrangement Act) (“Temple”), asserting, among other things, that a deemed trust is in substance a security interest and can therefore be subordinated to an interim financing charge pursuant to section 50.6 of the BIA (the “BIA”). The Nova Scotia Supreme Court disagreed with the decision in Temple and held that the language creating the deemed trust in the ITA clearly provides that a deemed trust created thereunder takes priority over any other security. As a result, and despite the terms of the DIP order issued in the case, the Canada Revenue Agency (“CRA”) had priority over the DIP lender.
In the recent decision of Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re) (“Rosedale”), the Supreme Court of Nova Scotia held that a deemed trust for unremitted withholdings under sections 227(4) and 227(4.1) of the Income Tax Act (Canada) had priority over a charge for interim financing granted by a court pursuant to section 50.6 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). The decision in Rosedale turns on an interpretation of First Vancouver Finance v Canada (National Revenue) (“First Vancouver”) and is in conflict with the Alberta Court of Queen’s Bench interpretation of First Vancouver in its 2007 decision Temple City Housing Inc. (Companies’ Creditors Arrangement Act) (“Temple”). In contrast to Temple, Rosedale concludes that First Vancouver is authority for the proposition that a deemed trust for unremitted withholdings takes priority over all security interests, including a security interest granted by a court in favour of an interim financing lender in restructuring proceedings.
A recent unreported decision in the Alberta Court of Queen’s Bench has clarified the ranking of certain municipal tax claims against a bankrupt in Alberta. In Bank of Nova Scotia et al v. Virginia Hills Oil Corp. et al, the Court accepted arguments by a court-appointed receiver and trustee in bankruptcy that unpaid pre-filing linear property taxes owed by a debtor company to a municipality are unsecured claims for the purposes of the Municipal Government Act.
Key Employee Retention Plans are a common feature in restructurings occurring under the Companies’ Creditors Arrangement Act. The basis for a KERP is simple and easily explainable. The value of almost any debtor company will be maximized through a sale or restructuring transaction that preserves it as a going-concern business and avoids a piecemeal and costly liquidation of assets at depressed prices. Employees are critical to maintaining going-concern value but may be anxious about their future role in an insolvent entity or lack motivation to continue employment with a struggling debtor, particularly if the employees hold an equity position in the company that is likely to be wiped out on exit from the insolvency proceedings. These concerns can be reasonably expected to cause employees to cease employment and result in a loss of value to the business. A secured retention payment buttresses this by incentivizing employees, notwithstanding the inherent uncertainty in a CCAA filing, to continue employment and maintain the value of the enterprise for the ultimate benefit of creditors and other stakeholders.
Over the past few years, rate floors have become standard in commercial loan agreements. Following the 2008 financial crisis, lending rates dropped significantly and a sustained period of low interest rates has followed. There have even been instances of interest rates for certain currencies becoming negative. To protect against negative interest rates, the lending market has adopted rate floors, particularly with respect to LIBOR rates. The purpose of rate floors is to give lenders a guaranteed return on their loans even in the event that rates become negative. In Canada, this development has resulted in floors on LIBOR and CDOR (Canadian Dollar Offered Rate) rates.
In a majority two to one decision released on April 24, 2017, the Alberta Court of Appeal has upheld the lower court ruling in Re Redwater Energy Corporation. The trial decision in Redwater, which settled a lengthy conflict between the Alberta Energy Regulator and insolvency professionals on the proper interpretation of section 14.06 of the Bankruptcy and Insolvency Act (Canada), was previously analyzed in detail here. The majority judgment confirms the proposition that a receiver or trustee is entitled to disclaim or not take possession of a debtor’s interest in select AER licensed properties that have no value due to abandonment obligations and to vend the remaining licensed assets that have value. By extension, the AER cannot refuse a license transfer solely because abandonment and reclamation obligations associated with the disclaimed properties will go unperformed. The proceeds of sale must then be disbursed in accordance with the priority regime established in the BIA. In more simple terms, the decision confirms that a court-officer appointed under federal legislation may pick and choose the realizable property in an estate in order to maximize the recovery available for creditors without undue interference from a provincial regulator.
In a recent decision, the Federal Court of Appeal had occasion to consider a claim at the crossroads of bankruptcy and maritime law (ING Bank N.V. v. Canpotex Shipping Services Limited et al., 2017 FCA 47). Normally in Canada, bankruptcy cases are adjudicated in the superior courts of the respective provinces. This case was unusual because, although also a bankruptcy case, it fell under the Federal Court’s jurisdiction over admiralty matters.
The restructuring of Sanjel Corporation and its affiliates (previously discussed here) continues to provide interesting developments on the application and interpretation of the Companies’ Creditors Arrangement Act. In a recent decision in the case, the Court of Queen’s Bench of Alberta interpreted an initial order so as to limit the super-priority of a financial advisor’s court-ordered charge to the priority amount specified in the order. In doing so, the court rejected a unique argument made by the financial advisor that attempted to classify the amount claimed beyond the court-ordered charge as an obligation that had to be paid due to certain other provisions of the order. The advisor’s application for leave to appeal was subsequently dismissed in a decision that is available here.