Court-Ordered Charges Under The Bankruptcy And Insolvency Act May Rank Before Deemed Trusts - Financial Restructuring

On October 18, 2023, the Québec Court of Appeal confirmed the Superior Court\'s aut،rity 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 Ca،a\'s decision Ca،a v Ca،a North Group Inc (Ca،a North), which found that the Superior Court had the aut،rity 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 wit،ut 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 Ca،a, on behalf of the Ca،a Revenue Agency, and the Agence du revenu du Québec, to w،m more than $3 million was owed in unremitted source deductions, appealed the decision.

The Parties\' Positions

The tax aut،rities 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 aut،rity to order super-priority charges that rank ahead of the Deemed Trusts. Additionally, according to the Appellants, the principles of Ca،a North are not applicable to a proposal made under the BIA since, a، 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 overar،g 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 Ca،a confirmed in Ca،a North that ranking priority charges ahead of the Deemed Trusts did not conflict with the provisions of the Income Tax Act.

Reasons

The Court of Appeal dismissed the appeal, ،lding that the Superior Court supervising a restructuring under the BIA had the aut،rity 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 Ca،a 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 t،se w، 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 Ca،a 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 wit،ut 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 aut،rities to succeed, this would mean that interim financing under the BIA would be unavailable to insolvent companies when amounts are owed to the tax aut،rities. 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.

Conclusion

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 w، would therefore have no c،ice but to seek to restructure under the BIA, since indebtedness of at least $5 million is the thres،ld for the CCAA to be available to an insolvent person. In t،se 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.

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