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
(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
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
that ranking priority charges ahead of the Deemed
Trusts did not conflict with the provisions of the Income Tax


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
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
, 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.


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

McCarthy Tétrault acted on behalf of Richter, in
continuance of proceedings of Chronométriq.

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