In Gidda (Re), 2020 BCSC 121, the Supreme Court of British Columbia affirmed the Crown’s priority as a secured creditor in bankruptcy proceedings, insofar as the registration of a tax debt judgment against the bankrupt’s interests in property is made prior to the bankruptcy order or assignment. The case is an appeal from a decision by a trustee in bankruptcy, who denied the Crown’s entitlement to proceeds from the sale of the Bankrupts’ property following his voluntary assignment into bankruptcy.
Mr. Gidda (the “Bankrupt”) had a one-half interest in a piece of land. Between October 2014 and March 2016, the Minister of National Revenue (the “Minister”) registered three judgments against this interest in the property on account of Goods and Sales Tax (“GST”) debt and income tax debt. However, the Minister was not the only, nor the first, to register a judgment against this interest. In November 2016, the Bankrupt made a voluntary assignment into bankruptcy.
In asserting her priority over other creditors, the Crown relied on subsection 223(11.1) of the Income Tax Act (“ITA”), and subsection 316(10.1) of the Excise Tax Act (“ETA”). These sections deem a registered claim in respect of an income tax or GST debt to be secured, ranking higher in relation to unsecured creditors, including those who registered claims in the property before the Minister.
On the bankruptcy law side, sections 86 and 87 of the Bankruptcy and Insolvency Act (“BIA”) deal with Crown claims, and when they may be deemed secured. In particular, subsection 87(1) leaves open the possibility that a secured claim may be created by legislation (such as section 223 of the ITA and section 316 of the ETA). However, subsection 87(2), to which each of the sections creating secured claims in question is explicitly subject, ensures that such a secured claim is subordinate to other securities in respect of which the necessary steps have been taken to ensure that they are effective against other creditors.
The Trustee’s position, however was that, based on principles of statutory interpretation, subsections 223(11.1) of ITA and 316(10.1) of the ETA must be read in conjunction with other subsections providing that certificates registered in Federal Court and/or memorials are subject to the same restrictions as judgements of a superior court of a province. The Trustee emphasized that both the tax statutes (ETA and ITA) and the BIA have provisions subordinating the charge, lien or priority created by a registered memorial to securities in respect of which all steps necessary to make them effective against other creditors were taken before that registration. Additionally, the Trustee invoked sections 70 and 72 of the BIA, which affirm that the bankrupt’s assignment into bankruptcy takes precedence over all judgements, and that the provisions of the BIA shall not abrogate or supersede other law or statute relating to property and civil rights that are not in conflict therewith.
Based on a novel interpretation of these provisions, the Trustee found that the judgements registered to the property prior to the Minister’s claim were charges under the Land Title Act, and by virtue of section 28 of this provincial statute, they enjoyed priority ranking based on the date of registration. In the notice rejecting the Crown’s claim, the Trustee suggested that the purpose of the BIA is to divide the bankrupt’s assets fairly among all creditors, and that the Crown’s claim of a security is contrary to that purpose. The Trustee argued in the alternative that the Crown was entitled to a pro-rata share of the proceeds after the prior judgments were accounted for, based on the District Registrar Report issued pursuant to section 94 of the Court Order Enforcement Act.
After reciting the statutory provisions invoked by the Trustee, the Supreme Court of British Columbia found that the Trustee’s position seeks to “impose upon the proceedings at bar an interpretation which is convoluted in the extreme and not keeping with the case law that has developed over at least the last 25 years”.
The Court explained that provisions subordinating the Crown’s claim to other prior judgements registered against interests in a property are only applicable in cases other than bankruptcy proceedings. In these circumstances, the Court noted, “the Crown becomes a secured creditor and the property so secured never passes to the trustee for distribution among the unsecured creditors”. Accordingly, the appeal was allowed and the Crown, being the only secured creditor, was found to be entitled to all the proceeds of sale of the properties secured by the memorials issued by the Federal Court prior to the bankruptcy.
This judgment is noteworthy for two reasons: 1. according to the Crown counsel, that was the first time that a trustee has challenged the security of the Crown following a bankruptcy; and 2. the Court held that costs incurred to appeal the Trustee’s vigorous defense of the interests of the high priority but unsecured creditors should be borne by the Trustee personally.
To the Court the Trustee’s ruling came across as a “run-it-up-the-flagpole-type of challenge,” and while we ultimately agree it was incorrect, the Trustee’s position was not beyond-the-pale. Perhaps it was incorrect, outside of the norm, or convoluted, but not extreme. It was a thoughtful application of the law to the facts and was taken in the interests of the other creditors, to whom the Trustee was accountable. In any event, this judgment will likely inhibit future attempts, even justifiable ones, to deny the Crown’s priority claim in bankruptcy proceedings.