The ongoing priority dispute between deemed trusts created under federal “fiscal statutes” (being the Income Tax Act, the Canada Pension Plan Act and the Employment Insurance Act) and priming charges arising under restructuring and insolvency legislation (being the Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act) has been previously discussed here and here. In sum, there were conflicting decisions from Nova Scotia (Rosedale) and Alberta (Canada North) on whether it was possible for CCAA and BIA created super-priority claims to rank senior to the Crown’s deemed trust claims under the fiscal statutes. In a split decision, the Alberta Court of Appeal has now upheld the lower court decision in Canada North that superior courts do have the requisite jurisdiction to subordinate the Crown’s deemed trust. This is an important decision as it is the first reported judgment of an appellate level court on the issue.
The starting point for the majority is a finding that the deemed trust is not a true trust that attaches to specific assets. This position, based on the definitions used within the fiscal statutes and the reasoning of the Supreme Court of Canada in Sparrow Electric and First Vancouver, equates the deemed trust to a floating charge. In doing so, the Court of Appeal explicitly rejects the reasoning employed in the Rosedale decision and reduces the question on the appeal to the scope of jurisdiction afforded to the justice supervising the bankruptcy or restructuring. In the view of Justices Rowbotham and Schultz, there are numerous reasons why the proper interpretation of the applicable sections of the CCAA and BIA affords a court with the authority to prime the Crown’s deemed trust claim. Those include:
- The remedial purpose of restructuring legislation, recognized in cases such as Century Services, requires an interpretation that encourages the preservation of going concern enterprises and strives to avoid the consequences of liquidation. Successful corporate restructurings that preserve business enterprises and employment of individuals will result in increased revenue and enhance recoveries on both existing and future Crown claims.
- The interpretation proposed by the Crown would produce absurd results as it would effectively end interim financing, which is granted in reliance on priority charges and necessary to achieve the objectives of the CCAA. Indeed, the Crown had acknowledged in this case that its position, if accepted, would “chill” restructuring efforts.
- Other sections of the CCAA, most notably 6(3) and 11.09, are illustrative of intention to insure payment on appropriate terms and authorize courts to exercise control over Crown claims while monitoring restructuring proceedings. The absolute priority interpretation favoured by the Crown would result in these provisions being either unnecessary or non-operative; and
- The implied exception rule (generalia specialibus non derogant), in which the specific language is preferred over the general, resolves any conflict that may exist in the statutes in favour of the insolvency laws.
While the decision is welcome in that it provides appellate level guidance on the dispute, there is a lengthy dissent that would have allowed the Crown’s appeal. Justice Wakeling, while acknowledging the importance of debtor in possession financing in restructurings, is unable to read the fiscal statutes as permitting the subordination of the deemed trust and, in light of the clear language being used, does not accept that the public policy reasons for encouraging restructuring can serve as a basis for an alternative interpretation. In more simple terms, the dissenting reasons hold that the undesired consequences that may result form the legislation cannot overcome the plain meaning of the statutory text. It remains to be seen whether the Crown will seek to have the issue determined with finality by the Supreme Court of Canada.