The Supreme Court of Canada recently ruled in the Century Servicesi case that Goods and Services Tax (“GST”) deemed trusts under the federal Excise Tax Act (“ETA”) are ineffective in proceedings under the Companies’ Creditors Arrangement Act (“CCAA”).
The Century Services case involved Ted LeRoy Trucking Ltd. ( “LeRoy Trucking”) which, in late 2007, obtained a CCAA stay of proceedings against it. On April 29, 2008, the supervising CCAA court made an order approving a payment to LeRoy Trucking’s major secured creditor, Century Services. As a part of that order, LeRoy Trucking proposed to hold back $305,202.30 in unremitted GST, and place it in the Monitor’s trust account until the after the CCAA proceeding was decided, arguing that the ETA creates a deemed trust in favour of the Crown for unremitted GST . On September 3, 2008, having concluded that reorganization was not possible, LeRoy Trucking sought and obtained an order assigning the company into bankruptcy pursuant to the Bankruptcy and Insolvency Act (“BIA”).
Prior to Century Services, the Court of Appeal in Ottawa Senatorsii had held that ETA deemed trusts for GST are enforceable against a CCAA debtor. However, as a result of the Supreme Court’s ruling in Caisse populaire Desjardins de Montmagnyiii, the effect of allowing a bankruptcy assignment was to destroy the Crown’s trust claim and demote the GST obligation to an unsecured claim. This meant that deemed trusts for GST under the ETA were treated differently depending on whether proceedings were bought under the CCAA or the BIA, thereby creating an incentive for debtors to attempt to liquidate the insolvent company under the BIA rather than seeking to restructure the business under the CCAA and have their claims subordinated to the Crown’s claim for unremitted GST.
Writing for the majority of the Supreme Court of Canada, Madam Justice Deschamps concluded that, since GST is not an explicit exception under the CCAA, it should rank as an unsecured claim. In reaching this determination, the Court noted that the intention of Parliament’s recent amendments to the CCAA was to restrict the priority of the Crown to a few specific cases mainly related to employment.
The Supreme Court’s conclusion relied heavily upon a purposive interpretation of the CCAA. The Court recognized that participants in insolvency proceedings depend on the broad and flexible authority of the supervising court to make the orders necessary to facilitate a reorganization. The Supreme Court acknowledged that the CCAA provides a court with the authority to make any order that it considers appropriate in the circumstances. The Supreme Court established a simple two-part analysis to be applied when considering whether there is jurisdiction to make a CCAA order:
- is the requested order subject to restrictions set out in the CCAA; and
- will the order usefully further efforts to achieve the remedial purpose of the CCAA.
In the Court’s view, both the CCAA and BIA were part of a broader insolvency regime and neither should be interpreted without consideration of the other. It is important, the Court opined, to promote the production of similar priority outcomes under both Acts, in order to avoid statute shopping and to better foster an harmonious transition between reorganization and liquidation.
The Supreme Court’s decision in Century Services will be an important precedent for all CCAA restructurings going forward. The Supreme Court has clearly stated that there is no priority of Crown deemed trusts for GST in CCAA proceedings. The Supreme Court confirmed that the CCAA should be interpreted in a purposive and liberal manner in order to provide the supervising court with the flexibility to make orders in furtherance of the CCAA objectives. Finally, the Supreme Court articulated the importance of bridging gaps between the CCAA and the BIA so as to ensure that the statutes operate in harmony.