In most restructuring proceedings, money is needed to fund the professionals and the management team retained to preserve value in the insolvent company. This money must often be borrowed, and is typically secured by "super-priority" charges granted by the Court. An issue that has recently been before the Alberta courts is whether these charges also rank ahead of other claims that also have priority according to federal legislation.

This issue was addressed by the Alberta Court of Appeal in Canada v Canada North Group Inc., 2019 ABCA 314 [North Group], in which the Court considered the relative ranking of super-priority charges ordered by the court in proceedings under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (CCAA) and certain deemed trust claims of the Crown.

In the result, the Court held that the Crown's deemed trusts under certain provisions of the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], the Canada Pension Plan, RSC 1985, c 8 and the Employment Insurance Act, SC 1996, c 23 can be subordinated to court-ordered charges under subsection 11.2, 11.51 and 11.52 of the CCAA (the "Priming Provisions"). The Court held that to find otherwise would have a chilling effect on commercial restructuring and subvert the intentions of the ITA and the CCAA: collecting tax and facilitating successful restructurings, respectively.

The Court of Queen's Bench Decision

In 2017, the Court of Queen's Bench granted an Initial Order, which included super-priority charges over the debtor’s property to secure the costs of administration, interim financing, and post-filing liabilities of directors. The Crown applied to vary the priority of those charges, arguing that the Initial Order failed to recognize the Crown's interest in unremitted source deductions, and that the deemed trust provisions at issue created a proprietary interest rather than a security interest.

The Chambers judge rejected the Crown's argument and held instead that the definition of "security interest" under section 224 of the ITA includes a deemed trust, which could be subordinated to court-ordered super-priority charges under the CCAA. She interpreted the statutes harmoniously to avoid conflict, finding that the Crown's statutory deemed trusts have priority over all security interests other than super-priority charges ordered under the CCAA.

Two questions arose on appeal from this decision: (1) is a deemed trust a proprietary interest? And (2) can a deemed trust be subordinated to charges granted under the Priming Provisions?

The Court of Appeal Decision

The majority of the Court of Appeal upheld the lower court's decision. The Court held that a deemed trust is not a proprietary interest. The Court applied the guiding rule of statutory interpretation, that the words of an act must be read using their ordinary meaning in context while considering the scheme and object of the act, and the intent of Parliament. The Court also applied the presumption of coherence, that Parliament does not pass contradictory or inconsistent legislation, and that each provision in each statute can operate harmoniously, without coming into conflict with any other.

Using these principles, the Court of Appeal concluded that the Crown's interest is in the nature of a security interest that ranks ahead of all other secured creditors, but that it is not a proprietary interest. This conclusion is consistent with giving effect to legislative intent—Parliament must not have intended that a statutory deemed trust attaches to particular assets, because freezing those assets and preventing the debtor from doing business would run contrary to the overall scheme of the CCAA.

The Court of Appeal also held that a court-ordered charge can subordinate a deemed trust in favour of the Crown on the following basis:

  • The presumption of statutory coherence requires that provisions be read together to achieve the related goal. Interpretation requires recognizing the interplay between statutory objectives. To conclude that a deemed trust has a superior claim would result in fewer restructurings and as a consequence a reduction in tax base, contrary to the purpose of the ITA. Reading the statutes harmoniously achieves the remedial purpose of the CCAA and the tax collection purpose of the ITA.
  • Interpreting legislation harmoniously also avoids absurd consequences. Predictability enables stakeholders to make the best possible decisions. Making interim financiers subordinate to deemed trust claims would simply end the practice of interim financing. As the value of unremitted source deductions is frequently unknown until the CCAA process concludes, to allow the Crown a priority claim, would result in an unacceptable level of uncertainty for other stakeholders.
  • Legislation avoids tautology. Every statutory provision serves a purpose. The court cannot sanction a CCAA plan of compromise unless it provides for payment in full to the Crown of all amounts owing to it within six months of the date on which the plan is sanctioned. If the Crown's statutory deemed trust were a proprietary interest ahead of all others, this section would be irrelevant.
  • The court has authority to stay the Crown's garnishment right. The CCAA grants courts this displacement power and illustrates Parliament's intent to authorize court control over the Crown's interests in proceedings. This provision would be rendered irrelevant if a deemed trust could not be subordinated.

The recent decision of the Supreme Court of Canada in Orphan Well Association et al. v Grant Thornton Limited et al., 2019 SCC 5 [Redwater] found that the abandonment and reclamation obligations of the debtor (owed to the Alberta Energy Regulator) bound the Trustee. While at first blush this may appear contrary to the decision in North Group, the Supreme Court in Redwater held that the abandonment and reclamation obligations are not creditor claims or claims provable in bankruptcy, so there was no conflict with the general priority scheme under the Bankruptcy and Insolvency Act, RSC 1985, c B-3. In contrast, the Court in North Group was dealing with claims considered to be creditor claims that were provable in bankruptcy.

In a lengthy dissent, Justice Wakeling held that a plain interpretation of section 227(4.1) of the ITA results in the Crown having a better claim to the debtor's assets than any other creditor, even those who are beneficiaries of court-ordered priming charges.