Judge supervising insolvency can prioritize priming charges over Crown's deemed trust: Supreme Court

Ruling provides clarity for insolvency practitioners and will benefit lenders, says lawyer

Judge supervising insolvency can prioritize priming charges over Crown's deemed trust: Supreme Court
Darren Bieganek, Duncan Craig LLP

In a split decision, the Supreme Court of Canada has held that a judge supervising the restructuring of a number of corporations had the authority to prioritize certain charges from the estate over a deemed trust held by the Crown.

The ruling in Canada v. Canada North Group Inc., 2021 SCC 30 is a “long-sought-after clarification” for insolvency practitioners, says Darren Bieganek, who was counsel for the monitor in the case, Ernst & Young Inc.

The issue before the SCC was whether, during a restructuring under the Companies’ Creditors Arrangement Act (CCAA), a judge had the authority and jurisdiction to grant priming charges – also known as super-priority charges – over assets subject to a Canada Revenue Agency claim, which was protected by a deemed trust.

“It's very significant to the insolvency and restructuring world,” says Bieganek, the leader of the insolvency and restructuring practice group at Duncan Craig LLP, in Edmonton.

“Particularly under the CCAA, because these charges are somewhat critical to allowing larger companies to restructure their affairs.”

The respondents, Canada North Group and six related corporations, had applied to the Court of Queen’s Bench of Alberta for three priming charges. One would allow the companies to pay fees to counsel, their monitor and a chief restructuring officer. The second charge would pay their interim lender. And third, a directors’ charge, would protect their directors and officers against liabilities incurred once the proceedings got under way.

The Judge granted the order, which meant these three priming charges had priority over Canada Revenue Agency’s deemed trust, created by s. 227(4.1) of the Income Tax Act, for unpaid taxes.

Canada filed a motion for variance, asking the court to set aside that priority. The motion was dismissed, and the ruling was upheld at Alberta’s Court of Appeal, with a dissent.

At the SCC, Canada argued s. 227(4.1) of the Income Tax Act creates a proprietary right, because the deemed trust gives the Crown beneficial ownership – in this particular case – over the amount of unremitted tax owed. A judge cannot, therefore, order the withdrawal of a priming charge from Her Majesty’s property.

In a 5-4 split decision, the SCC dismissed Canada’s appeal. The majority found s. 227(4.1) of the Income Tax Act does not create a proprietary interest in the debtor’s property, and s. 11 of the CCAA gives broad discretionary power to the supervising court.

The dissenters found that “only one plausible interpretation” could come from the Income Tax Act and the related deemed trust provisions in the Canadian Pension Plan and Employment Insurance Act. The Crown’s deemed trust has priority over all other claims, including priming charges under the CCAA, they said.

The clarification that a supervising judge has authority to grant priming charges over a deemed trust will be “extremely beneficial” to insolvency lawyers and lenders involved in restructurings, says Bieganek

“They have a clear sense and understanding of where they stand if the court grants these orders, that they can't be set aside readily by the crown stepping forward and saying the court lacked the jurisdiction. That's been settled.”

“Secondly, the fact that the court has affirmed the breadth of s. 11 is extremely beneficial as well,” he says.

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