Rebuilding Success Magazine Features - Fall/Winter 2023 > In Case You Missed It: Decisions on Our Radar
In Case You Missed It: Decisions on Our Radar
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by Natasha MacParland and Rui Gao
The financial restructuring group at Davies Ward Phillips & Vineberg LLP is tracking the following cases. We have briefly described issues and updates for each case relevant to the CAIRP membership. Unless otherwise noted, the information in the chart is current to September 27, 2023—more recent developments in each case are not reflected.
The blue shading of cells denotes new cases we have been tracking since the last issue of Rebuilding Success; the blue font denotes updates to cases described in a previous issue.
| Case | Issue | Summary and Update |
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Ernst & Young Inc. v. Aquino (Supreme Court of Canada) |
Was the false invoicing scheme carried out by the company’s directing mind a “transfer[s] at undervalue […] intended to defraud, defeat or delay a creditor”? |
Yes. The Ontario Superior Court of Justice (Commercial List) held that the payments made in the fraudulent scheme were transfers at undervalue. The Ontario Court of Appeal held that permitting fraudsters to benefit at the expense of creditors would be perverse. In the context of transfers at undervalue under the Bankruptcy and Insolvency Act, the fraudulent intentions of the company’s directing mind should be imputed to the company to achieve the social purpose of providing proper redress to creditors. On January 19, 2023, the Supreme Court of Canada granted the Aquino group leave to appeal. This appeal is scheduled to be heard together with Golden Oaks Enterprises Inc. v. Scott (see Row below) on December 5, 2023. The Insolvency Institute of Canada (IIC) and the Attorney General of Ontario are intervening in this appeal. |
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Golden Oaks Enterprises Inc. v. Scott (Ontario) |
In circumstances of fraud by a principal, when are creditors’ claims considered to be discoverable for the purposes of limitation periods? |
The Ontario Court of Appeal (“ONCA”) declined to apply the principle of corporate attribution, which would have imputed Golden Oaks with the knowledge of fraud of its principal. As a result, the limitation period in respect of the unjust enrichment claim began to run when the trustee in bankruptcy was appointed. There were strong public policy grounds to resist imputing the principal’s knowledge on the bankrupt. Corporate attribution would have also undermined a fundamental tenet of insolvency law: the equitable distribution of a debtor’s assets between its creditors. Attribution would lead to the perverse outcome of allowing the appellants to retain certain fraudulent payments as well as depriving the Trustee of a civil remedy that would enlarge recoveries for the bankrupt’s other legitimate creditors. On March 30, 2023, the Supreme Court of Canada granted leave to appeal the ONCA’s decision. This appeal is scheduled to be heard together with Ernst & Young Inc. v. Aquino (see Row above) on December 5, 2023. The Insolvency Institute of Canada (IIC) and the Attorney General of Ontario have been granted leave to intervene in this appeal. |
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Re Poonian (British Columbia) |
Does a “fresh start” granted in bankruptcy extinguish fraud related dues? |
No. The British Columbia Securities Commission imposed a disgorgement order and administrative penalty against the applicants on account of their fraudulent conduct in dealing with securities. The British Columbia Supreme Court (“BCSC”) granted an order that amounts owed by the Poonians would not be released by an order of discharge under the BIA. The BCSC relied on the provisions for ‘exemptions to the discharge of debts’, prescribed under the BIA. The British Columbia Court of Appeal (“BCCA”) dismissed an appeal against the BCSC’s decision. On March 30, 2023, the Supreme Court of Canada granted leave to appeal the BCCA’s decision. This appeal is scheduled to be heard on December 6, 2023. Numerous parties are intervening in the appeal, including the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and the Superintendent of Bankruptcy. |
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Piekut v. Canada (Minister of National Revenue) (British Columbia) |
Does the seven-year period in in section 178(1)(g)(ii) of the Bankruptcy and Insolvency Act (“within seven years after the date on which the bankrupt ceased to be a full- or part-time student”) run from the latest date that the bankrupt ceased to be a full- or part-time student, irrespective of whether the studies at that latest date were financed by one or more student loans secured through a government program? |
Yes. On April 19, 2023, the British Columbia Court of Appeal (“BCCA”) upheld the decision of the chambers judge regarding the interpretation of section 178(1)(g)(ii) of the BIA. The Chambers Judge had relied on the 2015 decision of the British Columbia Supreme Court in Mallory (Re) on this same issue. The BCCA acknowledged that there were conflicting decisions in other jurisdictions (for instance, St. Dennis (Re), 2017 ONSC 2417). In those decisions, other courts had found that the seven-year period in section 178(1)(g)(ii) of the BIA runs from the latest date that the bankruptcy ceased being a full- or part-time student in studies financed through a federal or provincial student loans program. However, the BCCA concluded that the Mallory, rather than those other decisions, was correctly decided. The bankrupt sought leave to appeal to the Supreme Court of Canada on June 15, 2023. The application for leave to appeal is pending. |
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Bogue v. Miracle (Ontario) |
Can a receiver, acting on behalf of a non-First Nation creditor, recoup profits from an on-reserve business of a First Nation debtor? |
No. On September 29, 2022, the Ontario Court of Appeal affirmed the protections under section 89 of the Indian Act, 1985 apply to the conduct of a receiver. The receiver could not recoup the profits from on-reserve businesses to satisfy a debt owed to a non-First Nation creditor but could seize property located off-reserve. In addition, the Court reaffirmed that section 89 of the Indian Act protects all on-reserve assets, from seizure by non-First Nation parties, regardless of whether they relate to dealings that form part of the “commercial mainstream” that amount to normal business transactions or not. An application for leave to appeal to the Supreme Court of Canada was filed on December 2, 2022. Leave to appeal was denied on May 25, 2023. |
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Rural Municipality of Eye Hill v. Saskatchewan (Minister of Energy and Resources) (Saskatchewan) |
Will dues owed to a rural municipality rank in priority to claims unaddressed environmental obligations owed to the Crown? |
No. On March 7, 2023, the Saskatchewan Court of King's Bench rejected an attempt by a rural municipality (“RM”) to gain priority in distribution of residual proceeds from the sale of assets in an oil and gas receivership. The Receiver sold certain oil and gas assets of the debtor and sought to distribute the residual proceeds to the Ministry of Energy Resources to offset $20 million in unaddressed environmental obligations. The RM took the position that it should be paid in priority for municipal taxes owed by the debtor, the RM also asserted a priority over funds in the receivership estate based on an alleged lien and orders issued in the CCAA proceeding. The Court rejected RM’s claims while holding that rural municipalities cannot "lie in the weeds", waiting to assert their claims. Leave to appeal to the Saskatchewan Court of Appeal was filed on March 16, 2023. The hearing is scheduled to take place on October 4, 2023. |
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FNF Enterprises Inc. v. Wag and Train Inc. (Ontario) |
Can a director, who is also the sole shareholder, be held personally liable for stripping value from a corporation to defeat corporate creditors? |
Yes. On February 9, 2023, the Ontario Court of Appeal held that the claim that value was stripped from Wag and Train by its sole director, with knowledge that the corporation had incurred liabilities by breaching its lease, is actionable under the oppression remedy. The prohibition on a director who is also a shareholder taking assets in priority to, and to the prejudice of, unpaid creditors is a statutory one. The Court ruled that the director misused corporate powers to her own benefit, arguably making a personal remedy a fair way of dealing with the situation. The time period for seeking leave to appeal to the Supreme Court of Canada has lapsed. Leave was not sought. |
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Arrangement relatif à Blackrock Metals Inc. (Re) (Quebec) |
Are supervising judges under the CCAA authorised to grant a reverse vesting order (“RVO”)? |
Yes. On July 8, 2022 the Quebec Superior Court (Commercial Division) (“QCCS”) granted a RVO along with a release in favour of the debtors—BlackRock entities. The Court recognized that BlackRock operates in the highly regulated mining industry, and its business is comprised of assets that would be difficult to assign. Forcing BlackRock to proceed with a traditional asset could significantly increase costs and reduce the value of its assets. On August 5, 2022, the Quebec Court of Appeal refused an application for leave to appeal against the QCCS’ order, sought by BlackRock’s shareholders. The appellants sought to contest the power of supervising judges under the CCAA to issue an RVO and the release granted to the debtors. An application for leave to appeal to the Supreme Court of Canada was filed on October 21, 2022. Leave to appeal was denied on May 4, 2023. |
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Golfside Ventures Ltd (Re) (Alberta) |
Can, and if so, should, the Court exercise its inherent jurisdiction to grant a priority charge in favour of the trustee for the payment of its professional fees? |
In the circumstances of this case, yes. On February 15, 2023, the Alberta Court of King’s Bench granted an order in favour of the trustee to create a first priority charge on the bankrupt’s assets as security for payment of its professional fees. A lien was registered on the bankrupt’s estate after the commencement of bankruptcy. The trustee was not aware of this lien at the time of bankruptcy. Unless the Court’s inherent jurisdiction was applied in this situation, this lien, as a secured claim, would have priority over the trustee’s fees and expenses. The Court considered the 2 pre-conditions for exercising its inherent jurisdiction: (i) the Bankruptcy and Insolvency Act does not exhaustively deal with the matter of priorities between secured creditors and trustees; and (ii) after balancing competing interests, the benefit of granting the relief in favour of the trustee outweighed the relative prejudice to the lien holder. An appeal to the Alberta Court of Appeal was filed on March 16, 2023. The appeal was struck on July 18, 2023 for failure to submit an appeal record. As of September 27, 2023, no application to restore the appeal or to extend time has been brought. |
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BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc. (Ontario) |
If there is more than one mortgage, do liens pursuant to the Construction Act, 1990 (Ontario) have priority over each mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner? |
No. In April 2022, the Ontario Superior Court of Justice (Commercial List) held that a lien claimant’s priority under the Construction Act, 1990 over the mortgages is limited to the extent of the deficiency in the owner's holdback. The Court observed that the number of mortgages is irrelevant. The key principle is that the Construction Act lien claimant receives priority only to the extent of any deficiency in the owner’s holdback. On January 3, 2023, the Ontario Court of Appeal dismissed an appeal of this decision. The time period for seeking leave to appeal to the Supreme Court of Canada has lapsed. Leave was not sought. |
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Just Energy Group Inc. et. al. v. Morgan Stanley Capital Group Inc. et. al. (Ontario) |
When will a reverse vesting order (“RVO”) be granted? |
Echoing the reasons in Harte Gold regarding when an RVO should be granted, the Ontario Superior Court of Justice (Commercial List) emphasized that courts must carefully consider whether an RVO is warranted in the circumstances. The Court identified that an RVO has been granted where – (i) the debtor operates in a highly-regulated environment; or (ii) the debtor is a party to certain key agreements that would be difficult or impossible to assign to a purchaser; or (iii) if maintaining the existing legal entities would preserve certain tax attributes that would be otherwise lost in a traditional vesting order transaction. Just Energy is the first RVO to be recognized under Chapter 15 of the U.S. Bankruptcy Code. No appeal has been brought and no leave to appeal has been sought. |
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Medipure Pharmaceuticals Inc. (Re) (British Columbia) |
Can funds received from an interim financing lender be used to pay that lender's secured pre-filing loan in priority to debts owing to other creditors? |
No. On October 7, 2022 the British Columbia Supreme Court dismissed an application for interim financing on the terms proposed by the applicant which included the pay out in full of the debtor’s pre-filing secured loan with the interim lender before other secured claims of the debtor. The Court acknowledged that CCAA judges can grant an interim financing charge in priority to statutory deemed trust claims. However, the Court found that the use of new money from the proposed interim financing to pay out its pre-filing secured loan and priming all pre-filing charges is prohibited. The Court found that section 11.2 (1) of the CCAA prevents an interim financing charge from securing pre-filing obligations through roll-up or take-out provisions to the prejudice of other creditors. No appeal has been brought and no leave to appeal has been sought. |
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Flight (Re) (Ontario) |
Can a trustee in bankruptcy be sued without the leave of the Court? |
No. Section 215 of the BIA requires that the Court’s permission be obtained to bring an action against a trustee in bankruptcy “with respect to a report made under, or any action taken pursuant to, this Act”. On July 13, 2022, the Ontario Court of Appeal held that if the claim alleges wrongdoing in the performance of the trustee’s role, naming an individual rather than the corporate trustee as a defendant or asserting the claim is brought against the trustee in a personal capacity is not sufficient to avoid the broad gatekeeping function of section 215. As clarified by Flight, section 215 is important as it allows the Bankruptcy Court to screen out frivolous, vexatious actions that do not disclose a cause of action or for which there is no factual support so that the trustee need not respond to them. This avoids the cost and distraction of litigation that would make the bankruptcy process unworkable. The Court distinguished Flight, in which the allegations were based in common law, from other cases in which the allegations were the failure to take or do an action specifically and expressly required by the BIA, which the Court held was outside section 215. An application for leave to appeal to the Supreme Court of Canada was filed on September 28, 2022. Leave to appeal was denied on April 13, 2023. |
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AG and Agence du revenu du Québec v. Richter Advisory Group Inc. (“ChronoMétriq”) (Quebec) |
Can the Court grant charges in favour of interim lenders and others that rank in priority to the Crown’s deemed trust claims? |
Yes. On October 27, 2021, the Quebec Superior Court (Commercial Division) approved an interim lender's charge, an administration charge and a directors’ and officers’ charge ranking in priority to any trusts (statutory or otherwise). The Attorney General of Canada and the Québec Revenue Agency filed notices of appeal with the Quebec Court of Appeal, arguing the Court did not have authority to rank the charges above Crown deemed trusts. CIBC, the Canadian Bankers’ Association and the Insolvency Institute of Canada intervened in the consolidated appeal. The appeal was heard on September 12, 2023. The panel took the matter under reserve. |
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Agence du revenu du Québec v. FTI Consulting Canada Inc. (Arrangement relatif à Bloom Lake (Re)) (Quebec) |
Do input tax credits (e.g., HST/GST credits) resulting from the payment of damages for the disclaimer of agreements constitute pre- or post-filing claims under the CCAA for set-off or compensation? |
They are post filing claims. In a decision issued on November 8, 2021, the Quebec Superior Court (“QCSC”) held that Input Tax Credits (“ITC”) resulting from the payment of damages for the disclaimer of agreements constitute post-filing claims under the CCAA that may not be set off or compensated with pre-filing claims. On December 22, 2022, the Quebec Court of Appeal (“QCCA”) dismissed an appeal brought by the Quebec Revenue Agency and the CRA. The QCCA upheld the QCSC’s ruling that a plain reading of the provisions in the Excise Tax Act and the Quebec Sales Tax Act led to the conclusion that when an amount is paid because of the termination of an agreement for a taxable supply, the person is deemed to have paid for the supply and the registrant is deemed to have collected the tax, on the day that the amount was paid. Hence, the ITCs could only have been claimed by the debtor when the suppliers received partial payment on the damage claims. Since this occurred when the interim distribution was made, long after the initial order, the ITCs were post filing claims. The QCCA also agreed that there can be no set-off between claims arising before and after an initial CCAA order and that the trial judge appropriately refused to exercise its discretion. An application for leave to appeal to the Supreme Court of Canada on February 16, 2023. Leave to appeal was denied on August 24, 2023. |
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Peace River Hydro Partners v. Petrowest Corporation (Supreme Court of Canada) |
Is a court-appointed receiver bound to arbitrate disputes under contracts that include mandatory arbitration clauses? |
No. The British Columbia Court of Appeal (“BCCA”) previously dismissed an appeal, confirming that, due to the doctrine of separability, which recognizes that arbitration clauses are independent agreements within the impugned agreement, the receiver effectively disclaimed the arbitration clause/agreement by bringing the contractual claim in court. As a result, the arbitration clause was of no force or effect. On November 10, 2022, the Supreme Court of Canada unanimously dismissed the appeal, supporting the conclusion of the BCCA but not supporting the use of the doctrine of separability employed by the BCCA. The majority found the arbitration provisions were inoperative. Ultimately, it was held that an arbitration agreement can be considered inoperative if enforcing it would compromise the orderly and efficient resolution of the insolvency proceeding. Various courts have mostly relied on and applied the framework set out in this decision of the Supreme Court of Canada in determining whether to stay proceedings in favour of arbitration in the insolvency context. |
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Urbancorp Toronto Management Inc. (Re) (Ontario) |
Should a lease provision which states that proceeds of a lease transfer at full market value are payable to a related party landlord (and not the tenant assignor) be invalidated under the pari passu rule or the anti-deprivation rule? |
No. Asset stripping concerns were raised in this case because the lease at issue (pursuant to which nominal rent was payable to a related party landlord) provided that upon the transfer of the lease, the proceeds reflecting the full market value of the lease paid by a third party transferee were to be paid to the landlord, and not the insolvent tenant assignor. On September 16, 2021, the Superior Court of Justice, Commercial List held that the provision was valid. The pari passu rule, which invalidates contractual terms that prefer one creditor ahead of the others, does not apply given the language of the provision. The anti-deprivation rule also does not apply as the relevant clause did not mention insolvency or bankruptcy. Instead, it is the lease transfer that triggers the clause. On March 3, 2022, the Ontario Court of Appeal dismissed the motion for leave to appeal. No further appeal has been sought to the Supreme Court of Canada. |
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Wiebe v. Weinrich Contracting Ltd (Alberta) |
Does a supervising judge in a CCAA proceeding have the jurisdiction and authority to retroactively expand the scope of the initial stay of proceedings regarding third-party claims? |
Yes. The Alberta Court of Appeal (“ABCA”) allowed the appeal on November 9, 2020, holding that while a court may have the jurisdiction to expand the scope of an initial stay retroactively, procedural fairness considerations overrode the necessity to perform this analysis, and the impugned paragraphs of the vesting order were struck. Specifically, in this case, the appellants were not provided with a reasonable opportunity to respond to the impugned provisions included in the approval and vesting order. Following the issuance of the above-noted order of the ABCA, the scope of the initial stay was reconsidered by the case management judge, who issued an order that arguably retroactively expanded the scope of the initial stay regarding certain third-party claims. On July 2, 2021, the ABCA granted leave to appeal this decision. On May 11, 2022, the ABCA dismissed the appeal. It held that the interpretation by the case management judge was reasonable. Accordingly, an appellate intervention was not warranted, as decisions of CCAA supervising judges are entitled to considerable deference. An application for leave to appeal to the Supreme Court of Canada was filed on August 10, 2022. Leave to appeal was denied on March 9, 2023. |
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Bryton Capital Corp. GP Ltd. v. CIM Bayview Creek Inc. (Ontario) |
Can the holder of a disputed option seek declaratory relief to pre-emptively preclude or dismiss any creditor claims or claims under sections 95 and 96 of the BIA? |
No. On May 19, 2023, the Ontario Court of Appeal (“ONCA”) upheld the decision of the lower court to dismiss an application by an option holder to preclude or dismiss certain creditor claims challenging the option and any sections 95 and 96 claims under the Bankruptcy and Insolvency Act. The ONCA agreed with the lower court that the court’s jurisdiction to make binding declarations of right is limited to confirming “legal rights that already exist”. The option holder could not obtain a declaration that pre-emptively bars claims that had not been made from being adjudicated on their merits. Moreover, declaratory relief is discretionary and can be refused based on a variety of considerations, and the lower court was entitled to exercise its discretion to refuse the declaration sought by the option holder. The time period for seeking leave to appeal to the Supreme Court of Canada has lapsed. Leave was not sought. |
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White Oak Commercial Finance, LLC v. Nygård Holdings (USA) Limited et al |
Does the Court have jurisdiction to make a substantive consolidation order in respect of a corporation that is solvent? |
Yes. Although the Manitoba Court of Appeal found in this case that the relevant corporations were insolvent, it nevertheless clarified that a Court may order a substantive consolidation between solvent and insolvent corporations in appropriate circumstances. In this regard, the Manitoba Court of Appeal endorsed case law from the United States, and also found that it is consistent with policy in favour of an equitable and orderly distribution of assets to creditors. The Court of Appeal further agreed with the lower court’s finding that prejudice to a related entity was outweighed by prejudice to a third party entity. In the alternative, even if the consolidation were not ordered, the Manitoba Court of Appeal would have upheld the lower court’s decision to approve the allocation by the receiver of priority payment obligations and costs as against the proceeds of realization of the assets of the relevant corporations. The allocation was found to be fair and reasonable. Receivership expenses do not need to be allocated amongst debtors strictly on the basis of how assets were chronologically realized and costs paid. It remains to be seen whether an application for leave to appeal to the Supreme Court of Canada will be filed. |