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Canadian Insolvency: Case Law, Trends and Shifts in 2023

April 17, 2024

Several significant judicial decisions and legislative updates occurred in 2023 that are relevant to commercial lenders, businesses and restructuring professionals. This bulletin summarizes the key developments of 2023 and highlights areas of significance to be aware of in 2024. 

1. Priority Scheme

In 2023, several cases and legislative updates raised important questions regarding the priority scheme in insolvency proceedings. 

Environmental Priorities

In the Western provinces, courts continued to consider the effect and proper interpretation of the Supreme Court of Canada (SCC) decision in Orphan Well Association v. Grant Thornton Ltd. (Redwater), which found that end-of-life reclamation obligations for oil and gas assets must be funded in priority to the claims of the debtor company’s secured and unsecured creditors. 

In Qualex-Landmark Towers Inc. v. 12-10 Capital Corp., the Court of King’s Bench of Alberta (ABKB) considered whether the Redwater decision could be applied in favour of a private party concerning environmental remediation costs. 12-10 Capital Corp. (12-10) purchased a property that had pre-existing environmental contamination. The owner of a neighbouring property, Qualex, alleged that the contamination had migrated onto its property and sought to recover its remediation costs from 12-10. Qualex later sought an attachment order over the proceeds of any future sale of the 12-10 lands and to add the registered mortgagees on the 12-10 lands (i.e., 12-10’s secured creditors) as defendants/respondents to its claim for recovery. The ABKB granted the relief requested by Qualex, preserving Qualex’s ability to pursue compensation for its remediation costs in priority to 12-10’s secured creditors in the event of a sale. The Court of Appeal of Alberta set aside the decision of the ABKB on April 8, 2024. It confirmed that the super-priority described in the Redwater decision does not extend to the environmental obligations of private parties. 

In Re Mantle Materials Group Ltd., Mantle Materials Group, Ltd. (Mantle) sought a priority charge for interim financing in its proposal proceedings under the Bankruptcy and Insolvency Act (BIA) to finance performance of environmental reclamation work on certain of its gravel pits. This priority charge was opposed by a secured creditor of Mantle, who held security over equipment it financed before the proposal proceedings, which equipment was used on a different gravel pit. The secured creditor argued that its secured claim should not be subordinated to the environmental remediation costs and that the correct interpretation of Redwater is that end-of-life obligations need only be satisfied using assets encumbered by or related to the specific end-of-life obligation. 

The ABKB rejected the interpretation of the secured creditor and granted the priority charge, finding that the application of Redwater is not limited to the oil and gas sector and that the assets subject to the priority set out in Redwater include all assets related to the business, and not just the particular property, from which the environmental remediation obligations arose. Leave to appeal this decision was denied

In Eye Hill (Rural Municipality) v. Saskatchewan (Energy and Resources), the Court of Appeal for Saskatchewan (SKCA) considered the application of Redwater in the Province of Saskatchewan. Several rural municipalities argued that their claims for unpaid property taxes should have priority over the Ministry of Energy and Resource’s claim for abandonment and reclamation obligations on the basis that the regulatory regime in Saskatchewan is different from the regime in Alberta and, as a result, Redwater does not apply. The SKCA confirmed that Redwater applies in Saskatchewan and that claims in insolvency related to abandonment and reclamation obligations take priority over claims for unpaid municipal taxes. 

Statutory Priorities

In Syndic de Chronometriq inc., the Court of Appeal of Quebec (QCCA) confirmed that the deemed trust created by the Income Tax Act to secure the obligation of debtors to make statutory remittances and equivalent provincial law in favour of the Crown can be subordinated in proposal proceedings under the BIA in the same manner that such deemed trust can be subordinated in Companies’ Creditors Arrangement Act (CCAA) proceedings. In Canada v. Canada North Group Inc., the SCC found that CCAA courts have the discretion to grant super-priority charges ranking in priority over the Crown’s deemed trust under the broad discretion afforded to CCAA courts under section 11 of the CCAA. The SCC was silent on the applicability of this principle to proposal proceedings under the BIA. The QCCA commented that the proposal provisions of the BIA serve the same remedial purpose as those in the CCAA and, to the extent possible, the two statutes should be read harmoniously. The BIA incorporates virtually identical provisions to the CCAA regarding court-ordered charges. Accordingly, the QCCA found no basis to distinguish between the two Acts on this subject. The Crown has sought leave to appeal this decision to the SCC. 

In 2021, the Ontario Securities Commission appointed a receiver for Bridging Finance Inc. (Bridging), a company that raised capital from investors by selling units across its three funds. In Ontario Securities Commission v. Bridging Finance Inc., a group of unitholders argued that they had priority claims over those of the general unitholders based on, among other reasons, statutory rights of rescission. The basis of this argument was section 130.1 of the Ontario Securities Act (OSA), which states that where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum may elect to exercise a right of rescission against the company. At the lower court, the Ontario Superior Court of Justice (ONSC) distinguished a receivership under the OSA, such as the Bridging receivership, from those conducted under the BIA and found that, because the federal insolvency regime was not engaged, the unitholders’ rights of rescission could be exercised notwithstanding the receivership proceeding. The ONSC concluded that the rescission claimants should receive priority to ensure their remedy was meaningful. 

The Court of Appeal for Ontario (ONCA) overturned this decision and found that the absence of express language in the OSA conferring a priority for the unitholders’ right of rescission was fatal to their argument. Thus, the court confirmed that the statute conferring the priority must contain express and unambiguous language to recognize a priority right. 

Pension Priorities

On April 27, 2023, Bill C-288, the Pension Protection Act (PPA) received royal assent. The PPA amends both the BIA and CCAA by expanding the super-priority protections afforded to pension claims in insolvency proceedings of a debtor employer. The protections now include amounts required to fund any unfunded liability or solvency deficit of federally or provincially registered defined benefit pension plans. On April 27, 2027, the amendments to the BIA and CCAA resulting from the PPA will begin to apply to defined benefit pension plans already in existence on April 27, 2023. The PPA will apply immediately to any defined benefit pension plans created after that date. See our April 2023 Five Under 5 article: New Protections for Pensions in Insolvency Proceedings for a complete summary of the PPA and its implications. 

2. Reverse Vesting Orders

Once a rare occurrence, reverse vesting orders (RVOs) have continued to be used with increased prevalence since 2020. In 2022, the ONSC clarified the factors relevant to granting an RVO in the Harte Gold Corp. (Re) (Harte Gold) decision (discussed in our bulletin on the case). In 2023, courts across the country continued to consider the appropriate circumstances in which to use an RVO. 

In Forage Subordinated Debt LP v. Enterra Feed Corporation, the ABKB found that an RVO is an available remedy in the context of a receivership. In this case, the ABKB found its jurisdiction to grant an RVO through the interplay of section 13(2) of the Judicature Act, section 192(1) of the Business Corporation Act (Alberta) (ABCA) and section 64 of the Personal Property Security Act (Alberta) (PPSA). Specifically, the ABKB pointed to the court’s wide-ranging authority under the Judicature Act to take any action the court considers advisable. The ABKB also noted that the fundamental changes to corporate structure necessary for an RVO were possible through an order for reorganization under the ABCA, available where a company is subject to reorganization proceedings (including a receivership order). Lastly, the ABKB pointed to the court’s authority to make any order necessary to ensure the protection of the interest of any person in collateral under the PPSA as authority for granting an RVO. 

In the Matter of CannaPiece Group Inc. (CannaPiece) and PaySlate Inc. (Re) (PaySlate), ONSC and Supreme Court of British Columbia (BCSC) each refused to grant an RVO, providing insight into circumstances where such relief may be denied. 

CannaPiece was the first time since Harte Gold that the ONSC refused to approve an RVO. CannaPiece had two main creditors — one that held security over specific equipment it financed and the other that held a first-ranking general security interest (Secured Creditor), subject only to the equipment lessor’s interest in the equipment. The Secured Creditor bid in the sales process and was selected as the successful bidder. Its bid included an RVO whereby the equipment lessor would have its claims but not the equipment transferred to a ResidualCo., effectively extinguishing its security interest. Notably, a third party’s stalking horse bid provided for the assumption of the Secured Creditor’s debt. Considering the prejudice to the equipment lessor and the availability of a less prejudicial bid, the ONSC declined to approve the RVO.  

In PaySlate, the BCSC similarly refused to grant an RVO. The BCSC provided additional guidance on factors that should be considered when determining whether to grant an RVO:

  1. Extraordinary circumstances must exist.
  2. Creditors should have the opportunity to have a voice in the workout strategy.
  3. Courts should be mindful that the purchaser in an RVO obtains all the go-forward value of the debtor’s activities and that RVOs remove the opportunity for negotiations that may lead to greater value for a broader group of creditors.
  4. An evidence-based rationale should explain why an RVO is at least equivalent to outcomes under statutory mechanisms.

With these factors in mind, the BCSC found that the proposed transaction did not meet the requirements for approval by way of an RVO. Procedurally, the BCSC noted that PaySlate failed to give notice of the RVO transaction to contractual counterparties who would have their rights impaired under the transaction. The BCSC was not satisfied that the RVO was meant to preserve PaySlate’s business as a going concern — PaySlate intended to terminate half its workforce in connection with the transaction. Lastly, the BCSC found that the evidence submitted regarding the value of PaySlate’s tax attributes was insufficient to determine if there was a viable alternative to the RVO transaction that might be better for creditors. 

Both CannaPiece and PaySlate underscore the importance of fairness (both procedurally and as between creditors) and of a strong evidentiary record establishing the value and superiority of the RVO as against other options when seeking the issuance of an RVO. 

3. Single Proceeding Model 

In our July 2023 Report: Key Developments in Canadian Insolvency Case Law in 2022, we discussed the 2022 decisions in Mundo Media Ltd. (Re) and Peace River Hydro Partners v. Petrowest Corp., where both the ONCA and SCC reiterated the importance of the single proceeding model in insolvency proceedings.

In 2023, in the case of Alderbridge Way GP Ltd. (Re) (Alderbridge), the BCSC continued to emphasize the single proceeding model by ordering that several related actions be tried within a CCAA proceeding over the debtors’ objection. 

The single proceeding model favours dealing with litigation concerning an insolvent company within a single insolvency proceeding rather than fragmented across separate proceedings. In Alderbridge, a secured creditor of the CCAA debtors asked that several crossclaims brought by it and the CCAA debtors against each other be heard within the CCAA proceeding. The debtors opposed this request because the actions concerned inter-creditor disputes or disputes around the amount of a debt, which are not central to the CCAA proceeding, the focus of which was a sales process. 

In considering the request, the BCSC confirmed that the single proceeding model has broad application. The BCSC held that it had jurisdiction to adjudicate issues related to the validity and priority of debt and security, including inter-creditor and debtor-creditor issues, under sections 11 and 20 of the CCAA. The BCSC also found that adjudicating the actions within the CCAA proceeding would further the remedial purposes of the CCAA. The litigation was at the forefront of the restructuring proceeding and had the potential to negatively impact the Monitor’s ability to sell the debtors’ assets if unresolved. The BCSC, therefore, ordered that the related actions be tried within the CCAA proceeding over the objections of the CCAA debtors. 

4. Substantive Consolidation

In 2022, the Court of Queen’s Bench of Manitoba (MBQB), as it was then, made the rare decision in White Oak Commercial Finance LLC v. Nygard Holdings (USA) Limited to order substantive consolidation of nine related Canadian and United States entities that comprise the Nygard Group. In 2023, the Manitoba Court of Appeal (MBCA) upheld this decision. In doing so, the MBCA observed in obiter that solvent entities may, in the right circumstances, be substantively consolidated with insolvent affiliates.

The debtors are part of a group of several entities under the direct or indirect ownership and control of Peter Nygard. Following criminal charges against Peter Nygard in 2020, the debtors were forced into receivership. Ultimately, only three of the nine debtors had any realizable assets of significance. The receiver sought and obtained an order to substantively consolidate the debtors, resulting in the allocation of costs and distribution of net receivership proceeds on a collective basis. 

In 2023, the MBQB’s decision was appealed by two of the nine debtors who alleged they were solvent — Nygard Properties Ltd. (NPL) and Nygard Enterprises Ltd. (NEL). The MBCA considered two main grounds of appeal: (1) NPL is a solvent entity with no creditors, and the court cannot order the substantive consolidation of solvent companies with insolvent companies, and (2) prejudice to NPL. NPL argued that it was a secured creditor of the other Nygard Group entities. As a guarantor, its assets were used to pay the debt of other Nygard Group entities to their secured creditor, which NPL argued gave it first claim to the net receivership proceeds due to rights of subrogation.  

The MBCA rejected both arguments and upheld the lower court decision. The MBCA confirmed that the leading test for substantive consolidation comes from Redstone Investment Corporation (Re) and requires the court to apply the following principles:

  1. Are the elements of consolidation present, such as the intertwining of corporate functions and other commonalities across the group?
  2. Do the benefits of consolidation outweigh the prejudice to particular creditors?
  3. Is consolidation fair and reasonable in the circumstances? 

The MBCA distinguished the Nygard Group from cases where substantive consolidation is rejected, noting that where substantive consolidation is denied, this is generally because of the second factor — prejudice to a particular creditor. The MBCA observed that NPL is a debtor in the receivership and is owned and controlled by the same individuals as the other debtors. None of the objective third-party creditors objected to the substantive consolidation. In the MBCA’s view, the second part of the Redstone test contemplated prejudice to third-party creditors.

Concerning NPL’s alleged solvency, the MBCA concluded on the facts that NPL was, in fact, insolvent. The MBCA noted, however, that there is no absolute bar to substantively consolidating solvent corporations with insolvent corporations. If such a bar existed, corporate groups could insulate money by lodging debt in one corporation and assets in another, contrary to the remedial purposes of insolvency legislation.

See our February 2024 Blakes Bulletin: Nygard’s Impact: A Deep Dive into Substantive Consolidation in Canadian Insolvency Cases, for an in-depth discussion about substantive consolidation in insolvency proceedings. 

5. Set-off

In our July 2023 Report: Key Developments in Canadian Insolvency Case Law in 2022, we discussed the QCCA’s decision in Arrangement relatif à Bloom Lake. On August 24, 2023, the SCC dismissed the taxing authority’s application for leave to appeal the QCCA judgment. This decision concerned the federal and provincial tax refunds (Damage Payment ITCs) that an insolvent corporation is entitled to claim when it makes a distribution to contractual counterparties that have had their contracts disclaimed on account of their resulting damage claim. The taxing authorities attempted to characterize the Damage Payment ITCs as pre-filing claims that could be set off against its pre-filing sales tax claim against the debtor. The basis of this argument was sub-section 32(7) of the CCAA, which provides for a provable claim if a loss results from a disclaimer or resiliation. Under subsection 19(1)(b) of the CCAA, a provable claim is a pre-filing claim. Characterizing the Damage Payment ITCs as a pre-filing claim was crucial because, in Montréal (City) v. Deloitte Restructuring Inc., the SCC concluded that pre-filing claims could not be set off against post-filing claims except in exceptional circumstances. 

The QCCA rejected this argument based on a plain reading of the relevant provisions of the Excise Tax Act (Canada) and Retail Sales Tax Act (Quebec) that give rise to the Damage Payment ITCs at issue. Both provisions stipulate that when an amount is paid because of the termination of an agreement for the making of 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 the damages were paid. Therefore, it was only when the interim distribution was made under the CCAA plan to creditors with damage claims arising from disclaimers that payment for the supply of taxable service was deemed to have been made. At this time, the entitlement of the CCAA debtor to the Damage Payment ITCs arose. The Damage Payment ITCs were, therefore, post-filing obligations.

6. Corporate Attribution Doctrine

In our July 2023 Report: Key Developments in Canadian Insolvency Case Law in 2022, we described the Ernst & Young Inc. v. Aquino (Aquino) and Golden Oakes Enterprises v. Scott (Golden Oakes) decisions of the ONCA, both of which contemplate the application of the corporate attribution doctrine in the insolvency context. The corporate attribution doctrine allows an individual’s actions to be attributed to the corporation they represent. Our July 2023 Blakes Bulletin: Corporate Attribution in Insolvency: Key Differences Between Aquino and Golden Oakes, summarizes both cases. In both Aquino and Golden Oakes, the ONCA emphasizes the discretion of the insolvency court in applying the corporate attribution doctrine, and the additional public policy considerations applicable in the insolvency context. 

In Aquino, the court-appointed monitor of Bondfield Construction Company (Bondfield) and trustee in bankruptcy of its affiliate sought to recover funds under section 96 of the BIA and 36.1 of the CCAA concerning transfers at undervalue. The transfers at undervalue resulted from a fraudulent invoicing scheme whereby suppliers would falsely invoice the company where no actual work was performed. Given the timing of the fraudulent scheme, the transfers in question could only be impugned where: (i) the transferee was not dealing at arm’s length with the debtor, and (ii) the debtor had the intent to defraud, defeat or delay a creditor. The principals of Bondfield contended that the requisite intent to defraud, defeat or delay a creditor could not be found because Bondfield and its related company were financially strong enough to sustain the fraud.

The ONCA rejected this argument, finding that, in the insolvency context, the application of the corporate attribution doctrine must consider the social purpose of insolvency legislation. In this case, the way to avoid the perverse outcome of having the principals benefit from the fraudulent scheme at the expense of creditors was to apply the principals’ fraudulent intent to Bondfield and its related companies, placing the transfers within the intent requirements of section 96 of the BIA and 36.1 of the CCAA.

In Golden Oakes, the ONCA considered the application of the corporate attribution doctrine to a trustee in bankruptcy’s attempt to recover funds lost in a Ponzi scheme carried out by the sole directing mind of the corporation. The trustee commenced several actions in the name of the bankrupt company against individuals and companies who received fraudulent payments from the company in connection with the Ponzi scheme. 

Generally, in Ontario, the Limitations Act, 2002, provides that a claimant has two years from the day they discovered the claim to commence a legal proceeding. The defendants in the actions argued that the claims were time-barred because Golden Oakes made the payments more than two years before the actions. 

The ONCA emphasized the result of applying the corporate attribution doctrine in the particular case. Applying the doctrine in Golden Oakes would have imputed the principal’s knowledge of the Ponzi scheme to the company, resulting in the bankruptcy trustee’s claim being statute-barred. This would ultimately allow the principal to avoid the consequences of his fraudulent actions, provide no civil remedy for the benefit of Golden Oakes’ creditors, and undermine the social policy goals of corporate responsibility. The ONCA, therefore, elected not to apply the corporate attribution doctrine. 

The appeal of these decisions was heard jointly by the SCC on December 5, 2023, and a decision on this appeal is expected in 2024. 

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