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CREDITORS AND CLAIMS - Claims - Priorities

Thursday, February 21, 2019 @ 8:34 AM  


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Appeal by GCNA from a ruling in a priority dispute between creditors and employees of a bankrupt company, A-1 Asphalt Maintenance. At the time of its bankruptcy, A-1 had four major paving projects with outstanding accounts receivable. The Receiver established a Paving Projects Account to which $675,372 was paid as monies owed under the paving contracts. Although the funds from various projects were comingled, the Receiver allocated funds to specific projects as payments occurred. It was accepted by the parties that the funds were trust funds within the meaning of s. 8 of the Construction Lien Act. A priority dispute arose between RBC, which was a secured creditor of A-1 under a general security agreement, GCNA, a bond company and secured creditor of A-1 that paid out 20 lien claims to certain suppliers and contractors of A-1, and two Unions representing A-1's employees who had worked on the projects. RBC submitted the funds in the Paving Projects Account formed part of A-1 bankruptcy estate available to creditors. GCNA and the Unions alleged the funds were s. 8(1) Construction Lien Act trust funds excluded from bankruptcy. The Receiver sought advice and directions. The motion judge rejected the contention that the funds were trust funds due to the comingling within the Account. The judge held that the monies were not excluded from A-1's estate available for distribution to creditors. GCNA was entitled to a pro rata share as a secured creditor and the Unions were entitled to their share as unsecured creditors. GCNA appealed.

HELD: Appeal allowed. The 1989 Supreme Court of Canada decision in Henfrey contemplated provincially created statutory trusts preserving assets from distribution to ordinary creditors under s. 67(1)(a) of the Bankruptcy and Insolvency Act, provided the statutory trust satisfied the general principles of trust law. The statutory trust created by s. 8(1) of the Construction Lien Act satisfied the requirement for certainty of intention to create a trust. It was not established that such certainty of intention created by s. 8(1) created an operational conflict with s. 67(1)(a), triggering the doctrine of federal paramountcy. The amounts owed under the paving contracts were debts subject to the Construction Lien Act that constituted choses in action supplying the required certainty of subject matter. Contrary to the motion judge's findings, the commingling of lien funds from various projects did not mean that the required certainty of subject matter was not present, as the funds remained identifiable and traceable based on the Receiver's careful accounting and allocation of the funds to specific projects within the Paving Projects Account. By operation of s. 67(1)(a) of the Bankruptcy and Insolvency Act, the disputed funds satisfied the legal requirements for a trust and therefore were not property of A-1 available for distribution to its creditors.

Royal Bank of Canada v. A-1 Asphalt Maintenance Ltd., [2019] O.J. No. 141, Ontario Court of Appeal, A. Hoy A.C.J.O., D.H. Doherty, R.J. Sharpe, L.B. Roberts and J.M. Fairburn, January 14, 2019. Digest No. TLD-February182019008