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CREDITORS AND CLAIMS - Creditors - Claims - Provable claims - Validity

Friday, October 02, 2020 @ 1:23 PM  

Lexis Advance® Quicklaw®
Appeal by Chandos Construction from a decision of the Court of Appeal of Alberta that found a provision in its construction contract with Capital Steel was invalid. The appellant, a general construction contractor, entered into a construction subcontract with Capital Steel. Clause VII Q(d) of the contract awarded the appellant 10 per cent of the subcontract price in the event of Capital Steel’s bankruptcy, which later occurred. At the time Capital Steel filed an assignment in bankruptcy, the appellant owed Capital Steel $149,618 under the subcontract. The appellant relied on clause VII Q(d) to make a claim in Capital Steel’s bankruptcy proceedings. The Trustee in Bankruptcy applied for advice and directions as to whether clause VII Q(d) was valid.

HELD: Appeal dismissed. Clause VII Q(d) of the contract was invalid by virtue of the anti-deprivation rule. The anti-deprivation rule existed in Canadian common law and had not been eliminated by the Court or Parliament. The rule voided contractual provisions that would prevent property from passing to the trustee and frustrate section 71 of the Bankruptcy and Insolvency Act. The Court of Appeal was correct to consider whether the effect of the contractual provision was to deprive the estate of assets upon bankruptcy rather than whether the intention of the contracting parties was commercially reasonable. Since clause VII Q(d) was triggered by bankruptcy, the threshold for considering the anti-deprivation rule had been met. The effect of the provision was to create a debt from Capital Steel to the appellant that would not exist but for the insolvency. The clause was a direct and blatant violation of the anti-deprivation rule. Dissenting reasons were provided.

Chandos Construction Ltd. v. Deloitte Restructuring Inc., [2020] S.C.J. No. 25, Supreme Court of Canada, R. Wagner C.J., R.S. Abella, M.J. Moldaver, A. Karakatsanis, S. Côté, R. Brown, M. Rowe, S.L. Martin and N. Kasirer JJ., October 2, 2020. Digest No. TLD-September282020011-SCC