Small error, big consequences

Overview: 

In this case, the appellant sought relief after an error was discovered in a proposal made to creditors under the Bankruptcy and Insolvency Act (the “BIA”). The error came to light during a re-assessment by the Canada Revenue Agency years after the proposal had been approved. The chambers judge refused to rectify the proposal but erred in not considering whether to exercise discretion under s. 187(5) of the BIA to amend the order approving the proposal. The appeal was allowed, and an order was granted to correct the drafting error retroactively.

Williams Moving & Storage (B.C.) Ltd. (“Williams Moving” or the “Appellant”) filed a Notice of Intention to Make a Proposal under the BIA in January 2015. At the time of the filing of the NOI, Williams Moving was indebted to a related party, Williams Transfer Ltd. (“Transfer”), and the Estate of George S. Williams (the “Estate”), who had been a principal of the companies, in the total amount of $17,368,000. That debt was unsecured. Transfer, the Estate, and a second related company, Williams Holdings Ltd. (“Holdings”), are collectively referred to as the Williams Group. A draft proposal to creditors was prepared by solicitors acting for Williams Moving and the Williams Group.

The creditors of Williams Moving approved the Proposal, as did the Supreme Court of British Columbia on an application made in accordance with the BIA. Specifically, the Williams Group agreed to the Proposal and contributed to it, despite the fact they would be paid nothing under it, because the Proposal was structured so that it did not adversely limit the ability of Williams Moving to access tax loss carry forwards in the future or otherwise adversely impact the overall tax position of the Williams Group. Years later, the Canada Revenue Agency concluded the Appellant’s debt to the Williams Group had been discharged by the Proposal. As a result, the CRA took the position that the Appellant could not access certain tax loss carry forwards. It re-assessed Williams Moving, triggering additional taxable income of about $9 million.

The source of the problem was a drafting error in the definition of “Unaffected Creditors”, those whose debts would not be discharged by the Proposal. Surplus words had been added to the definition. As a result of the insertion of those words, CRA read the Proposal in such a manner as to remove the Williams Group from those defined as “Unaffected Creditors”. Williams Moving argued the Proposal was intended to preserve its indebtedness to the Williams Group, and this was key to the Williams Group’s participation in and contribution to the Proposal. Accordingly, Williams Moving applied to rectify the Proposal or, in the alternative, sought to have the order approving the Proposal amended to correct the error pursuant to s. 187(5) of the BIA.

The chambers judge held rectification of the Proposal was not available as a remedy because, unlike the Appellant, the related parties and their professional advisors, and the court that approved it, the creditors were not under any misapprehension with respect to its terms. The terms, including the material error, were as set out in the written Proposal accepted by the creditors. Williams Moving had not established that the parties’ true agreement differed from the Proposal voted upon.

On appeal, the Appellant contended that the judge erred in concluding rectification was not available as a remedy in the circumstances. According to the Appellant, the judge failed to interpret the true proposal in accordance with accepted principles of contractual interpretation and, by doing so, elevated a typographical error evident on the face of the Proposal (which was the very term sought to be rectified) to a term of the proposal itself.

The Court of Appeal noted that the Appellant’s “rectification” argument did not sit well with the jurisprudence that describes rectification as a “potent remedy” which should be used “with great caution” so as to not undermine the confidence of the commercial world in written contracts. Rectification is limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement. Despite this limitation, for the purposes of rectification, the law does not require a prior agreement between the parties which is concluded and legally binding or which contains all of the relevant terms of a complete agreement. However, it is normally necessary when seeking rectification to show a common understanding on the matter in dispute. That common understanding must be ascertainable and certain.

In this case, where the error alleged was in the composition of the Proposal presented to creditors, and nothing in the Trustee’s report was inconsistent with the Proposal, it was difficult to see how it could be said that the creditors would have understood the Proposal to be anything other than what was presented to them. Thus, it was difficult to understand how the creditors and Williams Moving would have had any prior common understanding, or “antecedent agreement”, in respect of a particular provision or aspect of the Proposal which was not accurately recorded in the Proposal as written, as required to ground a grant of rectification. The Court of Appeal held that the chambers judge did not err in concluding that a case for rectification could not be founded upon the evidence that the Proposal presented to the creditors was not that which the Appellant intended to proffer. There was insufficient evidence of a common understanding amongst the Appellant and its creditors on the matter in dispute, i.e., whether the Williams Group would release the Appellant from all claims, which was not accurately recorded in the written Proposal.

The Court also addressed the Appellant’s alternative ground of appeal under s. 187(5). Section 187(5) overrides the principle of finality in bankruptcy proceedings, and provides an expedient means to advance the ends of justice. Judges have a broad discretion, however, the discretion should be “sparingly exercised”. A motion under s. 187(5) cannot be brought as a substitute for an appeal, or if its only purpose is to obtain an opportunity to appeal where the time to appeal has elapsed. For the provision to apply, there must have been a fundamental change in circumstances between the original hearing and the time of the motion to vary, or evidence must have been discovered that was not known at the time of the original hearing and which could have led to a different result. The discretion must be exercised in a manner consistent with the policies underlying the provisions of the BIA, including specific provisions that set out the circumstances in which a court may suspend or annul an order.

If the Proposal were read, as it was by the CRA, so as to exclude Holdings and Transfer from the definition of Unaffected Creditors, then amending that definition so as to include them would effect a substantive change. A court would not have authority to make such a substantive change to a proposal on an application for approval of that proposal pursuant to the BIA. It follows that employing the discretion afforded by s. 187(5) to effect such a change at this juncture would not be consistent with the policies underlying the provisions of the BIA, and would be an inappropriate exercise of the jurisdiction conferred on the court by that provision.

Here, the most common‑sense reading of the Proposal, and that which does the least violence to its words, is to read out the duplicated text so as to resolve the inconsistency in the definition of Unaffected Creditors (arising from the inclusion of Unsecured Creditors on Schedule “A”, but preserving the debts owed to them only insofar as they are secured). The Appellant was correct that the common understanding of the parties to the Proposal, evidenced by the document itself, was that the persons listed on Schedule “A” were to be unaffected by the Proposal. Nevertheless, the presence of the duplicated text in the Proposal as written risked the introduction of unnecessary confusion in respect of the scope and effect of the Proposal. For that reason, on an application for an order approving the Proposal, as a means of pre‑emptively mitigating the risk of such confusion, the court could have corrected what may be characterized as a typographical error—the erroneous inclusion of the duplicated text in the definition of “Unaffected Creditors”—by removing that text from the Proposal. As such, the chambers judge erred in failing to consider whether she should exercise her discretion pursuant to s. 187(5) of the BIA so as to vary the Order approving the Proposal.

The Court of Appeal allowed the appeal and granted an order pursuant to s. 187(5) of the BIA that the Order be varied such that the definition of “Unaffected Creditors” contained in the Proposal of Williams Moving approved by the Order be amended and corrected nunc pro tunc.

Judges: The Honourable Chief Justice Marchand, the Honourable Mr. Justice Willcock and the Honourable Mr. Justice Abrioux

Counsel: Craig Dennis, K.C. and Owen James of DJA Counsel for the Appellant