Must the superintendent’s levy always be deducted from distributions to secured creditors in a bankruptcy?
On June 10, 2016, Topsyn Flexible Packaging Ltd. (“Topsyn”) filed a notice of intention to make a proposal. PricewaterhouseCoopers (“PWC”) was appointed as proposal trustee. Following commencement of the proposal proceedings, two of Topsyn’s secured creditors—Business Development Bank of Canada (“BDC”) and the Royal Bank of Canada (“RBC”)—cooperated with Topsyn and PWC to permit Topsyn to continue to manage its operations for the purpose of selling the business as a going concern.
During the proposal proceedings, the court granted two approval and vesting orders permitting Topsyn to enter into sale transactions to dispose of substantially all of its assets. The orders also directed Topsyn to pay over the net proceeds from the transactions to PWC, to be held pending a determination of entitlement. Ultimately no proposal was filed and Topsyn was deemed to have made an assignment in bankruptcy on December 12, 2016. Following the deemed assignment, PWC paid BDC and RBC from the net proceeds, and it held back the levy that would apply to such payments under s. 147 of the Bankruptcy and Insolvency Act (the “BIA”).
The sole issue for determination in this application was whether the s. 147 levy applied to the payments made by PWC to BDC and RBC. The Office of the Superintendent of Bankruptcy (the “Superintendent”) argued that the levy is payable on all payments made by a trustee in bankruptcy on account of claims of creditors—whether they are unsecured, preferred or secured. A s. 147 levy applies to distributions under proposals. If the proposal proceeding fails, the debtor is deemed bankrupt and payments made through the statutory scheme of the BIA would attract the levy. The Superintendent suggested that PWC made a distribution of money in accordance with the scheme under the BIA, and the levy applied. BDC submitted that the levy is intended to apply only in cases where payments are made by a trustee in its capacity as a trustee administering the estate of a bankrupt. It argued that PWC acted as an “escrow” agent for the secured creditors and, accordingly, the levy was not payable.
On May 22, 2009, the Superintendent issued a Directive No. 10R on the matter, stating that a s. 147 levy is “payable to the Superintendent on all payments made by the trustee by way of dividend or otherwise on account of the claims of creditors whether unsecured, preferred or secured”. A levy is not payable where, inter alia, the trustee has “acted as agent, receiver or mandatory for the secured creditor in selling the encumbered assets. The purpose and intent of a levy is to defray the costs associated with federal oversight of insolvency matters.
The Court held that this application turned on whether the payments made by PWC were made in its capacity as a trustee administering the estate of a bankrupt. The levy is intended to apply only to cases where payments are made by a trustee in bankruptcy in its capacity as a trustee administering the estate of the bankrupt. The approval and vesting orders preceded the date of bankruptcy. Had a proposal been filed and the net sale proceeds been paid out in accordance with such proposal, the levy would have been payable. Similarly, had the sale transactions been completed after the date of the deemed bankruptcy and then paid out to the secured creditors, the levy would have been payable.
Other than holding the funds in accordance with the approval and vesting orders, PWC took no additional steps in the bankruptcy proceedings respecting the funds. PWC merely held the funds and later made payment to the secured creditors—who were clearly entitled to those funds. The secured creditors and PWC understood that the net sale proceeds were being held in escrow for the secured creditors, subject only to proof regarding the priority entitlement to the funds. Once such proof was received, the funds were paid out. The secured creditors were entitled to the funds before the date of the deemed bankruptcy. The funds could have been paid out by Topsyn or another party directly to the secured creditors. In other words, Topsyn’s lawyer could have continued to hold the net sale proceeds pending a determination as to entitlement, and when such funds would have been paid out, they would not have been subject to a levy.
The Court was not satisfied that the levy was payable. BDC’s request for a declaratory order that the levy under s. 147 of the BIA was not applicable in the case of the payments of the net sale proceeds made by PWC to BDC and RBC was granted.
Counsel: Ross McFadyen of Thompson Dorfman Sweatman LLP for Business Development Bank of Canada and Marlon Miller of Justice Canadafor the Superintendent.
Full case: http://canlii.ca/t/hs67q