Must the superintendent’s levy always be deducted from distributions to secured creditors in BIA proceedings?
On June 10, 2016, the Bankrupt filed a notice of intention to make a proposal pursuant to s. 50.4(1) of the Bankruptcy and Insolvency Act (the “BIA“). Despite various extensions granted to allow the Bankrupt to file a proposal, the Bankrupt was eventually deemed to have made an assignment in bankruptcy. The Court granted two separate approval and vesting orders to permit the Bankrupt to enter into transactions to dispose of substantially all of the Bankrupt’s assets. Following the deemed assignment in bankruptcy, the Trustee made payment of the net proceeds from the transactions to the Bankrupt’s secured creditors, and held back the levy that would apply to such payments under s. 147 of the BIA.
The net proceeds paid to the secured creditors were less than the debt owing to them by the Bankrupt. Subsequently, BDC, one of the secured creditors, moved for a declaration that the levy in favour of the Superintendent under s. 147 of the BIA is not payable with respect to the funds transferred to the secured creditors. The motion judge held that the levy was not payable because, inter alia, the secured creditors and the Trustee understood that the funds received pursuant to the approval and vesting orders were being held in escrow for the secured creditors, subject only to proof regarding the priority entitlements to the funds. The levy would have been payable if either the net sale proceeds had been paid out pursuant to an accepted proposal approved by the Court or the sale transactions had occurred after the assignment in bankruptcy pursuant to steps taken by the Trustee. The Superintendent appealed from the decision.
Section 147 of the BIA was enacted “[f]or the purpose of defraying the expenses of the supervision by the Superintendent”. The levy is directed to be made on “all payments . . . made by the trustee by way of dividend or otherwise on account of the creditor’s claims”. Parliament’s intention was for all creditors who receive payments through a proceeding under the BIA to contribute to the cost of supervision of those proceedings. Had Parliament intended that payments to secured creditors were to be exempt from the application of s. 147, such a declaration could have been easily incorporated in the revised legislation.
The key consideration in determining whether the levy is payable is to scrutinise the nature of the sale of the secured assets. Specifically, when an asset of a bankrupt’s estate is sold, the courts are concerned with whether it is the secured creditor that is realising its security or whether it is the trustee realising property of the estate. If the former, no levy is payable. If the latter, the levy is payable.
The motion judge found that the secured creditors and the trustee understood that the funds received pursuant to the approval and vesting orders were being held in “escrow” for the secured creditors. Escrow agreements are typically quite technical in nature. The legal relationship created by an escrow arrangement and the question of whether legal and/or beneficial ownership is transferred upon its creation will depend upon the particular terms of the contract.
In this case, the nature of the sale transactions in respect of the secured assets can be discerned from the particular context in which the sales occurred. When the Bankrupt filed its notice of intention to make a proposal appointing the Trustee as proposal trustee, the procedures under the BIA were engaged, including a stay of proceedings under s. 69 of the BIA. In accepting its appointment, the Trustee took on obligations to monitor the Bankrupt’s business and financial affairs and to report to the Official Receiver (who in turn reports to the Superintendent) and the Court. The Bankrupt’s motions for orders approving the sale of its significant assets were made on notice to the Superintendent.
It was clear from the record that the sale of the secured assets was undertaken by the Bankrupt itself with the assistance of the Trustee and under the supervision of the Superintendent and the Court. The Bankrupt and the Respondent secured creditor were, through this process, afforded the advantages of the BIA process and the participation of the Superintendent. There is no principled basis upon which to carve out an exception for payments to secured creditors derived from sale proceeds realised by a Bankrupt during the proposal period. Regardless of whether a secured creditor happily consents to the proceeding, acquiesces in it or is involuntarily “drawn into the bankruptcy”, if the secured creditor is part of the process and receives a benefit from it, the starting point is that he or she should contribute to the levy.
The Court of Appeal concluded that the motion judge made two palpable and overriding errors which led him to find that the levy was not payable in the circumstances. First, the motion judge made a palpable and overriding error in finding that the sale proceeds were being held by the Trustee in escrow rather than in its capacity as trustee in bankruptcy. Second, the motion judge failed to focus on the nature of the sale transactions and the capacities in which the parties were acting at that time.
The Court allowed the appeal.
Counsel: Marlon Miller of Justice Canada for the Appellant and Ross McFadyen of Thompson Dorfman Sweatman LLP for the Respondent