Co-written by authors Nicole Chang & Nesta Chan
In Canada v Canada North Group Inc., the Supreme Court of Canada held that a supervising court in a Companies’ Creditors Arrangement Act (the “CCAA”) proceeding can grant a super-priority (for fees and expenses in relation to the restructuring) over the Crown’s deemed trust for GST owing under s.277 (4.1) of the Income Tax Act (the “ITA”). This case shows the court’s broad discretionary power under the CCAA to order super-priority charges, so that the professionals aiding the debtor in the restructuring process would not be in a compromised position.
Background on the CCAA
The CCCA provides an opportunity for insolvent companies with more than $5,000,000 in liabilities to restructure their affairs through a plan of arrangement. The goal of the CCAA process is to avoid bankruptcy and maximize value for all stakeholders.
Upon initial application, the supervising judge makes an order that preserves the status quo by freezing claims against the debtor while allowing it to remain in possession of its assets in order to continue carrying on the business. During this time, the parties are encouraged to reach a compromise that allows the debtor to reorganize and emerge from the CCAA proceeding as a going concern.
S.11 of the CCAA provides the supervising court with broad discretionary power to “make any order that it considers appropriate in the circumstances”. In addition to s.11, subsequent provisions include the power to order a super-priority security or charge on all or part of a company’s assets in favour of critical costs to carry on the business (the “Priming Charges”).
Priming Charges are important because restructuring under the CCAA often requires the assistance of many professionals such as monitors and financiers. It is not reasonable to expect that professionals will take the risk of not being paid for their services, and that directors and officers will remain if placed in a compromised position. Therefore, courts supervising a CCAA reorganization have the authority to order super-priority charges to facilitate the restructuring process. Similarly, courts have ensured that the CCAA is given a liberal construction to fulfill its broad purpose and to prevent this purpose from being neutralized by other statutes.
Canada v Canada North Group Inc.
Canada North Group and its affiliates (the “Debtors”) elected for restructuring under the CCAA. They requested a package of relief standard to CCAA proceedings, including a thirty-day stay on all proceedings against them, the appointment of a monitor and the creation of three super-priority charges which include (i) an administration fee in favour of counsel, a monitor and a chief restructuring officer for the fees they incurred, (ii) a financing charge in favour of an interim lender, and (iii) a directors’ charge protecting their directors and officers against liabilities incurred after the commencement of the proceedings. The Debtors at the time owed a $1,140,000 debt to the Crown for source deductions and Goods and Services Tax. The court granted the initial order.
Shortly after the initial order, the Crown filed a motion to vary the order arguing the Priming Charges failed to recognize that the Crown’s proprietary interest in the Debtor’s property pursuant to s. 227(4.1) of the ITA.
Lower Court Decisions
The Alberta Court of Queen’s Bench held that the deemed trust created by s. 227(4.1) of the ITA is not a proprietary interest. Rather, the ITA creates a floating charge over a debtor’s assets, which permits the debtor to alienate property subject to the deemed trust. The court held that these characteristics are inconsistent with a proprietary interest and thus s. 277(4.1) does not create such an interest. Further, the court held that the CCAA authorized the reorganization of priorities by court order. As each of the charges included in the order was critical to the restructuring process, they were necessarily required by the CCAA regime. The Crown appealed.
The Alberta Court of Appeal affirmed the lower court’s decision that the Crown’s deemed trust under s. 277(4.1) of the ITA creates a security interest rather than a proprietary interest. The Court of Appeal further rejected the Crown’s argument as it failed to reconcile the objectives of the ITA and the CCAA. A deemed trust that could not be subordinated to super-priority charges would undermine both Acts’ objectives because fewer restructurings could succeed and thus less tax revenue can be collected. Wakeling J.A. dissented, concluding that s. 277(4.1) of the ITA was unambiguous in its language that the Crown has a proprietary interest in unremitted source deductions and should not be subordinated to the Priming Charges.
The Supreme Court of Canada
In a split decision, the SCC judges dismissed the Crown’s appeal. Justice Côté for the majority, held that supervising courts in CCAA proceedings have the authority to order super-priority charges to facilitate the restructuring process. When a company seeks protection under the CCAA, s. 37(1) of the CCAA provides that most of the Crown’s deemed trusts are nullified. However, s. 37(2) of the CCAA exempts the deemed trusts created by s. 277(4) and (4.1) of the ITA. The SCC held that s. 227(4.1) nonetheless did not create a beneficial interest that can be considered a proprietary interest because the interest is not attached to specific property, which is a significant quality of a true beneficial owner. Therefore, the Crown cannot prevent the broad discretionary power of the court under the CCAA to order super-priority charges.
The SCC noted that courts must still recognize the distinct nature of the Crown’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary. In creating a super-priority charge, a supervising judge must always consider whether the order will achieve the objectives of the CCAA and whether it is necessary to subordinate the Crown’s deemed trust.
The dissenting judge at the SCC found that the language of the ITA was unambiguous and that the Crown’s deemed trust had priority over all other claims, including the Priming Charges under the CCAA.
A court can order priming charges that are in priority to Crown charges. However, the court must exercise their discretion in ordering priming charges only when necessary, balancing the objectives of both the CCAA and the ITA.