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Superintendent's levy on secured claims in failed proposal proceedings

The Manitoba Court of Queen's Bench was recently asked to opine on whether the 5% levy payable in bankruptcy matters to the Superintendent of Bankruptcy pursuant to s. 147 of the Bankruptcy and Insolvency Act ("BIA") was applicable to secured creditors. Secured creditors generally operate outside of bankruptcy proceedings.

In this case, two secured creditors had issued notices of intent to enforce their security to the debtor, Topsyn Flexible Packaging Ltd. ("Topsyn"). Topsyn shortly thereafter filed a notice of intention to file a proposal pursuant to s. 50.4(1) of the BIA, thus stopping the secured creditors from taking any enforcement proceedings. The ensuing proposal proceedings lasted approximately 6 months during which extensions were granted to Topsyn's time to file a proposal which were supported by the secured creditors. During the proposal proceedings essentially all of Topsyn's assets were sold pursuant to vesting orders made by the court. The proceeds from the sales of Topsyn's assets were held by the Trustee pursuant to the vesting orders which stipulated that they "were to stand in place and stead of the assets that were sold and that all claims and encumbrances (including secured claims) against the net proceeds were to attach with the same priority as they had with respect to the sold assets immediately prior to the sale, as if they had not been sold"(see paragraph 6).

Topsyn ultimately didn't file a proposal and accordingly was deemed to have made an assignment into bankruptcy. The Trustee held the proceeds from the sales of Topsyn's assets and wished to pay them out to the secured creditors. The secured creditors objected to the payment by the Trustee of the Superintendent's levy from the proceeds. The Superintendent took the position that the levy was payable from the proceeds despite the fact that the claims were secured.

The court held that the levy was indeed not payable in these circumstances as the Trustee had not taken any additional steps regarding the funds other than holding them in accordance with the vesting orders. The court noted that had the sales proceeds been paid out pursuant to an accepted proposal or if the Trustee had taken steps to complete the sales after the bankruptcy, the levy would have been payable to the Superintendent.

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