All distributions made out of a bankrupt estate are subject to a 5% levy payable to Superintendent of Bankruptcy pursuant to section 147 of the Bankruptcy and Insolvency Act. Generally, this does not impact secured creditors, whose rights are largely unaffected in bankruptcy. However, in Superintendent of Bankruptcy v Business Development Bank of Canada, 2019 MBCA 72, the Manitoba Court of Appeal recently confirmed that in certain circumstances, even a secured creditor's recovery can be subject to the levy.
We discussed the lower court's decision in an earlier article. In short, the secured creditors had issued notice to enforce security, and the debtor then filed a Notice of Intention to File a Proposal. During that notice period, the debtor's property was sold with the oversight of the court, and the funds were held by the proposal trustee in place of the property. Then, before distribution of the proceeds, and without a proposal ever being made, the debtor was deemed bankrupt.
The trustee was of the view the levy did not apply to the payments out to secured creditors in these circumstances, and the lower court agreed, finding that the payment of funds was separate from the bankruptcy and the trustee had taken no steps with the funds other than to hold them.
The Court of Appeal disagreed. In reviewing the case law, the Court of Appeal determined that the levy was not payable only in instances where it was the secured creditor itself who was realizing on the assets. Otherwise, the levy was payable. The Court of Appeal determined that the sale was undertaken by the bankrupt itself, with the assistance of the trustee and under the supervision of the Superintendent and the court. Accordingly, the levy was payable on the distributions to secured creditors.
Realizing on security can be unexpectedly complicated, and insolvency proceedings complicate them even further. Secured creditors would be wise to seek the advice and strategic planning of experienced insolvency counsel at all stages of the security process.