When companies seek to restructure through insolvency proceedings there is frequently an interim lender who “primes” the restructuring process by making a loan to fund the company taking necessary restructuring steps. This lender is routinely given a super-priority ahead of all other potential creditors, which is seen as a necessity to entice someone to inject new funds into an otherwise heavily encumbered and insolvent operation.
However, there is an ongoing dispute as to whether this super-priority, arising under the authority of federal insolvency legislation such as the Bankruptcy and Insolvency Act (“BIA”) and the Companies' Creditors Arrangement Act (“CCAA”) can in fact take priority over deemed trusts created by other federal legislation (notably over certain amounts owing to the government under the Income Tax Act, Canada Pension Plan Act, and Employment Insurance Act).
The Alberta Court of Appeal recently confirmed the lower court’s decision (which we wrote about here) that the priming charge could indeed take priority over the statutory deemed trusts, in the decision of _Canada v Canada North Group Inc., _2019 ABCA 314.
In a 2–1 decision, the majority of the court of appeal confirmed that a court overseeing an insolvency proceeding under the _CCAA _had the jurisdiction to give a “priming” charge priority over the federal deemed trusts, noting in particular that such an interpretation of the relevant federal legislation was necessary to ensure and promote successful corporate restructurings, and in particular to ensure the interim financing necessary for most restructurings remained available. In making this finding, the majority emphasized the importance of the priming charge in the case before it by noting that it was only because of the priming charge that there were now sufficient funds in the restructuring company to pay both the priming charge and the statutory deemed trust amounts.
The lone dissenting judge did so on the basis that he felt the court was bound to interpret the deemed trust legislation as taking priority over all other federal statutes by its terms, and that the negative consequences of that interpretation had to be remedied by Parliament, rather than the courts.
While it appears there will be no further appeal taken to the Supreme Court of Canada in this case, it remains to be seen whether this is the last word on the issue.
The different priorities afforded to creditors in insolvency proceedings can be a complex matter, and significant in determining the extent to which a particular creditor will be paid, if at all. Creditors are encouraged to contact experienced insolvency counsel whenever the solvency of borrowers is at issue.