October 31, 2021
A judge supervising an insolvency may, in some situations under the Companies Creditors Arrangements Act (CCAA) order that “priming charges” have the effect of giving priority to freshly advanced credit over debts incurred before the insolvency, including those of secured creditors, and the so-called deemed trust under the Income Tax Act.
A priming charge is a form of super-priority that gives the interim lenders priority. Examples include the fees of counsel handling the insolvency proceeding, fees of a monitor or restructuring officer, interim loans, and indemnity for directors and officers.
The availability of the priming charge helps derive the most value for stakeholders. They are routinely requested in CCAA proceedings. It is not reasonable to expect interim lenders, professionals or directors to take risks without knowing that they will be protected.
In Canada v. Canada North Group Inc the Supreme Court of Canada rules that the “deemed trust” under the CCAA does not create a proprietary interest over the property of the debtor corporation. In other words, it is not a trust at all. No specific property is set aside in the hands of a trustee, therefore this provision more closely resembles that of a secured creditor. The Crown’s priority over secured interests generally is preserved, but in the case of a court supervised restructuring, the judge has discretion to make exceptions for priming charges.
Although this case comes out of Quebec, where trust principles are codified under the Civil Code, the equitable definition of a trust in common law provinces is similar to the codified definition in Quebec, in that a valid trust requires transfer of property to a trustee. Under the ITA, the debtor retains control over the property, so the crown’s claims are not truly trust claims.
The result may be different under the Bankruptcy and Insolvency Act (BIA). In concurring reasons, two judges point out that the BIA and the CCAA have different provisions governing trust property. The BIA, in their view, protects the crown’s priority. This makes sense, in that the CCAA is directed generally at restructuring a “going concern”, while in most cases, the BIA anticipates liquidation.
The four dissenting judges take a different approach and thus do not consider this issue, but at most, three judges who found a priority under the CCAA are silent as to the BIA situation.
It is also important to note that not ALL priming charges will be given priority over the Crown. That issue must be considered on a case by case basis by the supervising judge. In particular, if it is a liquidating CCAA proceeding, it may not be appropriate, because that situation parallels the BIA.
Parties and professional advisors contemplating insolvency proceedings need to be aware of this decision, its potential impact upon the process, and the uncertainty as to how future situations may be interpreted.