This article has been contributed to the blog by Dave Rosenblat and Mary Angela Rowe. Dave Rosenblat is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Mary Angela Rowe is an articling student at Osler, Hoskin & Harcourt LLP.
In International Hi-Tech Industries Inc. v. R., 2014 TCC 198, the Tax Court of Canada (the “Court”) considered whether secured creditors of a bankrupt had the legal capacity to continue the bankrupt’s appeal regarding alleged miscalculations of input tax credits (“ITCs”). The Court held that the secured creditors (the “Secured Creditors”) of International Hi-Tech Industries Inc. (“Hi-Tech” or the “Appellant”) could pursue the appeal without authorization from the trustee in bankruptcy (the “Trustee”), given that the entitlement to any proceeds from such appeal subsisted in the Secured Creditors through a valid assignment by way of a general security agreement (the “GSA”).
Prior to bankruptcy, Hi-Tech granted a security interest in all of its present and after-acquired personal property to the Secured Creditors via the GSA. The Trustee accepted the validity of the GSA and waived its interest in the corresponding collateral.
Two motions were made in an appeal regarding alleged miscalculations of ITCs. The Appellant brought a motion to seek representation by an agent. The Respondent, Her Majesty the Queen, brought a cross motion to dismiss the appeal.
The Respondent submitted that Hi-Tech was bankrupt when the Notice of Appeal was filed and that the Trustee had not “authorized” such appeal. Additionally, the Respondent argued that the Secured Creditors could not commence an appeal under their own name or the Appellant’s name. On this basis, the Respondent asserted that the appeal should have been quashed due to the absence of legal capacity.
The Court found that the Trustee’s authorization was not required. Under s. 30(1)(d) of the Bankruptcy and Insolvency Act (the “BIA”), the Trustee had exclusive power over legal proceedings “relating to the property of the bankrupt”. However, the Trustee had released the property to the Secured Creditors. It was thus no longer “property of the bankrupt”, and was beyond the Trustee’s exclusive authority. The Court was clear on this point, stating that “[t]he Trustee did not have an interest in the chose in action comprising the ITCs.” Once the Trustee had recognized the GSA’s validity and released its rights in the Secured Creditor’s collateral, the Trustee no longer had any interest in the property of the estate. Therefore, the only parties with any remaining rights in Hi-Tech’s estate were the Secured Creditors and the Trustee’s consent was unnecessary.
The Appellant’s motion for representation by an agent was dismissed.
Commentary Regarding Unsecured Creditors
The Court emphasized that this outcome was in line with the many distinctions between secured and unsecured creditors under the BIA. The Court acknowledged that a general creditor seeking to enforce a taxpayer’s appeal rights could not institute such an appeal without a trustee in bankruptcy’s consent (or through an order under section 38 of the BIA). The Secured Creditors’ ability to undertake legal proceedings on behalf of the estate in these circumstances followed necessarily from the text of the BIA and the GSA.