Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Caitlin Fell. Caitlin Fell is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP.
The Ontario Court of Appeal in Re Moore, 2013 ONCA 769 (Ont. C.A.) invoked the doctrine of paramountcy on finding that a provincial law frustrated the purposes of the federal Bankruptcy and Insolvency Act.
Background
The Respondent, Moore was a truck driver and due to his use of Highway 407, a private toll highway,  incurred indebtedness in the amount of $34,977.06 to 407 ETR Concession Company Limited (the “ETR”), the owner and operator of Highway 407. As a result of Moore’s failure to pay, the ETR sent notices of non-payment to the Registrar of Motor Vehicles (the “Registrar”). When Moore’s vehicle permit expired, the Registrar refused to renew the permit pursuant to section 22(4) of the Highway 407 Act (the “407 Act”), a provincially enacted law. Section 22(4) of the 407 Act provides that if the Registrar receives a notice of failure to pay from the ETR, he or she shall, at the next opportunity, refuse to validate the vehicle permit issued.
On November 10, 2007, the Respondent made an assignment into bankruptcy. The ETR was listed as a creditor on the statement of affairs filed by the Respondent in the bankruptcy proceedings; however the ETR did not file a proof of claim to share ratably in a distribution with the Respondent’s unsecured creditors.  In February 2011, the Respondent obtained a conditional discharge from bankruptcy and requested that the Ontario Ministry of Transportation (“MTO”) issue a vehicle permit. The MTO refused Moore’s request due to his outstanding indebtedness to the ETR. On June 11, 2011 the Respondent obtained an absolute discharge from bankruptcy and moved and obtained before the Registrar a declaration that his debt to the ETR was released as a result of his discharge and compelling the MTO to issue a vehicle permit to him. The ETR brought a motion before a judge to set aside the order of the Registrar. The motions judge granted the ETR’s motion. The Superintendent sought to appeal the decision of the motions judge and leave to appeal was granted.
Issues on Appeal
The issues on appeal were:(i) whether section 22(4) of the 407 Act conflicted with the operation of section 178(2) of the Bankruptcy and Insolvency Act (the “BIA”),  a federal legislation which provides that subject to certain exemptions, an order of discharge releases the bankrupt from all claims provable in bankruptcy; and (ii) whether section 22(4) of the 407 Act conflicts with the purpose of the bankruptcy and insolvency regime.
Analysis
The Court of Appeal began its analysis by outlining the doctrine of federal paramountcy. The doctrine of federal paramountcy provides that where there is an inconsistency between validly enacted but overlapping provincial and federal legislation, the provincial legislation is inoperative to the extent of the inconsistency and the remainder of the provincial legislation is unaffected. There are two ways in which a claim of paramountcy may arise: (i) where there is operational conflict between the federal and provincial laws, such that dual compliance is impossible; and (ii) where dual compliance is possible, but the provincial law is incompatible with, or frustrates the purpose of, the federal legislation.
The Superintendent submitted that section 22(4) permits the ETR to do indirectly that which it is prohibited from doing directly.  The BIA prohibits unsecured creditors from enforcing their monetary claims after discharge. However, section 22 of the 407 Act, which compels the Ministry to deny a vehicle permit until payment of outstanding amounts owing to the ETR, is used in this circumstance to enforce claims provable in bankruptcy against a discharged bankrupt. In this case, despite being discharged from bankruptcy the Respondent was refused a vehicle permit until such time as payment to the ETR was rendered. The Superintendent argued that this brings section 22(4) of the 407 Act into operational conflict with section 178(2) of the BIA.
The Superintendent also submitted that section 22(4) of the 407 Act frustrates the two main purposes of the bankruptcy regime: the “fresh start” principle which is the financial rehabilitation of insolvent individuals as well as the equal treatment of all unsecured creditors. The Superintendent submitted that section 22(4) frustrates the fresh start principle by permitting the ETR to coerce a bankrupt into satisfying its debts which are intended to be released by a discharge in bankruptcy. The Superintendent also submitted that section 22(4) of the 407 Act frustrates the purpose under the BIA of equal treatment of unsecured creditors. Under the BIA, all unsecured creditors rank equally and share ratably in the proceeds of the bankrupt estate. The only exceptions to the pari passu distribution of property among equal ranking creditors are listed in section 178(1) of the BIA. The Superintendant argued that the ETR’s debt did not fall within any such exception. Thus, the effect of the motion judge’s decision was to create a new class of debts that survives bankruptcy.
The ETR took the position that no federal head of power enables Parliament to require the provinces to grant vehicle permits or to require third parties to extend credit to a discharged bankrupt. Operational conflict is only engaged where dual statutory compliance is impossible. That was not the case in this appeal. In this case, the MTO’s right to suspend a vehicle permit is unaffected by bankruptcy.
On the strict reading of the test for operational conflict, the Court of Appeal concluded that there was no impossibility of dual compliance. The provincial legislation is permissive in that it does not require ETR to initiate the collection process. ETR could comply with both statutes by declining to pursue its remedy under section 22. However, the Court of Appeal held that the operation of section 22(4) of the 407 Act conflicted with the purposes of the BIA: the fresh start principle and the equal treatment of unsecured creditors.
In its reasoning the Court of Appeal noted that the fresh start principle is the primary goal of the bankruptcy regime. Therefore, the Court of Appeal stated that “permitting a creditor to insist on payment of pre-bankruptcy indebtedness after a bankruptcy discharge frustrates a bankrupt’s ability to start life afresh unencumbered by his or her past indebtedness”.  Under section 178(1) of the BIA there are some claims that constitute exceptions to the fresh start principle. These include certain specified provincial programs including loans and guarantees of loans to students and debts arising from an order or agreement for child or spousal support. However, there is no exception for toll debt owing to the ETR. Accordingly, the Court of Appeal found that there was a clear conflict between section 22(4) of the 407 Act and the purposes of the bankruptcy system.
In the result, the appeal was allowed and the decision of the motions judge was set aside. In its place, an order was issued to the effect that the discharge of Moore released him from all claims provable in bankruptcy, including the debt of the ETR.  This case is a reminder that creditors must comply with the provisions of the BIA in enforcing a claim against a bankrupt debtor and any payments to creditors of a bankrupt must be subject to and in accordance with the terms of the BIA. Creditors will not be able to do indirectly what they cannot do directly in using the law to frustrate the purposes of the BIA.

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