Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Caitlin Fell and Sean Stidwill. Caitlin Fell is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Sean Stidwill is a summer student at Osler, Hoskin & Harcourt LLP.
Overview
The Alberta Court of Queen’s Bench recently revisited an old issue with a new twist. The court had to decide whether a trust, specifically one created by provincial statute, could trump the secured interest of a creditor in bankruptcy proceedings under Canada’s Bankruptcy and Insolvency Act (BIA). In addressing this question, Justice Eidsvik ruled that a trust set up under provincial legislation could not displace normal distributions under the BIA.
Background
Iona Contactors Ltd. (Iona) was hired by the Calgary Airport Authority (the Airport) in 2009 to do work on one of its airfields, and by late 2010 the work was substantially complete. However, before ultimate completion of the project the Airport received notice that Iona had failed to pay certain of its subcontractors. In turn, the Airport withheld further payment to Iona. The amount withheld by the Airport under the contract with Iona (the Contract) totalled nearly $1 million (the Funds), and on March 18^th, 2011, Iona was assigned into Bankruptcy.
Under the terms of a Labour and Material Bond provided to Iona as Principal and the Airport as Obligee, Guarantee Company of North America (GCNA) had guaranteed it would pay Iona’s subcontractors and suppliers should Iona fail to do so. Accordingly, GNCA paid out those amounts owing.
The Trustee in Bankruptcy took the position that since work under the Contract had been substantially completed, the Funds represented an amount owed to Iona for that work and should therefore be forwarded to Iona’s secured lender, Alberta Treasury Branches (ATB). GNCA sought the funds as subrogee to the Airport who had the obligation to pay the subcontractors. GNCA argued first that the Funds were not owed to Iona, and alternatively that if they were due to Iona then they were held in trust for the subcontractors. By way of assignments, the Funds would then be paid to GNCA.
Analysis
Eidsvik J. made quick work of GNCA’s argument that the Funds were not owed to Iona. In examining the Contract, the judge noted that Iona and the Airport had specifically contemplated a situation where Iona became insolvent and had addressed it in a number of provisions.
Of particular note was section 6.3.3 (d) of the Contract, which reads as follows:
The Contractor’s right to any further payment that is due or accruing due (including any holdback or progress claim) for the Work taken out of the Contractor’s hands is extinguished, save and except that portion (if any) which is not required by the Airport Authority to have the Work completed or to compensate it for any consequential damages or losses arising out of the taking of the Work or any part of it out of the Contractor’s hands. (emphasis by Eidsvik J.)
In essence, the parties agreed that any amount the Airport owed to Iona under the Contract less any amount the Airport had to pay out of its own pockets to complete the work after Iona went insolvent would become due. This amount totalled $919,846.83, and the court declared it due to Iona with interest. Eidsvik J. noted that if all payment was to be suspended in the circumstances of insolvency, the Contract could have made that explicit.
Eidsvik J. then turned to the issue of whether there was a trust impressed on the funds due to Iona and the Trustee which would supersede the normal distribution of funds. Section 22 of Alberta’s Builders’ Lien Amendment Act contemplates a situation similar to the one at hand, and deems certain monies to be held in trust for the benefit of another. In Iona’s case it would be for the subcontractors. Further, section 67(1)(a) of the BIA exempts from distribution to creditors any property held by the bankrupt that is held in trust for another person.
The court examined appellate decisions from the Alberta Court of Appeal in Bassano Growers Ltd. v. Price Waterhouse Ltd. (1998), 218 A.R. 328, and from the Supreme Court of Canada in British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, where it was decided that only common law trusts are exempt under s.67(1)(a). Eidsvik J. stated that since provincially created statutory trusts are not exempt under s.67(1)(a), and no argument was made for a valid common law trust, the net Funds due and owing to Iona would pass to the ATB as a secured creditor.
Implications
Iona Contractors Ltd. (Receiver of) v. Guarantee Co. of North America demonstrates the need for careful forethought in drafting commercial contracts, particularly where insolvency is a possible scenario for one of the parties. Provisions addressing any amounts due upon insolvency should be examined closely before execution. Further, in similar proceedings it would be wise for a party in GNCA’s position to argue for the existence of a valid common law trust, thereby attempting to have the funds exempt from distribution to secured lenders through s.67(1)(a) of the BIA.

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