The Supreme Court of Canada recently released a decision in which it confirmed the broad discretionary power vested in the supervising court under the Companies’ Creditors Arrangement Act (“CCAA”) in a case involving an Alberta corporation. The CCAA is a Federal law that allows insolvent corporations owing their creditors in excess of $5 million to restructure their business and financial affairs.
Debtors Seek CCAA Restructuring
The Alberta corporation and six related corporation (the “debtors”) sought to restructure under the CCAA. In their initial CCAA application, they requested a package of relief standard to CCAA proceedings, including a thirty-day stay on all proceedings against them, the appointment of a monitor and the creation of three super-priority charges, which included an administration charge in favour of counsel, a financing charge in favour of an interim lender and, finally, a directors’ charge protecting their directors and officers against liabilities incurred after the commencement of the proceedings. Included in their initial motion, the debtors provided an affidavit from one of their directors attesting to a debt to the Federal Government for source deductions and Goods and Services Tax.
Initial Order Grants Super-Priority in Favour of Restructuring Experts
On July 5, 2017, a judge of the Court of Queen’s Bench granted an initial order in favour of the debtors on the terms requested in the initial application, aside from a $500,000 reduction in the administration charge.
As part of the terms of the order, the debtors were required to pay their restructuring experts first, which meant that those expenses were given super-priority status over the other debts.
Federal Government Objects and Seeks Super-Priority
In a subsequent proceeding, the Federal Government objected and sought to have its charges paid first. It sought to vary the initial order on the ground that it had failed to recognize its priority interest in unremitted source deductions, which represented the portion of remuneration that employers are required to withhold from employees and remit directly to the Canada Revenue Agency.
Lower Courts Reject Government’s Motion
In 2017, the Court of Queen’s Benchheard the Government’s motion to vary the initial order. While the court agreed to hear the motion based on the discretion and flexibility conferred by the CCAA, the motion was dismissed on the ground that s. 227(4.1) of the Income Tax Act (“ITA”) creates a security interest that can be subordinated to court‑ordered super-priority charges.
The Government appealed to the Alberta Court of Appeal, which dismissed the appeal. While it was divided as to whether the super-priority charges had priority over the Government’s claim, the majority of the court agreed with the motion judge that s. 227(4.1) of the ITA created a security interest.
Government Appeals to Supreme Court of Canada
The Federal Government appealed to the Supreme Court of Canada.
The court began by offering a summary of the purpose of the legislation, stating:
“The CCAA works by creating breathing room for an insolvent debtor to negotiate a way out of insolvency. Upon an initial application, the supervising judge makes an order that ordinarily preserves the status quo by freezing claims against the debtor while allowing it to remain in possession of its assets in order to continue carrying on business. During this time, it is hoped that the debtor will negotiate a plan of arrangement with creditors and other stakeholders. The goal is to enable the parties to reach a compromise that allows the debtor to reorganize and emerge from the CCAA process as a going concern.”
It further observed:
“The most important feature of the CCAA — and the feature that enables it to be adapted so readily to each reorganization — is the broad discretionary power it vests in the supervising court. Section 11 of the CCAA confers jurisdiction on the supervising court to “make any order that it considers appropriate in the circumstances”. This power is vast.”
Supreme Court of Canada Dismisses Government’s Appeal
As such, the majority of the Supreme Court of Canada ultimately dismissed the Government’s appeal, finding that it did not need todefinitively determine if the Federal Government fell within the legislation’s definition of “secured creditor”. Rather, the court affirmed the lower court’s order pursuant to its discretionary powers, stating:
In the result, the appeal was therefore dismissed.
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