In the recent landmark decision of The Guarantee Company of North America v. Royal Bank of Canada, a unanimous five judge panel of the Ontario Court of Appeal provided guidance as to whether statutory trusts created by provincial legislation, namely the Construction Lien Act ("CLA"), would be excluded from distribution to creditors in the context of insolvency proceedings by application of the Bankruptcy and Insolvency Act ("BIA").
Background to the Dispute
A-1 Asphalt Maintenance Ltd. ("A-1"), a paving business, filed a Notice of Intention to make a proposal under the BIA in 2014. A-1 was subsequently deemed a bankrupt failed to file a proposal and a Receiver was appointed by the Court. At the time of bankruptcy, A-1 had major ongoing projects with municipalities and outstanding accounts receivables. Ultimately, $675,372.27 in receivables were collected and deposited by the Receiver into a segregated account, as directed by the bankruptcy judge. However, funds received from other projects were commingled into the account, although the amounts deposited for the respective projects remained identifiable due to the Receiver's thorough accounting.
There was no dispute that the $675,372.27 in receivables were "trust funds" for the purposes of s. 8 of the CLA. However, a priority dispute arose between the secured creditors as to whether these funds should be distributed pro-rata to A-1's secured creditors or excluded from A-1's property for distribution pursuant to s. 67 of the BIA.
The Receiver brought forward a motion for advice and directions to settle the priority dispute. The motion judge determined that the trust funds created by the CLA were not excluded from A-1's estate as they did not meet the requirements of a common law trust.
Provincial Statutory Trusts and the Constitutional Issue
On appeal, the Bank called into question the constitutionality of s. 8(1) by arguing that its purpose is to alter priorities in the context of a bankruptcy, a power falling under federal jurisdiction. This prompted the Court to consider whether a conflict existed between the CLA and the BIA, triggering the application of the doctrine of federal paramountcy.
First, the Court of Appeal determined that the s. 8(1) trusts were well-within the province's legislative jurisdiction and an "integral part of the scheme of holdbacks, liens and trusts" protecting "the rights and interests of those engaged in the construction industry".
Second, relying on the Supreme Court of Canada decision in British Columbia v. Henfrey Samson Belair Ltd., the Court of Appeal confirmed that, for provincial statutory trusts to survive bankruptcy, they must meet the common law definition of a trust, "namely trust that meet the three certainties": certainty of intention, certainty of subject matter and certainty of object.
Therefore, only where a provincial statutory trust does not satisfy this definition, will it be in conflict with the BIA and rendered inoperative by virtue of the paramountcy doctrine.
Section 8(1) of the CLA Satisfies the Common Law Definition of a Trust
The Ontario Court of Appeal turned to the language of s. 8(1) of the CLA to determine whether the trust created by provincial statute met the three certainties of a common law trust.
The Court easily found that the wording of the statute supplied the required certainty of intention, i.e. that the "trustee [was] placed under an imperative obligation": s. 8(1) provides that the trustee contractor or subcontractor is not entitled to appropriate funds owing to a contractor or subcontractor for materials or services rendered until all subcontractors or suppliers had been paid for these materials or services.
Moreover, the statutory trust created by the CLA were for the benefit of subcontractors or suppliers in the construction industry – thereby meeting the criteria for certainty of objects.
The issue of whether certainty of subject matter was present was carefully considered by the Court of Appeal. While legislation may not always confer a trust over assets of a specific nature, the Court found that s. 8(1) "designated precisely what property the trust is meant to encompass", specifically, "all amounts, owing to a contractor or subcontractor, whether or not due or payable". The amounts owed to A-1 were properly construed as debts (a chose in action) which can be the subject matter of a trust.
Further, notwithstanding the fact that the funds at issue had been deposited in the same account as other project funds, they had not been converted for other uses and never ceased to be traceable to the specific projects. As such, this type of commingling did not defeat the element of certainty of subject matter from being made out.
The appeal was therefore allowed. By application of section 67(1)(a) of the BIA, the funds were protected by the trust and excluded from the assets available to A-1's creditors for distribution.
In the face of inconsistent jurisprudence on this issue, this decision has provided an unequivocal answer that statutory trusts created by provincial legislation can survive bankruptcy. That being said, priority disputes are likely to continue where it is unclear that statutory trusts meet the three certainties of a common law trust.