THE BUSINESS OF INSOLVENCY AND BANKRUPTCY ACT SYSTEM PREVAILS

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Introduction

The administration of the Canadian insolvency and bankruptcy system and the enforcement of the insolvency and bankruptcy act is delegated to the Office of The Superintendent of Bankruptcy (OSB). The Governor in Council appoints the Superintendent of Bankruptcy (Superintendent) “…to hold office during good behaviour for a term of not more than five years…”. The current Superintendent is Elisabeth Lang.

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The OSB is a self-funding federal government agency. It must fund itself from the insolvency process and system in Canada. It earns its revenue mainly from:

1. The fees charged for the licensing of individual and corporate licensed insolvency trustees (formerly called trustees in bankruptcy) (Trustee).
2. Filing fees for the registration of all insolvency files in Canada.
3. The levy is payable out of dividends paid to creditors by a Trustee to help defray the Superintendent’s expenses of supervising the Canadian insolvency system. The levy is mandated by section 147 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA).

That is how the government business side of the Canadian insolvency and bankruptcy act system works. The rate of levy is a sliding scale according to Rule 123 of the BIA as follows:

Full administration bankruptcy

• Five percent, if the amount of payments is $1,000,000 or less.
• 5% of the first $1,000,000, plus one and one-quarter per cent of the amount in excess of $1,000,000, if the amount of payments exceeds $1,000,000 but is not more than $2,000,000.
• Five percent of the first $1,000,000, one and one-quarter percent of the second $1,000,000, plus one-quarter of one percent of the amount in excess of $2,000,000, if the amount of payments exceeds $2,000,000.

In a proposal, the levy is the same as above, except for distributions over $2 million, there is no further levy collected on the excess.

The rate of levy payable for a streamlined personal bankruptcy, called a summary administration, is:

• 100 percent, if the amount of payments is $200 or less; or
• 100 percent of the first $200 plus zero percent of the amount in excess of $200, if the amount of payments exceeds $200.

The challenge to the levy

I want to describe to you the case of Superintendent of Bankruptcy v Business Development Bank of Canada, 2019 MBCA 72 (CanLII). This is an appeal to the Court of Appeal of Manitoba from the ruling of the lower court.

Topsyn Flexible Packaging Ltd. (the insolvent) is a bankrupt company. The Trustee made a payment from the sale of assets to the secured creditor, Business Development Bank of Canada (BDC) on account of its secured debt. The lower court judge on hearing the evidence ruled that the levy was not payable to the Superintendent by the Trustee for the payment made to BDC. The Superintendent appealed that decision.

The Superintendent’s position was that the lower court erred in deciding that the Trustee was not required to hold back the levy payable to the Superintendent from the funds paid to BDC.

History

The insolvent first filed a Notice of Intention To Make a Proposal. During those proceedings, the Court issued various vesting orders approving the insolvent selling its assets. The cash received from the sales was paid over to the Trustee as mandated by the Court Orders. The cash stood in place of the assets and the Trustee held the cash pending the determination as to who was entitled to the money and in what priority.

Ultimately the insolvent could not make a viable Proposal and was deemed to have filed an assignment in bankruptcy.

After falling into bankruptcy, the Trustee paid over the net proceeds from the deals to BDC (as well as Royal Bank of Canada, another secured creditor) (RBC). The Trustee also kept back the levy that should be paid.

The BDC motion

Ultimately, BDC filed motion materials on its application to the Court that the levy in favour of the Superintendent is not payable relative to funds paid to BDC as well as RBC as secured creditors of the insolvent.

The approval and vesting orders likewise ordered the insolvent to pay over the net sale proceeds to the Trustee, to be held pending a decision regarding priority.

The lower court made the following findings in deciding that the levy was not payable:

• When it made the repayments to BDC and RBC, the Trustee was acting neither as a representative for BDC or RBC nor as trustee in bankruptcy of the insolvent.
• The secured creditors and the Trustee believed that the funds held from the sale of assets from the approval and vesting orders were being kept in escrow for the secured creditors, subject only to determine who had priority for payment as between BDC and RBC.

The appeal court analysis

This lower court decision is just plain wrong. From my perspective, the issue was decided many years ago. The OSB’s position through its Directive No. 10, which has been updated over the years, is quite clear. The OSB directive on this point is its Directive No. 10R.

Although directives are not law, they do outline the OSB’s interpretation and position on BIA issues. This directive states that the levy is payable on all distributions made, with only two exceptions. The exemptions are:

• When the Trustee has actually functioned as the agent pr receiver in a separate but related engagement for a secured creditor in selling the assets.
• When the Trustee actually redeems, or buys out the security, within the definition of section 128(3) of the BIA.

Neither of those exceptions took place in this case.

The appellate court looked at section 147 of the BIA and Directive No. 10R. The appellate court said that Parliament’s objective is for all secured creditors that get payments from an insolvency proceeding under the BIA pays the levy. The appeallate court said that had Parliament planned that such payments to secured creditors were to be excluded from the application of s. 147, such a provision would have been included in the statute. No such exception exists in the BIA.

The appeal court also went through a very thorough analysis or previous case law. That level of detail is beyond the scope of my Brandon’s Blog. You can read the appeal court decision by clicking here if you like.

The appeal court decision

The appeal court said that the lower court judge made 2 mistakes which led him to discover that the levy is not payable in this situation.

• The first mistake was in finding that the net sale proceeds were being held by the Trustee in escrow as opposed to in its role as trustee in bankruptcy.
• The second mistake is highlighted by the fact that he made no findings concerning the existence of an escrow contract, its terms, the nature of the relationship produced by it, or exactly how that arrangement might bypass the requirements for the Trustee to deduct the levy and remit it to the OSB.

The appeal court, therefore, allowed the OSB’s appeal and the Trustee will have to remit the levy to the OSB on payments made to BDC and RBC.

There was always a simple fix

The simple fix is really easy. A bankruptcy trustee needs to obtain an independent legal opinion on the validity and enforceability of the security held by creditors claiming to be secured. The Trustee should get that opinion as early on in the bankruptcy administration as possible.

Once the Trustee has the opinion that the security is good, the Trustee can then approach the secured creditor(s) to see if they wish to retain that firm to act on the secured creditor’s behalf either as its agent or as a receiver. That is a separate appointment under the insolvency and bankruptcy act system.

Once appointed separately by the secured creditor, the payment made to the secured creditor by its agent or receiver, does not attract the levy. The secured creditor did not rely on the bankruptcy process to produce the payment to it, so no levy is payable. This has been our standard well-established way of dealing with such a situation forever.

Summary for insolvency and bankruptcy act

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