On October 18, 2023, the Court of Appeal of Quebec (the “Court of Appeal”) delivered its judgment in Attorney General of Canada v. Richter Advisory Group Inc.[1] confirming the jurisdiction of courts hearing matters under the Bankruptcy and Insolvency Act (“BIA”) to grant super-priority charges that supersede deemed trusts created in favour of the Crown under section 227(4.1) of the Income Tax Act[2] and its Québec equivalent[3] (the “Deemed Trusts”).
Background
On October 26, 2021, faced with liquidity problems, Chronometriq Inc. and Health Myself Innovations Inc. (the “Debtors”) filed a notice of intention to make a proposal pursuant to section 50.4 of the BIA. On the same date, the Debtors also filed a motion seeking, among other things, authorization for interim financing secured by a super-priority charge as well as a sale and investment solicitation process (the “Motion”). On October 27, 2021, the trial judge allowed the Motion and made an order approving, among other things, the interim financing and the super-priority charge in favour of the lender, with priority over the Deemed Trusts (the “Order”).
Decision of the Court of Appeal
The Honourable Mark Schrager, J.A., writing for the Court of Appeal, affirmed the trial judgment and concluded that under the BIA, the Superior Court had the power to grant super-priority charges ranking ahead of Deemed Trusts.
In its 2021 decision in Canada North, the Supreme Court of Canada (the “SCC”) confirmed the power of the courts hearing matters under the Companies’ Creditors Arrangement Act to order super-priority charges ranking in priority over Deemed Trusts. However, the Canadian courts had not yet had the opportunity to consider the power of a court hearing matters under the BIA to make similar orders.
In this appeal, the tax authorities argued that neither the BIA nor the inherent jurisdiction of the Superior Court authorized it to grant a super-priority charge ranking ahead of the Deemed Trust. The tax authorities also cited procedural breaches of the audi alteram partem rule.
As explained more fully below, the Court of Appeal rejected these three arguments and concluded that (i) the BIA granted the judge the power to make the Order; (ii) in the alternative, the judge could also have based his decision on his inherent jurisdiction; and (iii) there had been no procedural breach in the particular circumstances of the case.
The Superior Court has the power to order super-priority charges under the BIA
The Court of Appeal first confirmed that when granting super-priority charges a judge hearing matters under the BIA has the same powers as a judge hearing matters under the CCAA. These equivalent powers are justified by the fact that:
- the proposal provisions of the BIA serve the same remedial purpose as those in the CCAA: the financial rehabilitation of an insolvent corporate debtor;
- the provisions of both statutes dealing with interim lending are virtually identical (see section 11.2(2) of the CCAA and section 50.6(3) of the BIA); and
- the interpretation of both statutes requires a harmonious approach.[4]
The Court of Appeal referred to the important role played by interim financing in restructuring processes and noted that such financing could very well become unavailable to debtor companies without the protection afforded by a super-priority charge. Ultimately, it rejected the idea that Parliament’s intention could have been to allow the court to grant a super-priority under the CCAA but not under the BIA:
[52] It is self-evident, and has been recognized by the Supreme Court, that without the ability to establish a super priority, financiers would not offer interim or debtor-in-possession (“DIP”) loans. Interim lending charges are an essential ingredient of the restructuring process. The Alberta Court of Appeal noted that 75% of restructurings include interim lending. Thus, the outcome suggested by the Appellants’ reading of the BIA would make interim financing under s. 50.6 BIA unavailable to companies that seek to file a proposal under the BIA. As such, companies with total indebtedness of less than $5 million (i.e., the threshold for the CCAA to be available pursuant to s. 3 CCAA) could not obtain interim financing. This is far from the harmonization to be favoured in applying the two statutes. Moreover, such a state of affairs negates any practical effect or application of s. 50.6 BIA. Parliament does not speak for naught. I do not accept that the Appellants’ interpretation of the BIA is the policy outcome Parliament intended.
[53] I therefore find, on the basis of statutory interpretation, that the judge had the power to issue the Order Under Appeal with respect to the interim financing charge.
Jurisdiction is also based on the inherent jurisdiction of the Superior Court
The Court of Appeal also concluded that the inherent jurisdiction of the judges of the Superior Court would have allowed the Court to grant these super-priority charges under the BIA[5] if its interpretation of the statutory provisions summarized in the previous section were incorrect.
The Court noted that in Canada North, the SCC had based its reasoning largely on section 11 of the CCAA, which gives the supervising judge broad discretionary power.[6]However, it pointed out that the courts’ inherent competence to grant super-priority charges was recognized in both the CCAA and the BIA by insolvency practitioners well before the 2005 amendments to the CCAA that introduced section 11 as it stands today. Thus, the absence of a provision similar to section 11 of the CCAA could not, in and of itself, have deprived the Superior Court of the inherent jurisdiction to make the orders sought. The Court concluded, on the contrary, that the inherent jurisdiction of the Superior Court, hearing matters under the BIA, arises under section 183 of the BIA, article 49 of the Code of Civil Procedure of Quebec, and a consistent line of decisions of the Court of Appeal.[7]
The Court of Appeal confirmed that it is the inherent jurisdiction of the Superior Court that allows the courts to find pragmatic, fair and practical solutions to problems arising from insolvency, whether under the BIA or the CCAA:
[58] In matters of insolvency, courts have held that, as pragmatic problem solvers, they could exercise their inherent jurisdiction to effect a remedy or fill statutory gaps. The jurisprudence has evolved to include substantive law within the purview of the inherent jurisdiction, despite criticism. At the same time, the inherent jurisdiction must be used sparingly and with caution because of its broad and loosely defined nature. Inherent jurisdiction cannot be used in contravention of statutory provisions. It is also limited by the nature of the BIA: [quotation omitted]
[59] In Stephen Francis Podgurski (Re), Chief Justice Morawetz, of the Ontario Superior Court of Justice, delineated a broad definition of inherent jurisdiction in the context of insolvency. Here, too, in the search for a “just and practical response” – and because he found that the inherent jurisdiction of the court is broad and diverse, unlimited in substantive law and exercisable in any situation[55] – he granted a sweeping motion by the Superintendent of Bankruptcy, which had the effect of extending time limits and tolerating more extensive payment defaults in all cases in the context of COVID‑19.
[60] I would point out that inherent jurisdiction attaches to the Superior Court, such that the same inherent jurisdiction exists whether the CCAA or the BIA is applied. Historically, inherent jurisdiction has been exercised more often upon application of the CCAA, presumably because its skeletal nature makes for more gaps than is the case for the BIA, which offers a detailed rules-based regime. That being said, when a gap is identified upon applying the BIA, the inherent jurisdiction allows the gap to be filled when and as appropriate.
No violation of the audi alteram partem rule
The tax authorities also asserted a breach of the audi alteram partem rule because the motion had been served on the day before it was to be presented and the judge denied their request for an adjournment of the hearing. However, the Court of Appeal confirmed that in insolvency cases, proceedings like these are often filed and served on short notice due to the urgency of the request, and that the judge’s decision to deny the adjournment, in the circumstances, was not unreasonable.
Conclusion
In confirming that, under the BIA, the Superior Court has the power to order super-priority charges that rank ahead of the Deemed Trusts, the Court of Appeal has confirmed access to and made more accessible the interim financing required by debtor companies engaged in restructuring under the BIA. This decision reaffirms the principles set forth by the SCC, namely, that the BIA and the CCAA must be interpreted in a harmonious manner. The Court of Appeal also reiterated that the inherent jurisdiction of the judges of the Superior Court, which has long been recognized in the case law, applies to matters heard under the CCAA as well as under the BIA. The CCAA may therefore be relied on to fill the gaps in each of those statutes in order to facilitate the efficient restructuring of struggling companies.
