Century Services Inc v Canada (Attorney General)

INTRODUCTION

In the December 2010 decision of Century Services Inc v Canada (Attorney General), 2010 SCC 60, the Supreme Court of Canada for the first time directly interpreted key provisions of the Companies’ Creditors Arrangement Act (the CCAA), Canada’s “statute of choice” for complex insolvencies and restructurings.

The judgment of Canada’s highest court is notable for the following reasons:

• it reconciled an apparent conflict between the CCAA and the Excise Tax Act (the ETA), which lower courts across Canada had previously interpreted as conferring a priority for goods and services taxes (GST) on the Crown in CCAA proceedings; and

• more importantly for insolvency practitioners, who are regularly required to seek the court’s assistance in resolving the novel and often complex challenges that arise in a CCAA restructuring, it addressed the scope of the court’s jurisdiction and discretion when supervising a CCAA reorganisation.

BACKGROUND FACTS

The appellant, Century Services Inc, was the major secured creditor of a debtor corporation that had sought protection under the CCAA in an attempt to restructure its business and financial affairs. The debtor had collected approximately C$300,000 in GST, which it had not yet remitted to the Crown.

In the course of the debtor’s attempted reorganisation, the British Columbia Supreme Court ordered that this unremitted GST be placed in the monitor’s trust account until the outcome of the reorganisation was known. (A company that fails to make a satisfactory arrangement under the CCAA, will most often end up liquidating under the Bankruptcy and Insolvency Act (the BIA)).

When the debtor concluded a successful reorganisation was not possible and sought leave from the court to make an assignment in bankruptcy under the BIA, the Crown moved for immediate payment of the unremitted GST.

The Crown’s application required the Supreme Court of British Columbia to determine whether the Crown’s priority for unremitted GST under the ETA operated in a failed CCAA proceeding. This involved, in part, reconciling an apparent conflict between the ETA and the CCAA (the ETA provided in section 222(3) for a deemed trust in favour of the Crown in respect of GST, but created an exception only where the BIA applied, while the CCAA provided in section 18.3 that statutory deemed trusts do not apply in CCAA proceedings generally).

The British Columbia Supreme Court appeared to follow a line of lower court decisions that held that the section 222(3) deemed trust under the ETA gave the Crown priority over secured claims where the debtor was subject to the CCAA, but not the BIA. The court dismissed the Crown’s application, however, on the basis that it had the authority under the CCAA to stay the Crown when it became clear that the debtor would ultimately file for bankruptcy under the BIA (where the Crown would not have a priority for GST).

The British Columbia Court of Appeal overturned that decision on the basis that the court’s authority under section 11 of the CCAA did not extend to staying the Crown’s application. The Court of Appeal reasoned that once the debtor’s reorganisation efforts had failed, the British Columbia Supreme Court was bound to apply the priority for GST that courts across Canada had previously held applied in CCAA proceedings.

COURT’S REASONS

The Supreme Court of Canada, in a majority decision of seven justices, allowed the appeal of Century Services.

No Crown priority for GST in CCAA proceedings

The majority of the court turned first to the Crown’s priority for GST under the CCAA and the conflict between section 222(3) of the ETA and section 18.3(1) of the CCAA.

The court reversed a line of case law that had interpreted section 222(3) of the ETA as conferring a priority on GST for the Crown in CCAA proceedings. While much of the court’s reasoning on this point focused on past jurisprudence that addressed the apparent conflict, of note was the contextual and purposeful approach employed by the majority in the course of its reasoning. To this end, the majority noted:

• Canada’s lawmakers have shown a willingness to move away from asserting priority for Crown claims in insolvency (except in respect of certain claims, for which the priority is explicitly legislated);

• allowing the Crown access to GST funds in a CCAA while recognising that the Crown lost that priority in a bankruptcy, would encourage statute shopping by secured creditors in cases where their claims were underwater (ie, where these creditors’ claims were better protected in a liquidation under the BIA, their incentives would lie overwhelmingly with avoiding proceedings under the CCAA); and

• giving such key players in an insolvency such skewed incentives against reorganisation would undermine the CCAA’s objectives, which are to avoid the social and economic costs of liquidating a debtor’s assets.

The above reasoning is notable in that, in interpreting section 18.3 of the CCAA in the course of reconciling the conflicting provisions, the majority of the court considered the effect various interpretations had on the CCAA’s wider objectives, and favoured the interpretation that furthered those objectives. In the result, the court concluded that the British Columbia Court of Appeal, and other courts before it, had erred in concluding that the statutory deemed trust for GST under the ETA trumped the CCAA, and held that the Crown does not enjoy priority for unremitted GST under the CCAA.

Broad discretion of a CCAA court

The majority of the court then turned to consider the discretionary power of a court supervising a CCAA restructuring, as it was this power that the British Columbia Supreme Court had relied on in dismissing the Crown’s application in the first instance.

The majority of the court noted the broad authority conferred on a CCAA court and observed that the incremental exercise of judicial discretion has been the primary method by which the CCAA has adapted and evolved to meet contemporary business and social needs.

In respect of that discretion, the majority of the court offered the following guidance:

• a CCAA court’s discretion is primarily grounded in the CCAA itself, through the broad authority conferred under the stay power (found in section 11 of the CCAA);

• the requirements of appropriateness, good faith and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority;

• the court must be cognisant of the various interests at stake in a CCAA restructuring, which can extend beyond those of the debtor and creditors to include employees, directors, shareholders, other commercial parties and, on occasion, broader public interests; and

• in determining what orders should be made in the course of a CCAA restructuring, the key question for the court is whether the order sought will usefully further efforts to achieve the remedial purpose of the CCAA, which is to avoid the social and economic losses resulting from liquidation of an insolvent company.

Applying those guiding principles, the majority held that British Columbia Supreme Court had the authority to stay the effect of the Crown’s enforcement of the GST claim. It reasoned:

… after reorganization under the CCAA failed, creditors would have had a strong incentive to seek immediate bankruptcy and distribution of the debtor’s assets under the BIA. …. [The Supreme Court of British Columbia’s] order staying Crown enforcement of the GST claim ensured that creditors would not be disadvantaged by the attempted reorganization under the CCAA. The effect of [the] order was to blunt any impulse of creditors to interfere in an orderly liquidation. [The] order was thus in furtherance of the CCAA’s objectives to the extent that it allowed a bridge between the CCAA and BIA proceedings. ...The CCAA is silent on the transition into liquidation but the breadth of the court’s discretion under the Act is sufficient to construct a bridge to liquidation under the BIA. The court must do so in a manner that does not subvert the scheme of distribution under the BIA. Transition into liquidation requires partially lifting the CCAA stay to commence proceedings under the BIA. This necessary partial lifting of the stay should not trigger a race to the courthouse in an effort to obtain priority unavailable under the BIA.

Therefore, as it had done in interpreting section 18.3 of the CCAA, the majority again looked to the effect its interpretation of section 11 of the CCAA would have on the CCAA’s wider objectives. In holding that the British Columbia Supreme Court had the authority to stay the Crown’s application, the majority favoured an interpretation of section 11 that furthered those objectives.

While the Century Services case is notable in many respects, its precedential value arguably rests less on what it says about GST priorities, and more on what it says about a court’s discretion under the CCAA.

The CCAA is a skeletal statute, in the sense that it does not prescribe all that is permitted and barred in a CCAA restructuring. It is through the broad discretionary power conferred under section 11 of the CCAA that Canadian courts have been able to make the orders necessary to resolve the novel and often complex challenges that arise in a CCAA restructuring. Indeed, many of the features that are common in Canadian restructurings today, and pivotal to their success – such as DIP facilities and the court-appointed monitor – originated as products of the court’s discretionary jurisdiction, as opposed to the lawmaker’s pen.

Century Services reaffirms that the court’s discretionary power remains an essential aspect of the CCAA, and Canada’s insolvency regime generally. Moreover, it provides guidance on the principles that inform the court’s exercise of that discretion.

It is the opinion of the authors that the majority’s guidance in the Century Services case can only benefit Canada’s insolvency regime. As a starting point, the case assists CCAA courts by affirming that they are equipped with the authority necessary to address the novel issues that will undoubtedly arise in future CCAA proceedings. More importantly, however, the majority’s decision provides an invaluable precedent for insolvency counsel. Going forward, counsel will be able to rely on the Century Services decision to say conclusively that the court has the authority to make innovative orders, where it can be shown that those orders are essential to a successful CCAA restructuring.