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Insolvency Strategies on Construction Claims

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Title: Insolvency Strategies on Construction Claims


1
Insolvency Strategies on Construction Claims

2
Trust Issues on Insolvency
  • Revenue Canadas Super Priority

3
Liquidation Remedy
Federal BIA
Trust Issues
S. 68 CLA Super-Priority
Federal CCAA
Provincial CLA
Livent Case Study
4
What is Super-Priority?
5
S. 224(1.2) Income Tax Act
  • Notwithstanding any other provision of this Act,
    the Bankruptcy Act, any other enactment of
    Canada, any enactment of a province or any law,
    where the Minister has knowledge or suspects that
    a particular person is or will become, within 90
    days, liable to make a payment

6
S. 224(1.2) Income Tax Act
  • (a) to another person who is liable to pay an
    amount assessed under subsection 227(10.1) or a
    similar provision, or to a legal representative
    of that other person (each of whom is in this
    subsection referred to as the "tax debtor"), or
  • (b) to a secured creditor who has a right to
    receive the payment that, but for a security
    interest in favour of the secured creditor, would
    be payable to the tax debtor,

7
S. 224(1.2) Income Tax Act
  • the Minister may, by registered letter or by a
    letter served personally, require the particular
    person to pay forthwith, where the moneys are
    immediately payable, and in any other case, as
    and when the moneys become payable, the moneys
    otherwise payable to the tax debtor or the
    secured creditor in whole or in part to the
    Receiver General on account of the tax debtor's
    liability under subsection 227(10.1) or a similar
    provision,

8
S. 224(1.2) Income Tax Act
  • and on receipt of that letter by the particular
    person, the amount of those moneys that is
    required by that letter to be paid to the
    Receiver General shall, notwithstanding any
    security interest in those moneys, become the
    property of Her Majesty and shall be paid to the
    Receiver General in priority to any such security
    interest.

9
Constitutional Question
  • Does the manner in which moneys are obtained
    pursuant to s. 224(1.2) and (1.3) of the Income
    Tax Act constitute an infringement of the
    jurisdiction of the Provincial Legislature with
    respect to the regulation of property and civil
    rights pursuant to s. 92(13) of the Constitution
    Act, 1867, or any other provincial power under
    that Act, so that the manner in which moneys are
    obtained or any part of it is ultra vires the
    Parliament of Canada?

10
In Other Words
  • Did the federal government exceed its
    constitutional powers in enacting the
    super-priority garnishment provisions of the
    Income Tax Act?

11
TransGas Ltd. v. Mid-Plains Contractors Ltd.
(1994), 18 C.L.R. (2d) 157 (S.C.C.)
  • Supreme Court of Canadas answer, in its
    entirety
  • No.

12
After Trans-Gas
  • S. Tatrallyay paper, (1995)
  • Some hope to be found in the following
    argument
  • Lien Claimants who have status of purchaser pro
    tanto cannot be defined as a holder of a security
    interest and should be exempt from Revenue
    Canadas super-priority

13
Then, in 1996Alberta (Treasury Branches) v.
M.N.R. (1996), 133 D.L.R. (4th) 609 (S.C.C.)
  • Issue priority between garnishment and general
    assignment of book debts
  • S.C.C Conditional assignment is a security
    interest
  • Super-priority applies
  • Garnishment takes priority

14
S. Tatrallyay (1998)
  • So much for some hope!
  • However, Supreme Court of Canadas Sparrow
    decision gives rise to a thin ray of hope

15
Royal Bank of Canada v. Sparrow Electric Corp.
(1997), 143 D.L.R. (4th) 385 (S.C.C.)
  • Income Tax Act, ss. 227(4) and (5)
  • Employer who deducts source deductions deemed to
    hold such deductions in trust for Her Majesty
  • Act does not provide for super-priority for
    deductions similar to s. 224(1.2)
  • Deemed trust of ss. 227(4) and (5) has no
    priority over any other deemed trust

16
Royal Bank of Canada v. Sparrow Electric Corp.
(1997), 143 D.L.R. (4th) 385 (S.C.C.)
  • In cases of competing deemed trusts, priority
    goes to trust that attached or crystallized
    first
  • Therefore where tax debtor has been paid and
    paid neither Revenue nor suppliers such that s.
    224(1.2) priority is not available, suppliers
    might argue that their trust crystallized first
    and have priority over Revenue

17
  • Tatrallyay, 1998
  • Obviously the scenario is an unlikely one and
    the circumstances in which it might apply may
    never arise. Nevertheless as counsel for lien
    claimants we are reduced to finding what cold
    comfort we can and this was the best that I could
    offer.

18
Only to be followed byPaper by G.W. MacDonald,
Q.C.(1999), 47 C.L.R. (2d) 112
  • Thin ray of hope as a result of Sparrow turned
    out to be the headlight of a train bearing the
    most recent legislative amendment obtained by
    Revenue Canada to protect its unfettered priority
    rights.

19
Amendments to Income Tax Act in Response to
Sparrow
  • Every person who deducts or withholds an
    amount  under this Act is deemed, notwithstanding
    any security interest (as defined in subsection
    224(1.3)) in the amount  so deducted or withheld,
    to hold the amount separate and apart from the
    property of the person and from property held by
    any secured creditor (as defined in subsection
    224(1.3)) of that person that but for the
    security interest would be property of the
    person, in trust for Her Majesty and for payment
    to Her Majesty in the manner and at the time
    provided under this Act.

20
Amendments to Income Tax Act in Response to
Sparrow
  • Notwithstanding any other provision of this Act,
    the Bankruptcy and Insolvency Act , any other
    enactment of Canada, any enactment of a province
    or any other law, where at any time an amount
    deemed by subsection 227(4)  to be held by a
    person in trust for Her Majesty is not paid to
    Her Majesty in the manner and at the time
    provided under this Act, property of the person
    and property held by any secured creditor of
    that person that but for a security interest
    would be property of the person, equal in value
    to the amount  so deemed to be held in trust is
    deemed

21
Amendments to Income Tax Act in Response to
Sparrow
  • (a) to be held, from the time the amount was
    deducted or withheld by the person, separate and
    apart from the property of the person, in trust
    for Her Majesty whether or not the property is
    subject to such a security interest, and
  • (b) to form no part of the estate or property of
    the person  from the time the amount was so
    deducted or withheld, whether or not the property
    has in fact been kept separate and apart from the
    estate or property of the person and whether or
    not the property is subject to such a security
    interest

22
Amendments to Income Tax Act in Response to
Sparrow
  • and is property beneficially owned by Her Majesty
    notwithstanding any security interest in such
    property  and in the proceeds thereof, and the
    proceeds of such property shall be paid to the
    Receiver General in priority to all such security
    interests.

23
Result
  • No party, including secured creditors, can defeat
    Revenue Canadas super-priority
  • Donnie Brasco fuggedaboutit

24
But What About Conflict between Federal BIA and
Federal ITA?
  • Case Study
  • Metal Fabricating Construction Ltd. (Trustee
    of) v. Husky Oil Operations Ltd.
  • (1997), 37 C.L.R. (2d) 159 (Sask. C.A.)

25
Facts I
  • Construction company gave bank general assignment
    of present and future book debts
  • Contractor became indebted to company
  • Company became bankrupt before being paid by
    contractor

26
Facts II
  • After bankruptcy, Revenue Canada sent requirement
    to pay notice to contractor under s. 224(1.2)
    Income Tax Act in respect of moneys deducted by
    company from its employees wages but not
    remitted

27
Trustees Argument
  • Section 71(2) of the BIA vested title to the
    money in question to the trustee
  • Revenue Canada has nothing to attach by serving
    the requirement to pay notice

28
Judgment
  • In order for Minister to be able to issue s.
    224(1.2) notice, particular person must be held
    liable to make payment to another person
  • After bankruptcy, contractor was liable to pay
    trustee

29
Judgment
  • Trustee, as companys legal representative, is
    person for purposes of s. 224(1.2)
  • After bankruptcy, trustee became liable for
    source deductions

30
Judgment
  • S. 224(1.2) applies notwithstanding BIA
  • Trustee has to ignore other provisions of Act
    when facing a s. 224(1.2) requirement to pay
    notice
  • No inconsistency between s. 224(1.2) ITA and s.
    71(2) BIA

31
Judgment
  • Minister, not trustee in bankruptcy, was entitled
    to amount owed by company

32
Conclusion
  • 1. Revenue Canada is not to be confronted, it is
    to be negotiated with.
  • A half loaf is better than no loaf at all.
  • 2. To make matters worse
  • Breach of trust issues may survive discharge from
    bankruptcy
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