“Anti-deprivation” rule confirmed

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Commercial agreements often contains provisions that set out what happens if one of the parties defaults. These provisions, sometimes called “ipso facto” clauses, might give the innocent party the right to end the agreement, or might set out an agreed additional amount (“liquidated damages”) that the innocent party can claim as a result of the other party’s default.

Although otherwise valid, such clauses are not enforced on the bankruptcy of the defaulting party, because of the “anti-deprivation” rule: contractual clauses that have the effect of changing the bankruptcy priority rules are unenforceable in bankruptcy. If for example such a clause awards the innocent party an additional amount as liquidated damages, the effect of that in bankruptcy would be to take that amount out of the hands of the other creditors. The anti-deprivation rule prevents this.

In a recent Supreme Court of Canada decision, Chandos Construction v. Deloitte, a creditor seeking to uphold an ipso facto clause came up with a novel attempt to avoid the anti-deprivation rule. The Bankruptcy and Insolvency Act sets out a number of provisions which prohibit specific types of ipso facto clauses, such as s. 84.2 which invalidates clauses that grant an accelerated payment because of someone’s bankruptcy. In Chandos, the creditor argued that, taken together, these provisions “occupied the field” so that, unless the Bankruptcy and Insolvency Act specifically prohibits an ipso facto clause, that clause should be upheld. The creditor argued that the general anti-deprivation rule had been replaced by prohibitions only for specific categories of clauses; if your clause didn’t fit into one of those categories, then it should be upheld.

The creditor initially enjoyed success with this argument: a judge of the Alberta Queen’s Bench agreed with them and upheld their claim based on the ipso facto clause. The Alberta Court of Appeal disagreed, however, applying the anti-deprivation rule to strike down the claim. Unfortunately for the creditor, the result did not change in the Supreme Court of Canada: although one judge dissented, the majority held that the various Bankruptcy and Insolvency Act provisions dealing with particular ipso facto clauses did not do away with the general anti-deprivation rule, which continued to apply to all other ipso facto clauses.

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