Restructuring charges and deemed trust in CCAA proceedings

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Court-ordered restructuring charges on a debtor’s assets are a standard feature of restructuring proceedings, and are routinely granted priority over the security interests of creditors. These charges can include, for example, interim lending charges to permit the debtor to obtain financing during the restructuring, and administration charges to secure the payment of counsel and other professionals.

In Canada v. Canada North Group Inc., 2021 SCC 30, the Supreme Court of Canada considered an appeal regarding whether or not the Companies’ Creditors Arrangement Act, RSC, 1985, c C-36 permits courts to order restructuring charges with priority over the statutory deemed trust in favour of Canada Revenue Agency for unremitted source deductions.

The Court split 5-4, with four different sets of reasons (two for the majority, and two dissents). The majority held that courts have jurisdiction under the CCAA to order restructuring charges with priority over a deemed trust when it is necessary to do so and when it will achieve the objectives of the CCAA.

The Reasons

Justice Côté, in reasons also delivered for Chief Justice Wagner and Justice Kasirer, and Justice Karakatanis, in reasons also delivered for Justice Martin, approached the issue in different ways, particularly in whether it was necessary to characterize the nature of the deemed trust in order to determine the rights that flow from a deemed trust in a CCAA proceeding. Each of Justice Côté and Justice Karakatanis ultimately concluded, however, that s. 11 of the CCAA provides courts with jurisdiction to order restructuring charges with priority over the deemed trust.

Justice Brown and Justice Rowe, in reasons also delivered for Justice Abella, dissented on the basis that the language of the Income Tax Act, RSC 1985, c 1 (5th Supp) creates a deemed trust for unremitted source deductions with “absolute priority” over other claims in CCAA proceedings, including restructuring charges, and that the CCAA does not subordinate deemed trust claims under restructuring charges. Justice Moldaver, in separate dissenting reasons, agreed that the deemed trust takes priority over any restructuring charges ordered pursuant to the CCAA, but decided that it was unnecessary to define the nature of the deemed trust and sufficient to note that the deemed trust provision in the ITA expressly operates despite any other enactment of Canada so as to “stop short” any authority under s. 11 of the CCAA to subordinate the deemed trust.  

Considerations in Deciding to Grant Priority

Importantly, the two sets of reasons for the majority refer to considerations relevant to determining whether it is necessary and appropriate to grant priority to restructuring charges over a CRA deemed trust.

Justice Côté noted that:

  1. Subordination may be necessary when the supervising judge believes that a professional or lender will not act without a super-priority charge.
  2. Although subordinating charges to the deemed trust will often increase the cost and complexity of a restructuring, when the deemed trust is small or known with a high degree of certainty, commercial parties can manage their risks and super-property charges will not be required.
  3. Subordination of the deemed trust has less justification in a liquidating CCAA in which the fundamental objective is to liquidate rather than to rescue a going concern.

Justice Karakatanis noted that, in deciding whether an interim lender’s charge should have priority over a deemed trust, courts can consider:

  1. The factors listed in s. 11.2(4) of the CCAA for guidance, which are factors to be considered in deciding whether to make an order for interim financing.
  2. Whether the interim lender has indicated, in good faith, that it will not lend without ranking ahead of a deemed trust.
  3. The relative amounts of the interim loan and the unremitted source deductions, as interim lenders may not be significantly prejudiced if the amount of unremitted source deductions is small compared to the interim loan.
  4. Whether, and for how long, the Crown allowed source deductions to go unremitted without taking action.
  5. The prospects of success of a restructuring, and whether the CCAA is likely to be used to sell the debtor’s assets.

These various considerations provide important guidance for a court exercising its discretion under the CCAA, and for professionals and interim lenders seeking charges with priority in a CCAA proceeding.  

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