While the Bankruptcy and Insolvency Act, RSC 1985, c B-3 provides that the costs of administration of a bankruptcy have priority to proceeds from the property of a bankrupt, this priority is subject to other claims, including, importantly, the rights of secured creditors. For this reason, when there are potentially secured creditors of an insolvent person with significant claims relative to the assets, a trustee should arrange to protect itself before incurring fees and expenses to administer an estate.
In Golfside Ventures Ltd (Re), 2023 ABKB 86, a trustee sought a first charge over the assets of a bankrupt to secure payment of its fees and expenses ahead of a builders’ lien after it had already incurred fees and expenses.
The Court noted that a builders’ lien holder is a secured creditor entitled in the Bankruptcy and Insolvency Act (BIA) to priority over a trustee’s fees and expenses. While the trustee in Golfside had arranged for a postponement of the claim of another secured creditor, it was unaware of the existence of the builders’ lien claim as it had not been registered before the bankruptcy and the creditor’s Statement of Claim did not clearly mention the existence of the lien. The trustee was also unaware that the amount claimed would exceed the value of the bankrupt’s land, its only asset. The Court held that, in the circumstances, “even the most prudent trustee” would not have been alerted to the existence of the lien.
The Court further held that in these circumstances it could rely on its inherent jurisdiction to grant a charge. Courts can only rely on inherent jurisdiction when the BIA is silent in relation to a point or has not exhaustively dealt with a point. Although the BIA deals with the priorities between a secured claim and a trustee’s fees and expenses, the Court held that the BIA does not deal with the situation where a trustee makes inquiries about a bankrupt’s finances and then, after the trustee’s appointment, is alerted to an additional secured claim. The Alberta Builders’ Lien Act (now replaced by the Prompt Payment and Construction Lien Act), by creating a secured claim even before registration of the lien, creates a “silent security interest” that can unfairly disadvantage the most prudent trustee.
The Court balanced the competing interests and ultimately exercised its inherent jurisdiction to grant a priority charge securing the fees and expenses of the trustee. Given that the charge was appropriate in Golfside because it was “difficult to say what else the Trustee could or ought to have done to protect its interests,” it is unlikely a trustee will be able to obtain a charge to gain priority over the claim of a secured creditor when that claim could have been discovered by due diligence.