Deloitte & Touche Inc., Liquidator of Shoppers Trust Corporation v. Shoppers Trust Company

Deloitte & Touche Inc., Liquidator of Shoppers Trust Corporation appointed pursuant to the Winding-up and Restructuring Act, R.S.C. 1985, c. W-11 v. Shoppers Trust Company [Indexed as: Shoppers Trust Corp. (Liquidator of) v. Shoppers Trust Co.]

74 O.R. (3d) 652

[2005] O.J. No. 1081

Docket: C41924

Court of Appeal for Ontario,

Moldaver, Blair and LaForme JJ.A.

March 24, 2005

Bankruptcy and insolvency -- Liquidation -- Priorities -- Winding up -- Distribution of surplus proceeds of liquidation of assets -- Fundamental principle of pari passu distribution -- Fundamental principle of insolvency law that in case of insolvent estate, all money being realized should be applied equally and rateably in payment of debts as they existed at date of winding-up -- Winding-up and Restructuring Act, R.S.C. 1985, c. W-11. [page653]

In the early 1990s, Shoppers Trust Corp., a loan and trust company, fell into financial difficulties and, in August 1992, an order was made under the Winding-up Act that it be liquidated with an effective winding-up date of July 31, 1992. For the purposes of the liquidation, the assets of Shoppers Trust were divided into a "Guarantee Fund" of moneys held for the benefit of depositors and the "Company Fund" of all other assets. The Company Fund was subject to the unsatisfied claims of the depositors and to the claims of the Crown, secured creditors, unsecured creditors, and the subordinated noteholders. The respondent Phillip Daniels, who held 75 per cent of the shares of Shoppers Trust, held subordinated notes which were expressed to be "subordinated in right of payment to all other indebtedness of the corporation". In the winding-up proceedings, Houlden J. made an order on March 10, 1993, authorizing and directing Deloitte & Touche Inc. ("the Liquidator") to calculate interest due on provable claims to April 24, 1992. Houlden J. made this order based on the recommendation of the Liquidator and with the support of Canada Deposit Insurance Corporation ("CDIC"), which was subrogated to the rights of the insured depositors. In support of the motion leading to the March 10, 1993 order, the Liquidator filed a memorandum stating that if there was a surplus after all other claims on the Company Fund have been satisfied, then claims for interest accruing to July 31, 1992 would be considered. The Liquidator, however, did not expect there would be any surplus.

The Liquidator's expectation turned out to be incorrect. Because of delays in the administration of the estate, interest accumulated on the liquidated assets, and the Liquidator found itself with unanticipated extra funds of approximately $6 million available for distribution. The Liquidator moved for directions as to how the unanticipated extra funds should be distributed. On the motion, Ground J. accepted Daniels' argument that the Liquidator had in effect committed that it would not seek to pay interest to the Deposit Creditors and Ordinary Creditors to the date of the winding-up, unless it had been satisfied there was "a surplus after all other claims on the Company Fund". Ground J. concluded that there was no such "surplus" because the words "all other claims" must include the subordinated debt, and no amounts had yet been paid on those claims. Accordingly, he ruled that the March 10, 1993 order should not be varied. CDIC appealed.

Held, the appeal should be allowed.

The issues to be determined were whether, as a matter of law, the Deposit Creditors and Ordinary Creditors were entitled to prove their claims, including any interest component and, if so, whether the terms of the March 10, 1993 order precluded them from doing so in priority to the claims of the subordinated noteholders. The motion judge failed to address these questions, and this led him astray in three respects.

First, he erred in treating the proceeding before him as a motion to vary, governed by the provisions of rule 59.06 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rather than approaching it as the motion for directions.

Second, he was mistaken in viewing the right of a creditor to claim the full amount of principal plus interest due and owing to the date of the winding-up as a "usual practice" rather than as the governing principle of insolvency law that it is. The fundamental principle of insolvency law is that in the case of an insolvent estate, all the money being realized should be applied equally and rateably in payment of the debts as they existed at the date of the winding-up. The conclusion that the provisions of an order made ten years earlier "trumped" the governing principles of law at the time of the motion for directions -- particularly where circumstances had evolved that no one envisioned -- constituted an error in principle. The law is that claimants [page654] are entitled to prove their claims for principal and interest to the date of the winding-up. The law also is -- and the terms of the respondent's contract expressly provided -- that the claims of subordinate noteholders are subsidiary to all other claims in the insolvency. The respondent subordinated noteholder was not entitled to recover any of his principal or interest until those other claims had been paid in full.

Finally, Ground J. misconceived the effect of the memorandum filed by the Liquidator at the time of the motion before Justice Houlden; he placed too much emphasis on and misconstrued its wording. As a result, he failed to give effect to the fundamental principle of pari passu distribution underlying insolvency law. Further, he mistakenly treated the Liquidator's memorandum as if it were an agreement precluding the Liquidator from later proposing a different scheme of distribution regardless of the funds subsequently available and regardless of the priorities and legal principles governing that distribution.

APPEAL from the order of Ground J. dated January 30, 2004, made on a motion for directions, cited at 2004 20231 (ON SC), [2004] O.J. No. 362, 3 C.B.R. (5th) 155 (S.C.J.).

Cases referred to Canada (Attorney General) v. Confederation Trust Co. (2003), 2003 18103 (ON SC), 65 O.R. (3d) 519, [2003] O.J. No. 2754, 44 C.B.R. (4th) 198 (S.C.J.); Humber Ironworks & Shipbuilding Co., Warrant Finance Co.'s Case (Re) (1869), 4 Ch. App. 643, 38 L.J. Ch. 712, 20 L.T. 859, 17 W.R. 780; McDougall (Re), [1883] O.J. No. 63, 8 O.A.R. 309; Principal Savings & Trust Co. v. Principal Group Ltd. (Trustee of) (1993), 1993 ABCA 313, 14 Alta. L.R. (3d) 442, 23 C.B.R. (3d) 1, 109 D.L.R. (4th) 390, [1994] 2 W.W.R. 723 (C.A.) Statutes referred to Corporations Act, R.S.O. 1990, c. C.38 Loan and Trust Corporations Act, R.S.O. 1990, c. L.25 Winding-up and Restructuring Act, R.S.C. 1985, c. W-11, ss. 5, 71(1) [as am.] Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 59.06

Jeffrey Leon and Edmund Lamek, for appellant, Canada Deposit Insurance Company. John B. Laskin and Cynthia Tape, for respondent, Phillip Daniels.

The judgment of the court was delivered by

BLAIR J.A.: --

Background

[1] Shoppers Trust Corporation was a loan and trust company, incorporated under the Ontario Loan and Trust Corporations Act. [See Note 1 at the end of the document] [page655] It invested in mortgages, held and leased commercial real estate properties, and administered a portfolio of mortgage-backed securities. By 1992, it was the second-largest enterprise of its kind in Canada.

[2] Like many enterprises with a focus on real estate, however, Shoppers fell into financial difficulties in the early 1990s. On March 6, 1992, the Ontario Superintendent of Deposit Institutions took possession and control of its assets and it was shortly ordered to be wound up under the Ontario Corporations Act [See Note 2 at the end of the document]. When investigations confirmed that Shoppers Trust was insolvent, the Liquidator applied for an order under the federal winding-up legislation. On August 19, 1992, Mr. Justice Houlden granted an order under the Winding-up Act, now the Winding-up and Restructuring Act [See Note 3 at the end of the document], directing that the Corporation be liquidated, with an effective winding-up date of July 31, 1992.

[3] At the time of these events, everyone believed there would be insufficient funds from the liquidation of the assets of the Corporation to satisfy in full the claims of depositors, the Crown, and secured and unsecured creditors. That belief has turned out to be somewhat pessimistic, however. Because of various delays in the administration of the estate -- the reasons for which are not pertinent to this appeal -- a significant amount of interest has accumulated on the liquidated assets. The Liquidator finds itself with unanticipated extra funds of approximately $6 million available for distribution.

[4] At issue on this appeal is who is entitled to receive those funds.

[5] The appellant, Canada Deposit Insurance Corporation ("CDIC") -- which is subrogated to the rights of insured depositors whose claims it has paid -- asserts that the extra funds should be disbursed to the deposit creditors and ordinary creditors of the Corporation to the extent there is unpaid principal and unpaid interest outstanding to the date of the winding-up. The respondent, Mr. Daniels, submits that the additional moneys should be paid towards the principal outstanding on the sub debt held by him and other members of his family, notwithstanding that the claims of the subordinate noteholders rank behind the claims of all other creditors in the insolvency. Mr. Daniels makes this submission on the strength of an order made by Justice Houlden on March 10, 1993, authorizing and directing the Liquidator to calculate interest due on provable claims to April 24, 1992 [page656] (approximately three months before the effective winding-up date of July 31, 1992, set out in his earlier order of August 19, 1992).

[6] In January 2004, the Liquidator applied to Justice Ground for directions regarding the distribution of the extra funds. Treating the motion as in substance a motion to vary the March 10, 1993 order of Justice Houlden, the motion judge declined to do so, and ruled in favour of Mr. Daniels. It is that order which is under appeal.

[7] Respectfully, in my view, Ground J. erred, and I would allow the appeal, for the reasons that follow.

Facts

The claimants and the scheme of distribution

[8] The respondent held 75 per cent of the shares of Shoppers; his brother, John Daniels, the remaining 25 per cent. These shares were held either directly or indirectly through family members and related corporations. The Daniels were issued subordinated notes by the corporation in exchange for advances totalling approximately $8 million. It is not disputed that this is a legitimate corporate debt. However, the notes specifically provide that the indebtedness evidenced by them "is subordinated in right of payment to all other indebtedness of the corporation".

[9] Because of the obligation of a loan and trust corporation to keep certain of its assets segregated as security for the moneys placed with it on deposit, the assets of Shoppers are divided into two categories for purposes of its liquidation, namely, a Guaranteed Fund and a Company Fund. The Guaranteed Fund consists of moneys held for the benefit of the corporation's depositors. The Company Fund consists of all other company assets and is subject to the claims of the Deposit Creditors (to the extent they are not satisfied from the Guaranteed Fund), the Crown, secured and unsecured creditors, and the subordinated noteholders.

[10] In the liquidation, the administration of the Guaranteed Fund is substantially completed, and a final distribution was made from that fund in April 2000. The distribution was insufficient to satisfy the claims of the Deposit Creditors in full, leaving them with a shortfall claim (the "Shortfall Claim") against the Company Fund for $40,250,000, based on provable claims for principal as at July 31, 1992 (the date of the winding-up), with interest calculated as at April 24, 1992, pursuant to the order of March 10, 1993, referred to above.

[11] The Deposit Creditors consist of CDIC and a group of depositors whose claims exceed $60,000. CDIC is by far the largest claimant. It acquired that position in its subrogated capacity, [page657] having reimbursed the corporation's depositors -- up to $60,000 each -- in accordance with its guarantee obligations under the Loan and Trust Corporations Act. On April 24, 1992, CDIC paid a total of approximately $491.5 million to depositors, representing the insured portion of their claims. Its subrogated interest represents 99 per cent of the claims against the Shoppers Trust estate. In addition to CDIC's subrogated claim, a number of depositors whose claims exceeded the $60,000, also maintain claims in their own right for that excess. These uninsured depositor claims total approximately $5 million.

[12] Shoppers had trade creditors and other unsecured creditors (together, the "Ordinary Creditors") with claims totalling about $1.2 million. The claims of the Crown and of the secured creditors are not pertinent to the issues on this appeal.

[13] As at December 31, 2002, the Liquidator had funds of $47,283,000 for distribution from the Company Fund. This constitutes an excess of approximately $6 million over the amounts necessary to pay the claims of the Deposit Creditors and the Ordinary Creditors, with interest calculated to April 24, 1992, in accordance with the March 10, 1992 order. The effect of calculating the quantum of those claims based on interest to the date of the winding-up is to eliminate the $6 million excess referred to above. The following chart illustrates this outcome:

April 24, 1992 July 31, 1992

Guaranteed Fund Shortfall $ 40,250,000 $ 53,636,000 Claimants

Trade Creditors $ 565,000 $ 577,000

Other ordinary Creditors $ 5,000 $ 555,000 ------------ ------------ Subtotal: $ 41,370,000 $ 54,768,000

Total Amount Available for $ 41,283,000 $ 47,283,000 Distribution

Less Claims by Shortfall Claimants and Other Unsecured $ 41,370,000 $ 54,768,000 Creditors:

Balance Available for Distribution $ 5,913,000 $ 0

The March 10, 1993 order and the interest calculation date

[14] The March 10, 1993 order of Justice Houlden fixing an interest calculation date of April 24, 1992, was made -- on the recommendation of the Liquidator and with the support of CDIC -- for practical reasons. At the time, no one thought there would be sufficient funds in the insolvent estate to satisfy the claims of the Deposit Creditors and the Ordinary Creditors for principal and interest to the date of the winding-up. CDIC had made its [page658] payment to depositors based upon an interest calculation it had already done as at April 24, 1992. It was not worth the expense of re-calculating the interest amounts as at July 31 because doing so would not change the proportionate amounts that claimants would receive and the cost of the exercise would diminish the funds available for distribution.

[15] In support of the motion leading to the March 10, 1993 order, the Liquidator filed a memorandum -- as Liquidators normally do in the course of such proceedings -- reporting on the status of the liquidation to that point and making various recommendations. At paras. 91 and 92 of the memorandum, the Liquidator said:

91. The major creditor claiming against the Company Fund is CDIC as to 98 per cent in Proposal One and as to 97 per cent in Proposal Two [See Note 4 at the end of the document]. Again, CDIC has agreed to accept April 24, 1992 as the interest calculation date for the purposes of any distribution of the proceeds of assets in the Company Fund.

92. If there is a surplus after all other claims on the Company Fund have been satisfied, then claims for interest accruing to July 31, 1992 will be considered. The Liquidator expects a recovery for unsecured creditors on the Company Fund assets of only 46 per cent under Proposal One and no recovery under Proposal Two and therefore does not expect there to be any surplus.

[16] The motion judge accepted the respondent's argument that the Liquidator had in effect committed that it would not seek to pay interest to the Deposit Creditors and Ordinary Creditors to the date of the winding-up, unless there was "a surplus after all other claims on the Company Fund" had been satisfied (emphasis added). He concluded that there was no such "surplus" on the facts before him because the words "all other claims" must include the subordinated debt, and no amounts had yet been paid on those claims. Accordingly, he ruled that the March 10, 1993 order should not be "varied".

Analysis

[17] On behalf of the respondent, Mr. Laskin argues that the motion judge -- an experienced commercial list judge responsible for supervising the liquidation of Shoppers Trust -- exercised a discretion based on findings of fact and decided in the circumstances not to vary the earlier order of Justice Houlden. He submits that the judge's exercise of discretion is entitled to deference and that the appeal should be dismissed. [page659]

[18] In my view, however, the directions the motion judge was called upon to provide did not entail the exercise of discretion at all. Instead, he was required to determine whether, as a matter of law, the Deposit Creditors and Ordinary Creditors were entitled to prove their claims, including any interest component of those claims, to the date of the winding- up, and, if so, whether the terms of the March 10, 1993 order precluded them from doing so in priority to the claims of the subordinated noteholders. The motion judge failed to address his mind to these questions and, in my respectful opinion, this led him astray in three respects and resulted in a decision that must be set aside.

[19] First, the motion judge erred in treating the proceeding before him as a motion to vary, governed by the provisions of rule 59.06 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rather than approaching it as the motion for directions in the liquidation proceedings that it was. Secondly, and most significantly, he was mistaken in viewing the right of a creditor to claim the full amount of principal plus interest due and owing to the date of the winding-up as a "usual practice" rather than as the governing principle of insolvency law that it is. Finally, he misconceived the effect of the memorandum filed by the Liquidator at the time of the motion before Justice Houlden; he placed too much emphasis on and misconstrued its wording; and, as a result, he failed to give effect to the fundamental principle of pari passu distribution underlying insolvency law.

Motion for directions

[20] The motions judge was not faced with a motion to vary the March 10, 1993 order of Justice Houlden. He was faced with a motion by the Liquidator for directions as to how the unanticipated extra funds in the estate should be distributed in the circumstances. While the incidental effect of an order for directions in an insolvency proceeding might be to alter or vary a previous order made during the course of supervision of the proceedings, such a motion for directions is not governed by the same principles that apply to rule 59.06 motions to vary, in my opinion.

[21] The basis upon which an order may be set aside or varied under that rule is restricted to situations involving fraud or facts arising or discovered after the original order was made. Courts have traditionally taken a narrow approach to granting such relief. Where the ground asserted is that of fresh evidence or a change in circumstances -- the approach taken by the motion judge here -- the moving party must show that the new evidence (a) could not have been obtained through reasonable diligence [page660] prior to the order being made, (b) is apparently credible and (c) would probably have affected the outcome of the earlier hearing.

[22] Such an approach is inapposite to a motion for directions in a winding-up proceeding, where the emphasis is not so much on whether the subsequent change in circumstances would have affected the original order made, but rather is on what order should be made in the present circumstances based upon the governing legal principles, the objectives of the winding-up regime, and what is fair and reasonable in the circumstances. A motion for directions may or may not involve an exercise of discretion by the motion judge. In this case, it did not.

The law respecting the payment of interest in winding-up proceedings

[23] At para. 37 of his reasons, the motion judge said:

I am not satisfied that the fact that claims of creditors in a liquidation normally include interest up to the Winding- Up Date is a basis for the court, in this case, exercising its jurisdiction to vary the Houlden Order. There was no provision in the WUA [See Note 5 at the end of the document] applicable at the date of the Houlden Order providing that claims were to be calculated as of the Winding-Up Date and interest payable up to the Winding-Up Date. The fact that that appears to have been the usual practice in liquidations at that time does not, in my view, override a specific provision of a judicial order that a different calculation date apply [sic] and a direction to calculate claims as of that date.

[24] Respectfully, the motion judge erred in concluding that a creditor's right to claim principal plus interest due to the date of the winding-up was simply "the usual practice" in liquidation matters. The creditor's right in that regard was not a matter of practice; it was, and remains, a matter of insolvency law. As Selwyn L.J. stated in Re Humber Ironworks & Shipbuilding Co.; Warrant Finance Co.'s Case (1869), 4 Ch. App. 643, 17 W.R. 780, at pp. 64-47 Ch. App.:

Now, it has been very properly admitted, on the part of the Appellant, that there can be no question as to any interest due at the time of the winding-up . . . because [the creditor's] interest due at the date of the winding-up is just as much a debt as the principal. . . . I think the tree must lie as it falls; that it must be ascertained what are the debts as they exist at the date of the winding-up, and that all dividends in the case of an insolvent estate must be declared in respect of the debts so ascertained.

[25] The rationale underlying this approach rests on a fundamental principle of insolvency law, namely, that "in the case of an insolvent estate, all the money being realized as speedily as possible, [page661] should be applied equally and rateably in payment of the debts as they existed at the date of the winding-up": Humber Ironworks, supra, at p. 646 Ch. App. Unless this is the case, the principle of pari passu distribution cannot be honoured. See also Re McDougall, [1883] O.J. No. 63, 8 O.A.R. 309, at paras. 13-15; Principal Savings & Trust Co. v. Principal Group Ltd. (Trustee of) (1993), 1993 ABCA 313, 109 D.L.R. (4th) 390, 14 Alta. L.R. (3d) 442 (C.A.), at paras. 12-16; and Canada (Attorney General) v. Confederation Trust Co. (2003), 2003 18103 (ON SC), 65 O.R. (3d) 519, [2003] O.J. No. 2754 (S.C.J.), at p. 525 O.R. While these cases were decided in the context of what is known as the "interest stops" rule [See Note 6 at the end of the document], they are all premised on the common law understanding that claims for principal and interest are provable in liquidation proceedings to the date of the winding-up.

[26] Thus, it was of little moment that the provisions of the Winding-up Act in force at the time of the March 10, 1993 order did not contain any such term. The 1996 amendment to s. 71(1) of the Winding-up and Restructuring Act, establishing that claims against the insolvent estate are to be calculated as at the date of the winding-up, merely clarified and codified the position as it already existed in insolvency law. Any debate in the earlier authorities concerned the appropriate choice of an effective date for the winding-up. Should it be the date of presentation of the petition, or the date the winding-up order is actually made? There was never a debate over the right of creditors to prove their claims in full, including any interest component, as of that effective date, whatever it may be [See Note 7 at the end of the document].

[27] In giving the directions sought, in light of the unanticipated extra funds available to the Liquidator for distribution, the motion judge was obliged to give effect to the operative legal principles. His conclusion that the provisions of an order made ten years earlier in the liquidation proceeding "trumped" the governing principles of law at the time of the motion for directions -- particularly where circumstances had evolved that no one envisioned at the time -- constituted an error in principle. The law [page662] was, and continues to be, that claimants are entitled to prove their claims for principal and interest to the date of the winding-up. The law also was -- and the terms of the respondent's contract expressly provide -- that the claims of subordinate noteholders are subsidiary to all other claims in the insolvency. The respondent subordinated noteholder is not entitled to recover any of his principal or interest until those other claims have been paid in full.

[28] Finally, in this regard, I note that Justice Houlden did not purport to alter the date for proving claims in the liquidation by his order of March 10, 1993, although his earlier order of August 19, 1992, providing for the liquidation of Shoppers Trust, had specifically provided for a winding-up date of July 31, 1992. The order provided only for an earlier date for calculation of interest, based upon the practical considerations outlined above. Had such an experienced insolvency judge as Justice Houlden intended to alter a date as fundamental as the effective date of the winding-up -- and, therefore, the date for the proving of claims -- for all purposes of the liquidation, regardless of subsequent developments, I would have expected him to say so specifically. He did not.

[29] I therefore conclude that the March 10, 1993 order was not intended to, and did not, set a proof of claims date which precluded creditors from proving their claims in full up to the winding-up date. To interpret the order otherwise would be to prevent creditors with interest-bearing claims from proving their full entitlement to pre-winding-up interest and to benefit the subordinate noteholders (whose claims are inferior to all other claims) unfairly, thus contravening the pari passu principle that is fundamental to insolvency law. Accordingly, the order does not operate as a bar, trumping the rights of the Deposit Creditors and the Ordinary Creditors to be paid out of the unanticipated extra funds in priority to the subordinated noteholders.

The liquidator's memorandum

[30] The motion judge's third error in principle also flowed from his approaching the proceedings as a motion to vary. He placed unwarranted emphasis on the wording of the memorandum filed by the Liquidator in support of the motion before Justice Houlden. Further, he mistakenly treated the memorandum as if it were, in effect, an agreement precluding the Liquidator from later proposing a scheme of distribution, which did not comply with his interpretation of para. 92, regardless of the funds subsequently available and regardless of the priorities and legal principles governing that distribution. [page663]

[31] In considering whether the change in circumstances justified a variation of the March 10, 1993 order, he focused on whether the unanticipated extra funds constituted a "surplus" within the meaning para. 92 of the memorandum. He concluded there was no surplus in that sense because "all other claims" against the Company Fund -- that is, the claims of the subordinated noteholders -- had not yet been paid. Because he viewed the memorandum as a binding commitment on the part of the Liquidator not to seek to vary the order unless there was such a surplus, he decided that he should not exercise his discretion to vary the order in the circumstances.

[32] I see two problems with this approach.

[33] First, I do not read the memorandum to be anything other than what it purported to be, namely, a report by the Liquidator recommending a practical solution for the distribution of funds and the calculation of interest, based upon the then existing circumstances. I do not think it can reasonably be interpreted as a covenant on the part of the Liquidator -- and inferentially by CDIC -- to support a later distribution of then unanticipated extra funds in a fashion that contravenes both the legal principles governing provable claims and the premise of pari passu distribution that underlies insolvency proceedings. As an officer of the court responsible for the liquidation of the assets of Shoppers, the Liquidator could not make such a commitment without court approval, and, as I have noted above, if Justice Houlden had intended the order of March 10, 1993, to have had such an effect, he would have said so in it.

[34] Secondly, and in any event, while a literal reading of the words "all other claims against the Company Fund" in para. 92 of the memorandum might support the inclusion of the claims of subordinated noteholders, such an interpretation is inconsistent with the language of the paragraph as a whole, and makes no practical sense in the context of the proposed procedure for distribution of the Guaranteed Fund and the Company Fund that was being put forward.

[35] Deposit Creditors have resort to the Guaranteed Fund. Their claims were not to be satisfied under either suggested proposal for distribution from the Guaranteed Fund, and the Deposit Creditors were therefore entitled to claim -- pari passu with other unsecured creditors -- against the Company Fund (the Shortfall Claims). Paragraph 91 of the memorandum notes that CDIC is the major creditor claiming against the Company Fund. Paragraph 92 then provides that "if there is a surplus after all other claims on the Company Fund have been satisfied, then claims for interest accruing to July 31, 1992 will be considered". [page664] That the reference to "all other claims" was intended to refer to the claims of all other unsecured creditors (i.e., the uninsured deposit creditors, the trade creditors and the other ordinary creditors) and not the subordinated noteholders, is apparent from the next sentence in para. 92, which states that "the Liquidator expects a recovery for unsecured creditors on the Company Fund assets of only 46 per cent under Proposal One and no recovery under Proposal Two and therefore does not expect there to be any surplus" (emphasis added). The subordinated noteholders are not unsecured creditors. The reality of the context in which the memorandum was drafted is that no one contemplated the chance of any recovery whatsoever for the subordinated noteholders. I conclude the Liquidator did not intend to include them in the reference to "all other claims against the Company Fund" in para. 92 of the memorandum.

[36] In my view, therefore, there was a "surplus" as envisaged by para. 92 of the memorandum in the circumstances presented to the motion judge. The directions the Liquidator and CDIC were seeking from him were perfectly consistent with the Liquidator's recommendations in March 1993.

Disposition

[37] I therefore conclude that the appeal should be allowed, the order of Ground J. set aside, and in its place an order granted:

(a) authorizing the Liquidator to calculate the claims of (i) the Deposit Creditors who have Shortfall Claims, and (ii) the ordinary unsecured creditors, all of whom have claims against the Company Fund, including the interest component of such claims, as at the winding-up date of July 31, 1992 (the "Winding-up Date") and to admit such claims as of the Winding-up Date;

(b) authorizing the Liquidator to use an estimated average annual rate of interest in order to calculate the accrued interest component of the claims of depositors attributable to the period from April 24, 1992, to the Winding-up Date; and,

(c) authorizing the Liquidator to use the contractual rates of interest, if any, in order to calculate the accrued interest component of the claims of the other ordinary unsecured creditors of Shoppers attributable to the period from April 24, 1992, to the Winding-up Date. [page665]

[38] Counsel have agreed that, whatever the outcome of the appeal, there should be no order as to costs.

Order accordingly.

Notes

Note 1: R.S.O. 1990, c. L.25.

Note 2: R.S.O. 1990, c.38.

Note 3: R.S.C. 1995, c. W-11, as amended.

Note 4: The memorandum contained two proposals for the allocation of assets between trust claimants and ordinary creditors.

Note 5: The Winding-up and Restructuring Act, R.B.C. 1985, c. W-11.

Note 6: At common law, interest on provable claims stops at the commencement of the winding-up. No interest is payable on claims from that date forward, unless there is a surplus in the estate. In the event of a surplus, post-liquidation interest is payable first on debts in respect of which there is a right to interest prior to the liquidation date. See Canada (Attorney General) v. Confederation Trust Co., supra, at para. 21.

Note 7: Section 5 of the Winding-up and Restructuring Act, R.S.C. 1985, c. W-11, as amended, now fixes the date of presentation of the petition as the effective date of the winding-up.