In the Matter of the Proposal of WorkGroup Designs Inc., carrying on business and having its head office in the City of Vaughan in the Province of Ontario [Indexed as: WorkGroup Designs Inc. (Re)]
90 O.R. (3d) 26
Court of Appeal for Ontario,
O'Connor A.C.J.O., Rouleau and Watt JJ.A.
March 31, 2008
Bankruptcy and insolvency -- Proposal -- Proposal trustee erring in invoking general statutory power set out in s. 135 of Bankruptcy and Insolvency Act to assess value of secured creditor's claim and disallow [page27 ]that claim -- Proposal trustee required to follow procedure set out in s. 50.1 of BIA -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 50.1, 135.
RBC was a secured creditor of WGD. When WGD filed a proposal to its creditors under Part III, Division I of the Bankruptcy and Insolvency Act ("BIA"), RBC filed a proof of claim and voted against the proposal. The proposal trustee rejected RBC's claim as a secured creditor, citing s. 135(3) of the BIA as its authority. It reached that conclusion because, in its view, all of the assets of WGD were encumbered by the Canada Revenue Agency in priority to RBC and, on a liquidation, there would be insufficient assets to satisfy CRA's claim, so that there were, therefore, no assets over which RBC held any security. RBC appealed. The Deputy Registrar in Bankruptcy allowed the appeal and restored RBC's status as a secured creditor of WGD. WGD's appeal to the Superior Court was allowed. RBC appealed.
Held, the appeal should be allowed.
In a bankruptcy proposal, a proposal trustee cannot invoke the general statutory power set out in s. 135 of the BIA to assess the value of a secured creditor's claim and disallow that claim, eliminating the secured creditor's vote as a secured creditor on the proposal. The proposal trustee was required to follow the procedure set out in s. 50.1 of the BIA because that section specifically addresses the valuation of secured creditors' claims where a proposal is being made. Section 135 is not specific to proposals and does not address voting rights or the value of the claim that the secured creditor may vote in the context of a proposal. In this case, the proposal did not include a proposed assessed value for RBC's claim as provided in s. 50.1(2). Accordingly, s. 50.1(1) applied. Therefore, when RBC responded to the proposal by filing a proof of claim, RBC became entitled to vote "on all questions relating to the proposal in respect of that entire claim".
APPEAL from an order of Wilton-Siegel J., [2007] O.J. No. 1949, 157 A.C.W.S. (3d) 693 (S.C.J.), setting aside an order of the Deputy Registrar in Bankruptcy.
Cases referred to McKewen (Re), 1997 9517 (NB CA), [1997] N.B.J. No. 428, 193 N.B.R. (2d) 31, 50 C.B.R. (3d) 111, 75 A.C.W.S. (3d) 211 (C.A.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 50-56, 50.1 [as am.], 66 [as am.], 135 [as am.] Authorities referred to Houldon, Lloyd W., Geoffrey B. Morawetz and Janis P. Sarra, The 2008 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2007)
Natalie Marconi, for appellant, Royal Bank of Canada. Geoff R. Hall, for respondent, WorkGroup Designs Inc. [page28 ]
The judgment of the court was delivered by
[1] ROULEAU J.A.: -- This is an appeal by the Royal Bank of Canada ("RBC") of the order of the motion judge which set aside an order made by the Deputy Registrar in Bankruptcy, finding that RBC is a secured creditor of the respondent WorkGroup Designs Inc. ("WGD"). The main question raised in this appeal is whether in a bankruptcy proposal, a proposal trustee can invoke the general statutory power set out in s. 135 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ("BIA") to assess the value of a secured creditor's claim and disallow that claim, eliminating the secured creditor's vote as a secured creditor on the proposal.
[2] For the reasons that follow, I am of the view that s. 135 of the BIA cannot be used for that purpose and the proposal trustee should have adopted the procedure set out in s. 50.1 of the BIA, which specifically addresses the proper approach to be applied where a proposal has been made. As a result, I would set aside the motion judge's decision and reinstate the Deputy Registrar's finding that the appellant is a secured creditor. Facts
[3] RBC holds a general security agreement in WGD's assets. WGD, with the assistance of its proposal trustee, filed a proposal to its creditors under Part III, Division I of the BIA. In response, RBC filed a proof of claim as a secured creditor of WGD in the amount of approximately $125,000 and voted against the proposal.
[4] The proposal trustee rejected RBC's claim as a secured creditor citing s. 135(3) of the BIA as its authority. For the purposes of this appeal, the only basis for rejection that need be addressed is the trustee's finding that RBC was to be treated as a non-secured creditor for the purposes of the proposal. The proposal trustee reached this conclusion because, in its view, all of the assets of WGD were encumbered by the Canada Revenue Agency ("CRA") in priority to RBC, and, on a liquidation, there would be insufficient assets to satisfy CRA's claim. Therefore, there were no assets over which RBC held any security.
[5] RBC appealed the proposal trustee's disallowance of its status as a secured creditor. The Deputy Registrar in Bankruptcy allowed this appeal and restored RBC's status as a secured creditor of WGD on the basis of the general security agreement held by RBC in WGD's assets. In respect of the valuation of RBC's claim, he found that, while the proposal and s. 50.1(2) of the BIA [page29 ]gave the trustee the opportunity to value the RBC claim, the trustee failed to do this. Rather, the proposal trustee, relying on s. 135 of the BIA simply disallowed RBC's claim based on the super-priority rights of CRA. The Deputy Registrar in Bankruptcy concluded that such an approach failed to conform to the technical requirement of s. 50.1(2) of the BIA to value RBC's claim.
[6] WGD appealed to the Superior Court. The appeal was allowed and the proposal trustee's disallowance was restored. The motion judge determined the proposal had not complied with s. 50.1. He went on to find, however, that a proposal is intended to be a flexible proceeding under the BIA and that s. 135(3) provided the proposal trustee with the authority to determine the value of RBC's secured claim under the proposal and disallow RBC's claim to security. Analysis
[7] In this court, the appellant argued that the motion judge erred in his statutory interpretation of the relevant provisions of the BIA. The appellant also raised several other grounds of appeal relating to the manner by which the trustee arrived at the valuation of WGD's assets. In my view, the statutory interpretation issue is dispositive of this appeal and I need not address the valuation issues raised by the appellant.
[8] Sections 50-66 of the BIA set out the "General Scheme for Proposals". The relevant portions of s. 50.1 are as follows:
Secured creditor may file proof of secured claim
50.1(1) Subject to subsections (2) to (4), a secured creditor to whom a proposal has been made in respect of a particular secured claim may respond to the proposal by filing with the trustee a proof of secured claim in the prescribed form, and may vote, on all questions relating to the proposal, in respect of that entire claim, and sections 124 to 126 apply, in so far as they are applicable, with such modifications as the circumstances require, to proofs of secured claim.
Proposed assessed value
(2) Where a proposal made to a secured creditor in respect of a claim includes a proposed assessed value of the security in respect of the claim, the secured creditor may file with the trustee a proof of secured claim in the prescribed form, and may vote as a secured creditor on all questions relating to the proposal in respect of an amount equal to the lesser of (a) the amount of the claim, and (b) the proposed assessed value of the security. . . . . .
(4) Where a secured creditor is dissatisfied with the proposed assessed value of his security, the secured creditor may apply to the court, within fifteen days after the proposal is sent to the creditors, to have the proposed assessed value revised, and the court may revise the proposed assessed value, in which case the revised value henceforth applies for the purposes of this Part.
Preuve de créance garantie
50.1(1) Sous réserve des paragraphes (2) à (4), le créancier garanti à qui une proposition a été faite relativement à une réclamation garantie en particulier peut déposer auprès du syndic, en la forme prescrite, une preuve de réclamation garantie à cet égard; il peut, pour la totalité de sa réclamation, voter sur toute question se rapportant à la proposition. Les articles 124 à 126, dans la mesure où ils sont applicables, s'appliquent, avec les adaptations nécessaires, aux preuves de réclamations garanties. [page30 ]
Valeur attribuée
(2) En cas d'inclusion, dans la proposition faite à un créancier garanti relativement à une réclamation, d'une évaluation de la valeur de la garantie en cause, le créancier garanti peut déposer auprès du syndic, en la forme prescrite, une prévue de réclamation garantie et peut, à titre de créancier garanti, voter sur toutes questions relatives à la proposition jusqu'à concurrence d'un montant égal au moindre du montant de la réclamation et de la valeur attribuée à la garantie. . . . . .
(4) S'il n'est pas d'accord avec a valeur attribuée à sa garantie, le créancier garanti peut, dans les quinze jours suivant l'envoi de la proposition aux créanciers, demander au tribunal de réviser l'évaluation proposée. Le tribunal peut procéder à la révision souhaitée, auquel cas la présente partie s'applique par la suite en fonction de la valeur révisée.
[9] The last section in the part of the BIA that deals with proposals is s. 66. It provides that all other provisions of the BIA (with one exception that is of no relevance to this appeal) apply "with such modifications as the circumstances require, to proposals made under this Division".
[10] Section 135 that was referred to by the proposal trustee as providing a basis for his disallowance of RBC's claim is contained in the part of the BIA that deals with the administration of bankrupts' estates. The relevant portions of s. 135 are as follows: [page31 ] ADMISSION AND DISALLOWANCE OF PROOFS OF CLAIM AND PROOFS OF SECURITY
Trustee shall examine proof
135(1) The trustee shall examine every proof of claim or proof of security and the grounds therefor and may require further evidence in support of the claim or security. . . . . .
Disallowance by trustee
(2) The trustee may disallow, in whole or in part, (a) any claim; (b) any right to a priority under the applicable order of priority set out in this Act; or (c) any security.
Notice of determination or disallowance
(3) Where the trustee makes a determination under subsection (1.1) or, pursuant to subsection (2), disallows, in whole or in part, any claim, any right to a priority or any security, the trustee shall forthwith provide, in the prescribed manner, to the person whose claim was subject to a determination under subsection (1.1) or whose claim, right to a priority or security was disallowed under subsection (2), a notice in the prescribed form setting out the reasons for the determination or disallowance. ADMISSION ET REJET DES PREUVES DE RÉCLAMATION ET DE GARANTIE
Examen de la preuve
135(1) Le syndic examine chaque preuve de réclamation ou de garantie produite, ainsi que leurs motifs, et il peut exiger de nouveaux témoignages à l'appui. . . . . .
Rejet par le syndic
(2) Le syndic peut rejeter, en tout ou en partie, toute réclamation, tout droit à un rang prioritaire dans l'ordre de collocation applicable prévu par la présente loi ou toute garantie.
Avis de la décision
(3) S'il décide qu'une réclamation est prouvable ou s'il rejette, en tout ou en partie, une réclamation, un droit à un rang prioritaire ou une garantie, le syndic en donne sans délai, de la manière prescrite, un avis motivé, en la forme prescrite, à l'intéressé.
[11] The appellant submits that the proposal trustee was required to follow the procedure set out in s. 50.1 because the section specifically addresses the valuation of secured creditor's claims where a proposal is being made. Accordingly, a general section such as s. 135 contained in another part of the BIA ought not to have been relied upon. [page32 ]
[12] The respondent argues that it was quite proper for the proposal trustee to resort to s. 135. In the respondent's submission, s. 50.1 need only be resorted to where, as set out in s. 50.1(2) the proposal "includes a proposed assessed value of the security in respect of the claim". Because the proposal did not contain a proposed assessed value of RBC's security, s. 50.1 does not apply and, in the circumstances, it was appropriate for the proposal trustee to resort to s. 135 to value and disallow RBC's claim as a secured creditor.
[13] The respondent acknowledged that, to the extent that a specific section in the proposal part of the BIA was applicable, it would not be appropriate to resort to a general section contained in the balance of the BIA.
[14] I agree with the appellant on this issue. Properly interpreted, s. 50.1 of the BIA provides direction for the determination of the value of the secured creditor's claim that the secured creditor may vote in respect of a proposal. Section 50.1(1) sets out the general rule. It provides that, subject to subsections (2) to (4), the secured creditor has the right to vote the claim as a secured creditor for the entire amount once it has filed proof of security. Section 50.1(2) provides that, where the proposal ascribes an assessed value to the claim, the secured creditor is only allowed to vote for the lesser of the amount of the claim or the proposed assessed value. See Lloyd W. Houlden, Geoffrey B. Morawetz and Janis P. Sarra, The 2008 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2007), at p. 240.
[15] In contrast, s. 135 is concerned with the allowance or disallowance, in whole or in part, of the security itself for the purposes of distribution of dividends from a bankrupt's estate. See McEwen (Re), 1997 9517 (NB CA), [1997] N.B.J. No. 428, 50 C.B.R. (3d) 111 (C.A.), at para. 4. As noted, this provision is not specific to proposals and does not address voting rights or the value of the claim that the secured creditor may vote in the context of a proposal.
[16] In this case, the proposal did not include a proposed assessed value for RBC's claim as provided in s. 50.1(2). Had it done so, then the procedure set out in that section would have been mandatory and, if RBC disagreed with the proposed assessed value, RBC would have had the right to challenge it pursuant to s. 50.1(4).
[17] Because the proposal did not include a proposed assessed value for RBC's claim, s. 50.1(1) applies. Therefore, when RBC responded to the proposal by filing a proof of $125,000 secured claim in prescribed form, RBC became entitled to vote "on all questions relating to the proposal in respect of that entire claim". [page33 ]
[18] I note that the proposal contained a provision whereby the proposal trustee could determine the value of any proven claim to the extent of the value of the secured property. Whatever may have been the intent of this provision, it did not exempt the proposal trustee from compliance with s. 50.1.
[19] When a proposal is made, the value of the claim that the secured creditor may vote is to be determined in accordance with s. 50.1. This provision sets out an entire regime that must be followed to ensure that all parties have a fair opportunity to respond to the proposal. The value that the secured creditor can vote as provided by s. 50.1 is particularly significant since, ultimately, it determines whether the proposal is accepted or rejected at the meeting.
[20] In my view, s. 135 could not be resorted to by the proposal trustee to value RBC's claim and disallow the secured claim for the purpose of voting. The drafters of the BIA deemed it necessary to include provisions expressly addressing the value of the claim that the secured creditor may vote when a proposal has been made. Section 50.1, which specifically applies in this fact situation, must prevail over the more general s. 135.
[21] As a result, since no proposed assessed value was contained in the proposal, RBC, holding a general security agreement in WGD's assets, was entitled to vote the full amount of its $125,000 claim as a secured creditor in accordance with s. 50.1(1). Taking the vote of this $125,000 secured claim into account results in the rejection of the proposal by the secured creditors' class.
[22] The effect of this decision would be to restore the order of the Deputy Registrar in Bankruptcy. That was the order in effect when the parties sought and obtained court approval of the proposal. My understanding, therefore, is that the proposal as accepted by the court would remain in effect and RBC would regain the status it had when the proposal was approved. Disposition
[23] I would allow the appeal and restore the order of the Deputy Registrar in Bankruptcy. I would award the appellant costs in this court and in the proceedings below in the all inclusive amount of $15,000 inclusive of GST and disbursements.
Appeal allowed.