Supreme Court of Canada

Federal Business Development Bank v. Québec (CSST), [1988] 1 S.C.R. 1061

Date: 1988-05-26

Federal Business Development Bank Appellant

v.

Commission de la santé et de la sécurité du travail Respondent

and

Prothonotary of Superior Court, Québec district Mis en cause

and

Workers' Compensation Board of Alberta and Workers' Compensation Board of British Columbia Interveners

INDEXED AS: FEDERALBUSINESS DEVELOPMENT BANK v. QUEBEC (COMMISSION DE LA SANTÉ ET DE LA SÉCURITÉ DU TRAVAIL)

File No.: 19858.

1988: March 24; 1988: May 26.

Present: Beetz, Estey, Lamer, Wilson, Le Dain, La Forest and L'Heureux-Dubé JJ.

Estey J. took no part in the judgment.

ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC

Bankruptcy — Debt priority — Liquidation of property of bankrupt in possession of secured creditor outside bankruptcy — Whether to apply provisions of Bankruptcy Act indicating order of priority for payment of creditors or provisions of provincial law governing order of collocation — Bankruptcy Act, R.S.C. 1970, c. B-3, ss. 47, 49(2), 107 — Workmen's Compensation Act, R.S.Q. 1977, c. A-3, s. 110(1).

In its capacity as appellant's mandatary, a trustee took possession of the debtor's immovable because the debtor did not meet its obligations to appellant. Three months later, the debtor made an assignment of all its property in accordance with the provisions of the Bankruptcy Act. The trustee brought a hypothecary action in the civil division of the Superior Court to have the immovable of the debtor sold by the court. The trustee in bankruptcy did not appear. Before the sale, respondent registered a privilege against the immovable under s. 110 of the Workmen's Compensation Act. Once the immovable had been sold, the deputy prothonotary prepared an order of distribution in accordance with the

[Page 1062]

rules of provincial law: respondent was placed fourth and appellant seventh. Appellant then challenged the scheme of collocation, alleging that it should have been prepared in accordance with the provisions of the Bankruptcy Act. Its action was allowed by the Superior Court but the Court of Appeal reversed the judgment and approved the order of collocation fixed by the deputy prothonotary.

Held: The appeal should be allowed.

Once the bankruptcy occurs the provisions of the Bankruptcy Act apply to all creditors and their claims must be ranked in the order fixed by the Act. As Parliament has exclusive jurisdiction to set priorities in a bankruptcy matter, a provincial statute cannot override the scheme of distribution set out in the federal statute. In the case at bar, respondent's claim is covered by s. 107(1)(h) of the Bankruptcy Act. Respondent is a preferred creditor whose debt must be ranked after that of appellant.

Section 107 is applicable regardless of the fact that the trustee took possession of the debtor's property before the bankruptcy and realized on his security outside the bankruptcy proceeding. The trustee who takes possession of the property is only a creditor under a pledge; he cannot claim a right of ownership over the asset. The immovable, encumbered to appellant and seized by the trustee, is part of the bankrupt's estate and is "property of a bankrupt" within the meaning of ss. 47 and 107 of the Bankruptcy Act.

Cases Cited

Applied: Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785; Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35; disapproved: Re Rosenberg, Zeller and Rosenberg (1948), 1948 CanLII 307 (ON SC), 29 C.B.R. 103; Manufacture de seaux et de boites de Trois-Rivieres v. Béliveau (1920), 30 K.B. 389; In re Centre de golf Mont Pellier Inc.: Hébert v. Trust général du Canada, Mtl. C.A., No. 09-000498-72, March 22, 1974; referred to: Laliberté v. Larue, 1930 CanLII 84 (SCC), [1931] S.C.R. 7; General Trust of Canada v. Roland Chalifoux Ltée, 1962 CanLII 58 (SCC), [1962] S.C.R. 456; In re Sérabec Ltée: Place Desjardins Inc. et Perras, Fafard, Gagnon Inc., [1985] C.A. 212; Re Broydon Printers Ltd. (1975), 1974 CanLII 561 (ON SC), 19 C.B.R. (N.S.) 226; Re Black Forest Restaurant Ltd. (1981), 1981 CanLII 2829 (NS SC), 37 C.B.R. (N.S.) 176.

Statutes and Regulations Cited

Bankruptcy Act, R.S.C. 1970, c. B-3, ss. 2 "property",

12(11), 47, 49, 57, 98,101, 102, 107(1). Workmen's Compensation Act, R.S.Q. 1977, c. A-3,

s. 110(1).

[Page 1063]

Authors Cited

Houlden, L. W. and C. H. Morawetz. Bankruptcy Law of Canada, vol. l. Toronto: Carswells, 1984.

APPEAL from a judgment of the Court of Appeal for Quebec, [1986] R.J.Q. 633, setting aside a judgment of the Superior Court[^1]. Appeal allowed.

P. Michel Bouchard and Michel Cordeau, for the appellant.

Pierre Lessard and Albert Bohémier, for the respondent.

Patrick G. Yearwood, for the intervener the Workers' Compensation Board of Alberta.

Gerald W. Massing, for the intervener the Workers' Compensation Board of British Columbia.

English version of the judgment of the Court delivered by

LAMER J.—The rules governing the liquidation of the property of a bankrupt and the distribution of the proceeds of sale of that property as part of a bankruptcy proceeding are contained in the Bankruptcy Act, R.S.C. 1970, c. B-3. The federal Parliament has exclusive jurisdiction to determine the status and rank of creditors claiming in the bankruptcy proceeding. That is in effect what this Court held in Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, [1985] l S.C.R. 785 (hereinafter Deloitte); but what happens when a secured creditor takes advantage of s. 49(2) of the Act and proceeds to liquidate his security outside the bankruptcy proceeding? In such a case, must one apply the provisions of the Bankruptcy Act specifying the order of priority for the payment of creditors or the provisions of provincial law governing the order of collocation? That is the issue raised by the appeal at bar.

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I

Facts

On August 14, 1979, Structal Inc. entered into a trust deed with the Royal Trust Company to secure the payment of a bond for $1,800,000 issued to appellant. In July 1982, as Structal Inc. did not meet its obligations, the Royal Trust Company took possession of the debtor's property in its capacity as trustee and mandatary of appellant. Three months later, Structal Inc. made an assignment of all its property, in accordance with the provisions of the Bankruptcy Act. Royal Trust, acting as trustee, brought a hypothecary action in the civil division of the Superior Court to have the immovables of Structal Inc. sold by the Court. The trustee in bankruptcy did not appear and Royal Trust was authorized to proceed with the judicial sale of the property. Before the sale took place, respondent registered a privilege under s. 110 of the Workmen's Compensation Act, R.S.Q., c. A-3, on the immovables owned by Structal Inc. Section 110(1) provides:

110. (1) The amount of any assessment or compensation for which an employer is liable shall constitute a privileged claim on all the moveable and immoveable property of such employer and of the principal contemplated by subsection 3 of section 11 of this act, ranking immediately after law costs without registration.

The debtor's immovables were sold in June 1983. The deputy prothonotary prepared an order of distribution in accordance with the rules of Quebec law; respondent ranked fourth and appellant seventh. Appellant challenged the scheme of collocation, alleging that it should have been prepared in accordance with the relevant provisions of the Bankruptcy Act, in particular the scheme of distribution set out in s. 107 of the Act. The action was allowed by the Superior Court. Respondent appealed this decision and the Court of Appeal allowed the appeal, approving the order of collocation prepared by the deputy prothonotary: hence the appeal to this Court.

[Page 1065]

II

Judgments

In the opinion of Côte J. of the Superior Court, as he then was, the scheme of collocation prepared by the deputy prothonotary should have complied with the order of distribution set out in s. 107(1) of the Bankruptcy Act. He considered that the immovable encumbered by the trust deed is, within the meaning of s. 47 of the Act, "property of the bankrupt" which vests in the trustee in bankruptcy. The hypothecary action brought by Royal Trust and authorized by s. 49(2) of the Act does not deprive the trustee in bankruptcy of his rights to the proceeds of the judicial sale of the property. If such proceeds exceed the amount of the secured debt, the trustee in bankruptcy is entitled to the surplus. In the judge's view, once the bankruptcy occurs the provisions of the Bankruptcy Act apply. Accordingly in the case at bar respondent is no longer a secured creditor but a preferred creditor ranked according to s. 107(l)(h) of the Act. The judge accordingly altered the order of distribution, quashing the collocation made in respondent's favour.

In reasons written by Tyndale J.A., the Court of Appeal took the opposite view and restored the scheme of distribution prepared by the deputy prothonotary: [1986] R.J.Q. 633. In its opinion, by taking possession of the property and bringing a hypothecary civil action Royal Trust was acting as a secured creditor unrelated to the bankruptcy. The right to possession, administration and disposal of the property belongs to Royal Trust: this right has never been transferred to the trustee in bankruptcy. Section 107 of the Bankruptcy Act therefore cannot govern the distribution of the proceeds of sale of property possessed by Royal Trust. The decisions in Deputy Minister of Revenue v. Rainville, [1980] l S.C.R. 35 (hereinafter Re Bourgault), and Deloitte, supra, are not conclusive because, in the Court's view, the facts of each case can readily be distinguished. As all the proceedings and the court sale took place outside the bankruptcy, the Court of Appeal considered that only the rules of provincial law are relevant. Respondent's debt should therefore rank fourth in priority, ahead of appellant's hypothecary debt.

[Page 1066]

III

Law

The issue at bar arises from the fact that the provisions which may apply originate at two legislative levels, federal and provincial, and lead to opposing solutions. If the provincial law rules prevail, respondent is a secured creditor and its debt ranks before that of the trustee. If on the other hand the Bankruptcy Act has priority, the scheme of distribution set out in s. 107 of the Act determines the priority ranking. According to the decision of this Court in Deloitte, supra, respondent would then lose the benefit of its privilege and become merely a preferred creditor, since its claim is dealt with by s. 107(1)(h) as follows:

107. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(h) all indebtedness of the bankrupt under any Workmen's Compensation Act, under any Unemployment Insurance Act, under any provision of the Income Tax Act or the Income War Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld, paripassu;

In this Court respondent argued, inter alia, that the order of priority set out in s. 107 of the Bankruptcy Act is not applicable, as the immovable in Royal Trust's possession at the time of the bankruptcy was not part of the estate which passed to the trustee in bankruptcy. In respondent's submission property of a bankrupt within the meaning of s. 107 of the Act only includes property in the possession of the trustee in bankruptcy free of any encumbrance. This argument is based on the position taken by Houlden and Morawetz, who interpret s. 107 as follows:

Section 107 makes provision for the order of priority of the claims of the persons named therein, in the distribution of the property of the debtor. It is confined to those assets which come into the trustee's hands free from any encumbrance and are available for distribution among the unsecured creditors.

[Page 1067]

(Bankruptcy Law of Canada (1984), vol. l, at p. G-71.)

Some decided cases have in fact followed this line of approach (see for example, Re Rosenberg, Zeller and Rosenberg (1948), 1948 CanLII 307 (ON SC), 29 C.B.R. 103 (Ont. S.C.); Manufacture de seaux et de boîtes de Trois-Rivières v. Béliveau (1920), 30 K.B. 389). In In re Centre de golf Mont Pellier Inc.: Hébert v. Trust général du Canada, Mtl. C.A., No. 09-000498-72, March 22, 1974, the Court of Appeal held that the rights of a trustee who has already taken possession of the debtor's assets are not affected by the occurrence of a bankruptcy. The following passage from the judgment accurately reflects this point of view (at pp. 13-14):

[TRANSLATION] … before becoming bankrupt, the company had lost possession of the property assigned and hypothecated under the trust deed … the right to dispose of this property and the right to its possession were no longer part of its estate and therefore did not form part of the estate in the possession of the trustee….

With respect, I cannot accept this reasoning. The immovable, encumbered to appellant and seized by the trustee, is part of the "property of a bankrupt" mentioned in s. 107 of the Bankruptcy Act. Under s. 2 of the Act, the word "property" includes immovables situated in Canada or elsewhere. The phrase "property of a bankrupt" is also defined in s. 47 of the Bankruptcy Act:

47. The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person,

(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province within which the property is situated and within which the bankrupt resides,

but it shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

[Page 1068]

These two definitions clearly show that the immovable in the case at bar is property of the bankrupt within the meaning of the Bankruptcy Act. Even if the trustee takes possession of the immovable before the bankruptcy, the bankrupt remains owner of his property. The trustee who has seized an encumbered immovable cannot claim to have a right of ownership over that property: he has only the rights of a creditor under a pledge or hypothec. This Court has ruled this way twice in Laliberté v. Larue, 1930 CanLII 84 (SCC), [1931] S.C.R. 7, and General Trust of Canada v. Roland Chalifoux Ltée, 1962 CanLII 58 (SCC), [1962] S.C.R. 456. Under s. 47 of the Bankruptcy Act, the fact that property is owned by the bankrupt at the time of the bankruptcy is sufficient to make it part of the bankrupt's estate and for it to pass to the trustee in bankruptcy automatically. Thus the immovable is "property of the bankrupt" within the meaning of s. 47 of the Act, regardless of the rights conferred on the trustee by the security. Several decisions bear out my view on this point. In In re Sérabec Ltée: Place Desjardins Inc. et Perras, Fafard, Gagnon Inc., [1985] C.A. 212, the Quebec Court of Appeal held that the taking of possession of property by a trustee did not in any way affect ownership of that property. The appellant in that case was arguing that the immovable seized by the trustee before the bankruptcy had become the trustee's property and was no longer part of the bankrupt's estate. I agree with the Court of Appeal's description of the rights of the trustee (at p. 221):

[TRANSLATION] In my opinion, the taking of possession changed nothing as regards ownership of the property.

The right of a trustee if he is not paid is to have the property sold and to be paid from the proceeds.

Taking of possession and administration are only stages preliminary to realizing on the guarantee.

In another case, Re Broydon Printers Ltd. (1975), 1974 CanLII 561 (ON SC), 19 C.B.R. (N.S.) 226 (Ont. S.C.), the trustee in bankruptcy informed the secured creditor of his intention to inspect the property held by the latter. Section 57 of the Bankruptcy Act authorizes the trustee in bankruptcy to proceed with the inspection of the "property of a bank-

[Page 1069]

rupt" held as a pledge, pawn or other security, in order to determine whether such property represents an interest that may be realized for the creditors as a whole. The secured creditor denied the trustee in bankruptcy permission to inspect the said property. The Court defined the phrase "property of a bankrupt … held as … other security" (at pp. 228-29):

… I do not think s. 57 is intended to be restricted to property in the nature of a pledge or pawn. Rather, I believe the section is wide enough to include property of the bankrupt which is in the possession of a secured creditor at the date of bankruptcy. If this were not so, the trustee would be unable to protect the rights of creditors in respect of such property.

It is thus impossible for me to accept respondent's argument that s. 107 of the Bankruptcy Act cannot apply here, as the immovable at issue is not property of the bankrupt. In my view, though this immovable was held by the trustee at the time of the bankruptcy, it is property of the bankrupt within the meaning of s. 47, and thus of s. 107 of the Act—to the extent of course that these provisions are applicable.

The issue then is to determine what legislation, provincial or federal, applies here. A problem of the same type came before this Court in Re Bourgault and Deloitte, supra. In Re Bourgault, this Court held that in a bankruptcy matter s. 107(1) j) of the Bankruptcy Act determines the priority of any claim covered by that provision. A provincial statute cannot override the scheme of distribution set out in s. 107 of the Act. To borrow the words of Pigeon J. (at p. 44), "Parliament intended to put all debts to a government on an equal footing; it therefore cannot have intended to allow provincial statutes to confer any higher priority". Similarly, the majority of the Court in Deloitte held that a creditor who holds a privilege under a provincial statute cannot claim the status of a secured creditor within the meaning of the Bankruptcy Act so as to avoid the order of distribution of s. 107 of the Act. In the event of bankruptcy, priorities are exclusively a matter for federal jurisdiction.

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Respondent maintained that these two cases should be distinguished on the facts from the appeal at bar and that they are therefore not conclusive here. Respondent noted that in those cases, unlike the case at bar, no trustee or any secured creditor took possession of the property before the bankruptcy; the immovables subject to a privilege thus automatically passed to the trustee in bankruptcy. Moreover, respondent added that the point now at issue differs fundamentally from that raised in Re Bourgault and Deloitte. In those cases the Court had to decide whether creditors holding privileges under provincial statutes were secured creditors within the meaning of the Bankruptcy Act. In the case at bar respondent is not claiming the status of a secured creditor within the meaning of the Bankruptcy Act. Instead respondent is arguing that, as the hypothecated property was liquidated outside the bankruptcy proceeding, without involvement by the trustee in bankruptcy, the solution must be sought not in federal but in Quebec law. Respondent added that, as the trustee chose to realize his security himself outside the bankruptcy, he must bear the consequences of that choice and accept the order of collocation determined by provincial statutes.

While it is appealing this argument does not convince me. The secured creditor did liquidate his security outside the bankruptcy proceeding. However, it must be kept in mind that it is the Bankruptcy Act itself which authorizes him to act in this way. Section 49(2) of the Act provides that "a secured creditor may realize or otherwise deal with his security in the same manner as he would have been entitled to realize or deal with it" if s. 49(1) had not had the effect of staying proceedings brought by creditors of the debtor. It is therefore wrong to suggest that the Bankruptcy Act does not apply to a creditor who chooses to realize his security outside the bankruptcy proceeding. Sections 49, 57, 98, 101 and 102 of the Act, which deal with secured creditors in this context, only reinforce this opinion.

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Further, the failure of the trustee in bankruptcy to act cannot be taken as meaning that he has waived his right in the immovable property owned by the bankrupt. For such a waiver to be valid, it must meet the conditions specified by s. 12(11) of the Act, which is not the case here. Under the Bankruptcy Act the trustee in bankruptcy has several powers and rights which he may exercise over property encumbered by a security. For example, he may inspect property held "as a pledge, pawn or other security"; he may prevent a secured creditor from realizing his security before he has a reasonable opportunity to inspect the property and exercise his right of redemption (s. 57); the trustee in bankruptcy may also ask the court to order a creditor to stay realization on his security (s. 49). In my opinion, even if a trustee in bankruptcy does not exercise these rights and powers, the application of the Bankruptcy Act is not thereby precluded.

In any event, I feel that the decisions in Re Bourgault and Deloitte are conclusive as to the fate of the appeal. These cases stand for the following proposition: in a bankruptcy matter, it is the Bankruptcy Act which must be applied. If a bankruptcy occurs, the order of priority is determined by the ranking in s. 107 of the Act, and any debt mentioned in that provision must therefore be given the specified priority. In Deloitte, Wilson J., for the majority, accepted the reasoning and conclusions adopted in Re Bourgault, supra, and Re Black Forest Restaurant Ltd. (1981), 1981 CanLII 2829 (NS SC), 37 C.B.R. (N.S.) 176 (N.S.S.C.), and held that those cases determined the matter. In this regard she said (at p. 806):

With respect, the issue in Re Bourgault and Re Black Forest Restaurant Ltd. was not whether a proprietary interest has been created under the relevant provincial legislation. It was whether provincial legislation, even if it did create a proprietary interest, could defeat the scheme of distribution under s. 107(1) of the Bankruptcy Act. These cases held that it could not, that while the provincial legislation could validly secure debts on the property of the debtor in a non-bankruptcy situation, once bankruptcy occurred s. 107(1) determined the status and priority of the claims specifically dealt with in the section. [Emphasis added.]

[Page 1072]

It is clear in light of this passage that respondent's arguments cannot be upheld.

IV

Conclusion

I therefore consider that the claims of the parties to the case must be ranked in the order determined by the Bankruptcy Act. As the federal Parliament has exclusive jurisdiction to set priorities in a bankruptcy matter, the scheme of distribution in s. 107 of the Bankruptcy Act must be applied here. As respondent's claim was covered by s. 107(1) (h) of the Act, respondent is a preferred creditor whose claim must be ranked after that of appellant, whether or not the trustee realized on his security outside the bankruptcy proceeding. Once the bankruptcy has occurred, the federal statute applies to all creditors of the debtor.

It is true that such a solution may encourage secured creditors to bring about the bankruptcy of their debtor in order to improve their title. On the other hand, this solution has obvious advantages. As soon as the bankruptcy occurs the Bankruptcy Act will be applied: the mere fact that a creditor is mentioned in s. 107 of the Act suffices for such creditor to be ranked as a preferred creditor and in the position indicated in that provision. As provincial statutes cannot affect the priorities created by the federal statute, consistency in the order of priority in bankruptcy situations is ensured from one province to another.

For all these reasons, the appeal is allowed and the judgment of the Superior Court restored with costs throughout.

Appeal allowed with costs.

Solicitors for the appellant: Hickson, Sirois, Martin & Blanchard, Sillery.

Solicitors for the respondent: Lafontaine, Chayer, Cliche & Associés, Quebec.

Solicitor for the intervener the Workers' Compensation Board of Alberta: Patrick G. Yearwood, Edmonton.

Solicitor for the intervener the Workers' Compensation Board of British Columbia: Gerald W. Massing, Richmond.

[^1]: Sub. Ct. (District of Québec), No. 200-05-005299-826. October 21, 1983.