Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558

In the Matter of The Winding‑up Act, R.S.C. 1970, c. W‑10, as amended;

and

In the Matter of the Winding‑up of Canadian Commercial Bank

between

Price Waterhouse Limited, Liquidator of Canadian Commercial Bank Appellant

v.

Her Majesty The Queen in right of Alberta, Royal Bank of Canada, Bank of Montreal, Toronto‑Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada Respondents

Indexed as: Canada Deposit Insurance Corp. v. Canadian Commercial Bank

File No.: 22084.

1992: April 2; 1992: November 19.

Present: La Forest, L'Heureux‑Dubé, Gonthier, Cory, McLachlin, Stevenson* and Iacobucci JJ.

on appeal from the court of appeal for alberta

Banks and banking operations ‑‑ Winding‑up ‑‑ Bank facing solvency crisis ‑‑ Support group providing emergency financial assistance ‑‑ Whether money advanced was in nature of a loan or of a capital investment ‑‑ Whether participants rank pari passu with other unsecured creditors on winding‑up.

Banks and banking operations ‑‑ Winding‑up ‑‑ Postponement of claims ‑‑ Doctrine of equitable subordination ‑‑ Bank facing solvency crisis ‑‑ Support group providing emergency financial assistance ‑‑ Money advanced being in nature of a loan ‑‑ Whether loan comes within postponement provision in s. 4 of the Ontario Partnerships Act ‑‑ If not, whether claim should nonetheless be postponed under doctrine of equitable subordination ‑‑ Partnerships Act, R.S.O. 1990, c. P.5, ss. 3(3)(d), 4.

In early 1985 Canadian Commercial Bank ("CCB") faced a solvency crisis owing to a sharp deterioration in its loan portfolio. A support group consisting of the governments of Canada and of Alberta, the Canadian Deposit Insurance Corp. and six major Canadian banks (the "participants") entered into an arrangement to provide the emergency financial assistance requested. They essentially agreed to purchase from CCB an undivided interest by way of participation in a portion (the "syndicated portion") of a portfolio of assets it held, the participation interest of each being proportionate to its own financial contribution. The parties also agreed that the participants would receive from CCB on a proportionate basis the money recovered on the syndicated portion of the portfolio assets as well as 50 percent of CCB's pre‑tax income, or alternatively 100 percent of CCB's pre‑tax income plus interest at the prime rate, until such time as the money advanced had been repaid. CCB undertook to indemnify each participant against any loss experienced under the support program up to the amount paid by them to CCB. It was agreed that, in the event of the insolvency or winding‑up of CCB, any amount remaining unpaid "shall constitute indebtedness of CCB to the members of the Support Group". Finally, the parties agreed that each participant would receive from CCB, on a proportionate basis, warrants to purchase common shares of CCB, although the exercise of this option was contingent on shareholder, regulatory and legislative approval. The warrants were to expire 10 years after the date on which CCB had repaid the full amount advanced. Despite this financial assistance, CCB's financial status continued to deteriorate and the Court of Queen's Bench ordered that it be wound up. On an application by the liquidator for advice on the validity and ranking of the participants' claims, the chambers judge considered the injection of funds by the participants to have been a capital investment. He held that they were entitled to repayment of sums recovered on the syndicated portion of the portfolio assets but otherwise not entitled to recovery of their advances until after all ordinary creditors were paid in full. The Court of Appeal reversed the latter part of this judgment. It characterized the advance as a loan and concluded that the participants were entitled to rank pari passu with CCB's other unsecured creditors for all monies advanced and not repaid from the syndicated portion of the portfolio assets. This appeal is to determine (1) whether the Court of Appeal was correct in characterizing the advance by the participants to CCB as a loan; if so, (2) whether the loan comes within the postponement provision found in s. 4 of the Ontario Partnerships Act; and (3) if the Partnerships Act does not apply, whether the respondents' claim for the money loaned under the participation agreement should nonetheless be postponed to the claims of CCB's other unsecured creditors based on the doctrine of equitable subordination.

Held: The appeal should be dismissed.

Both the wording of the agreements and the surrounding circumstances clearly support the Court of Appeal's conclusion that the $255 million advance was in substance a loan and not a capital investment. Although the transaction did have an equity component (the warrants), this aspect alone does not in the circumstances of this case transform the essential nature of the advance from a loan to an investment. Nor does the fact that CCB's pre‑tax income was the main source for repayment affect this characterization as the amount to be repaid from this source was limited to the sum advanced to CCB. Thus, the respondents are creditors of CCB and, as such, are entitled to rank pari passu with the other unsecured creditors of CCB in the distribution of CCB's assets.

The Court of Appeal properly declined to postpone the respondents' claims for the moneys not repaid until the claims of the other ordinary creditors of CCB were satisfied. The postponement provision in s. 4 of the Ontario Partnerships Act applies only where "money has been advanced by way of loan upon such a contract as is mentioned in section 3". Section 3(3)(a) makes no reference to a "contract" and is thus beyond the scope of s. 4. Section 3(3)(d) applies where "the lender is to receive . . . a share of the profits arising from carrying on the business". Any fixed debt to be repaid out of profits does not in itself constitute a "share of the profits" within the meaning of this provision. A lender does not share in profits unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan. Here the participants had a fixed debt which would be repaid in part by the moneys received from the syndicated portion of the portfolio assets and in part by CCB's pre‑tax income. With the exception of the contingent interest at prime rate, under no circumstance were the payments from the pre‑tax income to be applied to anything but the repayment of the loan. Once the loan was fully repaid, all payments from CCB's pre‑tax income were to stop. Accordingly, the participants were not to receive a "share of the profits" of CCB within the meaning of s. 3(3)(d) by virtue of the repayment scheme for the advance. The contemplated granting of warrants under the highly contingent circumstances of this case does not alter this conclusion.

The principles of equitable subordination have no application to the facts of this case. Assuming that Canadian courts have the power in insolvency matters to subordinate otherwise valid claims to those of other creditors on equitable grounds relating to the conduct of these creditors inter se, the exercise of such a power is not justified in the present case. The reasons and limited evidence advanced before this Court disclose neither inequitable conduct on the part of the participants nor injury to the ordinary creditors of CCB as a result of the alleged misconduct.

Cases Cited

Considered: Sukloff v. A. H. Rushforth & Co., 1964 CanLII 11 (SCC), [1964] S.C.R. 459; referred to: Laronge Realty Ltd. v. Golconda Investments Ltd. (1986), 1986 CanLII 756 (BC CA), 7 B.C.L.R. (2d) 90; In re Dickie Estate (1924), 5 C.B.R. 214; In re Meade, [1951] 1 Ch. 774; In re Beale (1876), 4 Ch.D. 246; British Eagle International Airlines Ltd. v. Compagnie Nationale Air France, [1975] 2 All E.R. 390; Grace v. Smith (1775), 2 Wm. Bl. 997, 96 E.R. 587; Waugh v. Carver (1793), 2 Hy. Bl. 235, 126 E.R. 525; Cox v. Hickman (1860), 8 H.L.C. 268, 11 E.R. 431; Ex parte Taylor; In re Grason (1879), 12 Ch.D. 366; In re Stone (1886), 33 Ch.D. 541; In re Hildesheim, [1893] 2 Q.B. 357; In re Mason; Ex parte Bing, [1899] 1 Q.B. 810; In re Fort; Ex parte Schofield, [1897] 2 Q.B. 495; In re Young; Ex parte Jones, [1896] 2 Q.B. 484; In re Mobile Steel Co., 563 F.2d 692 (1977); In re Multiponics Inc., 622 F.2d 709 (1980).

Statutes and Regulations Cited

Act to Amend the Law of Partnership (U.K.), 28 & 29 Vict., c. 86 [rep. 53 & 54 Vict., c. 39].

Bank Act, R.S.C., 1985, c. B‑1, ss. 132, 173, 174, 277.

Bankruptcy Act, R.S.C., 1985, c. B‑3, s. 139.

Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39, ss. 2(3)(d), 3.

Partnerships Act, R.S.O. 1990, c. P.5, ss. 3(3)(a), (b), (d), 4.

Winding‑up Act, R.S.C. 1970, c. W‑10.

Winding‑up Act, R.S.C., 1985, c. W‑11, ss. 93, 94, 95.

Authors Cited

Canada. Inquiry into the Collapse of the CCB and Northland Bank. Report of the Inquiry into the Collapse of the CCB and Northland Bank. By the Hon. Willard Z. Estey, Commissioner. Ottawa: The Inquiry, 1986.

Crozier, Lawrence J. "Equitable Subordination of Claims in Canadian Bankruptcy Law" (1992), 7 C.B.R. (3d) 40.

DeNatale, Andrew, and Prudence B. Abram. "The Doctrine of Equitable Subordination as Applied to Nonmanagement Creditors" (1985), 40 Bus. Law 417.

Halsbury's Laws of England, vol. 2, 3rd ed. London: Butterworths, 1953.

Halsbury's Laws of England, vol. 3(2), 4th ed. London: Butterworths, 1985.

Lindley, Nathaniel. Lindley on the Law of Partnership, 15th ed. By Ernest H. Scamell and R. C. l'Anson Banks. London: Sweet & Maxwell, 1984.

Ziegel, Jacob S. "Characterization of Loan Participation Agreements" (1988), 14 Can. Bus. L.J. 336.

APPEAL from a judgment of the Alberta Court of Appeal (1990), 1990 ABCA 139, 107 A.R. 199, 74 Alta. L.R. (2d) 69, 69 D.L.R. (4th) 1, allowing the respondents' appeal from a judgment of the Court of Queen's Bench (1987), 1987 CanLII 3216 (AB KB), 83 A.R. 122, 56 Alta. L.R. (2d) 244, 46 D.L.R. (4th) 518, 67 C.B.R. (N.S.) 136. Appeal dismissed.

Charles P. Russell, for the Liquidator.

Earl A. Cherniak, Q.C., and Robert J. Morris, for the general body of creditors of the estate of Canadian Commercial Bank.

James Rout, Q.C., for the respondent Her Majesty the Queen in right of Alberta.

Colin L. Campbell, Q.C., for the respondents Royal Bank of Canada, Bank of Montreal, Toronto‑Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada.

//Iacobucci J.//

The judgment of the Court was delivered by

Iacobucci J. -- In September of 1985, the Canadian public witnessed what fortunately has been an infrequent occurrence in Canadian banking. Early that month, a chartered bank known as the Canadian Commercial Bank ("CCB") became insolvent and was ordered to be wound up pursuant to the provisions of the Winding-up Act, R.S.C., 1985, c. W-11 (formerly R.S.C. 1970, c. W-10). This appeal concerns the characterization of the unique and complex financial arrangement entered into by the Governments of Canada and of Alberta, six major Canadian financial institutions, the Canadian Deposit Insurance Corporation ("CDIC") and CCB in the spring of 1985 in an attempt to prevent its winding-up. The main issue is whether, in substance, the $255 million advanced to CCB under this arrangement was in the nature of a loan, in which case the "lenders" thereof would rank pari passu with the other unsecured creditors of CCB, or whether it was in the nature of a capital investment in the business of CCB, in which case such unsecured creditors would have priority over the "investors". If the former characterization is adopted, as I believe it should be, subsidiary issues concerning the postponement of claims under s. 4 of the Partnerships Act, R.S.O. 1990, c. P.5, and the doctrine of equitable subordination are also raised.

I. Facts

Although they are relatively uncomplicated, the facts of this case are rather extensive and warrant a full review. CCB was a chartered bank involved primarily in commercial lending. In early 1985, CCB faced a solvency crisis owing to a sharp deterioration in its loan portfolio. Many of its outstanding loans had become non-performing. On March 14, 1985, CCB's Chief Executive Officer reported this crisis to the Office of the Inspector General of Banks and announced the inability of CCB to continue in operation without outside assistance. At the request of the Governor of the Bank of Canada, a government and banking industry funded support initiative was undertaken to assist CCB and to avoid the loss of public confidence in Canada's banking system.

On March 24, 1985, a support group comprising Her Majesty in right of Canada ("Canada"), Her Majesty in right of Alberta ("Alberta"), CDIC and what I shall sometimes refer to as the "Bank Group", consisting of the Royal Bank of Canada, the Bank of Montreal, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, and the National Bank of Canada, entered into a Memorandum of Intent to provide the "emergency financial assistance" requested by CCB "on certain terms".

In essence, Canada, Alberta, CDIC and the Bank Group, collectively referred to as the "Participants", agreed to purchase from CCB, at a total price of $255 million, an undivided interest by way of participation in a portfolio of assets held by CCB consisting of loans and related security having a nominal value, on the books of CCB, of over $500 million ("Portfolio Assets"). The participation interest of each Participant was proportional to its own financial contribution and was to be evidenced by Participation Certificates issued by CCB. The parties also agreed in principle that the Participants would receive from CCB on a proportionate basis, and until such a time as the Participants received the amount they paid for their Participation Certificates, a portion of the money received on account of each Portfolio Asset as well as 50 percent of CCB's pre-tax income, or alternatively 100 percent of CCB's pre-tax income plus interest. In other words, it was agreed that the $255 million advanced by the Participants would be repaid by CCB. After repayment, the payments from the Portfolio Assets and from CCB's pre-tax income would cease.

Under the Memorandum of Intent, CCB undertook to indemnify each Participant against any loss experienced under the support program up to the amount paid by them to CCB. It was agreed that in the event of the insolvency or winding-up of CCB, any amount remaining unpaid "shall constitute indebtedness of CCB to the members of the Support Group". Finally, the parties agreed in principle that each Participant would receive from CCB, on a proportionate basis, transferable rights or warrants to purchase common shares of CCB at a price of $0.25 per share. The warrants were to expire 10 years after the day that CCB had repaid the full amount advanced for the Participation Certificates.

On March 25, 1985, the Department of Finance issued a press release announcing a joint agreement involving "an infusion of capital with repayment provisions . . . designed to provide the Canadian Commercial Bank with sufficient funds to ensure solvency following a recent and sharp deterioration in its U.S. loan portfolio". The agreement was described as resulting in the "purchase by the support group of a package of nonperforming loans", leaving CCB "in a strong position of solvency in order to support its deposit base". After setting out the general terms of the support program, the Minister of State (Finance) said she had "full confidence" that this program "involving Canada's largest chartered banks and the two Governments will permit the Canadian Commercial Bank to continue its active and important role in the growing economy of Western Canada". The Minister concluded that the support program represented "a strong collective vote of confidence in the health of the economy of Western Canada".

In order to carry out the letter and spirit of the Memorandum of Intent, the Participants and CCB were to execute, among other documents, a "Participation Agreement" (also referred to as "P.A."), an "Equity Agreement" (also referred to as "E.A.") and an "Amending and Subordination Agreement". These agreements, which incorporate and refine the general principles agreed to earlier in the Memorandum of Intent, were ultimately entered into as of April 29, 1985. The Participation Agreement and the Equity Agreement formed the core of the support program. There are no relevant inconsistencies between these documents and the Memorandum of Intent. I will, however, review in closer detail the former documents as their provisions are of crucial importance to the resolution of the issues raised by this appeal.

Section 2 of the Participation Agreement provided for the Participants to purchase from CCB, at a total price of $255 million, an undivided interest by way of participation in 255,000,000 units in the Portfolio Assets of CCB. Each Participant's interest was proportional to its financial contribution. For example, CDIC advanced $75 million and received a participation interest in 75,000,000 units. The total participation in the Portfolio Assets was divided into 529,798,627 units, with the portion of 255,000,000 units purchased by the Participants commonly referred to as the "Syndicated Portion". CCB retained beneficially an undivided participation interest in the remaining 274,798,627 units which comprised the aggregate of the "CCB Portion" of the Portfolio Assets.

Under s. 5 of the Participation Agreement, CCB warranted that the CCB Portion for each Portfolio Asset represented its "best estimate of the amount likely to be recovered from or with respect to that Portfolio Asset". Thus, as found by the learned chambers judge, the Participants purchased, in essence, a portfolio of bad loans or that portion of a loan not likely to be recovered.

CCB was appointed and authorized to act as agent to administer the Portfolio Assets (P.A. s. 6(a)). Pursuant to s. 9 of the Participation Agreement, all money received by CCB on account of each Portfolio Asset, whether principal, interest or otherwise, was first to be retained by CCB until the CCB Portion of that Portfolio Asset was completely recovered; then to be paid to the Participants (except CDIC) proportionately to reduce or retire their respective advances; then to be paid to CDIC to reduce or retire its proportionate share; and finally to be retained by CCB. Each Participant was entitled to receive these proceeds up until such time as it received an amount which, when taken together with all amounts received by that Participant from CCB's pre-tax income pursuant to s. 10, was equal to the price paid by that Participant for its Participation Certificate.

In addition to proceeds from CCB's Portfolio Assets, the Participants were entitled to receive proportionately from CCB, on a quarterly basis, an amount equal to 50 percent of CCB's pre-tax income (P.A. s. 10). CCB's "pre-tax income" was defined in s. 10 of the Participation Agreement as CCB's "net income . . . before making any allowance for the payments to be made pursuant to this section, accrued interest on any presently existing bank debenture of CCB or any provision for income taxes payable to Canada, the United States of America and any political division of either". Again, CCB's obligation to make such payments would terminate after each Participant received an amount pursuant to ss. 9 and 10 equal to the price paid by such Participant for its Participation Certificate (P.A. s. 10).

Under s. 11 of the Participation Agreement, if CCB failed by October 31, 1985, to obtain the shareholder and regulatory approval necessary for it to increase its authorized capital to the extent required for it to perform the Equity Agreement, as discussed below, then s. 10 of the Participation Agreement would be deemed to have been amended and would be construed as requiring CCB to pay to the Participants 100 percent of CCB's pre-tax income. This obligation would continue until such time as the total amount received by each Participant from the Portfolio Assets and CCB's pre-tax income satisfied the amount paid by that Participant for its Participation Certificate, together with interest at prime rate. It should be noted that this was the only circumstance under which CCB was to pay interest to the Participants.

Section 8 of the Participation Agreement provided that CCB indemnified each Participant against any loss suffered by it by reason of the amounts realized from the Portfolio Assets and from 50 percent of CCB's pre-tax income failing to equal the price paid by that Participant for its Participation Certificate. This indemnity was to be paid only by payments of the amount and source described in ss. 10 and 11, with one important exception: "if CCB becomes insolvent or is wound up, any amount remaining unpaid and required to be paid in order to indemnify that Participant completely in accordance with the foregoing indemnity, shall constitute indebtedness of CCB, to which the provisions of section 13 shall apply."

The relevant parts of s. 13 of the Participation Agreement read as follows:

13. Priorities on Insolvency

(a) Notwithstanding the provisions of section 277 of the Bank Act [which otherwise gives Canada and a province a first and second charge respectively on the assets of an insolvent bank] or any other rule of law, each of the Participants agrees that, in the case of the insolvency or winding-up of CCB:

(i) neither Canada, CDIC nor Alberta shall, in connection with any money owing to it under this agreement, claim any charge on the assets of CCB;

(ii) the right of each of the Participants other than CDIC to money owing to it under this agreement shall rank pari passu with the right of the depositors of CCB to payment in full of the deposit liabilities of CCB;

(iii) the right of CDIC to money owing to it by CCB, under this agreement but not by reason of the subrogation of CDIC to the claims of depositors of CCB (if any) shall be subordinate in right of payment to the prior payment in full of all money owing to the other Participants under this agreement and to the depositors of CCB, but shall rank in priority to any outstanding bank debentures of CCB.

Each of Canada, CDIC and Alberta acknowledges that it has waived, as set out above, any priority to which it would otherwise be entitled. Each Participant agrees that this section 13 is intended to benefit the depositors of CCB, and to enure to the benefit of the successors of CCB and any curator, liquidator or receiver that may be appointed to supervise or to wind up the business of CCB. [Emphasis added.]

Moreover, s. 13 provided that each Participant would rank pari passu with each other except CDIC and that each would, as necessary, redistribute payments received by it in order to achieve this ranking.

Pursuant to s. 12 of the Participation Agreement, CCB could not, without the consent of the Participants, declare or pay any dividend or reduce its issued capital until such time as CCB paid to each Participant its purchase price, and any additional amount (interest at prime rate) payable under s. 11. Moreover, the Participants required as a condition to their purchase, inter alia: (1) the execution of an Amending and Subordination Agreement; (2) the execution of the Equity Agreement; and (3) the opinion of the Inspector General of Banks that CCB would be solvent following the purchase (P.A. ss. 14 and 16). Finally, the parties expressly declared that the Participants were not partners or joint venturers with each other (P.A. s. 18(j)) and that the law governing the agreement would be the law applicable in the Province of Ontario (P.A. s. 18(d)).

The Equity Agreement gave the Participants warrants providing for the right to subscribe to a total of 24,062,517 common shares of CCB at a price of $0.25 per share, on a basis proportionate to each Participant's participation interest (E.A. ss. 2, 3, 5 and 6). At the date of the agreement, CCB had an authorized capital of 10,000,000 common shares with a par value of $10 each, of which 6,529,768 were issued and outstanding (E.A. s. 4). If all outstanding employee stock options to purchase common shares were exercised and all issued convertible preferred shares were converted into common shares, the issued capital of CCB would consist of a total of 8,020,839 common shares (E.A. s. 4). Thus, if the warrants were fully exercised, the Participants would own 75 percent of CCB's common shares.

Shareholder and regulatory approval were required to increase CCB's authorized capital from its current level of 10,000,000 common shares to the 32,100,000 required in order to give full effect to the Equity Agreement. Pursuant to s. 15 thereof, CCB had to first obtain shareholder approval no later than October 31, 1985, and next had to apply to the Minister of Finance pursuant to the Bank Act, R.S.C., 1985, c. B-1 (formerly S.C. 1980-81-82-83, c. 40) for the necessary change in its authorized capital. If such an application was not made by October 31, 1985, the provisions of s. 11 of the Participation Agreement (100 percent pre-tax income plus interest) were triggered. In s. 8 of the Memorandum of Intent, Canada had agreed that "an application for such alteration in capital when made shall be approved for purposes of the Bank Act".

The limited authorized capital of CCB was not the only obstacle to the issuance of common shares to the Participants. Under present law, the chartered banks which were Participants could not legally exercise their right to subscribe to common shares of CCB. This was recognized by the parties in paragraph (d) of the preamble to the Equity Agreement as well as in s. 10 of the agreement. Under s. 8 of the Equity Agreement, the warrants were made fully assignable and it was the declared intention of the Participants, as recorded in the preamble, "that unless the present law is materially changed, they shall assign such rights".

The Participants' right to purchase these shares was to continue for a period of 10 years after the date on which each Participant had been repaid the full amount it had advanced under the terms of the Participation Agreement (E.A. ss. 1 and 12). Again, this agreement would be governed by and construed in accordance with the law applicable in the Province of Ontario (E.A. s. 19).

Finally, under the Amending and Subordination Agreement, the holders of all outstanding subordinated debentures issued by CCB pursuant to s. 132 of the Bank Act (i.e. Canada, British Columbia, Alberta and the Workers' Compensation Board of British Columbia) agreed to postpone the repayment of the amounts represented by their debentures until such time as CCB had paid to each Participant an amount equal to the price paid by that Participant for its Participation Certificate.

To summarize, the Participants were to receive in return for the $255 million advanced under the support program, proportionally to their own financial contribution and up to that amount: (1) payments from the Portfolio Assets; (2) (a) 50 percent of CCB's pre-tax income and warrants to buy up to 75 percent of CCB's common shares, or (b) 100 percent of CCB's pre-tax income, with interest on the amount contributed; and (3) an indemnity for any losses caused. Under these agreements, the Participants could receive a return which was greater than their contribution only in two ways, namely by exercising or assigning their warrants up to 10 years after full repayment (however, this option was contingent on shareholder, regulatory and legislative approval) or, if these warrants could not be granted, by receiving interest on the amount advanced at the prime rate.

CCB was advised by the Office of the Inspector General of Banks, by a letter dated April 24, 1985, as to the appropriate accounting treatment to be applied to these transactions. Following these guidelines, CCB wrote down its loan assets by $255 million, charged the write-down to tax-allowable appropriations for contingencies and credited the $255 million received from the Participants to tax-paid appropriations for contingencies. CCB was not specifically directed by the Inspector General of Banks to record its indemnity towards the Participants as a liability, nor did CCB do so. By effectively "selling" that portion of its loan portfolio not likely to be recovered and by not recording its indemnity obligation under the Participation Agreement to repay the $255 million as a liability, CCB was able to restore a position of solvency on its books, thereby allowing it to remain in business, which was, after all, the raison d'être of the support program.

Despite this financial assistance, CCB's financial status continued to deteriorate. For reasons beyond the scope of this appeal, the support program was unsuccessful in ensuring CCB's long-term solvency. By an Order made September 3, 1985, on a petition by CDIC, Wachowich J. of the Alberta Court of Queen's Bench ordered CCB to be wound up pursuant to the Winding-up Act, R.S.C. 1970, c. W-10. At that point, none of the Participants had exercised or assigned (or even been granted) any of their warrants under the Equity Agreement as the preliminary conditions of shareholder and regulatory approval for the authorization and issuance of additional common shares had not been fulfilled. Price Waterhouse Limited was appointed, and remains, the sole Liquidator of CCB ("Liquidator").

As of August 18, 1987, the Liquidator had recovered approximately $112 million on account from CCB's Portfolio Assets, of which $5 million was attributable to the portion thereof beneficially owned by the Participants (namely, the Syndicated Portion). The Liquidator brought an application before Wachowich J. for advice and direction as to the interpretation of the support agreements. In particular, the Liquidator sought to determine the validity and ranking of the claims of the Participants pursuant to the Participation Agreement.

In a judgment rendered on December 7, 1987, Wachowich J. held the Participants to be entitled to the repayment of sums recovered by the Liquidator on the Syndicated Portion of the Portfolio Assets (the $5 million), but otherwise not entitled to recover their advances until after all ordinary creditors, including unsecured creditors, were paid in full. Wachowich J. interpreted the injection of funds by the Participants to have been a capital investment. The Participants, apart from Canada and CDIC, the respondents in this appeal, successfully appealed the latter part of this judgment. The Alberta Court of Appeal disagreed with Wachowich J., preferring to characterize the advance of $255 million as a loan. The Court of Appeal concluded that the Participants were entitled to rank pari passu with CCB's unsecured creditors for all monies advanced to CCB pursuant to the Participation Agreement and not repaid by monies recovered from the Syndicated Portion of the Portfolio Assets.

On an application by the Liquidator, Wachowich J. directed the Liquidator to present an application to this Court for leave to appeal from the Court of Appeal's decision. Wachowich J. further ordered that Lerner & Associates be appointed as Legal Representative ("Legal Representative") of CCB's general body of creditors, other than the Participants, for purposes of the application for leave to appeal and further on the appeal. Leave to appeal to this Court was granted on March 14, 1991, [1991] 1 S.C.R. vi. The Liquidator, as an officer of the Court and as the representative of all the creditors of CCB, takes no position in this appeal. The Bank Group and Alberta, the respondents before this Court, made separate written and oral submissions.

II. Judgments in the Courts Below

A. Alberta Court of Queen's Bench (1987), 1987 CanLII 3216 (AB KB), 83 A.R. 122

On the initial application, the Participants took the position that they were entitled under the terms of the support agreements: (1) to receive their proportionate shares of the moneys received by the Liquidator or CCB on account of the Portfolio Assets; and (2) to rank pari passu with all the other unsecured creditors of CCB for any amounts not recovered from the Portfolio Assets and still owing to them pursuant to the Participation Agreement. Wachowich J. agreed with the first proposition but rejected the second.

According to Wachowich J., the Participants' first submission involved a consideration of the validity of the Participation Agreement. The learned chambers judge confessed it was a "difficult task" to determine the position of the Participants with respect to CCB's estate given the "extraordinary nature of the agreement" involved (at p. 126). He noted there were no precedents dealing with similar commercial agreements. In his view, the Participation Agreement in question was not prohibited by ss. 173 and 174 of the Bank Act. While the agreement did not relate to business in which a bank would normally or commonly engage, he noted that "given the unique circumstances and the stated purpose of the Participation Agreement as a whole, one can hardly regard this as an invalid transaction" (at p. 127). He found it was a valid contractual document binding on all parties and held that the Participants were entitled to receive their proportionate share from moneys recovered by the Liquidator from the Portfolio Assets, in the manner provided for in s. 9 of the Participation Agreement (i.e. to the extent such recoveries exceed the CCB Portion).

Next, Wachowich J. turned to a consideration of the ranking of the Participants with the general body of creditors of CCB for any amounts not recovered from the Syndicated Portion of the Portfolio Assets, and still owing pursuant to the Participation Agreement. He noted that the Participants would have "valid claims" under the terms of the Participation Agreement for such amounts (at p. 128). However, whether they could rank pari passu with other unsecured creditors depended on the interpretation of the agreement taken as a whole and a determination of the "real basis upon which the $255 million was paid to CCB" (at p. 128).

In Wachowich J.'s view, the essence of the Participation Agreement was not the creation of a mere purchase and sale of assets with an added indemnity as to the value of those assets. Rather, the transaction reflected an investment of capital into CCB (at p. 129):

The agreement, as evidenced by all the surrounding circumstances, was really to effect an infusion of capital into C.C.B. whereby the Participants would be risking their monies in hope that the C.C.B. would continue as a viable and profitable business. If this in fact had occurred, the Support Group Participants stood to gain a healthy return on their investments.

The learned chambers judge found support for his characterization in the following: (1) the portion of the Portfolio Assets purchased by the Participants was of little value; (2) s. 2 of the Participation Agreement masked the true nature of the transaction, that is, the investment of working capital into CCB; (3) the indemnity provision and repayment structure set up by the agreement were directly connected to the profits and income of CCB; (4) the repayment of the purchase price was to come not only from the Portfolio Assets, but mainly from CCB's pre-tax income; (5) if CCB's business was successful, the Participants would benefit not only in recovering their purchase price, but as well by purchasing common shares in CCB under the Equity Agreement; (6) "[w]hile the transaction may not be a typical investment situation, where for example there is an outright purchase of shares, it is difficult to ignore the investment features of the agreement" (p. 130); (7) while the accounting treatment had to be looked at with caution, the fact there was no liability to the Participants recorded on the balance sheet of CCB, as created by the indemnity provisions of the agreement, supported the conclusion that the transaction was an investment; (8) the cases of Laronge Realty Ltd. v. Golconda Investments Ltd. (1986), 1986 CanLII 756 (BC CA), 7 B.C.L.R. (2d) 90 (C.A.) ("Laronge Realty"), In re Dickie Estate (1924), 5 C.B.R. 214 (N.S.S.C.), and In re Meade, [1951] 1 Ch. D. 774, "stand for the general proposition that advances of monies will be classed as capital investments where the monies were used in the business and the business was carried on for the joint benefit of the parties involved" (at p. 131); and (9) the Participants here did have a stake in the continued profitability of CCB in that (a) the repayment of the money advanced would come from the income of CCB and (b) their warrants allowed them to "continue to share in the profits of C.C.B." (at p. 131).

Thus, according to Wachowich J., the Participants could not rank pari passu with the ordinary creditors of CCB, including unsecured creditors, for the amounts not recovered from the Portfolio Assets. In so doing, he applied the principle that "if a person contributes capital to a business, even though that person is not a partner in the business and may have received no share of the profits, they cannot prove their claim in bankruptcy in competition with the creditors of the business" (at p. 131): Halsbury's Laws of England (3rd ed.), vol. 2, at p. 495; Laronge Realty, supra; and In re Beale (1876), 4 Ch.D. 246.

In concluding, Wachowich J. held the provisions of the Participation Agreement which attempt to rank the Participants pari passu and to create a debt on insolvency are ineffective to alter the "existing legal nature of their relationship" with CCB. These provisions would be void as they are an attempt to alter insolvency laws through a private agreement: British Eagle International Airlines Ltd. v. Compagnie Nationale Air France, [1975] 2 All E.R. 390 (H.L.).

B. Alberta Court of Appeal (1990), 1990 ABCA 139, 107 A.R. 199

The respondents (the Participants apart from Canada and CDIC) appealed from Wachowich J.'s conclusion with respect to their ranking on insolvency, whereas the then Legal Representative cross-appealed from the conclusion that the Participants could receive funds from the Syndicated Portion of the Portfolio Assets. Harradence J.A. (writing for the Court of Appeal) began by stating that the learned chambers judge had erred in law in his interpretation of the decisions in Laronge Realty, supra, In re Dickie Estate, supra, and In re Meade, supra (at p. 207):

I have examined closely the cases relied upon as well as others to which I have been referred and the inescapable conclusion to be reached is that the proposition as stated [by Wachowich J.] can only be correct where one implies into the term "monies were used in the business" a necessary condition that the investor has not expressly stipulated a requirement for the repayment of monies advanced. A failure to imply this term into the proposition results in a misstatement of the appropriate test and, further, is inconsistent with the decision of the Supreme Court of Canada in Sukloff v. Rushforth (1964), 1964 CanLII 11 (SCC), 45 D.L.R. (2d) 510 (S.C.C.).

Harradence J.A. reviewed the cases cited by Wachowich J. and noted that, unlike the case at bar, none of them involved transactions where provisions for the repayment of the money advanced had been included by the parties. Turning specifically to Sukloff v. A. H. Rushforth & Co., 1964 CanLII 11 (SCC), [1964] S.C.R. 459 ("Sukloff v. Rushforth"), Harradence J.A. said that while it was "difficult to glean" from that case the exact reason for concluding that the transaction under consideration therein was a loan rather than a capital investment, "the only reasonable conclusion to be reached is that the provision for repayment was determinative of the nature of the transaction" (at p. 209). He concluded his review of the jurisprudence by stating (at p. 210): "where, as in this case, the evidence indicated that monies advanced to a business are to be repaid, and particularly when the terms of repayment are specified, the transaction is classified as a loan".

Harradence J.A. next turned to the interpretation of the Participation Agreement. He noted at the outset the rule prohibiting extrinsic evidence from contradicting express contractual terms. He reviewed a number of factors favouring interpreting the agreement as a loan, namely: (1) there is nothing in the express terms of the agreement which supports a conclusion that the money was advanced as an investment; (2) there are express provisions pointing to the opposite conclusion, including provisions for repayment and for an indemnity that full repayment will be made; (3) pursuant to the Participation Agreement, upon insolvency or winding-up, any amount remaining unpaid was to constitute indebtedness and, in such circumstances, the Participants were to rank pari passu with other creditors; and (4) the intention of the Participants was consistent with a "loan" characterization. He did not find it necessary to determine whether the accounting treatment was consistent with an investment, holding that such a factor is not determinative of the legal relationship of the parties.

Harradence J.A. found that repayment of the money advanced was intended and was coupled with express repayment provisions. Thus, relying on Sukloff v. Rushforth, supra, and the other cases cited, he concluded that the $255 million advanced was not to be characterized as an investment in capital but rather as a "loan coupled with a purchase agreement to CCB" (at p. 211).

The observation made by the learned chambers judge that the business of CCB was carried on for the "joint benefit" of CCB and the Participants, because (1) repayment was to come from the income of CCB and (2) the warrants, if exercised, would allow the Participants to continue to share in the profits of CCB, was next addressed. With respect to the first factor, Harradence J.A. held that Wachowich J. erred in considering the source of the funds for repayment in concluding that the Participants would be sharing in CCB's profits. His comments warrant citation (at p. 211):

It is important to recognize that while repayment was to be made from pre-tax income of C.C.B., there was no direct link between the success of the C.C.B. and the overall quantum of the amount due to or payable to the Support Group Participants. I have been referred to no authority which supports the proposition that a repayment, the instalments of which are referable to the quantum of the income of the debtor, is a situation of "joint benefit". Since the sums to be received by the Participants were limited to repayment of monies advanced, with a contingent right to interest, the source of the repayment monies is not relevant and, with respect, the learned Chambers Judge erred in concluding the Participants were "sharing in profits" in this respect.

As for the second factor, Harradence J.A. summarily rejected it as an indicium of investment and "joint benefit" mainly because of the contingent nature of the warrants in question, as recognized by both the Participation Agreement and the Equity Agreement. He added (at p. 212): "Had shares actually been issued or even approval obtained, or if there was an obligation to purchase or if a purchase had been made, then the `joint benefit' argument might have some merit and it would have been necessary to fully address this issue."

Finally, Harradence J.A. considered whether repayment to the respondents was nevertheless postponed pursuant to what are now s. 139 of the Bankruptcy Act, R.S.C., 1985, c. B-3, and s. 4 of the Partnerships Act, R.S.O. 1990, c. P.5. In his view, the application of these provisions was precluded by his earlier conclusion that the Participants were not to receive a rate of interest varying with the profits of CCB or a share in the profits of CCB.

Thus, the appeal was allowed and it was ordered that the respondents were entitled to rank pari passu with the ordinary creditors of CCB for all monies advanced to CCB pursuant to the Participation Agreement and not repaid by monies recovered from the Portfolio Assets. In view of this result, the cross-appeal brought by the then Legal Representative, alleging an inconsistency in Wachowich J.'s conclusions, was dismissed.

III. Issues

There are many ways of characterizing the issues raised by this appeal. As I see it, the three main questions which need to be addressed are:

(1) Was the Court of Appeal correct in characterizing the advance of $255 million by the Participants to CCB as a loan, as opposed to an investment in capital, thereby creating a debtor-creditor relationship between the parties?

(2) If the true legal nature of this transaction is indeed a loan, does this loan come within the postponement provision found in s. 4 of the Partnerships Act, R.S.O. 1990, c. P.5?

(3) If the Partnerships Act does not apply, should the respondents' claim for the money loaned under the Participation Agreement nonetheless be postponed to the claims of the general body of CCB unsecured creditors, other than the Participants, based on the United States doctrine of equitable subordination?

The Legal Representative raises a subsidiary issue concerning the portion of the moneys recovered attributable to the Syndicated Portion of the Portfolio Assets:

(4) Was the Court of Appeal correct in upholding the conclusion of the learned chambers judge that the Participants are entitled to receive from the Liquidator, pursuant to the Participation Agreement, the sums recovered on the Syndicated Portion of the Portfolio Assets?

For the reasons that follow, it is my view that the first and fourth questions should be answered in the affirmative while the second and third should be answered in the negative. In summary, the words chosen by the parties in their agreements clearly support the Court of Appeal's conclusion that the assistance program involved, in substance, a loan of $255 million and not a capital investment. The surrounding circumstances provide additional support for, rather than detract from, this conclusion. Although the transaction did have an equity component (the warrants), this aspect alone does not, in the circumstances of this case, transform the essential nature of the advance from a loan to an investment. Put another way, while it is true that this transaction does have "investment features", these features were incidental to the debt features of the arrangement and do not alter the substance of the debtor-creditor relationship that was created by the parties with respect to the $255 million advanced by the Participants to CCB. Moreover, the fact that CCB's pre-tax income was the main source for repayment does not affect this characterization as the amount to be repaid from this source was limited to the sum advanced to CCB, plus a contingent interest at prime rate. Thus, the respondents are creditors of CCB and, as such, are entitled to what may be called a "prima facie" pari passu ranking with the other unsecured creditors of CCB in the distribution of CCB's assets.

In the circumstances of this case, this prima facie ranking is not altered by the principles of law and equity relied upon by the Legal Representative. Indeed, the loan in question does not fall within the ambit of the Ontario Partnerships Act (ss. 3(3)(d), 4) as the Participants were to receive neither a "rate of interest varying with the profits" of CCB nor a "share of the profits arising from carrying on the business" of CCB. In my view, the principles of equitable subordination have no application to the facts of this case. Finally, in light of these conclusions, the Legal Representative's subsidiary issue concerning the moneys recovered on the Syndicated Portion of the Portfolio Assets must also fail. Accordingly, I would dismiss the appeal.

IV. Relevant Statutory Provisions

Winding-up Act, R.S.C., 1985, c. W-11:

Distribution of Assets

93. The property of the company shall be applied in satisfaction of its debts and liabilities, and the charges, costs and expenses incurred in winding-up its affairs.

94. All costs, charges and expenses properly incurred in the winding-up of a company, including the remuneration of the liquidator, are payable out of the assets of the company, in priority to all other claims.

95. The court shall distribute among the persons entitled thereto any surplus that remains after the satisfaction of the debts and liabilities of the company and the winding-up charges, costs and expenses, and unless otherwise provided by law or by the Act, charter or instrument of incorporation of the company, any property or assets remaining after the satisfaction shall be distributed among the members or shareholders according to their rights and interests in the company.

Partnerships Act, R.S.O. 1990, c. P.5:

3. In determining whether a partnership does or does not exist, regard shall be had to the following rules:

4. The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular,

(a)the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such;

(d)the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto;

4. In the event of a person to whom money has been advanced by way of loan upon such a contract as is mentioned in section 3, or of a buyer of the goodwill in consideration of a share of the profits of the business, becoming insolvent or entering into an arrangement to pay his or her creditors less than 100 cents on the dollar or dying in insolvent circumstances, the lender of the loan is not entitled to recover anything in respect of the loan, and the seller of the goodwill is not entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer, for valuable consideration in money or money's worth, are satisfied.

V. Analysis

A. Characterization of the $255 Million Advanced: Capital Investment or Loan?

The first and foremost issue in this appeal concerns the determination of the true nature of the transaction in question between the Participants and CCB. Was the $255 million advanced by the Participants in the nature of a loan, as found by the Court of Appeal, or in the nature of an investment of capital, as found by the learned chambers judge? If the Court of Appeal was correct in describing the transaction as a loan, it follows that the Participants are creditors of CCB and as such, pursuant to both the Participation Agreement and ss. 93 to 95 of the Winding-up Act, they would be entitled, subject to the statutory (s. 4 of the Partnerships Act) and equity ("equitable subordination") principles raised by the Legal Representative, to rank pari passu with the other ordinary creditors of CCB in the distribution of CCB's assets. If, however, Wachowich J.'s characterization is to be preferred, then, relying on an old common law principle, it is argued the Participants would not be creditors entitled to an equal ranking with CCB's true creditors: In re Beale, supra; In re Meade, supra; Laronge Realty, supra; and Halsbury's Laws of England (4th ed.), vol. 3(2), at p. 315. Under this approach, it is said the Participants would have an equitable right to share in the distribution of the assets of CCB, but only at such time as the ordinary creditors have been paid in full.

The principal argument raised by the Legal Representative in favour of finding the transaction to have been that of a capital infusion is the potential for unlimited returns and control over CCB by reason of the warrants granted to the Participants under the Equity Agreement. Other indicia of capital investment are also suggested. First, CCB's accounts did not show their obligation to the Participants as a liability. It is submitted that, if the financial statements could have led creditors, including depositors, to believe that there was adequate capitalization, this should be taken into consideration in determining the rights of the ordinary creditors and the respondents. Second, it is argued that the Court of Appeal's interpretation of ss. 8 and 13 of the Participation Agreement fails to recognize that the rights of differing classes of people who provide funds for the use of a business crystallize prior to insolvency, and cannot be altered by an agreement. It is argued that the Court of Appeal erred in assuming that the characterization by the Participants and CCB of their rights and obligations inter se should be determinative of the relative priority of the claims of the Participants and the ordinary creditors of CCB. According to the Legal Representative, "[s]ection 13 should be disregarded by the Courts, as being a self-serving attempt by the Participants to enhance their position for distribution purposes in the event of insolvency." Finally, the Legal Representative argues that the Court of Appeal erred in its interpretation of Sukloff v. Rushforth, supra, which, according to him, stands for the proposition that, if someone has an interest in a business, in the sense that his or her potential for return is unlimited except by the enterprise's actual ability to generate profits, that person may not rank as a creditor if the business becomes insolvent. The key, according to the Legal Representative, is the right or potential to an unlimited return, not the right to repayment.

The respondent Alberta, on the other hand, submits that the advance was a loan and offers the following arguments: (1) the agreement for the advance contained no express provision that the advance was an investment in capital but did contain express provisions to the contrary, including provisions for repayment and an indemnity for that repayment; (2) the parties intended the advance to be repayable; (3) CCB was contingently liable to pay interest; (4) in its financial statements CCB accounted for the advance as being a debt by disclosing the outstanding balance of the advance at the opening, repayments during, and the obligation for the outstanding balance at the closing of each reporting period; (5) Mr. Justice Estey considered the advance to be a loan in the Report of the Inquiry into the Collapse of the CCB and Northland Bank (1986) ("Estey Report"), at pp. 115, 118 and 125; (6) the Participants could not and did not invest in CCB's equity capital; (7) the decision of this Court in Sukloff v. Rushforth, supra, as correctly demonstrated by the Court of Appeal, supports the conclusion that the advance to CCB was a loan; and (8) according to Sukloff v. Rushforth, supra, and other decisions, an advance of money which is to be repaid, without more, is a loan and not an investment in equity capital or the supply of capital for the business of the recipient for the joint benefit of the advancer of money and the recipient, even if it is described as an investment of capital or if the person advancing the money is to share the profits or to receive shares of the recipient or if the advance is repayable when funds are available or out of profits. Alberta also takes issue with the Legal Representative's characterization of s. 13 of the Participation Agreement. It submits that this is a common provision in loans and, rather than enhance the Participants' ranking on insolvency, has the effect of reducing the otherwise priority ranking of Canada, Alberta and CDIC.

For their part, the Bank Group note that the agreements in question represent a unique response to a unique situation, and thus, cannot be perceived as a normal investment in a business. For the reasons given therein, they commend the Court of Appeal's characterization of the advances as a loan in the form of a purchase of doubtful assets. Specifically, they submit that Harradence J.A. was correct in finding that, because of the contingent nature of the warrants, the support agreements did not provide a right to share in profits or for a rate of interest that varied with profits. They characterize the Equity Agreement as a mere "sweetener". The Bank Group submits that the cases, including Sukloff v. Rushforth, supra, do not support the conclusion that a contingent right to profits in circumstances like the case at bar can represent an interest in the business. With respect to the accounting issue, they argue that they should be considered on a basis different from the other Participants because they were prohibited from controlling or attempting to control CCB. Indeed, they had no control over how CCB showed its obligations to them in its financial statements. Further, such a factor should not determine the nature of the legal relationship between the parties to the agreement.

For my part, I agree in essence with the position advanced by Alberta and the Bank Group. Briefly put, the words chosen by the parties in their agreements strongly support the Court of Appeal's conclusion that the financial assistance program involved, in substance, a loan of $255 million rather than a capital investment and there is nothing in the surrounding circumstances which distracts from this characterization. On the contrary, the surrounding circumstances offer additional support for the Court of Appeal's conclusion. As noted by Wachowich J. and the Legal Representative, the transaction did indeed have an equity component (the warrants) and did involve a repayment scheme linked to the profits of CCB. However, for reasons which I shall elaborate, these aspects are insufficient to justify the conclusion reached by Wachowich J. Similarly, the other indicia of capital investment put forward by the Legal Representative, such as the accounting treatment given to the advance, do not affect the substance of this transaction.

As in any case involving contractual interpretation, the characterization issue facing this Court must be decided by determining the intention of the parties to the support agreements. This task, perplexing as it sometimes proves to be, depends primarily on the meaning of the words chosen by the parties to reflect their intention. When the words alone are insufficient to reach a conclusion as to the true nature of the agreement, or when outside support for a particular characterization is required, a consideration of admissible surrounding circumstances may be appropriate.

In the case at bar, it should be noted that the circumstances surrounding the financial arrangements between CCB and the Participants, and the agreements themselves, are somewhat unique. At the heart of this matter is the attempted rescue of a Canadian chartered bank. Recourse to emergency measures in order to preserve the solvency of a bank is, fortunately, relatively rare in our country. I say this not because financial support programs are harmful (quite the contrary), but because the events surrounding the CCB rescue in the mid-1980's infrequently arise. Part of the result, however, is that the task of ascertaining the intention of the Participants and of CCB with respect to the advance of $255 million is not particularly simple. Indeed, the learned chambers judge described the Participation Agreement as a "unique document based on a unique set of facts" as well as an "extraordinary transaction", and he found it "most difficult" to characterize (at pp. 132 and 126). Similarly, Harradence J.A. said that "[t]he unique situation of C.C.B. and the Participants resulted in novel and complex documentation, the interpretation and characterization of which is a challenging and difficult task" (at p. 206).

It is evident from reviewing the agreements in question that characteristics associated with both debt and equity financing are present. The most obvious examples are, on the one hand, ss. 8 and 13 of the Participation Agreement pertaining to CCB's indemnity towards the Participants and their ranking in the event of a winding-up and, on the other hand, the provisions of the Equity Agreement concerning the warrants granted by CCB to the Participants. Such a duality is apparently quite common in loan participation agreements. Indeed, in an article entitled "Characterization of Loan Participation Agreements" (1988), 14 Can. Bus. L.J. 336, Professor Ziegel uses the heterogeneity in some loan participations to explain, in part, the divergence of judicial and academic opinion in the United States on the proper characterization of a participation agreement (at p. 337):

This issue [the characterization of the participation agreement] has provoked a large body of case law and textbook and periodical literature, most of it American, and the conclusions are not always the same. At one time or another one or more of the following descriptions have been applied to a participation agreement: a simple debtor-creditor relationship, with or without the benefit of a security; an agency agreement; a partnership or joint venture; a trust; and, finally, a sale or assignment of an undivided interest in the loan.

It is easy to see why there should be this divergence of opinion. As with any agreement, the parties are free to verbalize it as they see fit and ambiguous or neutral language may reflect their unwillingness to answer hard questions, perhaps in the hope that the need to do so may never arise. Frequently, the several parts of a participation agreement lend themselves to different characterizations and the agreement is really a composite of cumulative legal elements. Finally, there is a significant overlap between such flexible concepts as a secured loan or trust and the sale or assignment of an undivided share of a loan, and the language of the agreement may be consistent with more than one of them. Faced with such ambiguity, the job of the adjudicator, when a dispute arises, is to find the characterization that best seems to fit the parties' intentions as derived from the total agreement and all the surrounding circumstances.

As I see it, the fact that the transaction contains both debt and equity features does not, in itself, pose an insurmountable obstacle to characterizing the advance of $255 million. Instead of trying to pigeonhole the entire agreement between the Participants and CCB in one of two categories, I see nothing wrong in recognizing the arrangement for what it is, namely, one of a hybrid nature, combining elements of both debt and equity but which, in substance, reflects a debtor-creditor relationship. Financial and capital markets have been most creative in the variety of investments and securities that have been fashioned to meet the needs and interests of those who participate in those markets. It is not because an agreement has certain equity features that a court must either ignore these features as if they did not exist or characterize the transaction on the whole as an investment. There is an alternative. It is permissible, and often required, or desirable, for debt and equity to co-exist in a given financial transaction without altering the substance of the agreement. Furthermore, it does not follow that each and every aspect of such an agreement must be given the exact same weight when addressing a characterization issue. Again, it is not because there are equity features that it is necessarily an investment in capital. This is particularly true when, as here, the equity features are nothing more than supplementary to and not definitive of the essence of the transaction. When a court is searching for the substance of a particular transaction, it should not too easily be distracted by aspects which are, in reality, only incidental or secondary in nature to the main thrust of the agreement.

The weight to be given to one aspect of the support agreements over another in assessing the true intention of the parties underlies the difference in opinion between the learned chambers judge and the Court of Appeal's characterization of the transaction. Wachowich J. emphasized both the fact that the recovery by the Participants of their contribution was dependent upon the income generated by CCB and the Participants' potential to share in the future success of CCB by the warrants, even after having been repaid, as evidencing that the essence of the transaction was that of a capital investment. The Court of Appeal, however, largely dismissed the relevance of the Equity Agreement because of its contingent nature and emphasized instead that the Participants were only entitled to receive from CCB the amount advanced to it and that the parties had included specific provisions in the Participation Agreement referring to debt; all of which amounted to a very strong indicium of a loan.

In the circumstances of this case, it is my view that the learned chambers judge and the Legal Representative give far too much weight to the equity features associated with the Equity Agreement in characterizing the overall nature of the advance of $255 million. It is true the Participants received warrants to purchase common shares of CCB through the Equity Agreement. It is also true, at least in theory, that by fully exercising their warrants the Participants would own 75 percent of the common shares issued by CCB. However, it is evident on the face of the record that this possibility was not only a mere hypothesis, but it was unlikely to occur. As noted by the respondents and the Court of Appeal, shareholder and regulatory approval was required to permit an increase in CCB's authorized capital and, unless the warrants were assigned, an amendment to the Bank Act was necessary before the Participants who are chartered banks could fully exercise their rights to purchase shares. It is not without significance that none of the Participants ever exercised any of their warrants nor did they assign them. In these circumstances, I agree with the Court of Appeal that the true effectiveness of the Equity Agreement was highly contingent and that the learned chambers judge erred in not considering the warrants for what they really were, namely so-called "sweeteners" or "kickers" with respect to the advance of $255 million which were simply additional features to the underlying loan arrangement between the parties. Undoubtedly, the warrants are an equity feature of the transaction supporting a conclusion that the advance was an investment. However, in the facts of this case, only minimal weight should be given to this factor in the overall characterization of the agreement. Alone, the highly contingent warrants are surely insufficient to tip the scales when faced with the strong indicia of debt present here as identified by the Court of Appeal.

Wachowich J. also erred in concluding that the Participants would be "sharing in the profits" of CCB under the support agreements. The Participation Agreement simply referred to CCB's profits (i.e. pre-tax income) as one of the sources for repayment. The other source for repayment, the moneys recovered on the Syndicated Portion of the Portfolio Assets, was not linked with CCB's profits. While full repayment from the Portfolio Assets alone was unlikely, the fact remains that the amount of money to be paid to the Participants from both sources was fixed at the amount advanced by each for their Participation Certificate. Regardless of where the repayments were coming from, they remained mere repayments for moneys advanced. Of course, the Participants would benefit from the success of CCB's business; however, this benefit would be capped by the amount of the advance. I shall examine in greater detail the "sharing in profits" argument of the Legal Representative when I deal with s. 4 of the Partnerships Act. For now, it is sufficient to state that, in the circumstances of this case, the source from which CCB was to repay the advance made does not carry any weight in favour of a finding that said advance was an investment in capital rather than what it appears to be on the face of the agreements, namely a loan of $255 million coupled with an equity "sweetener" or "kicker".

Another error committed by the learned chambers judge relates to his reliance on the decisions of Laronge Realty, supra, and In re Meade, supra. The latter case together with In re Beale, supra, are said to have established the common law principle applied in Laronge Realty and upon which Wachowich J. relied in order to deny ranking the Participants pari passu with CCB's unsecured creditors other than the Participants. This principle is stated as follows in Halsbury's Laws of England (4th ed.), vol. 3(2) (at p. 315):

If a person advances money to another, not by way of loan but as a contribution to the capital of a business carried on for their joint benefit, the person who has made the advance, even though he is not a partner in the business and has received no share of the profits as such, is debarred from proving in the bankruptcy of the recipient of the money in competition with the creditors of the business.

Briefly, I agree with Harradence J.A.'s conclusion that none of the agreements at issue in the cases relied upon by Wachowich J. contained express provisions for the repayment of the money advanced and that such a factor was crucial to the conclusions reached therein. I also agree that the express repayment scheme set out in the Participation Agreement clearly distinguishes the case at bar from those in which the common law rule relied upon by Wachowich J. has been applied.

This rule was referred to, but not applied, by this Court in Sukloff v. Rushforth, supra, a case upon which the Legal Representative strongly relies. There, Ritchie J. declined to apply the common law rule since he found that the money advanced by Mr. Sukloff was more in the nature of a loan, thereby creating a debtor-creditor relationship between the parties. Indeed, just after citing the above excerpt, Ritchie J. stated (at p. 467): "As I have indicated, I do not construe Mr. Sukloff's role as that of one who was supplying capital for a business carried on for the joint benefit of himself and the two limited companies." Earlier, he had specifically agreed with the trial judge's finding that Mr. Sukloff's relationship with the companies in question "was confined to that of a lender or financier who had a right to share in the profits, if any, of the undertakings of these companies" (at pp. 465-66) (emphasis added). This "share in the profits" aspect was later used by Ritchie J. in order to postpone part of the money advanced by Mr. Sukloff (the unsecured $10,000 upon which the Legal Representative asks this Court to focus) under what was then s. 98 (now s. 139) of the Bankruptcy Act, a provision similar to s. 4 of the Partnerships Act. However, this aspect had no effect whatsoever on the characterization of the true nature of the transaction involved and on the application of the common law rule set out in In re Beale, supra, and In re Meade, supra, and applied in Laronge Realty, supra. As found on the evidence, the advances in Sukloff v. Rushforth, supra, amounted to a loan.

As observed by Harradence J.A. in the case at bar, it is somewhat difficult to discern what specific evidence Ritchie J. was referring to when he agreed with the finding of the trial judge in Sukloff v. Rushforth, supra. However, I would note, as did Harradence J.A., that the agreements involved therein contained express repayment provisions similar to those contained in the Participation Agreement. It is not unreasonable to suggest that these provisions played an important role in the characterization of the advances as a loan. In any event, what is most important for our purposes is the fact that none of the moneys advanced by Mr. Sukloff was "postponed" under the common law principle advanced by Wachowich J. and the Legal Representative. The only part which was indeed postponed (the $10,000), was done so under the Bankruptcy Act and not following In re Meade, supra. I will explain in the context of my analysis of s. 4 of the Partnerships Act why, contrary to Sukloff v. Rushforth, supra, such statutory postponement has no application to the facts of this case (namely, because there is no profit sharing in the case at bar, simply a repayment out of profits). Suffice it here to say that, contrary to the Legal Representative's submissions, Sukloff v. Rushforth, supra, has no bearing on the characterization issue facing this Court.

Similarly, contrary to the Legal Representative's submissions, the accounting treatment is not by itself of great weight in the characterization of the advance. I agree with the learned chambers judge that this "evidence" should be "looked at with caution" (at p. 130). I say this for the following interrelated reasons. First, CCB was following the express directives given by the Office of the Inspector General of Banks, who is not a party to any of the agreements, in using the accounting methods it did. Second, as noted by the Bank Group, the accounting methods used by CCB were beyond the control of many of the Participants. Third, the Legal Representative is really asking us to look at the conduct of one party, after an arrangement has been signed, in order to discern the common intention of all contracting parties at the time of signing. This type of unilateral and after the fact "evidence" is clearly of little relevance and reliability with respect to the issues before this Court. Fourth, as previously noted, the accounting treatment used and the success of the support program were closely linked and it is unwise to draw inferences on the legal relationship of the parties therefrom. For all these reasons, I would not place much weight on the accounting treatment used by CCB in determining the true nature of the advance of $255 million. In so concluding, I do not wish to say that there may not be other cases where the accounting treatment could be helpful in determining the nature of a given transaction.

Finally, I cannot agree with Wachowich J. about the relevance to the characterization issue of the fact that the portion of the Portfolio Assets purchased by the Participants was of little value. Even assuming that courts are entitled to weigh the value of the consideration given for a particular promise when characterizing an agreement, there was more to the support agreements than the mere purchase of participations in bad loans. Regardless of the true value of the Syndicated Portion, the Participants were to be repaid the entire $255 million they had advanced to purchase their Participation Certificates. The source of this repayment was also the profits of CCB and the parties agreed that any amount remaining unpaid upon insolvency would be considered an indebtedness by CCB towards the Participants.

On the other hand, the factors noted by the Court of Appeal of Alberta and the respondents as providing indicia of the "loan" nature of the advance of $255 million are clearly relevant to the characterization issue and they strongly support such a conclusion. I have already referred to these factors in summarizing the reasons of Harradence J.A. and the submissions made by Alberta and the Bank Group. To repeat the most important ones: (1) there is nothing in the express terms of the agreements which supports a conclusion that the money was advanced as an investment; and (2) there are express provisions supporting a characterization of the advance as a loan, including provisions for repayment (P.A. ss. 9-11), for an indemnity should full repayment not be made from the sources contemplated (P.A. s. 8), and for equal ranking with the ordinary creditors of CCB (P.A. s. 13).

It is interesting to note that my conclusion that the $255 million advance was a loan also accords with the views of Mr. Justice Estey in his report. The relevant passages are found at pp. 115, 118 and 125 of the Estey Report:

The $255M reduced the bank's debt to the Bank of Canada, but itself became an obligation to be retired by collections on the Support Package loans or on liquidation, out of the assets of the bankrupt bank. The receipt of the $255M therefore is irrelevant to the presence or absence of solvency. Whatever state the bank was in at that time remained unaffected by the receipt of the Support Package moneys. The Inspector General, therefore, was in error in finding the bank to be solvent upon receipt of the $255M. It should be borne in mind that the $255M, by the terms of the interim and final agreements, remains an obligation in debt of the CCB.

The Support Package should have classified these moneys as an unrecoverable purchase price, as a capital grant of some nature or as a subordinated loan, repayable out of earnings only. What CCB needed at this time of crisis was a loan without recourse in the nature of a capital grant repayable only from future profits and not a loan which would retain that characteristic and revive when the bank ran into further difficulties.

The object of this Support Program therefore was to replace lost income and thereby protect and renew capital. The banks could not in law contribute equity capital, and the government agencies likewise were not in a position, either legally or practically, to do so. Resort was had to what amounted to a long-term loan repayable out of the prospects of collections from bad debts and future earnings. The money infused, therefore, could not be treated as capital, but only serve to reduce liquidity advances.

Contrary to the Legal Representative's submissions, s. 13 of the Participation Agreement is not an attempt to enhance the ranking of the Participants upon CCB's insolvency. As evidenced by the passages from this clause which I earlier emphasized, the main purpose and effect of s. 13 is to reduce, rather than enhance, the ranking of certain of the Participants (Canada and Alberta) upon insolvency as the parties agreed to do away with s. 277 of the Bank Act. As for the other Participants, there is nothing in s. 13 other than a confirmation that the ordinary principles of common law and of ss. 93 to 95 of the Winding-up Act apply upon insolvency, namely the Participants, as unsecured creditors of CCB, are entitled to rank pari passu with the other ordinary creditors of CCB.

For all the foregoing reasons, I find that the Court of Appeal did not err in characterizing the advance of $255 million to CCB as being, in substance, a loan rather than an investment of capital. While indicia supporting both conclusions are present, the overall balance clearly tilts in favour of the characterization put forward by the respondents. Accordingly, I would dismiss this first ground of appeal.

B. Postponement Under Section 4 of the Partnerships Act

In the alternative, the Legal Representative submits that, even if the advance of $255 million was properly characterized as a loan, the Court of Appeal erred in declining to postpone, under existing statutory and common law principles, the respondents' claims for the moneys not repaid until the claims of the other ordinary creditors of CCB were satisfied. Relying on ss. 3(3)(d) and 4 of the Partnerships Act, he argues that, where a lender advances money to a business borrower under a contract providing that the lender shall "participate in the profits of that business", and the borrower subsequently becomes insolvent, the lender is not entitled to recover anything in respect of the loan until the claims of all other creditors of the borrower have been satisfied. It is submitted that the support agreements in question are contracts of such a nature because the Participants contracted to be repaid their advances out of CCB's pre-tax income (either 50 percent or 100 percent plus interest, depending on whether the Equity Agreement could be carried out), and because of the potential for profits inherent in the warrants granted to the Participants under the Equity Agreement.

As noted earlier, the Alberta Court of Appeal rejected a similar argument on the grounds that, notwithstanding the source for repayment and the warrants, the Participants were not to receive under the agreements a "rate of interest varying with the profits" or a "share of profits" (at p. 212). In other words, the loan in question was not one to which s. 4 of the Partnerships Act applied. The respondents before this Court adopt a similar position on this issue.

Alberta argues, persuasively in my view, that a lender does not receive a "share of the profits" within the meaning of ss. 3(3)(d) and 4 of the Ontario Partnerships Act unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan. It is submitted that a lender does not share in profits merely by having a contingent right to acquire or possibly even by having the right to acquire or by owning shares of the borrower. In the case at bar, Alberta submits that all amounts which the Participants were entitled to be paid were to be applied only in repayment of the principal amount due and hence they were not entitled to and did not share in CCB's profits. As for the Bank Group, it is submitted that in the case of the insolvency of a bank, the Winding-up Act and not the Partnerships Act or the Bankruptcy Act determines the priority of claims. Moreover, they argue that the transaction at hand is not one to which the Partnerships Act applies because the Participation Agreement referred to profits only as a means of determining the source of the Participants' right to repayment, and because any alleged "share of the profits" would stop when the sum advanced was repaid.

I have already found that the Court of Appeal was correct in characterizing the advance of $255 million under the support program as a loan. In order to determine the applicability of s. 4 of the Partnerships Act to the facts of this case, a provision which may apply regardless of whether a partnership exists, the general question to be answered is whether this loan was made "upon such a contract as is mentioned in section 3" of the Act. If so, then, subject to any constitutional arguments not made herein, the respondents would not be entitled to recover anything in respect of the loan until the claims of the other ordinary creditors of CCB are satisfied.

The only provisions in s. 3 of the Partnerships Act which make specific reference to a "contract" are ss. 3(3)(b) and (d). Section 3(3)(b) is clearly irrelevant to this appeal. Thus, at least at first glance, the contracts in the case at bar must fall within the ambit of s. 3(3)(d) of the Partnerships Act in order to trigger the application of s. 4. The specific question then becomes whether or not the support agreements provided that the Participants were to receive a "rate of interest varying with the profits" of CCB, or a "share of the profits arising from carrying on the business" of CCB. While the Legal Representative originally structured his s. 4 argument exclusively around the wording in s. 3(3)(d) of the Partnerships Act, he expanded this argument during oral submissions to include s. 3(3)(a). He submitted that, even if the transaction does not fall within the ambit of the former subsection, it clearly falls within the latter. Accordingly, another specific question to be considered is whether s. 4 of the Partnerships Act can be triggered by "the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business" which does not involve a contract of the sort described in s. 3(3)(d). I will deal with both of these questions in turn.

Sections 3(3)(d) and 4 of the Partnerships Act originate from the now repealed 1865 Act to Amend the Law of Partnership (U.K.), 28 & 29 Vict., c. 86 ("Bovill's Act"). The intent of what is now s. 3 of the Partnerships Act was evidently to mitigate the harshness of the old common law rule, which was that any person who shared in the profits of the partnership was deemed to be a partner, and so liable for any debts of the partnership on insolvency: Grace v. Smith (1775), 2 Wm. Bl. 997, 96 E.R. 587 (at p. 588 per De Grey C.J.: "[e]very man who has a share of the profits of a trade ought also to bear his share of the loss"); and Waugh v. Carver (1793), 2 Hy. Bl. 235, 126 E.R. 525.

The old common law rule was first modified by the decision in Cox v. Hickman (1860), 8 H.L.C. 268, 11 E.R. 431, which in some respects was very similar on the facts to the present case. The company of Smith and Son fell into financial difficulties and was unable to pay its creditors. The Smiths entered into an arrangement with five of its creditors assigning the company to them (as trustees for all of the creditors), for a term of 21 years. During that period, the trustees were to carry on the business of the company "and to pay the net income, after answering all expenses; which net income was always to be deemed the property of the two Smiths, among [all] the creditors of the Smiths" (at p. 432 E.R.). In other words, the creditors "were to be paid their debts out of the profits of their debtors' business" (Lindley on the Law of Partnership (15th ed. 1984), at p. 104). The most significant fact for our purposes is that the repayment was to be only to the extent of the debts; when all the debts had been paid, the trustees were to hold the estate in trust for the Smiths. Financial troubles continued under the new management, and the company once again became unable to pay its debts.

Since at that time the law was thought to be that a person who shared in the profits was liable as a partner, the question in Cox v. Hickman, supra, was not, as here, whether those creditors who were being paid out of profits were to be ranked equally with subsequent creditors, but whether the former group were to be themselves liable as partners to subsequent creditors. In deciding that they were not so liable, the House of Lords is considered to have established, amongst other things, that receipt of a share of the profits is not conclusive proof of a partnership as was previously thought (Lindley on the Law of Partnership, supra, at p. 104).

However, it is interesting to note one excerpt of the opinion of Wightman J. (one of the judges who came to advise the House of Lords in Cox v. Hickman) who, instead of modifying the old common rule, would simply have not applied it to the facts of the case (at p. 443 E.R.):

It is said that a person who shares in net profits is a partner; that may be so in some cases, but not in all; and it may be material to consider in what sense the words, "sharing in the profits" are used. In the present case, I greatly doubt whether the creditor, who merely obtains payment of a debt incurred in the business by being paid the exact amount of his debt, and no more, out of the profits of the business, can be said to share the profits. If in the present case, the property of the Smiths had been assigned to the trustees to carry on the business, and divide the net profits, not amongst those creditors who signed the deed, but amongst all the creditors, until their debts were paid, would a creditor, by receiving from time to time a rateable proportion out of the net profits, become a partner? I should think not.

In my view, the undesirability of the result foreseen by Wightman J. is equally compelling in the context of ss. 3(3)(d) and 4 of the Partnerships Act.

Historically, s. 3(3)(d) of the Partnerships Act appears to refer to loans similar to those involved in Sukloff v. Rushforth, supra, namely loans in which the creditor advances money to the debtor on the terms that it shall be repaid with interest, and in addition the creditor is to receive a share of the profits over and above any payments on principal until the amount is paid off, as opposed to loans such as those in the present case where the share of the profits is used solely to repay the principal. In other words, s. 3(3)(d) applied to loans which had no cap or limit on the amount to be paid to the creditor from the profits of the debtor's business or which had a cap unrelated to the principal owing on the debt.

It is not entirely clear in Sukloff v. Rushforth, supra, whether the lender actually received any of the profits of the company via the arrangement for 50 percent of the profits. However, in many older cases it is clear that the lender did receive interest and the stated share of the profits for a period, and then claimed for the entire amount of the principal on bankruptcy of the debtor. In these cases ss. 2(3)(d) and 3 of the Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39 (similar to ss. 3(3)(d) and 4 of the Partnerships Act) were applied to subordinate the claims: see Ex parte Taylor; In re Grason (1879), 12 Ch.D. 366; In re Stone (1886), 33 Ch.D. 541; Re Hildesheim, [1893] 2 Q.B. 357; In re Mason; Ex parte Bing, [1899] 1 Q.B. 810; and In re Fort; Ex parte Schofield, [1897] 2 Q.B. 495. These sections of the Partnership Act, 1890 essentially repeated Bovill's Act so it seems reasonable that this was the specific situation envisaged by the Act.

Contrary to the oral submission of the Legal Representative, In re Young; Ex parte Jones, [1896] 2 Q.B. 484, is not inconsistent with the distinction I am drawing. There, Mr. Jones lent money to Mr. Young which was to be used to pay the expenses of Mr. Young's business. The terms of the agreement provided that, in return for the use of this sum, Jones was to be paid a fixed weekly sum out of the profits of the business. When Young became insolvent, Jones claimed for the entire amount of principal, without making allowance for the amounts received by virtue of the weekly payments. In other words, the weekly sum received by Jones out of profits was not for the purpose of repaying the principal sum on the debt. Thus, In re Young is clearly distinguishable from the facts of this case and should not be seen as foreclosing the interpretation of s. 3(3)(d) that I am advancing.

In addition, s. 3(3)(a) of the Partnerships Act provides strong support for the distinction between profits as the source of repayment, and a share in the profits, with any repayment of a fixed debt falling into the former category. Indeed, it provides that:

(a)the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such;

This seems to preclude any reading of s. 3(3)(d) which would catch debts which are to be repaid "out of profits". In this respect, it is interesting to note that the authors of Lindley on the Law of Partnership are of the view that the equivalent of s. 3(3)(a), not s. 3(3)(d), applies to cases such as Cox v. Hickman, supra, where, as we have seen, an arrangement similar to the one at bar was involved (at p. 108).

For the foregoing reasons, I would conclude that any fixed debt to be repaid out of profits does not in itself constitute a "share of the profits" within the meaning of s. 3(3)(d) of the Partnerships Act. As argued by Alberta, a lender does not receive a "share of the profits" under this provision unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan.

Having said this, the question of whether the support agreements provided that the Participants were to receive a "rate of interest varying with the profits" of CCB, or a "share of the profits arising from carrying on the business" of CCB, as to trigger s. 4 of the Partnerships Act, may be readily answered. Clearly, the Participants were not to receive in return for the advance of $255 million a rate of interest varying with CCB's profits. The rate of interest to be paid was fixed according to the prime rate and was contingent on whether or not the Equity Agreement could be carried out. As for CCB's profits, they merely represented the source from which the Participants were to be repaid their advance. In this respect, I entirely agree with the following excerpt taken from the reasons of Harradence J.A. in the case at bar (at p. 211):

It is important to recognize that while repayment was to be made from pre-tax income of CCB, there was no direct link between the success of the CCB and the overall quantum of the amount due to or payable to the Support Group Participants. I have been referred to no authority which supports the proposition that a repayment, the instalments of which are referable to the quantum of the income of the debtor, is a situation of "joint benefit". Since the sums to be received by the Participants were limited to repayment of monies advanced, with a contingent right to interest, the source of the repayment monies is not relevant and, with respect, the learned Chambers Judge erred in concluding the Participants were "sharing the profits" in this respect.

The Participants had a fixed debt which would be repaid in part by the moneys received from the Syndicated Portion of the Portfolio Assets and in part by CCB's pre-tax income. With the exception of the contingent interest at prime rate, under no circumstance were the payments from the pre-tax income to be applied to anything but the repayment of the loan. All amounts that the Participants were entitled to be paid were to be applied only in repayment of the principal amount of the loan. Once the loan was fully repaid, all payments from CCB's pre-tax income were to stop. Accordingly, I find that the Participants were not to receive a "share of the profits" of CCB within the meaning of s. 3(3)(d) of the Partnerships Act by virtue of the repayment scheme for the $255 million advance. I also do not accept that the contemplated granting of warrants under the highly contingent circumstances of this case alters this conclusion.

The question then is whether s. 4 of the Partnerships Act can be triggered by an arrangement falling under s. 3(3)(a). Indeed, as previously noted, the Legal Representative takes the alternative position that, even if s. 3(3)(d) does not apply, the transaction in this case is surely one contemplating "the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business". While one cannot seriously dispute this proposition, the fact remains that s. 4 cannot apply unless "money has been advanced by way of loan upon such a contract as is mentioned in section 3". The first point to note is that s. 3(3)(a) of the Partnerships Act makes no reference whatsoever to a "contract" and thus appears to be beyond the realm of s. 4. Clearly, the legislature could have chosen a more general term than "contract" in s. 4 had it wished this postponement provision to apply to every transaction described in s. 3. The same could also be said about the absence of the word "loan" in s. 3(3)(a). It is not without significance that we were not presented with any jurisprudence in which a person who had a fixed debt to be paid out of profits (i.e., who would fall under s. 3(3)(a) and not s. 3(3)(d)) was subordinated under the Act.

Further, if the policy on which s. 4 of the Partnerships Act is based is that a person who reaps the rewards of profits must share some risk, then this would not apply to a creditor with a fixed debt, notwithstanding that the fund or source of repayment is profits, because his or her total return will not vary with the profitability of the company.

From the above, I conclude that s. 4 of the Partnerships Act cannot be triggered by what is described in s. 3(3)(a) as "the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business", which does not involve a contract of the sort described in s. 3(3)(d). The present case may very well fall within s. 3(3)(a) of the Act. However, that section only deals with a guideline for determining whether or not a partnership has been created, an issue which is not raised in this appeal. Contrary to s. 3(3)(d) of the Partnerships Act, s. 3(3)(a) does not have the added function of triggering the postponement provision of the Act. As the Participants were not to receive a "rate of interest varying with the profits" of CCB or a "share of the profits arising from carrying on the business" of CCB, their claims for the return of the moneys advanced cannot be postponed under s. 4.

Accordingly, I would dismiss this ground of appeal. The Court of Appeal did not err in declining to postpone the respondents' claims under s. 4 of the Partnerships Act.

C. Equitable Subordination

In the further alternative, the Legal Representative submits that even if the transaction in question is a loan and the Partnerships Act does not apply, the Participants' claims should be subordinated on equitable grounds based on the United States doctrine of "equitable subordination".

More specifically, it is argued that the equitable jurisdiction of superior courts gives them authority in insolvency matters to subordinate claims that, while valid as against the insolvent's estate, arise from or are connected with conduct prejudicial to the interests of other creditors. While the Legal Representative does not assert that the conduct of the Participants was fraudulent or worthy of censure, he argues that the Participants acted to the detriment of the ordinary creditors of CCB in ways (which I shall outline below) that should invoke this equitable jurisdiction. Both the Bank Group and Alberta challenge the proposition that equitable subordination is available under Canadian law in insolvency matters. In addition, the respondents argue that the facts of this case do not call for the application of equitable principles.

This issue does not appear to have been raised before Wachowich J. or the Court of Appeal and consequently this Court does not have the benefit of any findings of fact as to the actual or potential prejudice suffered by CCB's depositors and other creditors as a result of the conduct of the Participants. In this respect, the evidence presented to this Court by the Legal Representative is limited to certain excerpts of the Estey Report, incorporated by reference in the affidavit of Mr. Allan Taylor of the Royal Bank of Canada (C.O.A. at pp. 236-41). The excerpts in question are those found at pp. 114-21 of the Estey Report under the heading "Flaws in the Support Program".

This Court also does not have the benefit of the insight of the courts below as to whether or not, in the first place, the doctrine of equitable subordination should become part of Canadian insolvency law. As I see the matter, however, it is not necessary in the circumstances of this case to answer the question of whether a comparable equitable doctrine should exist in Canadian law and I expressly refrain from doing so. Assuming, for the sake of argument only, that Canadian courts have the power in insolvency matters to subordinate otherwise valid claims to those of other creditors on equitable grounds relating to the conduct of these creditors inter se, this Court has been presented with insufficient grounds to justify the exercise of such a power in the case at bar. Briefly put, the reasons and limited evidence advanced by the Legal Representative before this Court disclose neither inequitable conduct on the part of the Participants nor injury to the ordinary creditors of CCB as a result of the alleged misconduct.

As I understand it, in the United States there are three requirements for a successful claim of equitable subordination: (1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy statute. See In re Mobile Steel Co., 563 F.2d 692 (5th Cir. 1977), at p. 700; In re Multiponics Inc., 622 F.2d 709 (5th Cir. 1980); A. DeNatale and P. B. Abram, "The Doctrine of Equitable Subordination as Applied to Nonmanagement Creditors" (1985), 40 Bus. Law. 417, at p. 423; and L. J. Crozier, "Equitable Subordination of Claims in Canadian Bankruptcy Law" (1992), 7 C.B.R. (3d) 40, at pp. 41-42. Even if this Court were to accept that a comparable doctrine to equitable subordination should exist in Canadian law, I do not view the facts of this case as giving rise to the "inequitable conduct" and ensuing "detriment" necessary to trigger its application.

In this regard, the actions cited by the Legal Representative as being detrimental to the ordinary creditors of CCB, thereby giving rise to equitable subordination, come down to two elements: (1) the press release of March 25, 1985, issued by the Department of Finance announcing to the general public that the support program would leave CCB "in a strong position of solvency" and that sufficient funds were being advanced "to ensure solvency"; and (2) the flaws in the support program outlined in the Estey Report and described by the Legal Representative as (a) the inadequacy of the support program to ensure CCB's solvency, (b) the accounting treatment disguised the fact that the Participation Agreement required the entire amount advanced to be repaid, (c) the accounting treatment used by the Bank Group gave rise to tax benefits not available to ordinary depositors, (d) the Participation Agreement allegedly obliged CCB to apply all amounts received on the Syndicated Portion of the Portfolio Assets to the Participants, (e) the warrants would have the effect of prohibiting CCB from raising funds in the equity market since they would enable the Participants to acquire 75 percent of the common shares of CCB up to 10 years after the advances had been paid in full, and (f) after making their advances and receiving their Participation Certificates, the Bank Group ceased dealing with CCB in the normal manner.

At the outset, I note that many of the actions relied on by the Legal Representative cannot be attributable to the Participants. For example, the press release was not issued by the respondents and the accounting treatment given by CCB to the advance of $255 million simply followed the instructions given by the Office of the Inspector General of Banks. Thus, even if some inequitable connotation could be given to these actions, they would not represent misconduct on the part of the respondents to whom the ordinary creditors of CCB are now attempting to rank in priority.

Another difficulty with the Legal Representative's submission, however, is that I fail to see anything remotely inequitable in the conduct complained of. With respect to the press release, the evidence does not show that the Participants were necessarily of a different opinion from that set out in the press release. Certainly, they advanced the funds on the condition that the Inspector General of Banks provide them with an opinion letter confirming the solvency of CCB on the infusion of the proposed funds. As for the flaws in the support program, there is nothing to show that the Participants' plans were other than well intentioned. As stated at the beginning of these reasons, it is beyond the scope of this appeal to engage in a detailed review of the reasons which led to the failure of the support program. Suffice it to say that the assertions of the Legal Representative in substance do not show wrongdoing or unfairness on the part of the Participants, but merely show that the support program did not work and, perhaps with hindsight, offer some explanations as to why.

In any event, it does not appear to have been suggested at any time in the courts below nor was any evidence led to suggest that any creditor of CCB was misled by any of the above actions or that the press release, accounting treatment or any flaw in the support program operated to cause any creditor to act to its detriment. Thus, even if this Court were to find that the Participants acted in an inequitable manner in their dealings with CCB and its depositors and other creditors, we do not have a shred of evidence upon which to conclude that the improper conduct resulted in actual harm to the ordinary creditors of CCB now before this Court. One can only speculate that depositors and other creditors relied on the press release or accounting treatment and thereby suffered damages. We have been offered no United States decision in which mere speculation of harm to other creditors has been found sufficient to meet the second requirement of the doctrine of equitable subordination. Of course, the ordinary creditors of CCB who appear before this Court have, to a varying extent, suffered from the winding-up of CCB, just as any creditor (including the Participants) suffer following an insolvency or bankruptcy. The Legal Representative has not shown, however, that these ordinary creditors have suffered identifiable prejudice attributable specifically to the alleged misconduct of the Participants.

Accordingly, I would reject this alternative ground of appeal. Even if equitable subordination is available under Canadian law, a question which I leave open for another day, the facts of this case do not call for an intervention with the pari passu ranking of the respondents in the name of equity.

D. The $5 Million Attributable to the Syndicated Portion of the Portfolio Assets

The last matter to be addressed pertains to the moneys recovered from the Portfolio Assets and attributable to the Syndicated Portion thereof. In his oral submissions, the Legal Representative argued that the learned chambers judge erred in allowing the Participants to recover funds from the Syndicated Portion of the Portfolio Assets. A similar submission was made in the Alberta Court of Appeal but was summarily rejected (at p. 212). As I understand it, the argument is one of inconsistency between the treatment given, on the one hand, to the respondents' claim for their portion of the moneys recovered from the Portfolio Assets and, on the other hand, to the respondents' claim for all moneys advanced to CCB pursuant to the Participation Agreement and not repaid by moneys recovered from the Portfolio Assets. According to the Legal Representative, these two claims stem from the same financial arrangement and cannot be given different legal effects. It is argued that, if the advance of $255 million is really an investment of capital, as found by Wachowich J., then it is wrong to rank the respondents behind the ordinary creditors of CCB only with respect to the claim for what is not repaid by moneys recovered from the Portfolio Assets. Similarly, if the transaction is really a loan but the loan is one to which s. 4 of the Partnerships Act applies, then both claims ought to be postponed.

This submission has already been answered by my conclusion that the advance of $255 million to CCB was substantially in the nature of a loan and that the Partnerships Act does not apply to postpone the loan.

VI. Disposition

For the foregoing reasons, I would dismiss the appeal with costs here and in the courts below. As found by the learned chambers judge and upheld by the Court of Appeal, the Participants are entitled to their proportionate share of the moneys recovered from the Portfolio Assets of CCB in the manner set out in the Participation Agreement, that is, to the extent such recoveries exceed the CCB Portion of each of the Portfolio Assets. Moreover, as found by the Court of Appeal, the respondents are entitled to rank pari passu with the ordinary creditors of CCB for all moneys advanced pursuant to the Participation Agreement and not repaid by moneys recovered from the Portfolio Assets.

Appeal dismissed with costs.

Solicitors for the Liquidator: Cruickshank, Karvellas, Layton & Connauton, Edmonton.

Solicitors for the general body of creditors of the estate of Canadian Commercial Bank: Lerner & Associates, Toronto.

Solicitor for the respondent Her Majesty The Queen in right of Alberta: The Attorney General for Alberta, Edmonton.

Solicitors for the respondents Royal Bank of Canada, Bank of Montreal, Toronto‑Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada: McCarthy Tétrault, Toronto.

• Stevenson J. took no part in the judgment.