On December 16, 2010, the Supreme Court of Canada (SCC) released its decision in Re Ted Leroy Trucking Ltd. In its decision, the SCC affirmed the importance of the Companies' Creditors Arrangement Act (CCAA) as a flexible restructuring tool, and clarified the source and limits of the Court's authority during CCAA proceedings. Furthermore, the Court overruled the judgment of the B.C. Court of Appeal in Re Ted Leroy Trucking Ltd., and the Ontario Court of Appeal in Re Ottawa Senators Hockey Club Corp., and concluded that GST deemed trusts are inoperative in CCAA proceedings.
At issue in Re Ted Leroy Trucking Ltd. was the Court's discretion to partially lift the stay in a failed CCAA proceeding to allow the debtor to make an assignment under the Bankruptcy and Insolvency Act (BIA), while continuing to stay the Crown's GST deemed trust claim.
In its judgement, the majority first considered whether GST deemed trusts remain enforceable in CCAA proceedings. Under s. 18.3 (now s. 37) of the CCAA, subject to certain explicit exceptions, statutory deemed trusts are ineffective under the CCAA. However, under the deemed trust provisions of the Excise Tax Act, GST deemed trusts operate despite any enactment of Canada except the BIA. The majority resolved the apparent conflict between these two rules in favour of the CCAA, and held that GST deemed trusts become inoperative upon the commencement of CCAA proceedings.
In its reasons, the majority noted Parliament's movement away from asserting priority for Crown claims in insolvency law. While source deductions are clearly and expressly carved out of the CCAA and the BIA, neither of the insolvency statutes explicitly addresses GST deemed trusts. Furthermore, the majority emphasized the importance of harmonization between the CCAA and BIA. Since GST claims are inoperative under the BIA, allowing them under the CCAA would encourage statute shopping and create a disincentive for companies to restructure under the more flexible and responsive CCAA regime.
In the course of its reasons, the majority considered the source and limits of a Court's authority during CCAA proceedings. The majority found that a Court's jurisdiction to make orders in a CCAA proceeding primarily arises from the text of the statute. However, as a secondary source, the Court may rely on its inherent or equitable jurisdiction. Furthermore, the Court's broad discretionary jurisdiction under the CCAA must be interpreted in light of the remedial nature of the CCAA and insolvency legislation generally. When exercising its authority under the CCAA, a Court should bear in mind the requirements of appropriateness, good faith, and due diligence. An order will be appropriate if it will usefully further efforts to achieve the remedial purpose of the CCAA, that is, avoiding the social and economic losses resulting from liquidation of an insolvent company.
In this case, the majority held that the Court had the discretion to partially lift the stay to allow the debtor to make an assignment in bankruptcy. In reaching this conclusion, the majority commented on the relationship between the BIA and the CCAA. The majority found that the CCAA and BIA should not be treated as distinct regimes subject to a temporal gap between the two, but as part of an integrated body of insolvency law. Since the CCAA is silent about what happens if reorganization under the CCAA fails, the BIA scheme of liquidation and distribution necessarily supplies the backdrop for what will happen if a CCAA reorganization is unsuccessful.
The majority held that the partial lifting of the stay advanced the underlying purpose of the CCAA by fostering a harmonious transition between reorganization and liquidation, and further met the objective of a single collective proceeding that is common to both statutes. Furthermore, the partial lifting of the stay prevented creditors from racing to the courthouse in an effort to obtain priority unavailable under either the CCAA or the BIA.
The SCC's decision in Re Ted Leroy Trucking Ltd. is important since it clarifies that GST deemed trusts are inoperative during CCAA proceedings. It also affirms the Court's discretion to partially lift a CCAA stay to allow a debtor to make an assignment in bankruptcy while still staying GST deemed trust claims. However, this decision is most important for its clear statements about the purposes of the CCAA and the nature of judicial discretion under the CCAA.
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