Canada: Restructuring And Insolvency Report - December 2014

Last Updated: December 29 2014
Article by John Birch, Natalie E. Levine and Monique Sassi

In This Issue

  1. Constructive Trust 1 vs. Secured Creditor 0
  2. Void Ab Initio: The Dangers of Insufficient Disclosure
  3. What We've Been Up To

Constructive Trust 1 vs. Secured Creditor 0

By John Birch

Many secured creditors see their position in absolute terms. They rely on their general security and aggressively assert their priority over unsecured creditors, such as trade creditors. However, a recent decision of the Ontario Court of Appeal(306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548) demonstrates that creative arguments by trade creditors may allow them to take priority over even secured creditors in certain circumstances, by using trust principles to remove assets from the estate.

In this case, a lender held general security over a borrower for advances made on an operating loan. The borrower carried on business storing, repairing and selling shipping containers for its customers, including a major international container lessor. Pursuant to a depot agreement (the "Depot Agreement") with this customer, the borrower stored and repaired the customer's containers. From time to time, the borrower also refurbished and sold the customer's containers to third parties. The customer then invoiced the borrower for the containers that had been sold. Nothing in the Depot Agreement gave the customer any security over the sale proceeds collected by the borrower or required such proceeds to be held in trust.

By early 2013, the borrower was insolvent and the lender applied for and obtained an order pursuant to section 243 of the Bankruptcy and Insolvency Act (Canada) and section 101 of the Courts of Justice Act (Ontario) appointing a receiver over all of the property, assets and undertaking of the borrower (the "Receiver"). Cassels Brock acted as counsel to the Receiver but took no position regarding priority.

By that point, all of the customer's containers had been sold, although not all sale proceeds had been received. After the Receiver liquidated the remaining assets of the borrower, the customer claimed a priority to a portion of the total proceeds. The customer claimed that the borrower had breached the Depot Agreement by selling many containers without the consent of the customer. Although such claim would normally have been advanced as an unsecured claim for damages for conversion of the containers or for breach of the Depot Agreement, the customer instead asserted a constructive trust over the proceeds in the Receiver's hands.

The customer's claim for priority over the lender based on constructive trust was unsuccessful at first instance. The Ontario Superior Court of Justice concluded that any proceeds from container sales had been comingled with other monies in the borrower's bank account and, in any event, the bank balance had fallen to zero prior to the appointment of the Receiver. The Court also concluded that it would be unjust to impose a constructive trust in light of the pre-existing general security held by the lender.

The customer appealed the decision to the Ontario Court of Appeal and the appeal was partially allowed. The Court of Appeal provided a clear explanation of constructive trusts and their potential use in insolvency situations. A constructive trust is a proprietary remedy. As such, it carries certain significant benefits, such as the removal of property from the estate of the insolvent party, effectively trumping the usual priority scheme under insolvency legislation. However, the Court noted that the nature of constructive trust as a proprietary remedy requires that there be "a close link between the property over which the constructive trust is sought and the improper benefit bestowed" on the other party. The Court found that the requirement of having such close connection should be even more stringent in commercial cases like this.

In respect of those proceeds of container sales that had been received and spent prior to the appointment of the Receiver, the Court concluded that a constructive trust remedy was not appropriate because there was no longer any clear and direct connection between those dissipated proceeds and the funds then in the hands of the Receiver. However, the Court did grant a constructive trust over the part of the proceeds that the Receiver collected after its appointment. The Court concluded that, even though the corresponding containers had been sold before the appointment of the Receiver, the proceeds were directly linked to those sales and thus the required close connection existed. The Court also concluded that, because the borrower had sold those containers without the requisite prior approval of the customer and in breach of the Depot Agreement, there was no "juristic reason" for the borrower to receive and retain those proceeds. The borrower had been unjustly enriched at the expense of the customer. As such, the Court of Appeal imposed a constructive trust over those proceeds, including the portion of the proceeds that represented the borrower's profit on the sale.

This case is therefore both good news and bad news for secured creditors. The Court made it clear that there is a high hurdle to overcome to establish a constructive trust, especially in commercial cases. However, the Court appears to have opened the door for trade and unsecured creditors to seek a constructive trust over proceeds realized from the sale of those creditors' goods as long as they can establish the required connection. General security may not be as infallible as lenders have previously thought.

Void Ab Initio: The Dangers of Insufficient Disclosure

By Natalie E. Levine, Monique Sassi

While it is common practice in Canada to seek certain emergency orders on an ex parte basis (i.e. where only one party (and not the adversary) appears before a judge), applicants for such orders are held to a high standard of candour with the court. Recently, the Ontario Superior Court of Justice (Commercial List) took the unusual step of finding that the initial order (the "Initial Order") granting protection under the Companies' Creditors Arrangement Act (Canada) (the "CCAA") was void ab initio as against all of the applicants thereto (CanaSea Petrogas Group Holdings Limited (Re), 2014 ONSC 6116). This was because subsequently produced evidence did not support the Court's initial conclusions regarding the applicants' eligibility for CCAA protection. In reaching this decision, the Court was very critical of the applicants for not fulfilling their high obligations of candour and disclosure on the ex parte hearing.

In September 19, 2014, CanaSea Petrogas Holdings Limited ("CPGH"), a Canadian holding company, and its subsidiaries (the "Applicants") sought CCAA protection on an ex parte basis. The other Applicants included two Singaporean companies, one of which, CanaSea Oil and Gas Group Pte. Ltd. ("COGG"), was the issuer of certain notes representing 49% of the debt obligations of the Applicants, and two Saskatchewan companies, one of which, CanaSea Oil and Gas Limited ("COGL"), held the major assets of the group being petroleum and natural gas licenses.

At the ex parte hearing, the Applicants relied on what they purported to be unaudited financial statements and advised the Court that the Applicants were eligible for CCAA protection as they each (i) had liabilities in excess of $5 million, (ii) were unable to meet their obligations as they came due; and (iii) had finances "inextricably intertwined" through intercompany advances. The Applicants also advised the Court that, although the Singaporean company (COGG) was the issuer of the notes, its Saskatchewan subsidiaries were "on the hook" for the notes due to the intercompany obligations thereby bringing the Applicants within the insolvency and $5 million debt thresholds required by the CCAA. On the basis of these representations, the Court granted the Initial Order.

Subsequently, COGG's noteholders sought a declaration that the Initial Order did not apply to COGG alleging that their loan documents designated Singapore as the venue for dispute resolution and that COGG did not qualify for CCAA protection because it did not have assets or business in Canada. However, the evidence produced by the noteholders lead the Court to also question the eligibility of the other Applicants. More specifically, while the Applicants purported to have included in the evidence unaudited financial statements that proved their insolvency and liabilities in excess of $5 million; instead they included only profit and loss statements or general ledgers. These documents alone could not demonstrate insolvency or these requirements. In addition, there was no evidence of intercompany loans that supported their representation that the Applicants' finances were inextricably intertwined.

The Court held that its previous conclusions were, in fact, wrong and that there was no evidence of the Saskatchewan subsidiary's (COGL's) insolvency independent of COGG. While the Canadian holding company and the two Singaporean companies were insolvent and had liabilities in excess of $5 million, the holding company did not do business in Canada, and the Singaporean companies, which were the real debtors in the proceeding, had very little connection to Canada. The Court held that, had it previously been aware of these facts, it would not have exercised its discretion to grant the Initial Order and ordered the Initial Order void ab initio as against all of the Applicants. The Court also found that the Applicants had not fulfilled their statutory obligation under section 10(2)(c) of the CCAA to disclose all financial statements prepared during the year before their CCAA application and held that it was "not satisfied that the [A]pplicants had filled their high obligations of candor and disclosure on an ex parte application."

The Applicants sought leave to appeal from the Ontario Court of Appeal on the basis that they were denied procedural fairness. They argued that the lower court terminated the Initial Order for their failure to make full and frank disclosure and, had they known this was the issue, they would have been able to satisfy the lower court that the disclosure made was adequate.

A single judge of the Court of Appeal denied leave to appeal (CanaSea PetroGas Group Holdings Limited, 2014 ONCA 824). The Court disagreed with the Applicants' characterization of the lower court's decision as an issue of disclosure. Instead, it reiterated the deference given to CCAA judges and deferred to the lower court's findings. The Court also held that the Applicants were unable to provide any authority to support their assertion of a common law doctrine of "common enterprise insolvency" and, therefore, simply because the two Singaporean companies were part of a larger group headed by a Canadian holding company, they could not claim the benefit of CCAA protection in respect of debt incurred in Singapore that is governed by Singapore law.

This case demonstrates that applications for insolvency proceedings on an ex parte basis will require a high level of disclosure and candour with the court. Companies and individuals who are considering seeking court protection from their creditors on an ex parte basis must be careful to err on the side of caution and ensure that all relevant financial and other information is disclosed to the court and interpreted fairly. In addition, this case demonstrates that a solvent company may not be eligible for CCAA protection where only its affiliated companies are insolvent.

What We've Been Up To

We are acting as counsel for Grant Forest Products Inc. and its affiliates in connection with their CCAA proceedings. The Office of the Superintendent of Financial Services has now perfected its appeal of an order of the Honourable Mr. Justice Campbell made last fall which, among other things, held that the CCAA stay should be lifted to permit an unsecured creditor to bankrupt Grant Forest Products Inc. affording no priority to outstanding wind-up deficits for two defined benefit pension plans whose wind-up had commenced during the CCAA proceedings. The appeal will be heard on January 13, 2015.

We are acting as counsel for Edgeworth Properties Inc. and certain of its subsidiaries in connection with their parallel CCAA and receivership proceedings. One of Edgeworth's secured creditors has perfected its appeal of an order of the Honourable Madam Justice Thorburn dated July 18, 2014, which varied the receivership order to correct an unintended effect of debt accruing interest at 12% per annum being repaid prior to debt accruing interest at 24% per annum to the prejudice of Edgeworth's subordinate creditors, and to achieve a commercially reasonable result. The appeal will be heard on January 21, 2015.

Alison Manzer was elected as Chair of the Project Finance and Development Committee of the American Bar Association (ABA) in September 2014.

Eleonore Morris was a panelist on "Careers in Law" as part of a Skills Development Series hosted by a conglomerate of Women's Shelters in Calgary, Alberta on September 15, 2014.

John Birch was elected as Vice-Chair of the Insolvency Committee of the Inter-Pacific Bar Association at the Mid-Year Council Meeting held in Brazil from September 24-30, 2014. John will serve a two year term as Vice-Chair from 2015 to 2017. The Inter-Pacific Bar Association is an international association of business and commercial lawyers from more than 65 national jurisdictions around the world.

Eleonore Morris was a member of the organizing committee for the Turnaround Management Association's Annual Conference held in Toronto, Ontario on September 29-30, 2014. Cassels Brock was a bronze sponsor for this event.

Joseph Bellissimo and Jane Dietrich were panelists on "TMA NextGen: Pitch Perfect: A Mock Pitch Event" at the Turnaround Management Association's Annual Conference held in Toronto, Ontario on September 29-30, 2014.

Alison Manzer and Eleonore Morris published a revised chapter on "Secured Debt Arrangements" in Manzer's International Finance in October 2014.

Alison Manzer was appointed to the Advisory Board of Practical Law Canada in October 2014.

Eleonore Morris taught the creditors' segment of the Internationally Trained Lawyers Program offered by the University of Toronto in Toronto, Ontario on November 9, 2014.

Eleonore Morris spoke on "Planning Networking Events" at the Turnaround Management Association's Global NextGen Leadership Conference in New York on December 15, 2014.

Seema Aggarwal was appointed as the Director of Community Service of the Ontario Network of the International Women's Insolvency & Restructuring Confederation (IWIRC) in December 2014. Seema will serve a one year term commencing on January 1, 2015.

Eleonore Morris was elected as Chair of the Turnaround Management Association's Toronto NextGen Chapter on December 3, 2014. Eleonore will serve a one year term commencing on January 1, 2015. As Chair, Eleonore will also sit on the Board of Directors of the TMA's Toronto Chapter.

David Ward will be a panelist on the topic of "Enforcement of Judgments in Foreign Proceedings" at the 12th Annual Review of Insolvency Law (ARIL) in Toronto, Ontario on February 6, 2015.

Alison Manzer and Carla Potter will be publishing a new edition of the book entitled "Asset Based Lending in Canada." The new edition is expected to be published in 2015.

The Cassels Brock Financial Services Group will be publishing a guide to project finance in Canada. The new book is expected to be published in Autumn 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions