SUBORDINATION, PRIORITIES AND SUPER-PRIORITIES: An Update January 2, 2008

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1 SUBORDINATION, PRIORITIES AND SUPER-PRIORITIES: An Update January 2, 2008 By: Jonathan A. Levin *, Fasken Martineau DuMoulin LLP The purpose of this paper is to provide a summary of recent developments in relation to subordination arrangements and court ordered and statutory priorities, particularly as such developments are relevant in connection with commercial loan finance and security therefor. Postponement and Subordination Arrangements Subordination arrangements applicable to different groups of unsecured creditors of a borrower are a common feature of corporate finance. Typically, what is agreed is that, in the event of an insolvency or liquidation of the borrower, the claims of certain of the creditors will rank junior to the claims of other creditors. Thus, the junior ranking claims are subordinated. There is only limited judicial or academic commentary on subordination: there are very few useful authorities on the subject of subordination. This caused Goode, in a text released prior to his Principles of Corporate and Insolvency Law, to observe at one point, in Legal Problems of Credit and Security, (London: Sweet & Maxwell, 1988) at 24: Again I cannot quote chapter and verse. So far as our textbooks are concerned, nobody ever enters into subordination agreements, because they are nowhere mentioned! Although Philip Wood appears to have answered this call in his later text, The Law of Subordinated Debt, this remains an area of extremely limited authority. 1 Are Subordination Agreements Void As A Matter Of Public Policy? From time to time, the question has arisen as to whether subordination agreements as between two unsecured creditors should be viewed as being void as a matter of public policy because the Bankruptcy and Insolvency Act 2 treats all unsecured creditors as ranking on a pari passu basis. Although the issue was not directly before the court, there is some helpful discussion in Canada Deposit Insurance Corporation v. Canadian Commercial Bank 3. This case concerned the failure * The author gratefully acknowledges the assistance of Ramsey T. Ali, Peter G. Armstrong, Shelley Babin, Dugan Edmison, Carole Hunter and Charles Toth of Fasken Martineau DuMoulin LLP in connection with research relevant to the preparation of this paper or the updating of cases and statutes. As well, portions of this paper dealing with debtor in possession financing were co-authored by Michael J. MacNaughton, Barrister & Solicitor. Bank of Montreal v. Dynex Petroleum Ltd. (1997), 12 P.P.S.A.C. (2d) 183 at 205 (Alta.Q.B.), appeal allowed in part (1999), 182 D.L.R. (4 th ) 640 (Alta. C.A.), affirmed (2001), 208 D.L.R. (4 th ) 155 (S.C.C.) R.S. 1985, c.b-3 [1992] 3 S.C.R. 558

2 - 2 - of Canadian Commercial Bank. Prior to its failure, a supporting group consisting of the governments of Canada and of Alberta, Canada Deposit Insurance Corporation and six major Canadian banks entered into an arrangement to provide emergency financial assistance to Canadian Commercial Bank. In essence, they agreed to purchase an undivided interest by way of participation in a portion of a portfolio of assets held by Canadian Commercial Bank. Canadian Commercial Bank agreed to indemnify each participant against any loss experienced under the support program. It was also agreed that, in the event of the insolvency or winding-up of Canadian Commercial Bank, any amount remaining unpaid shall constitute indebtedness of CCB to the members of the Support Group. The Supreme Court of Canada came to the view that the wording of the relevant agreements and surrounding circumstances supported the conclusion that the transaction was, in substance, a loan and not a capital investment. One of the provisions of the participation agreement specified the priorities on insolvency of the Canadian Commercial Bank. It is was argued before the Supreme Court of Canada that this provision was an attempt to enhance the ranking of certain participants upon the insolvency of Canadian Commercial Bank and, as such, should be viewed as being void as a matter of public policy. The court rejected this argument and, in substance, held that the main purpose and effect of the provision was not to enhance the rights of certain creditors but, rather, to reduce the rights of other creditors. This is consistent with a statement made in a New Zealand case, Stotter v. Ararimu Holdings Ltd. 4 : To allow debt subordination is to recognize a commercial arrangement common internationally and to ensure that the legitimate expectations of the parties and those induced to deal in reliance on the arrangement are met. It is also consistent with the views expressed in Re Maxwell Communications Corp. PLC (No.2) 5 where the court was asked to consider the effectiveness of certain subordination arrangements that did not constitute a trust or assignment. The court effectively held that there was no rule of public policy which invalidated an agreement between a debtor and a creditor postponing or subordinating the claim of the creditor to the claims of other unsecured creditors and precluded the waiver or subordination of the creditor s claim after the commencement of a bankruptcy or winding-up. Rather, the court considered that, since a creditor could waive his debt or decline to submit proof, there was no reason why he should not, prior to any insolvency proceedings, agree to subordinate his claim to that of other creditors in the event of the debtor company s insolvency. The court expressly commented as follows: The question is whether this underlying consideration of public policy should similarly invalidate an agreement between a debtor and a creditor postponing or subordinating the claim of the creditor to the claims of other unsecured creditors and preclude the waiver or subordination of the creditor s claim after the 4 5 [1994] 2 NZLR 655 at 62 (1994), 1 All ER 737 (Ch.D.)

3 - 3 - commencement of a bankruptcy or a winding-up. I do not think that it does. It seems to me plain that after the commencement of a bankruptcy or a winding-up, a creditor must be entitled to waive his debt just as he is entitled to decline to submit a proof. There might, in any given case, be a question whether a waiver was binding on him but that is irrelevant for this purpose. If the creditor can waive his right altogether, I can see no reason why he should not waive his right to prove, save to the extent of any assets remaining after the debts of other unsecured creditors have been paid in full, or, if he is a preferential creditor, to agree that his debt will rank equally with unsecured non-preferential debts. 6 As well, the court stated: Contractual subordination is recognized and given effect under the United States code. The scheme of arrangement and the plan for reorganization have been prepared on the assumption that the contractual subordination of the rights of bondholders under the guarantee (which is the only subordinated debt of MCC) is also recognized in English law and will be applied in the winding-up of MCC. There would be grave and possibly insuperable difficulties in negotiating an overall distribution to English and United States creditors out of the pool of assets if this assumption were ill-founded. 7 In Re Air Canada 8, certain creditors who were not expressly contemplated to have the benefit of contractual subordination sought to expand the scope of the contract on the basis that a fundamental principle of Canadian insolvency law is that all unsecured creditors are entitled to pro rata distribution so that that the doctrine of subordination would require that all unsecured creditors would enjoy the benefit of the subordination agreement. In his reasons, the court first distinguished between BIA and CCAA insolvency proceedings: However, this is a CCAA insolvency proceeding not a BIA one. The jurisprudence in CCAA proceedings is that any plans of arrangement are treated as contracts amongst the parties (including the minority voting against) and that the court in a sanction hearing will review the creditor approved plan to see if it is fair, reasonable and equitable, wherein equitable does not necessarily mean equal ibid, pg.746. Justice Farley of the Ontario Superior Court of Justice cautions that this quote must be taken in context. See Re Air Canada, [2004] O.J. No [QL] at para 7. ibid, pgs (2004), 2 C.B.R. (5 th ) 4 (Ont. S.C.J. Commercial List) (Farley J.). 9 Re Air Canada, supra at para 6.

4 - 4 - The court explained that, as a fundamental principle, creditors may agree to subordinate their claims to that of specific creditors only. The decision of Tysoe J. in Re Rico Enterprises Ltd. was cited in support of this proposition: If one creditor subordinates its claim to the claim of another party without subordinating to other claims ranking in priority to the claim of the other party, it is my view that a distribution of the assets of the bankrupt debtor should be made as if there was no subordination except to the extent that the share of the distribution to which the subordinating creditor would otherwise be entitled should be paid to the party in whose favour the subordination was granted. 10 Accordingly, the court went on to conclude that: In the end result I do not see that there is any problem with the SP Debt being selectively subordinated to the Senior Indebtedness. This subordination to that borrowed money does not result in the SP Debt being subordinated to all the unsecured debt, Senior Indebtedness and non-senior Indebtedness alike. 11 Do Subordination Arrangements Fail If There Is An Absence Of Privity? The cases referred to above involved fact situations where the subordination agreements had the relevant creditors and the borrower as parties to the same agreement. Thus, there were no issues as to privity. It is not uncommon in corporate finance for subordination arrangements to be put in place between a borrower and certain subordinating creditors in circumstances where senior creditors are not made party to the relevant subordination agreement. A question arises as to whether this lack of privity will impair the enforceability of the subordination arrangements in the event of an insolvency of the borrower as between unsecured creditors. Clearly the equities favour enforcing the arrangement notwithstanding the absence of privity. Not only does the arrangement respect the contractual rights that were agreed to, but, third parties may have relied upon the arrangement to their detriment. Two relatively recent Supreme Court of Canada cases allow for a limited relaxation of the privity of contract rule, London Drugs Ltd. v. Kuehne & Nagel International Ltd. 12 and Fraser River Pile & Dredge Ltd. v. Can- Dive Services Ltd. 13 In London Drugs, the Plaintiff delivered a transformer to the corporate defendant for storage. The original contract specified that the corporate defendant s liability would be limited to $40.00 per pallet unless the holder declared a valuation in excess of that amount and paid an additional 10 Rico Enterprises Ltd., Re (1994), 24 C.B.R. (3d) 309 (B.C. S.C. [In Chambers]) 11 Re Air Canada, supra at para (1992) 97 D.L.R. (4 th ) 261 (SCC) (1999), 176 D.L.R. (4 th ) 257 (SCC)

5 - 5 - charge by way of insurance. The Plaintiff did not take advantage of the insurance. Certain employees of the corporate defendant, who themselves were named in their individual capacities as defendants, damaged the transformer when lifting it. The Plaintiff sued the corporate defendant in bailment, contract and negligence. As well, the Plaintiff sued the individual employees in negligence. The question arose as to whether the employees would be entitled to the benefit of the $40.00 per pallet limitation of liability. Iacobucci J, speaking for a majority of the court, commented as follows: The doctrine or privity fails to appreciate the special considerations which arise from the relationships of employer-employee and employer-customer. There is clearly an identity of interest between the employer and his/her employees as far as the performance of the employer s contractual obligations is concerned. When a person contracts with an employer for certain services, there can be little doubt in most cases that employees will have the prime responsibilities related to the performance of obligations which arise under the contract. This was the case in the present appeal, clearly to the knowledge of the appellant. While such a similarity or closeness might not be present when an employer performs his or her obligations through someone who is not an employee, it is virtually always present when employees are involved. Of course, I am in no way suggesting that employees are a party to their employer s contracts in the traditional sense so that they can bring an action on the contract or be sued for breach of contract. However, when an employer and a customer enter into a contract for services and include a clause limiting the liability of the employer for damages arising from what will normally be conduct contemplated by the contracting parties to be performed by the employer s employees, and, in fact, so performed, there is simply no valid reason for denying the benefit of the clause to employees who perform the contractual obligations. The nature and scope of the limitation of liability clause in such a case coincides essentially with the nature and scope of the contractual obligations performed by the third party beneficiaries (employees). Upholding a strict application of the doctrine of privity in the circumstances of this case would also have the effect of allowing the appellant to circumvent or escape the limitation of liability clause to which he had expressly consented 14 Iacobucci J also offers the following remarks: The appellant cannot obtain more than $40.00 from Kuehne & Nagel, whether the action is based in contract or in tort, because of the limitation of liability clause. However, resorting to exactly the same actions, it is trying to obtain the full amount from the individuals (warehousemen) who were directly responsible for the storing of its goods in accordance with the contract. As stated earlier, 14 supra, note 8, pg.361

6 - 6 - there is an identity of interest between the respondents and Kuehne & Nagel as far as performance of the latter s contractual obligations is concerned. When these facts are taken into account, and it is recalled that the Appellant knew the role to be played by the employees pursuant to the contract, it is clear to me that this court is witnessing an attempt in effect to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort. In my view, we should not sanction such an endeavour in the name of privity of contract. Finally, there are sound policy reasons why the doctrine of privity should be relaxed in the circumstances of this case. A clause such as one in a contract of storage limiting the liability of a warehouseman to $40.00 in the absence of a declaration by the owner of the goods of their value and the payment of an additional insurance fee makes perfect commercial sense. It enables the contracting the parties to allocate the risk of damage to the goods and procure insurance accordingly. If the owner declares the value of the goods, which he or she alone knows, and pays the additional premium, the bargain will have placed the entire risk on the shareholders of the warehouseman. On the other hand, if the owner refuses the offer of additional coverage, the bargain will have placed only a limited risk on the warehouseman and the owner will be left with the burden of procuring private insurance if he or she decides to diminish its own risk. In either scenario, the parties to the contract agree to a certain allocation and then proceed, based on this agreement, to make additional insurance arrangements if required. It stretches commercial reality to suggest that a customer, acting prudently, will not obtain insurance because he or she is looking to the employees for recovery when generally little or nothing is known about the financial capacity and professional skills of the employees involved. That does not make sense in the modern world. In addition, employees such as the Respondents do not reasonably expect to be subject to unlimited liability for damages that occur in the performance of the contract when said contract specifically limits the liability of the warehouseman to a fixed amount. According to modern commercial practice, an employer such as Kuehne & Nagel performs its contractual obligations with a party such as the Appellant through its employees. As far as the contractual obligations are concerned, there is an identity of interest between the employer and the employees. It simply does not make commercial sense to hold that the term warehousemen was not intended to cover the Respondent employees and as a result to deny them the benefit of the limitation of liability clause for a loss which occurred during the performance of the very services contracted for. Holding the employees liable in these circumstances could lead to serious injustice especially when one considers that the financial position of the affected employees could

7 - 7 - vary considerably such that, for example, more well off employees would be sued and left to look for contribution from less well off employees. Such a result creates uncertainty and requires excessive expenditures on insurance and that defeats the allocation of risk specifically made by the contracting parties and the reasonable expectations of everyone involved, including the employees. When parties enter into commercial agreements and decide that one of them and its employees will benefit from limited liability, or when these parties choose language such as warehouseman which implies that employees will also benefit from a protection, the doctrine of privity should not stand in the way of commercial reality and justice. 15 It is submitted that the logic and reasoning underlying the quoted comments of Mr. Justice Iacobucci could be adapted to a fact situation dealing with the enforceability of subordination agreements by creditors who were intended to have the benefit of those arrangements but who did not have privity with the subordinated creditors. In Fraser River, a marine insurance policy included a waiver of the insurer s right of subrogation against, among others, any charterer. The insured vessel was sunk by the negligence of a charterer. Following the loss, the insurer and the owner agreed that the owner would waive any right it may have pursuant to the waiver of subrogation clause. The insurer then brought a subrogated action in the owner s name against the charterer. The Supreme Court of Canada held that, since the insurer had clearly intended to benefit the charterer in precisely the circumstances that had occurred, it was consistent with the intention of the parties and with commercial reality to recognize an exception to the doctrine of privity of contract. Again, Mr. Justice Iacobucci wrote the reasons of the court. He made the following comments: As a preliminary matter, I note that it was not our intention in London Drugs, supra, to limit application of the principled approach to situations involving only an employer-employee relationship. That the discussion focussed on the nature of this relationship simply reflects the prudent jurisprudential principle that a case should not be decided beyond the scope of its immediate facts. In terms of extending the principled approach to establishing a new exception to the doctrine of privity of contract relevant to the circumstances of the appeal, regard must be had to the emphasis in London Drugs that a new exception first and foremost must be dependent upon the intention of the contracting parties. Accordingly, extrapolating from the specific requirements as set out in London Drugs, the determination in general terms is made on the basis of two critical and cumulative factors: (a) do the parties to the contract intend to extend the benefit in question to the third party seeking to rely on the contractual provision; and (b) are the activities performed by the third party seeking to rely on the contractual 15 supra, note 8, pg

8 - 8 - provision, the very activities contemplated as coming within the scope of the contract in general, or the provision in particular, again as determined by reference to the intentions of the parties? 16 Mr. Justice Iacobucci also commented: In my opinion, the case in favour of relaxing the doctrine of privity is even stronger in the circumstances of this appeal than was the case in London Drugs, supra, wherein the parties did not expressly extend the benefit of limitation of liability clause covering a warehouseman to employees. Instead, it was necessary to support an implicit extension of the benefit on the basis of the relationship between the employers and its employees, that is to say the identity of interests between the employer and its employees in terms of performing the contractual obligations. In contrast, given the express reference to charterer(s) in the waiver of subrogation clause in the policy, there is no need to look for any additional factors to justify characterizing Can-Dive as a third party beneficiary rather than a mere stranger to the contract. 17 The quoted language from both London Drugs and Fraser River suggest a trend to the development of exceptions from the strict doctrine of privity where the parties to the contract intend the benefit to be extended to a particular identified third party and the activities performed by that third party are the very activities contemplated as coming within the scope of the contract. Such reasoning seems to lend itself to the enforceability of a subordination agreement by a third party creditor for whose benefit the provisions of the agreement were intended. Re Stelco Inc 18 is also a helpful case in delineating an exception to the privity doctrine. In that case, Stelco issued unsecured subordinated debentures to noteholders, who expressly agreed to subordinate their right of repayment to payment in full of Senior Debt (which consisted of specified debentures). Stelco filed for and obtained protection under the CCAA, and a proposed plan of arrangement was developed to treat the Senior Debt debentureholders and noteholders, together with other unsecured creditors, as members of the same class. The debentureholders sought to enforce the subordination provisions agreed to by the noteholders, despite being third parties to the agreement. They relied upon the principles enunciated by the Supreme Court of Canada in London Drugs and Fraser River. The court noted, First, I am satisfied that the two-part test set out by Iacobucci J. at para 32 in Fraser River is satisfied. There is no question that the benefit of the provisions 16 supra, note 9, pg supra, note 9, pgs [2006] O.J. No (Ont. S.C.J. - Commercial List) (H.J. Wilton-Siegel J.). The Ontario Court of Appeal largely upheld this decision, as reported at Re Stelco Inc., 226 O.A.C. 72, although the motion judge was reversed in part in relation to whether a particular claim was Senior Debt.

9 - 9 - extends to the Senior Debt Holders. Unlike the situations presented in London Drugs and Fraser River, the Senior Debt Holders are the only parties who benefit from these provisions. The second part of the test is satisfied insofar as the actions of the Debentureholders are limited to enforcing the covenants made in favour of Stelco that are intended to ensure that the Senior Debt Holders receive the benefit of the Subordination Provisions. In addition, because the policy concerns of multiplicity of actions and double recovery do not present themselves in the present action, there is no principled reason to refuse to extend the principle in London Drugs to the present action. 19 The court goes on to note, The exception should be applied in an incremental manner. It is clear from the decision that the fundamental consideration in the determination of whether, in any particular circumstance, relaxation of the doctrine of privity can be characterized as incremental is the potential for double recovery and multiplicity of actions. In the present proceeding where such concerns are not present, I believe the principle in Fraser River contemplates extension of the third party beneficiary principle regardless of whether it is being used as a shield or a sword. 20 Secured creditors have a somewhat easier time when it comes to enforcing subordination arrangements even in the absence of privity. Typically, they can rely on statutory provisions such as section 38 of the Personal Property Security Act (Ontario) to the effect that a secured party may, in the security agreement or otherwise, subordinate the secured party s security interest to any other security interest and such subordination is effective according to its terms. 21 Court Ordered Priorities One typically thinks in terms of priorities that arise by virtue of subordination arrangements expressly agreed to by creditors. One also thinks in terms of priority arrangements arising by reason of the order of perfection of security on personal property or the order of taking of mortgages against real property or by virtue of statutory provisions. It should be noted that, in recent years, particularly in the context of proceedings under the Companies Creditors Arrangement Act 22, the courts have ordered super-priority charges. These charges typically have related to court ordered priority for administrative expenses relevant to proceedings under the Companies Creditors Arrangement Act (e.g. the expenses of the court-appointed monitor and counsel to the monitor) and security to protect the directors from personal liability in the event 19 Re Stelco, supra at para Re Stelco, supra at para R.S.O. 1990, c.p.10 R.S.C. 1985, c.c-36, as amended

10 that salaries or statutory remittances are not paid on a timely basis. Of greater importance, because of the amounts involved, are court-ordered charges to support new financing during the proceedings under the Companies Creditors Arrangement Act necessary to keep the insolvent company in operation during its attempted restructuring. Such financing is typically referred to as super-priority debtor-in-possession (or DIP) financing, a term imported from United States practice in Chapter 11 proceedings under the U.S. Bankruptcy Code. In a Canadian context, the term refers to post-filing financing which is secured on property of the debtor where that new security ranks in priority to some or all pre-filing secured claims. The super-priority is invariably established by court order. The Development of Super-Priority DIP Financing in Canada While the courts have, from time to time, approved and authorized super-priority DIP financing, usually that financing has been authorized to a limited extent, in time and amount, and in circumstances where the court has concluded that there will likely be no prejudice to the rights of existing secured creditors, where the possible prejudice is outweighed by the benefits to be derived from the new financing or where the possible prejudice has been considered small in light of the amounts involved. 23 The following are some examples of courts exercising discretion with respect to the granting of super-priority financing: 23 See the discussions in B. Nadler, Debtor-in-possession principle allows insolvent companies to arrange financing, (March 2005), The Lawyers Weekly, Vol. 24, No. 42, J. Fogarty, Is Canadian DIP financing model the better way? (January 2001), The Lawyers Weekly, Vol. 20, No. 33, J. Sarra, Debtor in Possession Financing: The Jurisdiction of Canadian Courts to Grant Super-Priority Financing in CCAA Applications (Fall 2000) 23 Dalhousie L.J. 337, M. Rotsztain Case Comment: Re United Used Auto & Truck Parts Ltd. 12 C.B.R. (4 th ) 156, M. Rotsztain, Debtor in Possession Financing in Canada: Current Law and a Preferred Approach (April 2000) 33:2 C.B.L.J. 283, R. J. Kearns, Administrative Charge, Debtor s Counsel Fees and DIP Financing Super-Priorities under the Companies Creditors Arrangement Act (April 2000) 12:4 Comm. Insol. R. 45, S. Weisz, The Bar is Raised: Further Developments in Debtor-in-Possession Financing (February 2000) 12:3 Comm. Insol. R. 37, H. A. Zimmerman, Financing the Debtor in Possession (Insolvency Institute of Canada, November, 1999), T. Reyes, DIP financing wins greater acceptance (July 1999) The Lawyer s Weekly, Vol. 19, No. 10, and K. Atlans and K. Kraft, Canadian bankruptcy and insolvency: DIP financing, automatic stays and personal jurisdiction (December 1997) 12:4 Nat. Creditor/Debtor Rev. 61. See also Sulphur Corp. of Canada Ltd. (Re), [2002] A.J. No. 918 (Alta. Q.B.) (LoVecchio J.), Hunters Trailier & Marine Ltd. (Re), [2001] A.J. No. 857 (Alta. Q.B.) (Wachowich J.), United Used Auto & Truck Parts Ltd. (Re) (2000) 16 C.B.R. (4 th ) 141 (B.C.C.A.) (MacKenzie J.A.), (leave to appeal was granted by the Supreme Court of Canada but the matter settled prior to the hearing), Re Westar Mining Ltd. (1992) 14 C.B.R. (3d) 88 (B.C.S.C.), Re Royal Oak Mines Inc. (1999), 6 C.B.R. (4 th ) 314 (O.C.J.) (Blair J.), Re Royal Oak Mines Inc.(1999), 7 C.B.R. (4 th ) 293 ((O.C.J.) (Farley J.), Re Sharp-Rite Technologies Ltd. [2000] B.C.J. No. 135 (Holmes, J.), Re. Starcom International Optics Corp. (1998), 3 C.B.R. (4 th ) 177 (B.C.S.C.) (Saunders, J.), Re Dylex (1995) O.C.J. Court File No. B-4/95 (Houlden J.A.), General Electric Capital Canada Inc. v. Euro United Corp. (1999) O.C.J. Court File. No. 99- CL-3593 (Blair J.). As to the last point see Re Skydome (1998) 16 C.B.R. (4 th ) 118 (Ont. Gen. Div. - Commercial List) (Blair J.).

11 In the first Eaton s restructuring, the court authorized the company to obtain priority credit by granting security on unencumbered assets, even though doing so would breach a negative covenant. (This is not super-priority DIP financing as commonly referred to but was one of the first cases where the court authorized the grant of security to the prejudice (or possible prejudice) of the rights of existing creditors.) 2. In Dylex, the court authorized the company to obtain bridge financing on a secured basis and in priority to existing secured creditors where the court concluded that an existing and opposing secured creditor would not be adversely affected because there was ample security for the now subordinated secured creditor. 3. In Skydome, the court based its exercise of discretion on a balancing of the relative prejudice experienced by creditors against the benefit gained if financing were granted. The court authorized the company to borrow on a priority basis over the existing secured creditors against the opposition of the first secured creditors, as the court found that the adverse effect on the opposing secured creditors would be minimal, but failing to provide financing could result in substantial adverse effects on the rest of the creditors. 4. In Royal Oak, the court noted that its discretion should be exercised only where there is cogent evidence that the benefit of the DIP financing clearly outweighs the potential prejudice to secured creditors. In this case, it authorized super-priority financing notwithstanding the opposition of the first secured creditor and of a group of three second secured creditors where such evidence as there was indicated that the first secured creditor would not be adversely affected (other than by delay) and the majority of the second secured creditors, as well as the third secured creditors, were in favour, and the alternative was receivership. 5. In the Algoma filing, the court authorized substantial super-priority financing ahead of the first fixed asset secured creditors apparently on the basis that the alternative was receivership and that the holders of the fixed asset secured claims had purchased their positions at a discount and had, implicitly, bargained for treatment of this sort. 6. In Cineplex, the court authorized the company to borrow on a super-priority secured basis (and also authorized motion picture distributors to have a super-priority charge for their claims in relation to the supply of motion pictures, without which Cineplex would have been out of business). 7. In the Sulphur Corp. of Canada decision, the court authorized a charge to secure DIP financing ranking in priority to a statutory lien under the Builders Liens Act of British Columbia. 8. In Air Canada s filing, a General Electric subsidiary not only received super priority status for its DIP financing but also cross collateralized other outstanding obligations.

12 The super-priority position provided by these kinds of orders is not the only benefit that Canadian super-priority DIP lenders enjoy. Typically DIP loans are, by their terms, and accordingly with the court s approval, of relatively short duration usually less than the expected life of the restructuring. In addition, DIP lenders are not usually subject to the stay of proceedings provided in the initial and subsequent CCAA orders (which often apply to all or most other secured and other creditors). Even if there are constraints placed on the rights of DIP lenders to exercise their rights on default they are usually relatively modest in the circumstances. Finally, the terms of typical DIP loans, invariably approved by the court, provide attractive rates of return, provide for the payment of up-front fees and provide for the payment of a DIP lender s costs of administration and supervision by the company, again on a priority basis. DIP lending is not without some burdens. The most critical element is the court-ordered superpriority charge in favour of the DIP lender. Obviously, the lender must be satisfied with the underlying break-up value of the assets of the debtor. Equally important, since the priority of the charge is a function of a court order in a perhaps contentious proceeding, a DIP lender must constantly monitor the proceedings. If any interested person moves to challenge the priority of the loan the lender must be ready to stop funding. While the DIP lender can safely rely on advances made under an order providing for super-priority, where that order is challenged the lender must recognize that further advances may be in jeopardy. 24 The Policy Reasons For and Against the Grant of Super-Priority DIP Financing The policy reasons in favour of and against the availability of this kind of super-priority financing are relatively easy to explain. At bottom, the interests of the debtor and others in a restructuring collide with the interests of secured creditors that their existing rights and interests not be prejudiced. The purpose of the Companies Creditors Arrangement Act is to facilitate the making of a compromise or arrangement between an insolvent debtor company and its creditors so that the company is able to continue in business. The court is called upon to play a kind of supervisory role to preserve the status quo and to move the process along to the point where a compromise or arrangement is approved or it is evident that it is doomed to failure. 25 It has been said that the Companies Creditors Arrangement Act is remedial in its purest sense in that it provides a means whereby the devastating social and economic effects of bankruptcy or creditor-initiated termination of ongoing business operations can be avoided while a court-supervised attempt to reorganize the financial affairs of the debtor can be made. In these circumstances, the For example, in the most recent Algoma filing, after the initial order was made and after advances had been made by the DIP lender, an application for leave to appeal the initial order was launched. The DIP lenders took the position that they would not advance in the face of the leave to appeal application on the basis that, if they did so and if the leave to appeal application was granted and the appeal succeeded, they might not be able to rely on the super-priority charge in respect of advances made after the leave to appeal application was launched Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 4 C.B.R. (3d) 311 (B.C.C.A.) at 315 per Gibbs J.A.

13 Companies Creditors Arrangement Act must be given a wide and liberal interpretation so as to enable it to serve this remedial purpose. 26 It is argued that in some cases super-priority financing must be available; otherwise a restructuring under the Companies Creditors Arrangement Act is impossible. For example, if a debtor has granted general security upon all of its property and its post-filing cash flow will be insufficient to effect a restructuring, then additional financing will be a prerequisite to the possibility of a reorganization. A new lender to a debtor in the context of the debtor s admitted insolvency likely will not be prepared to lend except on a priority basis. In such circumstances, if the court is satisfied that super-priority DIP financing will not prejudice the positions of existing secured creditors then, arguably, that new financing should be authorized so that the debtor has an opportunity to put a restructuring plan forward. The contrary argument is equally straightforward. Statutory security regimes in Canada are designed to give relative certainty to secured creditors about their priority in the event of insolvency. Those regimes are premised on bargains made between debtors and creditors pursuant to which debtors assign or grant interests in their property to a creditor having a certain rank or priority. It may be argued that those bargained for and statutorily recognized rights ought not to be subordinated to the rights of others except in cases where clearly and unambiguously permitted. 27 The Legal Basis for Super-Priority DIP Financing Where does the court derive the authority to authorize super-priority DIP financing? A review of the existing case authority and writing leaves the impression that this may be the most difficult of the questions that arise in this context. 28 The reason that the question may raise some difficulty is that the Companies Creditors Arrangement Act does not expressly provide for the grant of super-priority DIP financing. The framework of the Act is simple. It provides that the court may authorize the calling of meetings of classes of secured and unsecured creditors to vote on a plan of compromise and arrangement and, subject to affirmative votes of the necessary majorities of the classes of creditors, the court may approve the Plan whereupon it is binding on all, including dissenting creditors. In order to facilitate the making, consideration of and voting upon plans of compromise or arrangement, the court may, pursuant to section 11 of the Companies Creditors Arrangement Act make orders, on such terms as the court may impose, restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the debtor company Nova Metal Products Inc. v. Comisky (Trustee of) (1990), 1 C.B.R. (3d) 101 (Ont. C.A.) per Doherty J.A. There are, of course, many cases where statutorily recognized priorities may be trumped. One obvious example is the case of statutory deemed trusts that arise when a debtor who is an employer fails to deduct and remit to the Crown certain kinds of employee withholdings. See below. See the cases and articles referred to in note 16 Paragraphs 11(3)(b) and 11(4)(b) of the Companies Creditors Arrangement Act

14 Likewise, the court may make orders, on such terms as the court may impose, prohibiting the commencement of or proceeding with any other action, suit or proceeding against the debtor company. 30 As might be expected, the stay powers contained in section 11 of the Companies Creditors Arrangement Act have been given a liberal interpretation consistent with the purposes of the Act as described above. 31 Accordingly, the court may stay the enforcement by secured creditors of their rights whether that enforcement is sought through judicial proceedings or by some other method. 32 From the perspective of a secured creditor, the use of the stay power may be the functional equivalent of a super-priority loan. A secured creditor with security on accounts receivable and inventory may fear that its collateral will be used and depleted during the course of the reorganization process. If that were to occur then the position of the secured creditor would be prejudiced. The court will engage in the same kind of balancing of interests as in the cases of requests for the authorization of super-priority financing. That is, the court will balance the objective of allowing a debtor company an opportunity to attempt to restructure its affairs against the possible prejudice to creditors arising from the grant of a stay of proceedings. 33 While the courts approach to the circumstances in which super-priority DIP financing should be authorized is similar to the approach taken to the application of the stay power, it has, so far, not been suggested that the statutory stay power can form the foundation for the grant of superpriority financing. 34 The courts have looked for this authority from other sources. Two explanations have been given by courts of their authority to authorize and to give superpriority DIP financing: (1) the general equitable jurisdiction of the court and (2) the inherent jurisdiction of the court. Neither of these explanations is entirely satisfactory at the level of legal theory or history. Nonetheless, at this stage in the development of the law, these theories have been accepted by those courts that have had an opportunity to consider the issue Paragraphs 11(3)(c) and 11(4)(c) of the Companies Creditors Arrangement Act See the discussion and the cases referred to in Houlden & Morawetz, Bankruptcy and Insolvency Law of Canada (Carswell, 3 rd ed.) (hereafter H&M ) at N 16 and following See the discussion in H&M referred to in note 24 and see, for example, Campeau v. Olympia & York Developments Ltd. (1992), 14 C.B.R. (3d) 303 (Ont. Gen. Div.), Re Philip s Manufacturing Ltd. (1992), 12 C.B.R. (3d) 133 (aff d by the British Columbia Court of Appeal at 12 C.B.R. (3d) 149), Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 4 C.B.R. (3d) 307 (affirmed by the British Columbia Court of Appeal at 4 C.B.R. (3d) 311) among others See H&M note 24 above While the explanation may seem somewhat awkward, it is tempting to suggest that the power to stay the enforcement by secured creditors of their contractual and statutory rights on terms could be used by the courts to grant an effective priority to a post-filing lender See Re United Used Auto & Truck Parts Ltd. (2000), 16 C.B.R. (4 th ) 141 (BCCA) affirming Re United Used Auto & Truck Parts Ltd. (1999), 12 C.B.R. (4 th ) 144. Note that leave to appeal the Court of Appeal s decision to the Supreme Court of Canada was granted. However, before the appeal was heard the matter settled. It is also worth noting that in the most recent Algoma filing a substantial super-priority DIP financing was approved by the court. That financing primed the security held by a group of noteholders who, until the DIP loan was

15 Equitable Subordination A different type of court ordered priority or subordination surrounds the U.S. doctrine of equitable subordination. In the U.S., there are three requirements for a successful claim of equitable subordination: (1) a claimant has engaged in some type of inequitable conduct; (2) the misconduct has resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim is not inconsistent with the provisions of bankruptcy legislation. While the test has been accepted by the Supreme Court of Canada 36, equitable subordination has had only limited application in Canadian law, which is reinforced by two recent Ontario decisions. 37 In both General Chemicals Canada Ltd. and New Solutions Financial the court denied the subordination of a secured creditor s claim to a lower ranking claim because there was no evidence that the secured creditor had undertaken inequitable conduct. Priorities Granted to Governmental Agencies And Authorities On An Insolvency Pre-Bankruptcy Situation It has long been accepted by the courts that, in the event of an insolvency, where an ordinary creditor and the Crown have equal ranking claims against the insolvent company, the common law will afford to the Crown a priority over other equal ranking creditors. 38 Where there has been no bankruptcy, this Crown prerogative continues to apply. authorized, had first security on Algoma s fixed assets. The initial order that authorized the DIP facility was not made on notice to the noteholders. After the noteholders learned of the DIP facility and after they retained counsel, the noteholders sought leave to appeal the initial order to the Ontario Court of Appeal. Leave was denied and the matter remitted to the supervising judge, The Honourable Mr. Justice Farley. This is yet another clear indication that the Ontario Court of Appeal is loathe to interfere with the balancing process over which the supervising judge in CCAA proceedings presides. From a secured creditor s perspective, the Algoma order seems to tilt the balance very much in favour of restructuring and away from the preservation of the rights of preexisting secured creditors. See also Hunters Trailer & Marine Ltd., [2001] A.J. No. 857 (Alta Q.B.) at para. 51. See also Simpson s Island Salmon Ltd. (Re), [2006] N.B.J. No. 345 (N.B.Q.B.), in particular paragraphs 33 and 34 wherein Glennie J. notes that the debtor s ability to put forth a plan that will involve significant payment of the outstanding indebtedness to secured creditors while continuing to operate as a going concern, subject to the debtor s ability to arrange appropriate financing, is what the structure and process of the CCAA is designed to achieve. 36 See the SCC s articulation of the test in Re Canada Deposit Insurance Corp. and Canadian Commercial Bank (1992), 97 D.L.R.(4 th ) 385 (SCC) and the discussion in National Bank of Canada v. Merit Energy Ltd., [2001] A.J. No. 918 (Alta Q.B.) 37 New Solutions Financial Corp. v Ontario Ltd., [2007] O.J. No. 43 (Ont. S.C.J. - Commercial List) (Campbell J.) at para 32 (New Solutions Financial); Harbert Distressed Investment Fund, L.P. v. General Chemical Canada Ltd., [2006] O.J. No (Ont. S.C.J. - Commercial List) (Mesbur J) at para 92 (General Chemicals Canada). 38 Household Realty Corporation Ltd. v. A.G. Canada; MacCulloch & Co. Ltd. v. A.G. Canada, [1980] 1 SCR 423. See also Ontario (Attorney General) v. Pettit (1999), 119 O.A.C. 348 (Ont.C.A.)

16 It was recognized by the Government of Canada that this Crown prerogative potentially adversely affected the ability to achieve financial restructurings under the Bankruptcy and Insolvency Act and also potentially created inequities. Thus, in 1992, the Bankruptcy and Insolvency Act was amended to include sections 86 and 87: Status of Crown claims 86. (1) In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in right of Canada or a province or of any body under an Act respecting workers compensation, in this section and in section 87 called a workers compensation body, rank as unsecured claims. (2) Subsection (1) does not apply (a) to claims that are secured by a security or privilege of a kind that can be obtained by persons other than Her Majesty or a workers compensation body (i) pursuant to any law, or (ii) pursuant to provisions of federal or provincial legislation, where those provisions do not have as their sole or principal purpose the establishment of a means of securing claims of Her Majesty or of a workers compensation body; and (b) to the extent provided in subsection 87(2), to claims that are secured by a security referred to in subsection 87(1), if the security is registered in accordance with that subsection. (3) Subsection (1) does not affect the operation of (a) subsections 224(1.2) and (1.3) of the Income Tax Act; (b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or an employee s premium, or employer s premium, as defined in the Employment Insurance Act, and of any related interest, penalties or other amounts; or (c) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest, penalties or other amounts, where the sum (i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar in nature to the income tax imposed on individuals under the Income Tax Act, or

17 (ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a province providing a comprehensive pension plan as defined in subsection 3(1) of the Canada Pension Plan and the provincial legislation establishes a provincial pension plan as defined in that subsection, and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2) of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts. R.S., 1985, c. B-3, s. 86; 1992, c. 27, s. 39; 1997, c. 12, s. 73; 2000, c. 30, s (1) A security provided for in federal or provincial legislation for the sole or principal purpose of securing a claim of Her Majesty in right of Canada or a province or of a workers compensation body is valid in relation to a bankruptcy or proposal only if the security is registered, before the earliest of (a) (b) the date a petition is filed against the debtor, the date the debtor makes an assignment, and (c) the date the debtor files a notice of intention under section 50.4, (d) the date on which a proposal is filed, pursuant to a prescribed system of registration. Idem (2) In relation to a bankruptcy or proposal, a security referred to in subsection (1) that is registered in accordance with that subsection (a) is subordinate to securities in respect of which all steps necessary to make them effective against other creditors were taken before that registration; and (b) is valid only in respect of amounts owing to Her Majesty or a workers compensation body at the time of that registration, plus any interest subsequently accruing on those amounts.

18 R.S., 1985, c. B-3, s. 87; 1992, c. 27, s. 39; 1997, c. 12, s. 74. Regard should also be had to section 67 of the Bankruptcy and Insolvency Act: 67. (1) The property of a bankrupt divisible among his creditors shall not comprise (a) property held by the bankrupt in trust for any other person, (b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides, or (b.1) such goods and services tax credit payments and prescribed payments relating to the essential needs of an individual as are made in prescribed circumstances and are not property referred to in paragraph (a) or (b), but it shall comprise (c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and (d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit. (2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision. (3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment Insurance Act (each of which is in this subsection referred to as a federal provision ) nor in respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where (a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in subsection 227(4) or (4.1) of the Income Tax Act, or

19 (b) the province is a province providing a comprehensive pension plan as defined in subsection 3(1) of the Canada Pension Plan, that law of the province establishes a provincial pension plan as defined in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3) or (4) of the Canada Pension Plan, and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as the corresponding federal provision. R.S., 1985, c. B-3, s. 67; 1992, c. 27, s. 33; 1996, c. 23, s. 168; 1997, c. 12, s. 59; 1998, c. 19, s From the provisions of section 86(1) of the Bankruptcy and Insolvency Act, it is evident that, where that Act applies (in other words, where the insolvency has led to a filing under the Bankruptcy and Insolvency Act), unless the exceptions set forth in section 86(2) or 86(3) are applicable, the Crown will rank on a pari passu basis with other unsecured creditors. The ability to take advantage of exceptions as contemplated by sections 86(2) and 86(3) of the Bankruptcy and Insolvency Act has given rise to a host of amendments to federal statutes as well as to a host of amendments to Ontario statutes. Federal Statutory Deemed Trusts Section 227(4) of the Income Tax Act 39 provides that every person who deducts or withholds an amount under that Act is deemed, notwithstanding any security interests in the amounts that are deducted or withheld, to hold that amount separate and apart from the property of the person and from property held by any secured creditor of that person that, but for the security interests would be the property of the person, in trust for Her Majesty. Section 224(1.3) of the Income Tax Act defines a security interest as any interest in property that secures payment or performance of an obligation however or whenever arising. This provision is also incorporated into Ontario s Income Tax Act 40 for any monies deducted or withheld under that Act R.S.C. 1985, c.1 (5 th Supp.). Section 227 of the Income Tax Act was amended in light of the decision of the Supreme Court of Canada in Royal Bank of Canada v. Sparrow (Electricorp), [1997] 1 S.C.R In that case, although the prior version of the section had the effect of making Her Majesty the beneficiary under a trust, the court noted that the trust was not a real trust because its subject matter could not be identified where the tax debtor failed to set aside monies to be remitted to Her Majesty. The statutory amendments had the result of deeming funds to be set aside. See also First Vancouver Finance v. M.N.R. (2002), 212 D.L.R. (4 th ) 615 (S.C.C.). R.S.O. 1990, c.i.2, as amended

20 These provisions specifically provide that the deemed statutory trust operates notwithstanding any security interest and, as a result, such deemed statutory trust will have priority over preexisting security interest in the funds withheld or deducted. This deemed statutory trust will be effective in bankruptcy. Canada Pension Plan Deductions Subsection 23(3) of the Canada Pension Plan 41 creates a deemed statutory trust for deducted but unremitted contributions from an employee s remuneration to the Canada Pension Plan. The employer is deemed, notwithstanding any security interest in the amount deducted, to hold the amount of the unremitted contributions in trust for Her Majesty. The definition of security interest is that found in section 224(1.3) of the Income Tax Act. Section 23(4) of the Canada Pension Plan provides that, notwithstanding the Bankruptcy and Insolvency Act or any other enactment, the property of the employer and the property held by any secured creditor of that employer, equal in value to the amount so deemed to be held in trust, is deemed to be beneficially owned by Her Majesty notwithstanding any security interest in such property or in the proceeds thereof. The proceeds of the property are to be paid to the Receiver General in priority to all such security interests. This deemed statutory trust is effective in bankruptcy. Employment Insurance Act, 1996 Deductions Subsection 86(2) of the Employment Insurance Act creates a deemed statutory trust for deducted but unremitted premiums from an employee s remuneration to the Receiver General. The employer is deemed, notwithstanding any security interest (also defined in section 224(1.3) of the Income Tax Act) in the amount deducted, to hold the amount of the unremitted premiums in trust for Her Majesty. Section 86(2.1) provides that, notwithstanding the Bankruptcy and Insolvency Act or any other enactment, the property of the employer and property held by any secured creditor of that employer, equal in value to the amounts deemed to be held in trust, is deemed to be beneficially owned by Her Majesty notwithstanding any security interest in such property or in the proceeds thereof. The proceeds of the property are to be paid to the Receiver General in priority to all such security interests. Again, this deemed statutory trust is effective in bankruptcy. Federal Super-Priority Garnishment Orders Section 224(1.2) of the Income Tax Act gives the Minister the power to issue super-priority garnishment orders (i.e. demands) in a limited number of circumstances where a person becomes R.S.C. 1985, c.c-8, as amended S.C. 1996, c.23, as amended

21 liable to pay amounts owing under that Act. Once a garnishment order has been issued and received by a third party who is required to pay, it charges the tax debtor s interest in monies owing to the tax debtor by the third party within 90 days after service of the demand. This provision creates an interest in receivables identified in the demand and not in all of the debtor s accounts receivable in general. This section specifically provides that the security interest (as defined in section 224(1.3) of the Income Tax Act) will have priority over all security interests in monies and accounts receivable referred to in the demand. The super-priority garnishment order is incorporated by reference into the Canada Pension Plan pursuant to section 23(2), into the Employment Insurance Act, 1996, pursuant to section 99 and into the Ontario Income Tax Act pursuant to section 27. This form of garnishment order is effective in bankruptcy. Treatment of Goods and Services Tax Section 222(1) of the Excise Tax Act 43 creates a trust for collected but unremitted Goods and Services Tax ( GST ). This trust will attach to money received by a tax collector in respect of GST, notwithstanding any security interest applicable to that tax collector. The amounts subject to the trust are deemed to be held separate and apart from the property of the tax collector and any property of the tax collector held by a secured creditor as a result of a security interest. Section 222(3) of the Excise Tax Act provides that, in the event of liquidation, assignment, receivership or bankruptcy, an amount equal to the deemed statutory trust is deemed to be separate from and to form no part of the estate in liquidation, assignment, receivership or bankruptcy. A property that is subject to the trust is stated to be beneficially owned by Her Majesty regardless of any security interest in either the property or the ensuing proceeds. The proceeds are to be paid to Her Majesty in priority to all security interest. In contrast to the treatment described above under the Income Tax Act, the Canada Pension Plan, the Employment Insurance Act 1996 and super-priority garnishment orders, the deemed statutory trust created by sections 222(1) and (3) of the Excise Tax Act are not enforceable in bankruptcy. Ontario Statutory Liens A number of Ontario statutes permit statutory liens to be created that will have priority over any pre-existing security interests. Generally, these statutory liens must be registered under a prescribed system of registration such as the Personal Property Security Act 44 having regard to the provisions of section 87 of the Bankruptcy and Insolvency Act R.S.C. 1985, c.e-15, as amended R.S.O. 1990, c.p.10, as amended

22 Corporations Tax Act Section 99 of the Corporations Tax Act 45 provides for the creation of a lien against land and/or personal property as security for any amount owing under that Act. As regards personal property, the lien will come into existence upon registration of a financing statement under the Personal Property Security Act, whereupon it will charge all personal property owned or held at the time of registration or acquired afterwards. The lien has a duration of five years. Section 99(3) of the Corporations Tax Act provides the lien will have priority over any security interest perfected by a registration or possession after registration of the notice and over any encumbrance or other claim that is registered against or that otherwise arises and effects the corporation s property after the notice is registered. By virtue of the provisions of section 87 of the Bankruptcy and Insolvency Act, this lien will have priority in bankruptcy. Retail Sales Tax Act Section 23 of the Retail Sales Tax Act 46 provides for the creation of a lien against land and/or personal property as security for any amount owing under that Act. The Act contains similar provisions to those set forth in the Corporations Tax Act such that, where the lien has been registered under the Personal Property Security Act, it will have priority in bankruptcy by virtue of the provisions of section 87 of the Bankruptcy and Insolvency Act. Employer Health Tax Act Section 23 of the Employer Health Tax Act 47 provides for the creation of a lien against land and/or personal property as security for any amount owing under that Act. The Act contains similar provisions to those set forth in the Corporations Tax Act such that, where the lien has been registered under the Personal Property Security Act, it will have priority in bankruptcy by virtue of the provisions of section 87 of the Bankruptcy and Insolvency Act. Other Ontario Statutes It is interesting to contrast the provisions of the Corporations Tax Act, Retail Sales Tax Act and Employer Health Tax Act with those of the Workplace Safety and Insurance Act, and the Pension Benefits Act R.S.O. 1990, c.c.40, as amended R.S.O. 1990, c.r31, as amended. See section 24.1 R.S.O. 1990, c.e.11, as amended. See section 22 S.O. 1997, c.16. See section R.S.O. 1990, c.p.8, as amended. See section 14

23 While the statutes contemplate liens being created, they do not contemplate registrations of those liens under a prescribed system of registration such that the liens will not have priority in bankruptcy by virtue of the provisions of section 87 of the Bankruptcy and Insolvency Act. Ontario Statutory Deemed Trusts A number of Ontario statutes create deemed trusts in relation to money collected. For example, the Tobacco Tax Act 50, the Retail Sales Tax Act 51, the Fuel Tax Act 52, the Pension Benefits Act 53 and the Employment Standards Act, create deemed statutory trusts. The trusts arising under the Tobacco Tax Act, the Retail Sales Tax Act and the Fuel Tax Act pertain to monies collected by way of tax. The trust under the Pension Benefits Act pertains to monies withheld by an employer on account of payroll deductions which are to be paid into a pension plan. The Employment Standards Act pertains to a deemed trust for vacation pay accruing due to employees. Each of these deemed trusts will become unenforceable in a bankruptcy. Conflicting Case Law Regarding Purchase Money Security Interests There was some confusion in the case law that interprets the deemed trust provisions contained in sections 227(4) and (4.1) of the Income Tax Act. At trial, in Daimler-Chrysler Financial Services (Debis) Canada Inc. v. MegaPets Ltd. 55, a vehicle was purchased by way of a conditional sales contract with the usual registrations being made under applicable personal property security legislation. The Crown took the position that it was the beneficial owner of the vehicle because of the statutory deemed trust provisions contained in the Income Tax Act which the Crown alleged were applicable due to the debtor s failure to remit employee income tax deductions. The finance company, which was entitled to the benefit of the conditional sales contract, sought to rely upon its security. Notwithstanding that the security was in the nature of a purchase money security interest, the British Columbia Supreme Court held that the Crown was entitled to priority in respect of the proceeds of sale of the vehicle. Fortunately, this decision was reversed on appeal to the British Columbia Court of Appeal and the court followed the reasoning in Canada (Deputy Attorney General) v. Schwab Construction Ltd. 56 This case pertained to a contest between Her Majesty and various equipment lenders in relation to certain equipment. Her Majesty claimed superpriority pursuant to sections 227(4) and 4.1 of the Income Tax Act in relation to payroll source 50 R.S.O. 1990, c.t.10, as amended 51 R.S.O. 1990, c.r.31, as amended 52 R.S.O. 1990, c.f.35, as amended 53 Section S.O. 2000, c. 41 [2000] B.C.J. No (B.C.S.C.) (Martinson J.), reversed (2002) 212 D.L.R. (4 th ) 41 (B.C.C.A.) (Newbury J.A.) [2001] S.J. No. 279 (Sask. Q.B.) (Dovell J.), affirmed, [2002] S.J. No. 16 (Sask. C.A.)

24 deductions that were not remitted by the debtor. The court noted that the definition of security interest as contained in section 224(1.3) of the Income Tax Act contains a specific list of commercial arrangements including debenture, mortgage, lien, pledge, charge, deemed or actual trust assignment, but not the word lease. The court felt that the deemed trust provisions of the Income Tax Act were very powerful and that there should be sufficient clarity to forewarn citizens so that they can govern their everyday affairs accordingly. The court refused to accept the argument that leases should be included in the definition of security interest in section 224(1.3) of the Income Tax Act. Instead, the court held that all leases including true leases and security leases in which ownership remains with the creditor are not a security interest within the meaning of section 224 (1.3) of the Income Tax Act. The court said that to decide otherwise would allow the participant to claim as part of its deemed trust property not owned by the bankrupt but owned by an innocent third party. The court specifically found that it made no difference whether or not the lease agreement in question provided for an option to purchase at the end of the term of the lease for either the fair market value of the item being leased or whether the lease in question was a true lease or a security interest. A further decision worthy of note is that of Paccar Financial Services Ltd. v. Win-Storm Trucking Inc. 57 This is a decision of the Alberta Court of Queen s Bench also dealing with whether Her Majesty could assert a statutory priority in light of the deemed trust provisions contained in the Income Tax Act. Again, the contracts in question were leases. Notwithstanding the decision in Schwab (which pre-dated this decision by several months), the court found that Her Majesty would be entitled to priority in relation to the vehicles covered by the lease contracts. The court also found that Her Majesty would have priority in relation to property that was subject to a conditional sales contract. In light of MegaPets and Schwab, and notwithstanding Paccar, it would seem that the correct interpretation of the Income Tax Act deemed trust provisions will result in the priority created by that Act only applying to the equity of the debtor in the equipment subject to the financing arrangements. It is particularly inequitable that an equipment lender which provides purchase money financing in good faith, without which financing the debtor would not have possession of the equipment, should rank subordinate to Her Majesty. That does not seem to be a necessary or appropriate interpretation of the Income Tax Act. Does the Doctrine of Marshalling Apply to Her Majesty? The doctrine of marshalling requires that a debtor with two sources available to satisfy the creditor s claim be directed to satisfy the claim out of one source to benefit a secondary creditor [2001] A.J. No.941 (Alta. Q.B.) (Master Funduk) 58 Nova Scotia Business Development Corp. v. Wandolyn Inn Ltd., [1999] N.S.J. No. 478 (N.S.S.C.) (Davison J.) (Wandolyn)

25 The doctrine of marshalling is discussed in Halsbury s Laws of England 59 : Generally, three conditions must be satisfied in order that the doctrine of marshalling may be applied as regards claims by creditors: (i) (ii) (iii) the claims must be against a single debtor; if one creditor has a claim against C and D, and another creditor has a claim against D, the latter creditor may require the former to resort to C unless the liability is such that D could throw the primary liability on C. For example, where C and D are principal and surety; the two funds must be at the debtor s disposal; if they are not, the persons interested in the fund not under the debtor s control have a right to throw his debts on the other fund which is under his control and against them there is no marshalling; funds must be in existence when the question of marshalling arises.if the owner of two properties mortgages both to the same person, and afterwards mortgages one only to a second mortgagee, the court will marshall the two properties so as to throw the first mortgage as far as possible on the property not included in the second mortgage. This principle applies whatever the nature of the estates, and it extends to charges in equitable liens, in accordance, however, with the rule that marshalling will not be allowed to the prejudice of a third party, where two estates, X and Y, are mortgaged to A and X is mortgaged to B, and then Y is mortgaged to C, B cannot require A to satisfy himself out of Y and so exclude C, but A must satisfy himself rateably out of the two estates. If, however, C s mortgage is expressly subject to prior satisfaction of A s and B s debts, B is entitled to marshall. In Nova Scotia Business Development Corp. v. Wandolyn Inn Ltd. 60, the issue before the court was the availability of marshalling of funds as between various inns owned by Wandolyn Inn Limited, a bankrupt company. The receiver and some creditors of Wandolyn Inn had applied to the court for direction or guidance with respect to the disposition of funds held by the receiver in light of the deemed trust claim of Her Majesty under the Income Tax Act. The Minister had taken the position that it could allocate monies without regard to any obligation to marshall on the basis that section 227(4.1) of the Income Tax Act effectively eliminates from its provisions any law which would include the equitable doctrine of marshalling. The court concurred with this result Volume 16(2), pgs. 342 to 345 at paras. 758 to 763, as described by Davidson J. at paras. 54 and 55 in Wandolyn, supra Wandolyn, supra

26 If this case represents a correct conclusion, given the extent of the super-priority claims available to Her Majesty as discussed above, the absence of a duty to marshall will prove to be a matter of considerable concern to competing creditors in the future. Recent Changes to Insolvency Legislation Affecting Priorities On November 25, 2005, Chapter 47 of the Statutes of Canada 61 received Royal Assent. Chapter 47 was intended to be a comprehensive insolvency reform package with the goal of modernizing the Bankruptcy and Insolvency Act and related legislation. 62 In December 2006, the government issued a Ways and Means motion to fast-track further reforms since it was recognized at the time of Royal Assent that Chapter 47 would be subject to further review to resolve some technical issues in the legislation. On December 14, 2007, Bill C received Royal Assent. Bill C-12 contains amendments to Chapter 47 s provisions as well as further amendments to the Bankruptcy and Insolvency Act and related legislation. relating to the personal liability of insolvency professionals, transfers at undervalue and student loan issues. Although Bill C-12 has received Royal Assent, its provisions are not yet effectively operative including because Chapter 47 itself is not yet in force. It is expected that Chapter 47 will come into force during Some of the changes in Bill C-12 are minor and merely affirm the court s authority under section 11 of the Companies Creditors Arrangement Act to grant certain relief, while other changes represent a significant departure from the current practice in insolvency proceedings. The following discussion summarizes the major changes to priorities Chapter 47 and Bill C-12 (collectively the New Legislation ) will have on proceedings under the Companies Creditors Arrangement Act and the Bankruptcy and Insolvency Act. Unpaid Wages and Unpaid Pension Contributions The New Legislation proposes the Wage Earners Protection Program Act, which would be established to make payments to individuals in respect of wages owed to them by employers who are bankrupt or subject to a receivership. 64 Under the Wage Earners Protection Program Act, an employee will be entitled to apply to the Minister for the payment of the amount of wages owing for the six months prior to the date of the bankruptcy or receivership. Wages is defined to include salaries, commissions, compensation for services rendered, vacation pay and any other 61 An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act and to make consequential amendments to other acts, S.C c See D. Jackson, BIA transformed into mini CCAA, (March 2006) The Lawyers Weekly, Vol. 25, No An Act to amend the Bankruptcy and Insolvency Act, the Companies Creditors Arrangement Act, the Wage Earner Protection Program Act and Chapter 47 of the Statutes of Canada, 2005, S.C c Section 4 of the Wage Earners Protection Program Act

27 amounts prescribed by regulation but does not include severance or termination pay. 65 The maximum amount that the employee will receive is the greater of $3,000 and an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act, less any applicable deductions under a federal or provincial law. Employees who have been employed for a period of three months or less, officers, directors, any individual with a controlling interest in the debtor and individuals occupying managerial positions are not eligible for protection under the Wage Earners Protection Program Act. It should be noted that the term managerial position is not defined and an expansive definition of that term would significantly reduce the number of employees who will benefit from the Wage Earners Protection Program Act. Pursuant to the proposed sections 81.3 and 81.4 of the Bankruptcy and Insolvency Act, certain claims for unpaid wages and other compensation during the period that is six months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, to the extent of $2,000 (less any amount paid by the trustee or a receiver) are secured against current assets. The security is granted a super priority (subject to certain limitations described in those sections). The proposed section 6(4) of the Companies Creditors Arrangement Act provides that the court may only sanction a plan of compromise and arrangement if the plan provides for the payment to the employees of amounts equal to at least what the employees would have been paid under section 136(1)(d) of the Bankruptcy and Insolvency Act. 66 Unpaid pension contributions 67 are defined in reference to the Pension Benefits Standards Act, and the Pension Benefits Standards Regulations to include regular and special contributions. Unpaid pension contributions do not include deficiency claims. 65 Section 2(1) of the Wage Earners Protection Program Act. 66 Section 136(1)(d) provides for the payment of wages, salaries, commissions or compensation of any clerk, servant, travelling salesman, labourer or workman for services rendered during the six months immediately preceding the bankruptcy to the extent of $2,000 in each case, together with, in the case of a travelling salesman, disbursements properly incurred by that salesman in and about the bankrupt s business to the extent of $1,000 in each case, during the same period. 67 The unpaid pension contributions include (a) an amount equal to the sum of all amounts that were deducted from he employees remuneration for payment to the fund; (b) if the prescribed plan is regulated by an Act of Parliament, (i) an amount equal to the normal cost with the meaning of the Pension Benefits Standards Regulations, R.S.C. 1985, and (ii) an amount equal to the sum of all amounts that were required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985; and (c) in the case of any other prescribed pension plan, (i) an amount equal to the amount that would be the normal cost, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985 that the employer would be required to pay to the fund if the prescribed plan were regulated by an Act of Parliament, and (ii) an amount equal to the sum of all amounts that would have been required to be paid by the employer to the fund under a defined contribution provision, within the meaning of subsection 2(1) of the Pension Benefits Standards Act, 1985 that the employer would be required to pay to the fund if the prescribed plan were regulated by an Act of Parliament. 68 R.S.C. 1985, Chap. 32 (2nd Supp.).

28 The proposed sections 81.5 and 81.6 of the Bankruptcy and Insolvency Act, address unpaid pension contributions in the context of a bankruptcy or receivership, respectively. Pursuant to both sections, where there are unpaid pension contributions on the date of bankruptcy or the date before the receiver is appointed, such amounts are secured by a charge on all the assets of the debtor. In the context of a bankruptcy, the charge in respect of the unpaid pension contributions ranks above every other claim, right, charge or security against the bankrupt s assets except the rights under statutory deemed trust claims, 69 unpaid suppliers claims, 70 claims of farmers, fishers and aquaculturalists, 71 and claims secured for unpaid wages. 72 In the context of a receivership, the charge for the unpaid pension contributions only ranks behind claims for unpaid suppliers, 73 claims of farmers, fishers and aquaculturalists, 74 and claims secured for unpaid wages. 75 The proposed section 60(1.5) of the Bankruptcy and Insolvency Act deals with unpaid pension contributions in the context of a proposal. This section provides that no proposal in respect of an employer who participates in a prescribed pension plan can be approved by the court unless certain pension fund payments are made under the proposal. The court may, however, approve the proposal if it is satisfied that the interested parties have entered into an agreement, approved by the relevant pension regulator, respecting the amounts of those payments. Similar revisions are included in proposed sections 6(5) and 6(6) of the Companies Creditors Arrangement Act. The inclusion of the super-priority charge for unpaid pension contributions in the context of bankruptcies and receiverships is likely cause for concern in the lending community since it will be difficult for lenders to estimate with any accuracy the amount of these unpaid contributions. There is also some concern about how this charge will be enforced and which assets will be called upon to satisfy the unpaid pension contribution claims. There are no provisions in the Bankruptcy and Insolvency Act that provide for marshalling in respect of these claims or that require the pension claimants to look first to unencumbered assets before looking to the assets subject to the claims of secured creditors. Each claim secured for unpaid wages 76 and unpaid pension contributions 77 is granted a priority charge under the Bankruptcy and Insolvency Act that ranks above every other claim, right, charge or security against the current assets of the debtor, regardless of when that other claim, right, charge or security arose, except for certain enumerated exceptions which are specific to each 69 Section 67.3 of the Bankruptcy and Insolvency Act. 70 Section 81.1 of the Bankruptcy and Insolvency Act. 71 Section 81.2 of the Bankruptcy and Insolvency Act. 72 Section 81.3 of the Bankruptcy and Insolvency Act. 73 Section 81.1 of the Bankruptcy and Insolvency Act. 74 Section 81.2 of the Bankruptcy and Insolvency Act. 75 Section 81.3 of the Bankruptcy and Insolvency Act. 76 Sections 81.3 and 81.4 of the Bankruptcy and Insolvency Act. 77 Sections 81.4 and 81.6 of the Bankruptcy and Insolvency Act.

29 section. In a situation where a security arises under each of the sections it is possible that the result would be multiple claims, each ranked above each other. In the event of such a situation, it is likely that a court would, to the extent the sections are applicable, direct that the claims referred to in these sections rank on a pari passu basis. Interim Financing In accordance with proposed sections 31(1), 31(2) and 50.6 of the Bankruptcy and Insolvency Act and 11.2 of the Companies Creditors Arrangement Act, the court may authorize interim financing to a debtor company during the restructuring process on notice to secured creditors likely to be affected by the security or charge. The interim financing may rank in priority over the claim of any secured creditor of the debtor. 78 In deciding whether to grant the interim financing, the court must consider, among other things: (a) the period the debtor is expected to be subject to restructuring proceedings; (b) how the debtor s business and financial affairs are to be managed during the proceedings; (c) whether the debtor s management has the confidence of its major creditors; (d) whether the loan would enhance the prospects of a viable proposal/arrangement being made in respect of the debtor; (e) the nature and value of the debtor s property; (f) whether any creditor will be materially prejudiced as a result of the security or charge; and (g) the report of the trustee or monitor (depending upon the applicable statute). Governance Issues The proposed sections 64.1 and 64.2 of the Bankruptcy and Insolvency Act and and of the Companies Creditors Arrangement Act codify the creation of priority charges for directors and officers liabilities and professional fees on notice to secured creditors who are likely to be affected by the charges. The directors and officers charge includes indemnification for any obligations and liabilities that may be incurred after the filing of the notice of intention, proposal or commencement of Companies Creditors Arrangement Act proceedings. The charge will not cover any obligation or liability incurred as a result of a director s gross negligence or wilful misconduct or, in Quebec, gross or intentional default. The court may not, however, grant the charge if in its opinion the director or officer could obtain adequate indemnification insurance at a reasonable cost. 79 The professionals charge includes the fees and expenses of the trustee/monitor including any financial, legal or other experts engaged by the trustee/monitor and financial, legal or other experts as well as, under the Companies Creditors Arrangement Act, 78 It is clear that certain super-priority entitlements, in relation to unpaid pension contributions and unpaid wages, as discussed above, will rank in priority over any claim of a secured creditor. It is also clear that a court-ordered charge resulting from interim financing may rank in priority over any claim of a secured creditor. What is not clear under the New Legislation is whether court-ordered charges may have priority over claims for unpaid pension contributions and wages. Absent such priority, access to debtor-in -possession financing necessary to achieve a financial restructuring of an insolvent entity may be adversely affected, which would be undesirable. 79 Whether such insurance in fact exists, and what would constitute a reasonable cost in the circumstances, may be very much open to debate.

30 financial legal or other experts engaged by the company. Similar charges are available for financial, legal or other experts engaged by any other interested person if the court is satisfied that these costs are necessary for the effective participation of the person in the proceedings. The amendments in the New Legislation propose that these charges (and other charges) rank in priority to the claims of any secured creditor of the debtor. There is, however, no provision which codifies how the charges will rank vis-à-vis one another or vis-à-vis other statutory priority claims set out in the Bankruptcy and Insolvency Act and Companies Creditors Arrangement Act (i.e. statutory deemed trusts, unpaid suppliers, unpaid wages and unpaid pension contributions). Critical Suppliers The proposed section 11.4 of the Companies Creditors Arrangement Act allows a debtor to apply to court to have a person declared to be a critical supplier of goods and services. If such a declaration is made, the court may make an order requiring the person to supply any goods or services specified by the court on any terms and conditions that are consistent with the supply relationship or that the court considers appropriate. The supplier is entitled to a charge in an amount equal to the value of the goods or services supplied. The court may order that the charge rank in priority over the claim of any secured creditor of the company. There is no indication as to whether the suppliers would be able to continue to supply on a cash on delivery basis or whether the suppliers would be entitled to object to continuing to supply on the basis of financial hardship. Subordination of Equity Claims Pursuant to the proposed section of the Bankruptcy and Insolvency Act and section 22 of the Companies Creditors Arrangement Act, a creditor will not be entitled to claim a dividend in respect of an equity claim (a defined term that includes dividends and returns of capital) until all claims that are not equity claims have been satisfied. The subordination of equity claims will also apply to monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission of a purchase or sale of an equity interest. Inclusion of Income Trusts The definitions of corporation and company in the proposed revisions to sections 2 of the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act, respectively, will now include an income trust that has assets in Canada and whose units are listed on a prescribed stock exchange or the majority of whose units are held by a trust whose units are so listed. The definition of income trust in the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act is sufficiently broad to include not only those trusts

31 described in the investment community as income trusts, but also real estate investment trusts and royalty trusts. On October 31, 2006, the federal government announced changes to the rules concerning income trusts, which apply to all publicly traded income trusts other than those that hold passive real estate investments. When they come into full force, the changes will effectively eliminate any tax-based advantage for income trusts versus corporations. These changes are leading to a flow of funds out of these trusts. These changes will consequently reduce the impact of the proposed revisions to include an income trust in the section 2 definitions of the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act. Changes to Unpaid Suppliers Rights The proposed revisions to section 81.1 of the Bankruptcy and Insolvency Act will continue to allow unpaid suppliers to have access to and repossess goods for use in relation to the purchaser s business (which have not fully been paid for) and which have been delivered to the purchaser or the purchaser s agent or mandatory. Under the current law, the demand for repossession must be presented within 30 days after the date of delivery of the goods even if the bankruptcy or receivership occurs 29 days after the date of delivery. This is generally an impossible task because the supplier may not learn of the bankruptcy or receivership for several days. The proposed revisions provide that the purchaser, trustee, receiver or purchaser s agent or mandatory is required to release the goods if (a) the goods were delivered within 30 days before the day on which the purchaser became bankrupt or subject to a receivership; and (b) the supplier presents a written demand for repossession to the purchaser, trustee or receiver within 15 days after the day on which the purchaser became bankrupt or subject to a receivership. If a notice of intention or proposal was filed prior to the purchaser becoming bankrupt or subject to a receivership, the relevant 30-day period is the 30 days before the filing of a notice or intention or, if there was no notice of intention, the proposal. If a supplier does not exercise its right to demand repossession within the prescribed 15-day period, the right of possession will expire unless extended prior to expiry by the bankruptcy trustee, the receiver or the court. The rights of unpaid suppliers will only be triggered by a bankruptcy or where a receiver has been appointed within the meaning of section 243(2) of the Bankruptcy and Insolvency Act. This does not include a receiver appointed by the court under provincial law. Creditors Not at Arm s Length The proposed revisions to section 137 of the Bankruptcy and Insolvency Act will change the common law position with respect to non-arm s length creditors entering into transactions with debtors before bankruptcy. The proposed revisions provide that a creditor who enters into a

32 transaction with a debtor who is not at arm s length at the time of the transaction, is not entitled to claim a dividend in respect of a claim arising out of that transaction until all of the other creditors claims have been satisfied, or unless the trustee or court deems the transaction to have been proper. In effect, this is a statutory enactment of the U.S. doctrine of equitable subordination. 80 To date, the oppression remedy has been available to achieve a similar result where a related party would otherwise rank ahead of other creditors, particularly if the related party induced others to advance credit without disclosing that the related party was the real beneficiary of the advance. Conclusion In terms of the law applicable to subordination of unsecured claims, the treatment of priorities in favour of Her Majesty and the law of marshalling, there would appear to be relatively little case law. As well, in each of these areas, the law seems to be in a state of evolution. The result is a level of considerable uncertainty for creditors, which uncertainty will almost by definition breed additional litigation. The New Legislation, if proclaimed into force without further amendments, will have a significant impact on the priorities and super-priorities under the Bankruptcy and Insolvency Act and Companies Creditors Arrangement Act. One can only speculate how these priorities will affect a debtor s access to credit in the future and the extent to which lenders may change their lending practices in response to statutory subordinations of their security. 80 Quaere whether, it will be open to argue that section 137 of the Bankruptcy and Insolvency Act is, in substance, property and civil rights legislation such that it is not constitutional.