2011 QCCA 718, 2011 QCCA 718

Unofficial English Translation Stonehaven Country Club Centre de villégiature & spa, l.p. (Syndic de) 2011 QCCA 718 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-019650-092 (700-11-009752-082) DATE: April 4, 2011 CORAM: THE HONOURABLE J.J. MICHEL ROBERT, C.J. Q. BENOÎT MORIN, J.A. JACQUES A. LÉGER, J.A. IN THE MATTER OF THE BANKRUPTCY OF: STONEHAVEN COUNTRY CLUB CENTRE DE VILLÉGIATURE & SPA L.P. Bankrupt and EUGENE J. HOWARD JUERGEN EISERMANN STONEHAVEN COUNTRY CLUB INC.

APPELLANTS/Creditors-respondents and INVESTISSEMENT QUÉBEC RESPONDENT/Creditor-petitioner and SAMSON BÉLAIR/DELOITTE & TOUCHE INC. , in its capacity as trustee in bankruptcy of Stonehaven Country Club Centre de Villégiature & SPA L.P. IMPLEADED PARTY/Trustee JUDGMENT [ 1 ] The Court; - On the appeal from a judgment rendered on April 22, 2009, by the Superior Court, District of Terrebonne (the Honourable Mr.

Justice Jean-Yves Lalonde), which set aside the notice of disallowance of the proof of claim of respondent Investissement Québec in the matter of the bankruptcy of Stonehaven Country Club Centre de villégiature & Spa L.P.; [ 2 ] Having examined the file, heard the parties, and deliberated; [ 3 ] For the reasons of Morin J.A., with which Robert C.J.Q. and Léger J.A. agree; [ 4 ] DISMISSES the appeal, with costs. J.J. MICHEL ROBERT, C.J.Q. BENOÎT MORIN, J.A. JACQUES A. LÉGER, J.A.

Mtre Guy P. Martel Mtre Joseph Reynaud Stikeman, Elliott For the appellants Mtre Jean Lozeau Mtre Brigitte Gobeil Joli-Coeur, Lacasse For the respondent Date of hearing: December 8, 2010 REASONS OF MORIN J.A. [ 5 ] The appellants appeal from a judgment rendered on April 22, 2009, by the Superior Court, District of Terrebonne (the Honourable Mr.

Justice Jean-Yves Lalonde), which set aside the notice of disallowance of the proof of claim of the respondent Investissement Québec (IQ) in the matter of the bankruptcy of Stonehaven Country Club Centre de villégiature & Spa L.P. (Stonehaven). the facts [ 6 ] On January 20, 2005, Stonehaven accepted a hypothecary loan offer of $2,500,000 made by IQ (exhibit R-1). [ 7 ] The contract in respect of this loan, namely the loan offer accepted by Stonehaven, includes the following clauses: [ translation ] 7.

INTEREST RATE 7.1 The Loan will bear interest, from each disbursement, at a rate calculated monthly and equal to the weekly variable rate in effect at IQ increased by two point twenty-five per cent (2.25%). If the Business decides to change the variable rate to a fixed rate in accordance with the provisions of subsections 7.4 et seq. of this

section 7, the fixed rate in effect at IQ at that time will also be increased by two point twenty-five per cent (2.25%). 7.2 IQ’s weekly variable rate, before the increase provided in subsection 7.1, is currently, for reference purposes only, [five point seventy-five] per cent (5.75%) per annum . For the purposes hereof, the weekly variable rate in effect at IQ is equal to the average prime rate of six

(6) Canadian chartered banks chosen by IQ, expressed on an annual basis and increased by one and one-half per cent (1.5%). This rate is revised once a week and is therefore likely to change on a weekly basis. 7.3 The Business accepts at this time any variation in the weekly variable rate that IQ may determine from time to time and which IQ will take into account in calculating interest on the Loan.

Any statement of account sent to the Business by IQ will constitute incontrovertible proof of the accuracy of such calculation, unless the Business notifes IQ to the contrary within a period of ten (10) days from the receipt of any such statement of account. 7.4 Starting from the last disbursement of the Loan, the Business may make a written request to IQ that the variable rate applicable to the Loan be changed to the fixed rate in effect at IQ at that time. 7.5 In the event of a request to change from the variable rate to the fixed rate, such new rate will take effect for a term of five (5) years, from the date of the effective conversion, and will correspond automatically thereafter to the new fixed rate in effect at IQ on expiry of such period of five (5) years, and so on and so forth, from one period of five (5) years to the next, until the end of the repayment period.

The Business may, nevertheless, at least one (1) month before the expiry of each period of five (5) years, make a written request to IQ that the Loan bear interest at the variable rate in effect at IQ at that time.

If the Business had previously chosen the variable rate, it may at any time revert to the fixed rate in effect at IQ at the time of its request and such rate will be in effect for a period of five (5) years. 7.6 If the Business requests IQ to change the variable rate applicable to the Loan to the fixed rate, it agrees at this time that the fixed rate will be that in effect at IQ at the time of the effective conversion from the variable rate to the fixed rate, provided that the fixed rate has not increased since the date of the conversion request.

If it has decreased, the Business will have a period of five (5) days from the date on which it is informed by IQ of the new fixed rate in effect to accept or refuse the new rate in writing. 7.7 IQ sets aside a maximum period of one (1) month to effect the conversion from the variable rate to the fixed rate, insofar as the fixed-rate funds are available at IQ on conditions acceptable to it. … 11.

PREMIUM 11.1 In consideration of the Loan, the Business will pay an annual premium, hereafter referred to as the Premium, equal to four point seven six one nine per cent (4.7619%) of its profits before income tax and yearly amortization, as established in its audited annual

financial statements. 11.2 The Premium will be payable annually on the last day of the sixth (6th) month following the end of each fiscal year of the Business. The first fiscal year used to calculate payment of the Premium will be that of the fiscal year ending December 31, 2005. 11.3 The last fiscal year to which the Premium will apply will be that during which the last capital repayment on the Loan is made.

Regardless of the amount of the balance of capital repaid during the last fiscal year, the Premium will be based on the earnings as a whole for the said fiscal year. 11.4 In the event of prepayment of the Loan, the Business shall reimburse the Premium for the two (2) fiscal years subsequent to the year during which the prepayment is made. … 13.

SECURITY 13.1 As specific and continuous security for the performance by the Business of all its obligations to IQ under this offer, the Business shall: 13.1.1 grant IQ a first-ranking principal hypothec in the amount of two million five hundred thousand dollars ($2,500,000) and an additional hypothec in the amount of five hundred thousand dollars ($500,000) on the universality of its property, present and future, movable, corporeal or incorporeal, it being agreed that such hypothec will be drafted in such a way as to enable the Business to dispose of its property in inventory in the ordinary course of its business and to give its banker a prior hypothec on its property in inventory, the proceeds of insurance thereon and its accounts receivable, as security for operating credits; 13.1.2 grant IQ a first-ranking principal hypothec in the amount of two million five hundred thousand dollars ($2,500,000) and an additional hypothec in the amount of five hundred thousand dollars ($500,000) on the universality of its immovable property, present and future, and without limiting the generality of the foregoing, in particular on the parcels of land covering an area of 427 acres included in the land acquired from the Missionary Oblates by the Business; 13.1.3 obtain, to IQ’s satisfaction, the requisite assignments of rank so that IQ obtains the rank specified at paragraphs 13.1.1 and 13.1.2 on the property of the Business; 13.1.4 subscribe, to IQ’s satisfaction, for an all-risk insurance policy with a hypothecary clause covering its assets for the full amount of the Loan and designating IQ as beneficiary; [ 8 ] On February 11, 2005, Stonehaven granted in favour of IQ a hypothec (exhibit R–2) containing, among others, the following clauses: [ translation ] 1.

DEBT The Creditor has granted the Debtor a loan in the amount of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000.00) under a loan offer addressed by the Creditor on January seventeenth, two thousand and five (2005) and accepted by the Debtor on January twentieth, two thousand and five (2005), which loan offer is appended hereto as

Schedule C as an integral part hereof after having been recognized as genuine and executed for identification by the parties in the presence of the undersigned notary (the “ Loan Offer ”). All the amounts due or accruing due from the Debtor as a result of the Loan Offer, in capital, interest, costs and accessory amounts, are hereafter collectively referred to as the “debt”.

If the Creditor were to agree to the renewal or replacement of the document evidencing the Debt or to evidencing the amount lent through another document, such renewals, replacements, or other documents would not effect novation and this deed will retain all its effect. 2. HYPOTHEC 2.1 To secure payment of the debt and the performance of its obligations under this deed, the Debtor hypothecates the universality of its property, movable and immovable, present and future, corporeal and incorporeal, of any nature whatsoever and wherever it may be situated (hereafter referred to as the “ Hypothecated Property ”). 2.2.

This hypothec is granted for the amount of TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000.00) with interest at the rate of twenty-five (25%) per annum from the date hereof. 2.3 Without limiting the generality of the foregoing, this hypothec affects in particular the immovable property described hereafter, the present and future rent from such immovable property and other immovable property of the Debtor, as well as the indemnity payable under insurance contracts covering such rent; … 9. ADDITIONAL HYPOTHEC To secure the payment of interest not already secured by the hypothec constituted in

section 2, as well as to secure further the performance of its obligations under this deed, the Debtor hypothecates the Hypothecated Property for an additional amount equal to twenty per cent (20%) of the amount in capital of the hypothec constituted in

section 2. [ 9 ] On July 11, 2006, being in default of its contractual obligations to IQ, Stonehaven filed a notice of intention to make a proposal in bankruptcy to its creditors under subsection 50.4(1) of the Bankruptcy and Insolvency Act , R.S.C. (1985), c. B-3 (the Act).

[ 10 ] Samson Bélair/Deloitte & Touche Inc. was named trustee in the notice of intention. [ 11 ] On December 4, 2006, Stonehaven filed a proposal to its creditors that was accepted by the requisite majority at a meeting held on December 21, 2006. [ 12 ] On January 26, 2007, the Superior Court approved the proposal, but it would never be carried out. [ 13 ] In addition, on January 17, 2007, IQ served on Stonehaven a prior notice of its intention to exercise the hypothecary remedy of sale by judicial authority under articles 2757 et seq. of the Civil Code of Québec (exhibit R–3). [ 14 ] On May 15, 2007, IQ served on Stonehaven a motion to institute proceedings for forced surrender and sale by judicial authority under articles 2791 et seq. of the Civil Code of Québec (exhibit R–3). [ 15 ] On October 4, 2007, Gaudreau J. allowed the motion in accordance with its conclusions (exhibit R–4). [ 16 ] On February 1, 2008, Stonehaven made an assignment of its property to the trustee Samson Bélair/Deloitte & Touche Inc. and, the same day, the trustee sent IQ a notice of stay of proceedings under

section 69.3 of the Act (exhibit R–5). [ 17 ] On March 18, 2008, the trustee served on IQ a notice under subsection 128(1) of the Act requiring that the respondent file with it with proof of the security that it apparently held on Stonehaven’s property (exhibit R–6). [ 18 ] On or about April 16, 2008, IQ filed with the trustee a proof of claim as a secured creditor for the amount of $3,249,009.73, emphasizing that it held Stonehaven assets estimated at $4,800,000 (exhibit R–8). [ 19 ] On May 1, 2008, the appellants, Stonehaven’s most important ordinary creditors, requested that the trustee disallow IQ’s claim as a secured creditor and instead treat its claim as a postponed claim within the meaning of

section 139 of the Act (exhibit I–3). [ 20 ] On May 6, 2008, the trustee refused the application, while indicating that it would not oppose a motion by the appellants under subsection 38(1) of the Act : 38

(1) Where a creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct. [ 21 ] On May 22, 2008, the registrar of bankruptcy allowed such an application brought by the appellants (exhibit I–5) and, on May 26, 2008, as a result of that judgment, the trustee assigned to the appellants all its rights and interests in respect of IQ’s proof of claim (exhibit R–9). [ 22 ] On May 28, 2008, the appellants disallowed IQ’s proof of claim as a secured creditor, relying on

section 139 of the Act , which had the effect of postponing IQ’s claim to the last rank of the ordinary claims in the bankruptcy of Stonehaven. [ 23 ] On April 14, 2008, IQ brought a motion to appeal the disallowance of its proof of claim under subsection 135(4) of the Act . [ 24 ] This motion gave rise to the judgment a quo. judgment of the superior court [ 25 ] The trial judge considered the origins of

section 139 of the Act and the Supreme Court of Canada judgment in Sukloff v. A.H. Rushforth & Co . [1] He concluded that its objective was [ translation ] “ to prevent a silent or sleeping partner from participating in the distribution of dividends by a trustee in bankruptcy, as a result of advances given in consideration of a percentage of the profits”. [2] [ 26 ] The loan contract between the parties provided that a premium of 4.7619% of the debtor’s profits before income tax and amortization would be paid to the respondent.

The Court noted that the amounts advanced were recorded in the bankrupt’s financial statements as loans payable rather than contributions to the funds of the general partner or of the partners and that the security was duly published.

It concluded that the true, principal, and overriding substance of this agreement was to establish a debtor-creditor relationship, and that the premium based on a percentage of the earnings was only ancillary. [3] [ 27 ] The Court then considered the appellant’s argument that the provincial legislature did not have the requisite constitutional jurisdiction to create prior claims interfering with the distribution scheme provided by Parliament at sections 136 to 147 of the Act .

The appellants submitted a [ translation ] “ quintet” of judgments, namely the following judgments of the Supreme Court of Canada: Deputy Minister of Rev. (Que.) v. Rainville , [4] Deloitte Haskins & Sells v. Workers’ Compensation Board , [5] Federal Business Development Bank v. Québec (CSST) , [6] British Columbia v. Henfrey Samson Belair Ltd. [7] and Husky Oil Operations Ltd. v. Minister of National Revenue . [8] The trial judge was of the opinion that this dispute did not place in opposition contradictory federal and provincial laws, but that it raised the question of

interpretation of

section 139 of the Act , and that these judgments were therefore not applicable in this case. [9] [ 28 ] Finally, the Court stated that the respondent’s claim could be divided between the amount attributable to the premium under the loan agreement and the remainder, and suggested that the first portion would be subject to

section 139 of the Act . Given the lack of profit, however, no order was made in this respect. [10] [ 29 ] The judge therefore set aside the notice of disallowance of the respondent’s claim and confirmed its status as a secured creditor of the bankrupt. issues in dispute

[ 30 ] The appellants raise the two following issues: 1. Did the trial judge err in concluding that

section 139 BIA does not cover a contract secured by a hypothec charging the borrower’s property? 2. Did the trial judge err in concluding that he could divide the respondent’s proof of claim by splitting it to remove the amount attributable to the Premium exacted by the respondent and provided in the Loan? [ 31 ] In my opinion, the answers to these two questions result from the Sukloff judgment rendered by the Supreme Court of Canada on April 28, 1964. In this judgment, the Court ruled on the

interpretation of

section 98 of the Bankruptcy Act , R.S.C. 1952, c. 14, which was the equivalent of

section 139 of the current Bankruptcy and Insolvency Act . [ 32 ] Here is how the latter

article reads, in both English and French: Postponement of claims of silent partners 139. Where a lender advances money to a borrower engaged or about to engage in trade or business under a contract with the borrower that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the trade or business, and the borrower subsequently becomes bankrupt, the lender of the money is not entitled to recover anything in respect of the loan until the claims of all other creditors of the borrower have been satisfied.

Renvoi des réclamations d’un bailleur de fond 139. Lorsqu’un prêteur avance de l’argent à un emprunteur, engagé ou sur le point de s’engager dans un commerce ou une entreprise, aux termes d’un contrat, passé avec l’emprunteur, en vertu duquel le prêteur doit recevoir un taux d’intérêt variant selon les profits ou recevoir une

partie des profits provenant de la conduite du commerce ou de l’entreprise, et que subséquemment l’emprunteur devient failli, le prêteur n’a droit à aucun recouvrement du chef d’un pareil prêt jusqu’à ce que les réclamations de tous les autres créanciers de l’emprunteur aient été acquittées. analysis [ 33 ] I believe it is advisable, at the outset, to cite the appellants’ comments on Sukloff in paragraphs 57 to 62 of their memorandum: [ translation ] 57. The Supreme Court ruled only once on the scope of

section 139 BIA , in Sukloff , and it was long before the aforementioned quintet of judgments. In Sukloff , the Supreme Court determined that Mr. Sukloff’s total claim of $50,000, arising from three separate loans, had to be treated as follows in the bankruptcy of the debtors: • an amount of $35,000 being the subject of an assignment and to be paid from the funds held by the trust company; • an amount of $5,000 to be considered an ordinary claim and to be collocated pari passu because the agreement between the bankrupts and Mr. Sukloff did not provide that he would receive a portion of the profits of the bankrupts in respect of this loan; and • the balance of $10,000 was covered by

section 139 BIA because the agreement provided that Mr. Sukloff could receive a portion of the profits of the bankrupts in respect of this loan. 58. The Supreme Court stated that

section 98 BA (now

section 139 BIA ) originated from

section 5 of Bovill’s Act of England, which read as follows: In the event of any such Trader as aforesaid being adjudged a Bankrupt, or taking the Benefit of any Act for the Relief of Insolvent Debtors, or entering into an Arrangement to pay his Creditors less than Twenty Shillings in the Pound … the Lender of any such Loan as aforesaid shall not be entitled to recover any Portion of his Principal, or of the Profits or Interest payable in respect of such Loan…until the Claims of the other Creditors of the said Trader for valuable Consideration in Money or Money’s Worth, have been satisfied. [p. 466] 59. We respectfully submit that

section 139 BIA must be interpreted differently from

section 5 of Bovill’s Act because the terms used in the two provisions are different. Indeed,

section 5 of Bovill’s Act provides that the lender may not recover any portion of the principal, profits, or interest payable under the loan whereas

section 139 BIA provides that the lender is not entitled to recover anything in respect of the loan . The far broader terms of

section 139 BIA make it possible to argue that the lender intended by it may not execute the security that it could have obtained under provincial law to guarantee performance of the obligations arising from the loan, with the words “ is not entitled to recover anything in respect of the loan” covering the exercise of a security. 60. Moreover, in Sukloff , Mr. Sukloff had obtained not a mortgage or another security of the same kind on the estate of the bankrupts, but an assignment of the amount of $35,000 before the bankruptcy.

The valid assignment fully made before the occurrence of the bankruptcy had to be recognized by the Court, because the amounts assigned were no longer part of the bankrupts’ estate. In the present case, the respondent did not want to obtain recognition of an assignment validly made before the bankruptcy but to obtain recognition of a mortgage on the estate that clearly illegally modified the scheme of distribution of the estate of a bankrupt provided in the BIA . 61. Also, in Sukloff , the Court divided Mr. Sukloff’s claim because it arose from three separate loans.

In this case, the trial judge could not divide the respondent’s Proof of Claim by removing the premium because there was only one Loan and the respondent’s entire

Proof of Claim had to suffer the same fate. 62. Moreover, in Sukloff , the Court did no analysis of the exclusive federal jurisdiction over bankruptcy and insolvency, and the provincial laws that amend the rules established under this jurisdiction, and relied on the English decision Badeley to interpret

section 139 BIA , whereas the question of exclusive federal jurisdiction over bankruptcy and insolvency did not arise in this English decision. With respect, the trial judge clearly erred in law by determining that the rule of stare decisis required that the principles of Sukloff be applied. The question of exclusive federal jurisdiction over bankruptcy and insolvency was thoroughly analyzed in the quintet of judgments, whereas there is not a single line about this matter in Sukloff .

We submit that it is the principles established in the quintet of decisions as well as those that arise from Ocean Drive that must instead be applied in the present case. [ 34 ] Furthermore, before turning to the Sukloff judgment, I believe it is appropriate to point out that the Superior Court of Quebec had already had the opportunity, in 1953, to rule on

section 98 of the Bankruptcy Act in Duranceau and Perras v.

Chatel . [11] [ 35 ] Batshaw J. had briefly summarized the matter as follows: In the present case the trustee invokes the application of s. 98 of The Bankruptcy Act which provides for the postponement of claims of silent partners and asks the Court to set aside a mortgage granted by the debtor under the hereinafter related circumstances. [12] [ 36 ] He then added: Under the circumstances, the Court has come to the conclusion that the respondent’s loan was made under the conditions stipulated by s. 98 and that his claim must be deferred until all the other creditors have been paid.

The Court has considered whether the fact that the respondent received security by way of hypothec on his debt should make any difference in the matter, but has decided that, since the hypothec is merely an accessory of the debt, the respondent should not be permitted to realize thereon, for to allow him to do so would defeat the principle of deferment created by s. 98. [13] [ 37 ] He had ultimately allowed the trustee’s motion, declaring that the hypothec securing the respondent’s loan could not be set up against the trustee. [ 38 ] This judgment was harshly criticized by Lloyd W.

Houlden, the well-known author on bankruptcy, who wrote as follows: If this were a case where money had been loaned to the bankrupt in the circumstances set out herein, the learned judge’s reasons would appear to be undoubtedly correct. The English Partnership Act (1890), c. 39, contains a similar provision to s. 98 of The Bankruptcy Act. The English Courts have given a very strict

interpretation to their Act , for example in the recent decision of Re Meade , [1951] Ch. 774, [1951] 2 All E.R. 168 , it was held that a common law wife who advanced money to a man with whom she was living, but there was no agreement to repay or for payment of interest or for a share of the profits, but received a home and a living, was not entitled to prove in competition with other creditors. However, where a loan is made and security has been given for the loan, it would seem that there should be a different result. In Ex parte Sheil; In re Lonergan (1877), 4 Ch.

D. 789 , a loan was made to a trader at a rate of interest varying with the profits of the business, the amount of the loan and interest being secured by a mortgage to the lender of the lease on the house where the business was carried on and of the goodwill of the business. It was held that the rights of the mortgagee under his mortgage was in no way affected by the provisions of s. 5 of The Partnership Law Amendment Act , 1865. The Court of Appeal was of the opinion that the word “recover” in the

section was not equivalent to “retain” and a mortgagee could keep his security. Similarly in Badeley v. Consolidated Bank (1888), 38 Ch. D. 238 , the Court of Appeal held that realizing upon security was not recovering in respect of a loan within the meaning of the section. Cotton L.J. said at p. 254: “In my opinion, the

section only means that the lender shall not come in and rank with other creditors in the bankruptcy independently of any security he has in respect of the principal, interest or profits. He is not in any way prevented from insisting upon his security.” The judgment in the instant case appears to be directly contrary to the decisions of the English Courts. [14] [ 39 ] Returning to Sukloff , we see that Ritchie J. wrote: In the course of the argument before this Court, counsel for the appellant made reference to the case of Badeley v.

Consolidated Bank, which, as I understand it, was not drawn to the attention of either of the Courts below. That was a case in which the plaintiff advanced money to a contractor to enable him to carry out a contract with a railway company for the construction of a railroad and the parties executed a deed by which the contractor assigned to the plaintiff all his machinery, plant, etc., and all shares and debentures he might receive from the company to secure the repayment of the loan. The deed also provided that the plaintiff should receive 10 per cent interest on his money and 10 per cent of the net profits.

Having held that the plaintiff and the railway company were not partners in the undertaking, Cotton L.J., commenting on the provisions of s. 5 of Bovill’s Act , had this to say: Mr. Wallis says the Plaintiff is here seeking to recover within the meaning of the section. In my opinion he is not seeking to recover any principal or interest. These words must mean, recover as against the property of the debtor not comprised in the security. If there is a security then insisting upon that security is not recovering principal and interest from the debtor.

It may enable him ultimately to get it; but insisting upon the security and realizing the security, or, in my opinion, taking any proceedings which are necessary in order to recover that which is comprised in the security, cannot be said to be recovering principal or interest within the meaning of that section. In my opinion, that

section only means that the lender shall not come in and rank with other creditors in the bankruptcy independently of any security he has in respect of the principal, interest or profits. He is not in any way prevented from insisting upon his security… It appears to me that Badeley’s case provides a very close analogy to the present circumstances and that the reasoning advanced by the Court of Appeal in England in that case in relation to Bovill’s Act applies with equal force to the provisions of s. 98 of the Bankruptcy Act and s. 4 of The Partnerships Act .

It is, however, argued on behalf of the respondent that the principle of Badeley’s case does not apply where the security is taken, as were the equitable assignments in this case, after the original loan. I can see nothing in either Badeley’s case or in Ex parte Sheil to limit their application to cases in which the taking of security is contemporaneous with the making of an

advance, and in any event, the present case is marked by the fact that a further advance of $5,000 was made at the time of the taking ofthe security on October 31, 1958.

The two agreements of July 31 and October 31, 1958, taken together with the direction addressed to the Guaranty Trust Company onOctober 31, in my opinion constitute a valid equitable assignment of a future chose in action which was so assigned for the expresspurpose of providing the plaintiff with security for the advance by way of loan which he made to the Rushforth and Rest PlanCompanies, nor do I think that there is any validity in the plea that the assignment was void as constituting a fraudulent preference.[15] [40] When one reads these words of Ritchie J., it is difficult not to make a connection with those of Lloyd W.

Houlden, which Ihave already cited, in particular the reference to Badeley v. Consolidated Bank and the argument that

section 98 of the Bankruptcy Act didnot apply to a secured creditor. [41] Furthermore, in the wake of Sukloff, the following comments were made by the editorial team of the Canadian BankruptcyReports: The result of this decision is to bring Canadian law into line with the decisions of the English courts. If security has been given for aloan, s. 98 has no application even though the agreement provides for a sharing of profits. The case of Duranceau and Perras v. Chatel, 34 C.B.R. 106, 1 Abr. Con. (2nd) 530, is now overruled as a result of this case.[16] [42] Similar comments are found concerning

section 139 of the Act in The 2011 Annotated Bankruptcy and Insolvency Act: If a creditor holds security for its claim, the creditor is entitled to enforce it notwithstanding the fact that its agreement calls for it toreceive a share of profits. It is not necessary that the taking of security be contemporaneous with the making of the advance: Sukloff v.A.H. Rushforth & Co., (SCC), 6 C.B.R. (N.S.) 175, [1964] S.C.R. 459, 45 D.L.R. (2d) 510.[17] [43] In the present case, it is clear that the respondent acted as a hypothecary lender and that it is therefore a secured creditorwithin the meaning of this term under

section 2 of the Act. [44] It should be noted here that a claim may be secured in various ways according to this definition, and it seems clear to me that,in Sukloff, Ritchie J. considered a portion of the funds advanced by Mr. Sukloff to be a secured claim. The argument raised by theappellants at paragraph 60 of their memorandum is therefore not relevant. [45] In addition, the respondent’s claim does not fall into the categories covered by subsection 136(1) of the Act and therefore doesnot lose its status of secured claim pursuant to the case law cited by the appellants.

This case law, need one emphasize, never stated thatSukloff had to be set aside under the principles stated therein. Moreover, in Canada Deposit Insurance Corporation v. CanadianCommercial Bank,[18] the Supreme Court of Canada reviewed Sukloff without calling its conclusions into question. [46] I am therefore of the opinion that, in accordance with that judgment, the secured claim status of the loan made by IQ toStonehaven does not allow the appellants to cite

section 139 of the Act in support of their argument. [47] As to the second question, it should be answered in the affirmative, taking into account the conclusion of Ritchie J. in Sukloff: In view of all the above, I have formed the opinion that the appellant is entitled to be paid $35,000 from the fund now held by theGuaranty Trust Company, and that as to the $5,000 advanced on October 31, 1958, he is entitled to rank pari passu with the generalcreditors because at the time of that advance no stipulation was made for him to share in the profits of the company.

As to the balance ofhis claim, I think that he is postponed to the general creditors having regard to the terms of the agreement and to the provisions of s. 98of the Bankruptcy Act.[19] [48] I believe that because of these remarks, Lalonde J. misguidedly stated the following at paragraphs 53 and 54 of his judgment: [translation] [53] Applying the principles established by Sukloff, the Court cites it as authority to divide IQ’s provable claim and split it to removeonly the amount attributable to the premium required by IQ.

Only this portion of the provable claim representing the premium based on apercentage of the profits would be subject to

section 139 BIA. [54] But the question remains theoretical because the evidence shows that IQ’s provable claim involves no numerical value as apremium payable. In point of fact, during its corporate existence Stonehaven never had any profits before income tax and amortizationwithin the meaning of clause 11.1 of the loan agreement (R-1). [49] In fact, as the appellants suggest at paragraphs 57 and 61 of their memorandum, Ritchie J. considered Mr.

Sukloff’s claims tobe divided into three: 1. a claim of $45,000 for advances of funds to give rise to profit sharing, including $35,000 constituting a secured claim and$10,000, an unsecured claim; and 2. a claim of $5,000 for an advance of funds not giving rise to profit sharing and constituting an unsecured claim. [50] Concerning the claim of $35,000, Ritchie J. decided that

section 98 of the Bankruptcy Act did not apply, because it was a

secured claim. [ 51 ] He drew the same conclusion regarding the $5,000 claim, given that this claim did not give rise to profit sharing. [ 52 ] He did, however, subject the $10,000 claim to the application of

section 98, given that this claim fulfilled the conditions provided in that

section and was not a secured claim. [ 53 ] In the present case, the trial judge could not cite Sukloff as authority to make the statements found at paragraphs 53 and 54 of his judgment, given that the circumstances were different. [ 54 ] That being said, the answer to the second question has a purely theoretical scope in this case, given that the answer to the first question is enough to seal the fate of the appeal. [ 55 ] For these reasons, I would dismiss the appeal with costs. BENOÎT MORIN, J.A.