Chandos Construction Ltd. Appellant v. Deloitte Restructuring Inc. in its capacity as, 2020 SCC 25

SUPREME COURT OF CANADA Citation: Chandos Construction Ltd. v. Deloitte Restructuring Inc., 2020 SCC 25, [2020] 3 S.C.R. 3 Appeal Heard: January 20, 2020 Judgment Rendered: October 2, 2020 Docket: 38571 Between: Chandos Construction Ltd. Appellant and Deloitte Restructuring Inc. in its capacity as Trustee in Bankruptcy of Capital Steel Inc., a bankrupt Respondent - and - Attorney General of Canada, Canadian Association of Insolvency and Restructuring Professionals and Insolvency Institute of Canada Interveners Coram: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.

Reasons for Judgment: (paras. 1 to 46) Rowe J. (Wagner C.J. and Abella, Moldaver, Karakatsanis, Brown, Martin and Kasirer JJ. concurring) Dissenting Reasons: (paras. 47 to 139) Côté J.

chandos construction v. deloitte restructuring Chandos Construction Ltd. Appellant v. Deloitte Restructuring Inc. in its capacity as Trustee in Bankruptcy of Capital Steel Inc., a bankrupt Respondent and Attorney General of Canada, Canadian Association of Insolvency and Restructuring Professionals and Insolvency Institute of Canada Interveners Indexed as: Chandos Construction Ltd. v. Deloitte Restructuring Inc. 2020 SCC 25 File No.: 38571. 2020: January 20; 2020: October 2.

Present: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ. on appeal from the court of appeal for alberta Bankruptcy and insolvency — Anti-deprivation rule — Priority of claims — Clause in subcontract awarding fee to general contractor in the event of subcontractor’s bankruptcy — Subcontractor filing assignment in bankruptcy prior to completing subcontract — Whether general contractor entitled to set fee off against amount owing to subcontractor — Whether anti-deprivation rule exists at common law — If so, whether clause invalid by virtue of anti-deprivation rule.

Chandos Construction Ltd. (“Chandos”), a general construction contractor, entered into a construction subcontract with Capital Steel Inc. (“Capital Steel”). Clause VII Q(

d) of the subcontract provides that Capital Steel will pay Chandos 10 percent of the subcontract price as a fee for the inconvenience or for monitoring the work in the event of Capital Steel’s bankruptcy. When Capital Steel filed an assignment in bankruptcy prior to completing its subcontract with Chandos, Chandos argued it was entitled to set off the costs it had incurred to complete Capital Steel’s work and to set off 10 percent of the subcontract price, as provided for by clause VII Q(d). Capital Steel’s trustee in bankruptcy applied for advice and directions as to whether clause VII Q(

d) was valid. The application judge found the provision to be a valid liquidated damages clause, but the Court of Appeal reversed the decision. Held (Côté J. dissenting ): The appeal should be dismissed. Per Wagner C.J. and Abella, Moldaver, Karakatsanis, Brown, Rowe, Martin and Kasirer JJ.: Clause VII Q(

d) is invalid by virtue of the anti-deprivation rule. This rule renders void any provision in an agreement which provides that upon an insolvency (or bankruptcy), value is removed from the reach of the insolvent person’s creditors which would otherwise have been available to them, and places that value in the hands of others. The anti-deprivation rule has existed in Canadian common law since before federal bankruptcy legislation existed, and has not been eliminated by any decision of the Court or by Parliament.

Parliament’s actions are better understood as gradually codifying limited parts of the common law rather than seeking to oust all related common law. The anti-deprivation rule prevents contractual provisions from frustrating the scheme of the Bankruptcy and Insolvency Act (“ BIA ”) as it renders void contractual provisions that would prevent property from passing to the trustee. This helps maximize the global recovery for all creditors in accordance with the priorities set out in the BIA .

The test under the anti-deprivation rule has two parts: the relevant clause is triggered by an event of insolvency or bankruptcy, and the effect of the clause is to remove value from the insolvent’s estate. This is an effects-based test. What should be considered is whether the effect of the contractual provision was to deprive the estate of assets upon bankruptcy, not whether the intention of the contracting parties was commercially reasonable. Adopting a purpose-based test would create new and greater difficulties .

It would require courts to determine the intention of contracting parties long after the fact, detract from the efficient administration of corporate bankruptcies, and encourage parties who can plausibly pretend to have bona fide intentions to create a preference over other creditors by inserting such clauses. It would also be inconsistent with the general principles of contractual freedom — parties do not negotiate with a view to protecting the interests of their creditors in the event of their bankruptcy. Finally, under a purpose-based rule, unsecured creditors would receive even less than they do now.

An effects-based approach provides parties with the confidence that contractual agreements, absent a provision providing for the withdrawal of assets upon bankruptcy or insolvency, will generally be upheld. Clause VII Q(

d) violates the anti-deprivation rule and is thus void. It provides that, in the event Capital Steel commits any act of bankruptcy, Capital Steel shall forfeit 10 percent of the subcontract price — this is a direct and blatant violation of the rule. It cannot be rescued by the law of set-off, as set-off only applies to enforceable debts or claims. It applies to debts owed by the bankrupt that were not triggered by the bankruptcy, since the anti-deprivation rule only makes deprivations triggered by insolvency unenforceable.

Per Côté J. (dissenting): There is agreement with the majority that the anti-deprivation rule has a longstanding and strongjurisprudential footing in Canadian law and that it has not been eliminated by the Court or through legislation. However, this rule shouldnot apply to transactions or contractual provisions which serve a bona fide commercial purpose. As clause VII Q(

d) furthers a bona fidecommercial purpose, it is enforceable and does not offend the anti-deprivation rule. Accordingly, the application judge’s order should berestored. The anti-deprivation rule should not apply to transactions or contractual provisions which serve a bona fide commercialpurpose for three reasons.

First, courts applying the anti-deprivation rule in Canada have not been content to rest their reasons fordecision merely on a finding that the effect of a transaction or contractual provision was to deprive a bankrupt’s estate of value — thegolden thread weaving its way through the jurisprudence is the presence or absence of a bona fide commercial purpose behind thedeprivation. In the minority of cases where bona fide commercial purpose has not been discussed, its absence has been readily inferablefrom the circumstances. Second, there is a principled legal basis for retaining a bona fide commercial purpose test.

The anti-deprivation rule is basedon the common law public policy against agreements entered into for the unlawful purpose of defrauding or otherwise injuring thirdparties. It thus requires an objective assessment of the parties’ intentions. In contrast, the pari passu rule has an effects-based testbecause it is based on an implied prohibition in the BIA that operates regardless of the parties’ intentions. The pari passu provision in theBIA establishes a very clear bright line rule that all claims proved in a bankruptcy shall be paid rateably.

This clear and straightforwardstatutory language readily supports a conclusion that Parliament intended to prohibit a debtor from contracting with creditors for adifferent distribution of the debtor’s assets in bankruptcy than that provided in s. 141 of the BIA. The anti-deprivation rule does not derive from a strained

interpretation of s. 71 of the BIA. But even if the anti-deprivationrule was an implied prohibition in the BIA, it is a well-established principle that the BIA does not grant a trustee any greater interest in abankrupt’s property than that enjoyed by the bankrupt prior to the bankruptcy. Holding that s. 71 of the BIA converts the bankrupt’squalified interest in an asset into an absolute or unqualified interest in the hands of the trustee breaks with this principle.

The statutorycontext includes numerous provisions indicating that arm’s-length bona fide commercial transactions are valid as against the trustee of abankrupt’s estate. Third, as a matter of public policy, the considerations cited in support of an effects-based test are not sufficient to overridethe otherwise strong countervailing public interest in the enforcement of contracts.

Despite being a judicially-derived public policy, it isstill prudent for courts to take into account the policies embodied in legislation as a reflection of society’s public policy concerns.Therefore, anti-deprivation rule’s common law character does not preclude a court from taking into account Parliament’s objective ofmaximizing global recovery for all creditors, when considering how to formulate the anti-deprivation rule. However, Parliament’sobjectives must be weighed against the other policy interests protected by the common law when considering how to best formulate therule.

The common law places great weight on the freedom of contracting parties to pursue their individual self-interest, and the publicpolicy considerations which have been cited in support of an effects-based test are not sufficient to override the otherwise strongcountervailing public interest in the enforcement of contracts. A purely effects-based test gives too little weight to freedom of contract, party autonomy, and the elbow-room which thecommon law traditionally accords for the aggressive pursuit of self-interest.

It may also create significant uncertainty by introducing avague standard which unduly restricts the scope of the anti-deprivation rule. By contrast, a subjective purpose test would place too littleweight on Parliament’s objective of maximizing global recovery for all creditors. The middle path — the objective bona fide commercialpurpose test — is the best way to balance freedom of contract, the interests of third party creditors, and commercial certainty.

Certaintyin commercial affairs is typically better served by giving effect to contracts which were freely entered into, particularly when they servecommercial purposes and are not directed at an unlawful objective. In addition, applying a bona fide commercial purpose test would not require a significantly more onerous analysis into theparties’ intentions than that entailed by an effects-based test.

Moreover, while debtors are not properly incentivized to protect theircreditors’ interests when dealing with third parties, creditors can access a full range of options to protect their rights: the oppressionremedy, the directors’ duty of care, the various anti-avoidance provisions in the BIA and in provincial statutes, as well as the ability ofcreditors to bargain for contractual protections. Parliament has also occupied much of the ground formerly covered by the common lawsuch that there is a reduced need for a general anti-deprivation rule.

Indeed, the many statutory protections already in place to safeguardthe interests of creditors undermine any perceived policy need to expand the reach of the anti-deprivation rule. These provisions reflectParliament’s policy preference for upholding the validity of bona fide commercial arrangements, even when they have the effect ofreducing the pool of assets available to a debtor’s creditors in bankruptcy. In the instant case, clause VII Q(

d) furthers a bona fide commercial purpose. A general contractor’s role is essentially tooversee and coordinate the construction of a project by various subcontractors according to a set schedule. It is evident that asubcontractor’s bankruptcy during the construction of the project would require the general contractor to redirect significantadministrative and management resources. The general contractor would also incur administrative and management costs frommitigating the fallout up and down the construction pyramid. Costly delays would ensue as well. Thus, a fee for the inconvenience ofcompleting the work using alternate means is legitimate. Clause VII Q(

d) does not demonstrate any intent on the part of Chandos orCapital Steel to avoid the operation on bankruptcy laws or to prejudice Capital Steel’s creditors. Cases Cited By Rowe J. Distinguished: Coopérants, Mutual Life Insurance Society (Liquidator of) v. Dubois, (SCC), [1996] 1S.C.R. 900; referred to: Belmont Park Investments Pty. Ltd. v. BNY Corporate Trustee Services Ltd., [2011] UKSC 38, [2012] 1 A.C.383; A.N. Bail Co. v. Gingras, (SCC), [1982] 2 S.C.R. 475; Canadian Imperial Bank of Commerce v.

Bramalea Inc.(1995), (ON SC), 33 O.R. (3d) 692; In Re Hoskins and Hawkey, Insolvents (1877), 1 O.A.R. 379; Re Wetmore, (NB CA), [1924] 4 D.L.R. 66; Westerman (Bankrupt), Re, 1998 ABQB 946, 234 A.R. 371, rev’d 1999 ABQB 708, 275 A.R.

114; Re Knechtel Furniture Ltd. (1985), 56 C.B.R. (N.S.) 258; Re Frechette (1982), (QC CS), 138 D.L.R. (3d) 61;Aircell Communications Inc. (Trustee of) v. Bell Mobility Cellular Inc., 2013 ONCA 95, 14 C.B.R. (6th) 276; HGC v. IESO, 2019 ONSC259; 1183882 Alberta Ltd. v. Valin Industrial Mill Installations Ltd., 2012 ABCA 62, 522 A.R. 285; Watson v. Mason (1876), 22 Gr.574; Hobbs v. The Ontario Loan and Debenture Company (1890), 1890 CanLII 10 (SCC), 18 S.C.R. 483; Parry Sound (District) SocialServices Administration Board v. O.P.S.E.U., Local 324, 2003 SCC 42, [2003] 2 S.C.R. 157; Heritage Capital Corp. v.

Equitable TrustCo., 2016 SCC 19, [2016] 1 S.C.R. 306; Royal Bank of Canada v. North American Life Assurance Co., (SCC), [1996]1 S.C.R. 325; Alberta (Attorney General) v. Moloney, 2015 SCC 51, [2015] 3 S.C.R. 327; Husky Oil Operations Ltd. v. Minister ofNational Revenue, (SCC), [1995] 3 S.C.R. 453; Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494; Watkins v.Olafson, (SCC), [1989] 2 S.C.R. 750; Borland’s Trustee v. Steel Brothers & Co., Limited, [1901] 1 Ch. 279; Holt v.Telford, (SCC), [1987] 2 S.C.R. 193. By Côté J. (dissenting) A.I. Enterprises Ltd. v.

Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177; Sattva Capital Corp. v. Creston MolyCorp., 2014 SCC 53, [2014] 2 S.C.R. 633; Symes v. Canada, (SCC), [1993] 4 S.C.R. 695; Ludco Enterprises Ltd. v.Canada, 2001 SCC 62, [2001] 2 S.C.R. 1082; Belmont Park Investments Pty. Ltd. v. BNY Corporate Trustee Services Ltd., [2011] UKSC38, [2012] 1 A.C. 383; Hobbs v. The Ontario Loan and Debenture Company (1890), 1890 CanLII 10 (SCC), 18 S.C.R. 483; Ex parteVoisey (1882), 21 Ch. D. 442; Ex parte Williams (1877), 7 Ch.

D. 138; Coopérants, Mutual Life Insurance Society (Liquidator of) v.Dubois, (SCC), [1996] 1 S.C.R. 900; A.N. Bail Co. v. Gingras, (SCC), [1982] 2 S.C.R. 475; BritishEagle International Airlines Ltd. v. Cie Nationale Air France, [1975] 1 W.L.R. 758; In Re Hoskins and Hawkey, Insolvents (1877), 1O.A.R. 379; Murphy, a Bankrupt (1803), 1 Ch. 44; Watson v. Mason (1876), 22 Gr. 574; Re Frechette (1982), (QCCS), 138 D.L.R. (3d) 61; Borland’s Trustee v. Steel Brothers & Co., Limited, [1901] 1 Ch. 279; Re Knechtel Furniture Ltd. (1985), 56C.B.R. (N.S.) 258; Canadian Imperial Bank of Commerce v.

Bramalea Inc. (1995), (ON SC), 33 O.R. (3d) 692;Aircell Communications Inc. (Trustee of) v. Bell Mobility Cellular Inc., 2013 ONCA 95, 14 C.B.R. (6th) 276; Westerman (Bankrupt), Re,1998 ABQB 946, 234 A.R. 371, rev’d 1999 ABQB 708, 275 A.R. 114; R. v. Salituro, (SCC), [1991] 3 S.C.R. 654;Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, [2009] 1 S.C.R. 157; Transport North American Express Inc. v. NewSolutions Financial Corp., 2004 SCC 7, [2004] 1 S.C.R. 249; Higinbotham v. Holme (1812), 19 Ves. Jr. 88, 34 E.R. 451; In reStephenson, [1897] 1 Q.B. 638; Whitmore v.

Mason (1861), 2 J. & H. 204, 70 E.R. 1031; Ex parte Mackay (1873), L.R. 8 Ch. App. 643;Elford v. Elford (1922), (SCC), 64 S.C.R. 125; Campbell River Lumber Co. v. McKinnon (1922), (SCC), 64 S.C.R. 396; Zimmermann v. Letkeman, (SCC), [1978] 1 S.C.R. 1097; Giffen (Re), (SCC),[1998] 1 S.C.R. 91; Lefebvre (Trustee of), 2004 SCC 63, [2004] 3 S.C.R. 326; Flintoft v. Royal Bank of Canada, (SCC),[1964] S.C.R. 631; Saulnier v. Royal Bank of Canada, 2008 SCC 58, [2008] 3 S.C.R. 166; Alberta (Attorney General) v. Moloney, 2015SCC 51, [2015] 3 S.C.R. 327; St. John Shipping Corp. v.

Joseph Rank Ltd., [1957] 1 Q.B. 267; Still v. M.N.R., (FCA),[1998] 1 F.C. 549; Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69;Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494; In re Estate of Charles Millar, Deceased, (SCC), [1938] S.C.R.1; Fender v. St. John-Mildmay, [1938] A.C. 1; Lomas v. JFB Firth Rixson Inc., [2010] EWHC 3372 (Ch.), [2011] 2 B.C.L.C. 120, aff’d[2012] EWCA Civ. 419, [2012] 2 All E.R. (Comm.) 1076; Watkins v. Olafson, (SCC), [1989] 2 S.C.R. 750; PeoplesDepartment Stores Inc. (Trustee of) v.

Wise, 2004 SCC 68, [2004] 3 S.C.R. 461; Heritage Capital Corp. v. Equitable Trust Co., 2016SCC 19, [2016] 1 S.C.R. 306; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23; BGCheco International Ltd. v. British Columbia Hydro and Power Authority, (SCC), [1993] 1 S.C.R. 12; Douez v.Facebook, Inc., 2017 SCC 33, [2017] 1 S.C.R. 751; Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., (SCC), [1980] 1 S.C.R. 888. Statutes and Regulations Cited Bankruptcy Act, R.S.C. 1970, c. B-3, s. 112. Bankruptcy and Insolvency Act, R.S.C. 1985, c.

B-3, ss. 65.1, 66.34, 71, 84.2, 95(1), 96(1), 97(1), (3), 99(1), 141. Canadian Business Corporations Act, R.S.C. 1985, c. C-44, s. 241. Companies Act, 1948 (U.K.), 11 & 12 Geo. 6, c. 38, s. 302. Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. Authors Cited Canada. Senate. Standing Senate Committee on Banking, Trade and Commerce. Debtors and Creditors Sharing the Burden: A Review ofthe Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. Ottawa, 2003. Goode, Roy. “Perpetual Trustee and Flip Clauses in Swap Transactions” (2011), 127 Law Q. Rev. 1.

Grottenthaler, Margaret, and Elizabeth Pillon. “Financial Products and the Anti-Forfeiture Principle” (2012), 1 J. Insolvency Inst. Can.139. Ho, Adrienne. “The Treatment of Ipso Facto Clauses in Canada” (2015), 61 McGill L.J. 139. McCamus, John D. The Law of Contracts, 2nd ed. Toronto: Irwin Law, 2012. Waddams, S. M. The Law of Contracts, 7th ed. Toronto: Thomson Reuters, 2017. Westeinde, John. “Construction is ‘Risky Business’” (1988), 29 C.L.R. 119. Wood, Roderick J. Bankruptcy and Insolvency Law, 2nd ed. Toronto: Irwin Law, 2015.

Wood, Roderick J. “Direct Payment Clauses and the Fraud Upon the Bankruptcy Law Principle: Re Horizon Earthworks Ltd. (Bankrupt) ” (2014), 52 Alta. L.R. 171 . Worthington, Sarah. “Good Faith, Flawed Assets and the Emasculation of the UK Anti-Deprivation Rule” (2012), 75 Mod. L. Rev. 112. APPEAL from a judgment of the Alberta Court of Appeal (Rowbotham, Veldhuis and Wakeling JJ.A.), 2019 ABCA 32 , 438 D.L.R. (4th) 195, 70 C.B.R. (6th) 1, 91 B.L.R. (5th) 1, [2019] A.J. No. 99 (QL), 2019 CarswellAlta 125 (WL Can.), setting aside a decision of Nielsen J., Alta. Q.B., Edmonton, No. 24-2169632, March 17, 2017.

Appeal dismissed, Côté J. dissenting. Darren Bieganek , Q.C. , and Ryan Quinlan , for the appellant. Shauna N. Finlay and Victoria Merritt , for the respondent. Zoe Oxaal , for the intervener the Attorney General of Canada. Ashley Taylor and Sinziana R. Hennig , for the intervener the Canadian Association of Insolvency and Restructuring Professionals. Sean F. Collins , Brandon Kain and Cassidy Thomson , for the intervener the Insolvency Institute of Canada.

The judgment of Wagner C.J. and Abella, Moldaver, Karakatsanis, Brown, Rowe, Martin and Kasirer JJ. was delivered by [ 1 ] Rowe J. — This case concerns a common law rule (“anti-deprivation rule”) that operates to prevent contracts from frustrating statutory insolvency schemes. Chandos Construction Ltd. (“Chandos”) entered into a construction contract (“Subcontract”) with Capital Steel Inc. (“Capital Steel”). A provision of the Subcontract would award Chandos a sum of money in the event of Capital Steel’s bankruptcy, which later occurred.

This case deals with whether that provision was invalid by virtue of the anti-deprivation rule. [ 2 ] I conclude that it is, essentially for the reasons of the majority of the Court of Appeal of Alberta. Accordingly, the appeal is dismissed. I. Facts [ 3 ] Chandos, a general construction contractor, entered into the Subcontract with Capital Steel, a subcontractor. The value of the Subcontract was $1,373,300.47.

The provision at issue is in clause VII Q, one of the “Conditions” of the subcontract: Q Subcontractor Ceases Operation In the event the Subcontractor commits any act of insolvency, bankruptcy, winding up or other distribution of assets, or permits a receiver of the Subcontractor’s business to be appointed, or ceases to carry on business or closes down its operations, then in any of such events: (

a) this Subcontract Agreement shall be suspended but may be reinstated and continued if the Contractor, the liquidator or Trustee of the Subcontractor and the surety, if any, so agree. If no agreement is reached, the Subcontractor shall be considered to be in default and the Contractor may give written notice of default to the Subcontractor and immediately proceed to complete the Work by other means as deemed appropriate by the Contractor, and (

b) any cost to the Contractor arising from the suspension of this Subcontract Agreement or the completion of the Work by the Contractor, plus a reasonable allowance for overhead and profit, will be payable by the Subcontractor and or his sureties, and (

c) the Contractor is entitled to withhold up to 20% of the within Subcontract Agreement price until such time as all warranty and or guarantee periods which are the responsibility of the Subcontractor have expired and, (

d) the Subcontractor shall forfeit 10% of the within Subcontract Agreement price to the Contractor as a fee for the inconvenience of completing the work using alternate means and/or for monitoring the work during the warranty period. (A. R., at p. 157) [ 4 ] This clause provides four consequences that follow from the insolvency, bankruptcy, or cease of business of Capital Steel. First, clause VII Q(

a) provides that the Subcontract will be suspended and can only be continued if the Trustee in bankruptcy and Chandos agree. Second, clause VII Q(

b) provides that Capital Steel will pay Chandos “any cost . . . arising from the suspension” of the Subcontract or from Chandos having to complete the work, plus a “reasonable allowance for overhead and profit”. Third, clause VII Q(

c) allows Chandos to withhold certain funds from Capital Steel until the warranty and guarantee periods run out. Fourth, clause VII Q(

d) provides that Capital Steel will pay Chandos 10 percent of the Subcontract price “as a fee for the inconvenience . . . and/or for monitoring the work”. [ 5 ] When Capital Steel filed an assignment in bankruptcy prior to completing its Subcontract with Chandos, Deloitte Restructuring Inc. was appointed as its Trustee in bankruptcy. At the time, Chandos owed Capital Steel $149,618.39 under the Subcontract. Chandos argued that it was entitled to set off $22,800 ― the costs it had incurred to complete Capital Steel’s work ― such that it would owe Capital Steel only $126,818.39 ($149,618.39 less $22,800).

In so arguing, Chandos did not have to rely on clause VII Q as it could rely on the ordinary common law rules relating to damages for breach of contract and the law of set-off, which persists in bankruptcy under s. 97(3) of the Bankruptcy and Insolvency Act , R.S.C 1985, c. B-3 (“ BIA ”). [ 6 ] Chandos argued that it was also entitled to set off the amount triggered by the bankruptcy according to clause VII

Q(d), under which Capital Steel forfeits 10 percent of the Subcontract price in the event of insolvency. The Subcontract price was$1,373,300.47, so, by its terms, clause VII Q(

d) created a debt owed by Capital Steel to Chandos of $137,330.05. If clause VII Q(d)applied, it would mean Chandos had a $10,511.66 claim provable in bankruptcy proceedings rather than a debt to Capital Steel of$126,818.39. [7] Faced with these arguments, the Trustee applied for advice and directions from the Court of Queen’s Bench as towhether clause VII Q(

d) was valid. II. Judgments Below [8] The application judge found the provision to be valid (Alta. Q.B., Edmonton, 24-2169632, March 17, 2017). Heconcluded that, so long as the provision was not an attempt to avoid the effect of bankruptcy laws, the anti-deprivation rule does notprevent contracting parties from agreeing that upon the insolvency of one party, the other party can make a liquidated damages claim. Hefound that, in this case, Chandos had not attempted to avoid the effect of bankruptcy laws.

He also found that the provision was a (valid)liquidated damages clause, not an (invalid) penalty clause. [9] On appeal, the majority of the Court of Appeal reversed the decision, finding the provision invalid (2019 ABCA 32,438 D.L.R. (4th) 195). [10] As Rowbotham J.A., for the majority, explained, whether a provision is a liquidated damages clause or a penaltyclause is a separate and distinct analysis from whether the provision violates the anti-deprivation rule.

A provision can be invalid if itviolates either the anti-deprivation rule or the penalty clause rule. [11] Justice Rowbotham’s reasons proceeded in three stages. First, she identified the long history of the anti-deprivationrule in Canadian jurisprudence. Second, she found that the rule has not been eliminated by either subsequent decisions or by statutoryamendments. Finally, she determined that the content of the rule should remain as articulated in the Canadian jurisprudence rather thanadopt the approach taken by the United Kingdom Supreme Court in Belmont Park Investments Pty. Ltd. v.

BNY Corporate TrusteeServices Ltd., [2011] UKSC 38, [2012] 1 A.C. 383 (“Belmont Park”, earlier know as “Perpetual Trustee”). [12] As Rowbotham J.A. explained, the common law has two distinct rules that both invalidate contracts that affect thedistribution of proceeds in bankruptcy, although they had earlier been combined under the moniker of a “fraud upon the bankruptcylaw”. The rules do not stand on their own, but rather exist to give effect to an implicit prohibition in bankruptcy legislation.

First, the paripassu rule forbids contractual provisions that would allow certain creditors to receive more than their fair share. It does not matterwhether the provision is triggered by insolvency or bankruptcy, so long as it would alter the scheme of distribution after proceedingsbegin. Second, the anti-deprivation rule prevents parties from agreeing to remove property from a bankrupt’s estate that would otherwisehave vested in the trustee. It invalidates provisions that are “engaged by a debtor’s insolvency and remove value from the debtor’s estateto the prejudice of creditors” (para. 32).

Put another way, although both rules concern creditors receiving an appropriately-sized slice ofthe proverbial pie, the anti-deprivation rule relates to the size of the pie and the pari passu rule relates to the slicing of the pie, whateversize it may be (see R. Goode, “Perpetual Trustee and Flip Clauses in Swap Transactions” (2011), 127 Law. Q. Rev. 1, at p. 4). [13] Justice Rowbotham concluded that both rules have been applied in Canadian jurisprudence. She cited A.N.

Bail Co. v.Gingras, (SCC), [1982] 2 S.C.R. 475, at para. 23, as an application of the pari passu rule, and the following cases asexamples of the application of the anti-deprivation rule: Canadian Imperial Bank of Commerce v. Bramalea Inc. (1995), (ON SC), 33 O.R. (3d) 692 (C.J. (Gen. Div.)) (“Bramalea”); In Re Hoskins and Hawkey, Insolvents (1877), 1 O.A.R. 379(C.A.); Re Wetmore, (NB CA), [1924] 4 D.L.R. 66 (N.B.S.C. (App. Div.)); Westerman (Bankrupt), Re, 1998 ABQB946, 234 A.R. 371, rev’d on other grounds 1999 ABQB 708, 275 A.R. 114; Re Knechtel Furniture Ltd. (1985), 56 C.B.R. (N.S.) 258(Ont.

S.C.); Re Frechette (1982), (QC CS), 138 D.L.R. (3d) 61 (Que. Sup. Ct.); Aircell Communications Inc. (Trusteeof) v. Bell Mobility Cellular Inc., 2013 ONCA 95, 14 C.B.R. (6th) 276, at paras. 10-12; HGC v. IESO, 2019 ONSC 259, at para. 100; 1183882 Alberta Ltd. v. Valin Industrial Mill Installations Ltd., 2012 ABCA 62, 522 A.R. 285, per McDonald J.A., dissenting. [14] Justice Rowbotham identified no cases where the anti-deprivation rule had been eliminated. She consideredCoopérants, Mutual Life Insurance Society (Liquidator of) v.

Dubois, (SCC), [1996] 1 S.C.R. 900 (“Coopérants”),because, even though it involved a contractual provision triggered by liquidation, this Court did not discuss the anti-deprivation rule. Shenoted, however, that there was no evidence the provision at issue prejudiced creditors, so the anti-deprivation rule would not have beenengaged. [15] Justice Rowbotham also found that no statutory changes had eliminated the anti-deprivation rule, either explicitly orby negative implication, as when Parliament occupies the field. The only changes that might arguably be relevant were to the BIA.

They,however, addressed a different problem than that addressed by the anti-deprivation rule: whereas the anti-deprivation rule protectscreditors, the changes in question protect debtors. [16] One such change came when Parliament enacted ss. 65.1 and 66.34 of the BIA. These sections invalidate contractualprovisions triggered by insolvency in both commercial and consumer restructurings. Parliament’s focus was on ensuring that debtorshave time necessary to restructure their affairs.

There was no suggestion that these sections were meant to affect the anti-deprivation rule,which is aimed at protecting the interest of creditors. [17] Similarly, when Parliament enacted s. 84.2 of the BIA, it intended to protect consumer debtors from the deleteriousconsequences of provisions that trigger upon bankruptcy, not to protect one creditor from a debtor’s contract with another creditor. [18] Justice Rowbotham concluded that in none of these instances did Parliament intend to occupy the field and eliminatethe anti-deprivation. [19] Next, Rowbotham J.A. considered whether to follow the U.K.

Supreme Court’s approach to the anti-deprivation rulein Belmont. In Belmont, the U.K. Supreme Court concluded that the anti-deprivation rule does not apply to “bona fide commercial

transactions which do not have as their predominant purpose, or one of their main purposes, the deprivation of the property of one of theparties on bankruptcy” (para. 104). [20] Justice Rowbotham declined to follow Belmont. She noted that this purpose-based test was contrary to the effects-based test applied by Canadian courts, and that this new test had been criticized by British legal scholars as defeating the purpose of theanti-deprivation rule.

She further noted that a party who might become insolvent has no incentive to resist a clause that directs propertyout of its estate upon insolvency, since, upon that event, the insolvent party will no longer have an interest in that property. [21] Finally, Rowbotham J.A. applied the common law anti-deprivation rule to clause VII Q(d). She determined that thisclause triggered upon insolvency and that giving effect to it would remove value from the debtor’s estate to the prejudice of creditors.The clause was therefore invalid. [22] Justice Wakeling dissented.

In his view, the anti-deprivation rule has never existed in Canadian common law or, if itdid, it ceased to exist after amendments to the BIA and the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, in 2009. Evenif it did exist, he would have adopted the purpose-based test from Belmont. These conclusions were advanced by Chandos before thiscourt. Justice Wakeling also would have reformulated the penalty rule. Given my conclusions as to the anti-deprivation rule, I do notaddress the penalty rule. III.

Issues on appeal [23] On appeal before us, Chandos alleges the majority at the Court of Appeal made five errors, by:

a) emphasizing bankruptcy law over contract law;

b) failing to abandon the classic penalty rule of contract law;

c) finding an anti-deprivation rule exists at common law;

d) applying an effects-based anti-deprivation rule; and

e) failing to consider the effect of set off. [24] The first issue is readily dealt with: contract law and bankruptcy law work together, in this instance through theoperation of the anti-deprivation rule. The second issue can also be disposed of summarily: if the provision is invalid for one reason (theanti-deprivation rule in bankruptcy law), it does not matter whether it is or is not invalid for another (the penalty rule in contract law). Iwill discuss the other issues below. IV.

The Existence of the Common Law Anti-Deprivation Rule [25] As to the existence of the anti-deprivation rule, I see no error in Rowbotham J.A.’s consideration of this issue, in thatthe rule has existed in Canadian common law and has not been eliminated by either this Court or Parliament. [26] Justice Rowbotham correctly found that there has been support for the anti-deprivation rule in the decisions to whichshe referred; I would add Watson v. Mason (1876), 22 Gr. 574 (U.C. Ch.), and Hobbs v.

The Ontario Loan and Debenture Company(1890), 1890 CanLII 10 (SCC), 18 S.C.R. 483, at p. 502, per Strong J., even if Hobbs is from a period in Canadian history where nofederal bankruptcy legislation existed (R. J. Wood, Bankruptcy and Insolvency Law (2nd ed. 2015), at pp. 33-35). [27] No decision of this Court has eliminated the anti-deprivation rule. Coopérants, as Rowbotham J.A. stated, was not ananti-deprivation case as there was no deprivation (Coopérants, at paras. 43-44). [28] Nor has Parliament eliminated the anti-deprivation rule.

As Rowbotham J.A. observed, Parliament did not implementss. 65.1, 66.34, or 84.2 of the BIA so as to eliminate the anti-deprivation rule: the anti-deprivation rule protects third party creditors,whereas Parliament’s changes were directed toward protecting debtors (see Bill C-22: Clause by clause Analysis, cl. 87, s. 65.1 and cl.89, s. 66.34, reproduced in the Attorney General of Canada’s book of authorities, at Tab 4; Standing Senate Committee on Banking,Trade and Commerce, Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies’Creditors Arrangement Act (2003), at pp. 74-75).

This goal of protecting the debtor is relevant only where the debtor persists after theproceedings conclude. It is common for the debtor to persist after a restructuring or after the bankruptcy of a natural person. It isuncommon for the debtor to persist after a corporate bankruptcy as, typically, no assets remain for the corporation after all creditors arepaid. [29] Moreover, as the intervenor Attorney General of Canada submitted, Parliament’s actions are better understood asgradually codifying limited parts of the common law rather than seeking to oust all related common law.

As this Court has repeatedlyobserved, Parliament is presumed to intend not to change the existing common law unless it does so clearly and unambiguously (ParrySound (District) Social Services Administration Board v. O.P.S.E.U., Local 324, 2003 SCC 42, [2003] 2 S.C.R. 157, at para. 39;Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at paras. 29-30). [30] Indeed, the most relevant statutory provision in the BIA is not s. 65.1, s. 66.34, or s. 84.2, but rather s. 71. As thisCourt recognized in Royal Bank of Canada v.

North American Life Assurance Co., (SCC), [1996] 1 S.C.R. 325, s. 71provides that the property of a bankrupt “passes to and vests in the trustee” (para. 44). This helps maximize the “global recovery for allcreditors” in accordance with the priorities set out in the BIA (Alberta (Attorney General) v. Moloney, 2015 SCC 51, [2015] 3 S.C.R.327, at para. 33; see also Husky Oil Operations Ltd. v. Minister of National Revenue, (SCC), [1995] 3 S.C.R. 453, atparas. 7-9).

The anti-deprivation rule renders void contractual provisions that would prevent property from passing to the trustee and thusfrustrate s. 71 and the scheme of the BIA. This maximizes the assets that are available for the trustee to pass to creditors.

V. The Content of the Anti-Deprivation Rule [31] As Bramalea described, the anti-deprivation rule renders void contractual provisions that, upon insolvency, removevalue that would otherwise have been available to an insolvent person’s creditors from their reach. This test has two parts: first, therelevant clause must be triggered by an event of insolvency or bankruptcy; and second, the effect of the clause must be to remove valuefrom the insolvent’s estate.

This has been rightly called an effects-based test. [32] Chandos submits that this Court should change the anti-deprivation rule to follow Belmont and adopt a purpose-basedtest. As noted above, Belmont held that the English anti-deprivation rule does not invalidate provisions of “bona fide commercialtransactions which do not have as their predominant purpose, or one of their main purposes, the deprivation of the property of one of theparties on bankruptcy”.

Chandos says we should follow this reasoning because upholding bona fide commercial agreements would strikethe best balance of public policy considerations and contribute to commercial certainty. It also submits that the side-effects of such a rulewould not be so deleterious, as unsecured creditors tend to receive little in bankruptcy; as well, courts would be able to tell who hadinserted provisions that remove value from the debtor’s estate for bona fide commercial reasons.

None of these reasons holds water. [33] The goal of public policy, in this instance, is not decided by the common law; rather, that policy has been establishedin the legislation. What is left to the common law is the choice of means that best gives effect to the statutory scheme adopted byParliament. Thus, once a court ascertains that Parliament intended, by virtue of s. 71, that all of the bankrupt’s property is to be collectedin the trustee, it is not for the court to substitute a competing goal that would give rise to a different result.

In this, I agree with ProfessorWorthington that “[a]ny avoidance, whether intentional or inevitable, is surely a fraud on the statute” (“Good Faith, Flawed Assets andthe Emasculation of the UK Anti-Deprivation Rule” (2012), 75 Mod. L. Rev. 112, at p. 121). [34] In addition, I would disagree that adopting a purpose-based test would create commercial certainty. To the contrary,applying such a test would require courts to determine the intention of contracting parties long after the fact and it would detract from theefficient administration of corporate bankruptcies.

Parties cannot know at the time of contracting whether a court, possibly years later,will find their contract had been entered into for bona fide commercial reasons. This will give rise to uncertainty at the time ofcontracting. [35] The effects-based rule, as it stands, is clear. Courts (and commercial parties) do not need to look to anything otherthan the trigger for the clause and its effect. The effect of a clause can be far more readily determined in the event of bankruptcy than theintention of contracting parties.

An effects-based approach also provides parties with the confidence that contractual agreements, absenta provision providing for the withdrawal of assets upon bankruptcy or insolvency, will generally be upheld. Maintaining an effects-basedtest is also consistent with the existing effects-based test recognized in Gingras, at p. 487, for the pari passu rule founded on s. 141 of theBIA (previously s. 112 of the Bankruptcy Act, R.S.C. 1970, c. B-3), as well as the effects-based test set out in ss. 65.1, 66.34 and 84.2 ofthe BIA.

These tests should remain consistent to prevent duplicative proceedings and avoid arcane disputes over whether the pari passurule or the anti-deprivation rule is engaged by a particular provision.

Although it is often easy to tell that a provision would affect theamount a creditor will receive, determining whether this is because it deprives the estate of value (thus violating the anti-deprivationrule) or because it reallocates the estate among creditors (thus violating the pari passu rule) depends on the precise machinery of law,disputes over such intricacies can be avoided if both rules apply an effects-based test. [36] Moreover, an intention-based test would encourage parties who can plausibly pretend to have bona fide intentions tocreate a preference over other creditors by inserting such clauses.

Parties will often be able to state some commercial rationale forprovisions altering contractual rights in the event of a counterparty’s insolvency, such as guarding against the risk of the counterparty’snon-performance. An intention-based test would render the rule ineffectual, save in the most flagrant cases of deliberate circumvention ofinsolvency law. This would threaten to undermine the statutory scheme of the BIA. [37] Reliance on general principles of contractual freedom to support an intention-based test is no less misplaced. As notedin Bhasin v.

Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 70, the common law of contract “generally places great weight on thefreedom of contracting parties to pursue their individual self-interest” but, by definition, an assignment in bankruptcy strips the insolventparty of their interest. As Rowbotham J.A. observed, a party who might become insolvent has no incentive to resist a clause that deprivestheir estate of value upon bankruptcy. Parties do not negotiate with a view to protecting the interests of their creditors in the event of theirbankruptcy.

The costs of accepting the clause are borne solely by the unsecured creditors of the insolvent company (who are without aseat at the bargaining table) while the benefits are enjoyed only by the company while it is solvent. [38] Finally, while it may be true that unsecured creditors tend to receive relatively little now, the effect of a purpose-basedrule is that they would receive less. [39] Overall, Chandos has not shown us good reason to adopt a purpose-based test. In my view, adopting the purpose-based test would create “new and greater difficulties” of the sort cautioned against in Watkins v.

Olafson, (SCC), [1989]2 S.C.R. 750, at p. 762. As recognized in Bhasin, at para. 40, although a change to the Canadian common law may be appropriate whenit creates greater certainty and coherence, it is not when the change would foster uncertainty and incoherence. [40] All that said, we should recognize that there are nuances with the anti-deprivation rule as it stands. For example,contractual provisions that eliminate property from the estate, but do not eliminate value, may not offend the anti-deprivation rule (seeBelmont, at para. 160, per Lord Mance; Borland’s Trustee v.

Steel Brothers & Co., Limited, [1901] 1 Ch. 279; see also Coopérants). Nordo provisions whose effect is triggered by an event other than insolvency or bankruptcy.

Moreover, the anti-deprivation rule is notoffended when commercial parties protect themselves against a contracting counterparty’s insolvency by taking security, acquiringinsurance, or requiring a third-party guarantee. [41] In sum, the Court of Appeal was correct to consider whether the effect of the contractual provision was to deprive theestate of assets upon bankruptcy rather than whether the intention of the contracting parties was commercially reasonable. VI. Application and the Effect of Set-Off

[42] This brings us to Chandos’ final argument concerning the effect of set-off on the application of the anti-deprivationrule in this case. Set-off is given statutory approval in s. 97(3) of the BIA:

(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted bythe trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff ordefendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Actrespecting frauds or fraudulent preferences.

As this Court described in Husky Oil, at para. 3, s. 97(3) incorporates the provincial law of set-off (and the related civil law concept ofcompensation) into the federal bankruptcy regime. Set-off is a defence to the payment of a debt. The effect of set-off is to allow acreditor who happens to be also a debtor to recover ahead of their priority. [43] The BIA’s affirmation of set-off and the anti-deprivation rule are not incompatible. While set-off reduces the value ofassets that are transferred to the Trustee for redistribution, it is applicable only to enforceable debts or claims (see, e.g., Holt v.

Telford, (SCC), [1987] 2 S.C.R. 193, at pp. 204-6). The anti-deprivation rule makes deprivations triggered by insolvencyunenforceable. The combination means that set-off applies to debts owed by the bankrupt that were not triggered by the bankruptcy. [44] The case at bar is quite different. The chapeau of clause VII Q provides that the clause triggers “[i]n the event[Capital Steel] commits any act of insolvency, bankruptcy, winding up or other distribution of assets”. Since, here, the clause wastriggered by bankruptcy, the threshold for considering the anti-deprivation rule had been met.[1] Clause VII Q(

d) itself provides thedeprivation: “[Capital Steel] shall forfeit 10% of the within Subcontract Agreement price to [Chandos] as a fee”. The effect of thisprovision is to create a debt from Capital Steel to Chandos that would not exist but for the insolvency. It is this “debt” created by ClauseVII Q(

d) because of the insolvency that Chandos seeks to “set off” against the amount it owed to Capital Steel. One can hardly imagine amore direct and blatant violation of the anti-deprivation rule. [45] Accordingly, I conclude that clause VII Q(

d) violates the anti-deprivation rule and is thus void. VII. Conclusion [46] I would dismiss the appeal with costs throughout. The following are the reasons delivered by Côté J. (dissenting) — I. Introduction [47] I have had the advantage of reading the reasons of my colleague, Rowe J., and there is much with which I agree inthem. In particular, I agree that the anti-deprivation rule has a longstanding and strong jurisprudential footing in Canadian law and that ithas not been eliminated by this Court or through legislation.

However, I write to express a different view on a point of law which iscentral to the outcome of this appeal. In short, my view is that the anti-deprivation rule should not apply to transactions or contractualprovisions which serve a bona fide commercial purpose. I reach this conclusion essentially for three reasons. [48] First, my reading of the jurisprudence is that courts applying the anti-deprivation rule in Canada have not been contentto rest their reasons for decision merely on a finding that the effect of a transaction or contractual provision was to deprive a bankrupt’sestate of value.

As I explain below, Canadian courts have looked past the effects of the arrangement and inquired into the presence orabsence of a bona fide commercial purpose behind the deprivation. [49] Second, there is a principled legal basis for retaining a bona fide commercial purpose test. The anti-deprivation rulehas its origins in the common law public policy against agreements entered into for the unlawful purpose of defrauding or otherwiseinjuring third parties.

Unlike the related pari passu rule, the anti-deprivation rule should not be regarded as arising from an impliedprohibition in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

Thus, the different legal bases of the two rules explainwhy the pari passu rule operates regardless of the parties’ intentions while the anti-deprivation rule takes into account the parties’ bonafide commercial purposes. [50] Third, as a matter of public policy, the considerations cited in support of an effects-based test are not sufficient tooverride the otherwise strong countervailing public interest in the enforcement of contracts.

A purely effects-based test gives too littleweight to freedom of contract, party autonomy, and the “elbow-room” which the common law traditionally accords for the aggressivepursuit of self-interest: see A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. In addition,Parliament has occupied much of the ground formerly covered by the common law such that there is a reduced need for a general anti-deprivation rule.

Indeed, the many statutory protections already in place to safeguard the interests of creditors undermine any perceivedpolicy need to expand the reach of the anti-deprivation rule for that purpose. [51] Therefore, like Wakeling J.A., dissenting in the Court of Appeal below, I would hold that the anti-deprivation ruledoes not apply to transactions or contractual provisions which serve a bona fide commercial purpose.

As the chambers judge (Alta Q.B.,Edmonton, 24-2169632, March 17, 2017; A.R., at pp. 9-10) and the Court of Appeal (2019 ABCA 32, 438 D.L.R. (4th) 195, at paras. 55and 394-97) were unanimous in finding a bona fide commercial purpose behind the contractual provision at issue, I would allow theappeal and restore the order made at first instance. II. Background [52] My colleague provides a helpful

summary of the essential facts in his reasons, and I am content to rely on it. I will

therefore only highlight a few important aspects of the contractual relationships in this case. [53] The appellant, Chandos Construction Ltd., hired Capital Steel Inc. to perform important structural steel subcontractwork on a condominium project in St. Albert, Alberta (“Subcontract”). The appeal revolves around whether clause VII Q(d) (“clauseQ(d)”) of the Subcontract offends the anti-deprivation rule. Clause Q(

d) is reproduced in my colleague’s reasons. Capital Steel alsoprovided a guarantee by which it agreed to repair and make good any defect in its work and all resulting damages that might appear as aresult of any improper work: clause III, “Guarantee”, A.R., at p. 155.

In addition, Clause VII G of the Subcontract required Capital Steelto indemnify Chandos and hold it harmless “from any and all claims, costs, liabilities and causes of action” and for “any loss or damage”caused to Chandos or the owner of the condominium project by Capital Steel or any of Capital Steel’s subcontractors, employees, agents,licensees, and permitees in carrying out the Subcontract.

The same indemnity also applied between Capital Steel and the owner. [54] The Stipulated Price Contract between Chandos and the owner-developer, Boudreau Developments Ltd., requiredChandos to be “as fully responsible to the Owner for acts and omissions” of its subcontractors as it was for “acts and omissions ofpersons directly employed by” it: clause GC 3.7.1.3 (emphasis in original). Chandos also agreed that it would promptly correct defects ordeficiencies in the work which appeared during the warranty period at its own expense: clause GC 12.3.4.

As well, Chandos was obligedto correct or pay for damage resulting from such corrections: clause GC 12.3.5. III. Issues [55] The focus of these reasons is whether the anti-deprivation rule applies regardless of the parties’ bona fide commercialpurposes. [56] Another issue raised by the parties is whether clause Q(

d) is a valid liquidated damages provision or an unenforceablepenalty clause. The chambers judge, Justice Nielsen, concluded that the clause was a valid liquidated damages provision. That findingwas not disturbed on appeal, and I do not see any extricable error of law which would justify appellate interference with it. I thereforedecline to address this issue further. IV. Analysis A.

The Anti-Deprivation Rule Does Not Apply Where a Transaction or Contractual Provision Serves a Bona Fide CommercialPurpose [57] Before embarking upon an analysis of whether the jurisprudence on the anti-deprivation rule has traditionallyincluded a purpose element, I find it useful to clearly state what I mean by a “bona fide commercial purpose”. [58] The inquiry I propose is primarily objective and centres around the presence or absence of a legitimate commercialbasis for a transaction or contractual provision.

An objective approach dovetails with the approach taken in another important and relatedarea of commercial law, the

interpretation of contracts, where “the goal of the exercise is to ascertain the objective intent of the parties”:Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 49. It also parallels this Court’s approach toascertaining the purpose behind commercial transactions in tax characterization cases. As this Court stated in Symes v.

Canada, (SCC), [1993] 4 S.C.R. 695, at p. 736: As in other areas of law where purpose or intention behind actions is to be ascertained, it must not be supposed that in responding to thisquestion, courts will be guided only by a taxpayer’s statements, ex post facto or otherwise, as to the subjective purpose of a particularexpenditure. Courts will, instead, look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decidedwith due regard for all of the circumstances. (See also Ludco Enterprises Ltd. v.

Canada, 2001 SCC 62, [2001] 2 S.C.R. 1082, at para. 54.) [59] Obviously, evidence of a lack of subjective good faith is relevant to such an inquiry; however, positive assertions ofgood faith, while relevant, are not determinative. Courts applying the anti-deprivation rule should (and do) have due regard to the parties’objective manifestations of purpose. In the case of the anti-deprivation rule, the primary means by which the parties objectively manifesttheir intentions is through the terms of the contractual agreements by which they bind themselves.

Therefore, careful regard should behad to the terms of the contractual arrangements which are said to offend the anti-deprivation rule. [60] I add that the leading English authority on the anti-deprivation rule also employs a similar approach to determiningthe purpose behind the transaction or contractual provision at issue: Belmont Park Investments Pty. Ltd. v.

BNY Corporate TrusteeServices Ltd., [2011] UKSC 38, [2012] 1 A.C. 383, at paras. 74-79, per Lord Collins; and para. 151, per Lord Mance. [61] With this understanding in hand, I now turn to consider, as an empirical question, whether courts applying the anti-deprivation rule inquire into the presence or absence of such a purpose.

(1) Courts Applying the Anti-Deprivation Rule Inquire into the Existence of a Bona Fide Commercial Purpose [62] As Canadian courts considering the anti-deprivation rule have often had recourse to English jurisprudence on the rule,I begin by briefly looking at whether the English jurisprudence has traditionally included a bona fide commercial purpose test. I thenturn to a more thorough consideration of the Canadian jurisprudence to determine whether Canadian courts inquire into the presence orabsence of a bona fide commercial purpose when applying the anti-deprivation rule. (

a) English Jurisprudence [63] I do not intend to undertake an extended review of the English anti-deprivation rule in these reasons. The UnitedKingdom Supreme Court recently did so in Belmont, and I cannot hope to add much of value to the thorough analysis offered in thatdecision. I will therefore confine my general comments on the English jurisprudence to Belmont.

[ 64 ] The respondent, Deloitte Restructuring Inc., argues that Belmont “shifted” the English common law from an effects- based test to a purpose-based test for the anti-deprivation rule: R.F., at para. 115. However, in my view, Belmont recognized that a purpose requirement has always been an element of the English anti-deprivation rule. Lord Collins undertook an extensive review of the English jurisprudence on the anti-deprivation rule: paras. 58-73.

He found that, “where the rule has been applied, it has been an almost invariably expressed element that the party seeking to take advantage of the deprivation was intending to evade the bankruptcy rules”: para. 75. Further, in the English authorities “where the either . . . or anti-deprivation rule was held not to apply, good faith and the commercial sense of the transaction have been important factors”: para. 77.

Lord Collins was thus able to conclude that the English jurisprudence reflected “an impressive body of opinion from some of the most distinguished judges that, in the case of the anti- deprivation rule, a deliberate intention to evade the insolvency laws is required”: para. 78; see also paras. 152-53, per Lord Mance. [ 65 ] I find Lord Collins’s review of the English jurisprudence, as well as the conclusions of law he drew from it, to be authoritative characterizations of the English position on the anti-deprivation rule.

I therefore cannot accept that Belmont ’s recognition of a purpose requirement for the anti-deprivation rule was as novel as Deloitte suggests. Further, as I demonstrate below, the Canadian jurisprudence on the anti-deprivation rule also supports the conclusion that a purpose requirement is not a novel feature of the anti- deprivation rule. (

b) Canadian Jurisprudence (

i) Supreme Court of Canada Jurisprudence [ 66 ] While this appeal gives this Court its first opportunity to fully consider and apply the anti-deprivation rule, in three previous decisions the Court either commented in obiter on this area of the law or considered contractual arrangements which would have been subject to the anti-deprivation rule or the pari passu rule had the contracts in question been governed by the common law.

On my reading, this Court’s jurisprudence favours a bona fide commercial purpose test for the anti-deprivation rule. [ 67 ] This Court had an opportunity to comment in obiter on the fraud upon the bankruptcy laws principle in Hobbs v. The Ontario Loan and Debenture Company (1890), 1890 CanLII 10 (SCC) , 18 S.C.R. 483. A mortgage provided that the mortgagees leased the mortgaged property to the mortgagor and that the rent was equal to the principal payments under the mortgage.

The issue was whether the rights created by the lease were enforceable as against a third party execution creditor. [ 68 ] Chief Justice Ritchie (Taschereau J., as he then was, concurring) concluded that a sham lease in a mortgage which is not intended to create a bona fide landlord-tenant relationship is void as against assignees in bankruptcy: pp. 486-89. Justice Strong, as he then was (Fournier J., concurring) agreed: pp. 502-3 and 507. However, they disagreed as to the result.

Chief Justice Ritchie found that there was a bona fide arrangement because there was no bankruptcy law in force, whereas Strong J. found that there was not such an arrangement because the principle has wider application outside of bankruptcy: pp. 485-87 and 508-9. [ 69 ] The authorities on which Ritchie C.J. and Strong J. relied were based on the English fraud upon the bankruptcy laws principle. Chief Justice Ritchie relied heavily upon the decision of the English Court of Appeal in Ex parte Voisey (1882), 21 Ch.

D. 442 (C.A.) , quoting the reasons of Lord Brett, at pp. 459 and 461: The only way in which it can cease to be a bona fide contract is if it was not intended to be acted upon between the parties at all, and was only a device to evade the bankruptcy laws. That would not be what is ordinarily called a fraud, but it would be what is called a fraud upon the bankruptcy laws, that is, an attempt to evade the bankruptcy laws in case of a bankruptcy.

Now that attempted evasion, that want of bona fides with regard to the bankruptcy laws, must exist, if at all, at the moment when the contract is made. . . . . . . . . . the question is whether there was a real honest stipulation between the parties, intended to be acted upon whether there should be a bankruptcy or not, or whether it was a stipulation which they intended to be acted upon only for the purpose of defeating the bankruptcy law. [ 70 ] Justice Strong also relied on Ex parte Williams (1877), 7 Ch.

D. 138 (C.A.) , the ratio decidendi of which he described as being that “any provision by a debtor that in the event of his becoming bankrupt or insolvent there shall be a different distribution of his effects from that which the law provides is void”: p. 502. While noting that Williams was of limited value due to the lack of bankruptcy legislation in Canada, Strong J. went on to comment favourably upon the English cases which followed it, including Voisey .

He described the law established by those authorities as being that, if it appears that the tenancy for which a mortgage provides is not intended by the parties to be a bona fide agreement, and is instead a sham or pretence, then such a lease is “void . . . as against the assignees in bankruptcy”: p. 503.

Justice Strong adopted these principles, adding that they must have a wider application beyond the bankruptcy context in order to protect third parties more generally. [ 71 ] The separate opinion of Patterson J. is also noteworthy because he stated that the enforceability of the tenancy between the mortgagor and a third party depended in part on the “ bona fides of the transaction”: p. 543.

He noted that the bona fides of a transaction “has usually been tested in England in the light of the bankruptcy law”, and, while Canada did not have a bankruptcy law at that time, it did “not therefore follow that the intention with which the lease is made is to be disregarded”: p. 543. [ 72 ] In my view, the reasons of Ritchie C.J. and Strong and Patterson JJ. indicate this Court’s nearly unanimous obiter approval both of the existence of a general fraud upon the bankruptcy laws principle, even if it could not be applied at the time, and of a bona fide commercial purpose test corresponding to that principle. [ 73 ] This Court addressed a set of circumstances resembling those governed by the common law anti-deprivation rule in

Coopérants, Mutual Life Insurance Society (Liquidator of) v. Dubois, (SCC), [1996] 1 S.C.R. 900. Mr. Dubois andCoopérants were the undivided co-owners of two immovables situated in Laval, Quebec. Their interests in the immovables weregoverned by two agreements in which they waived the right to demand a partition of the immovables for 35 years. Each agreement alsoprovided that, in the event that one of the parties applied to a court for the appointment of a liquidator for the party’s property, thatparty’s interest in the immovable in question had to be sold to the counterparty.

If the parties did not agree on the price, the defaultingparty’s interest would be sold to the counterparty at 75 percent of its fair market value, which was to be determined without regard to thefact that the immovable was held in undivided co-ownership. Subsequently, Coopérants applied to a court for the appointment of aliquidator due to insolvency, and Mr.

Dubois sought to rely on the forced sale clause in their agreements. [74] This Court held that the liquidator was bound by the clause because there was no evidence that the contractualmethod for determining the sale price resulted in a price which was less than fair market value, nor was there any evidence that theclause gave Mr. Dubois an “unjust preference”: para. 41. [75] I caution against overreliance on Coopérants for the purposes of ascertaining the content of a common law rule.

Theagreements at issue were governed by the Civil Code of Lower Canada, not the common law, and the Court’s comments regarding theenforceability of the clause in question were directed at how a court should exercise its discretion under what is now the Winding-up andRestructuring Act, R.S.C. 1985, c. W-11. Nonetheless, Coopérants is significant for having recognized the importance of enforcingarrangements which reflect a bona fide commercial purpose. The Court noted that the clause at issue created an obligation to sell aunique, non-fungible and indivisible property in which Mr.

Dubois, as co-owner, had a specific interest. The Court also observed that theagreements in which the clause was found included reciprocal obligations between the co-owners, which called for ongoing performance.This Court stated that “[i]t is advisable to respect such contracts and ensure that they are as stable as possible”: para. 38.

Thus, this Courtacknowledged that the clause at issue served a bona fide commercial purpose which the law should strive to uphold, even if doing sogranted a degree of preference over other creditors. [76] Finally, this Court addressed a set of circumstances resembling those governed by the pari passu rule in A.N. Bail Co.v. Gingras, (SCC), [1982] 2 S.C.R. 475. A contract between a general contractor and a subcontractor authorized thegeneral contractor to pay the subcontractor’s suppliers directly in order to discharge obligations arising out of a construction project.

Thesubcontractor entered into bankruptcy proceedings and the general contractor made use of the provision in question to pay one of thesubcontractor’s suppliers, which was a creditor of the subcontractor. This Court held that in the bankruptcy context such arrangementscould not be used to supplant the pari passu distribution scheme in the BIA. This was so notwithstanding the general contractor’s goodfaith. [77] Gingras is consistent with the English approach to the pari passu rule. The House of Lords held in British EagleInternational Airlines Ltd. v.

Cie Nationale Air France, [1975] 1 W.L.R. 758 (H.L.), that the pari passu rule applies where the effect of acontract is that a bankrupt’s assets would be distributed to the bankrupt’s creditors otherwise than in accordance with the bankruptcylaws, notwithstanding the parties’ legitimate commercial purposes. However, as I explain in detail below, it does not follow that the anti-deprivation rule must adopt a similar effects-based test.

Certainly, the United Kingdom Supreme Court did not regard British Eagle asprecluding it from holding that the English anti-deprivation rule includes a bona fide commercial purpose element: Belmont. Therefore, Ido not view Gingras as undermining the existence of a bona fide commercial purpose test for the anti-deprivation rule. [78] In

summary, Hobbs and Coopérants include significant obiter dicta which are suggestive of a bona fide commercialpurpose test for the common law anti-deprivation rule. Gingras neither contradicts those obiter dicta nor departs from the law of Englandas stated in Belmont and British Eagle. Therefore, I am of the view that this Court’s jurisprudence favours a bona fide commercialpurpose test for the anti-deprivation rule — though, to be clear, this Court has not previously bound itself as a matter of stare decisis inthis regard.

My empirical inquiry must, therefore, live or die on the jurisprudence of the courts that have actually applied the commonlaw anti-deprivation rule. (ii) Superior Court and Appellate Jurisprudence [79] On my reading of the jurisprudence, courts applying the anti-deprivation rule in Canada have not been content to resttheir reasons for decision merely on a finding that the effect of a transaction or contractual provision was to deprive a bankrupt’s estate ofvalue.

As I explain below, courts have looked past the effects of the arrangement and inquired into the presence or absence of a bona fidecommercial purpose behind the deprivation. In the minority of cases where this discussion has not occurred, the absence of a bona fidecommercial purpose has been readily inferable from the circumstances.

These observations lead me to conclude that a bona fidecommercial purpose element has a strong jurisprudential footing in Canadian law. [80] The Ontario Court of Appeal, in In Re Hoskins and Hawkey, Insolvents (1877), 1 O.A.R. 379, applied the anti-deprivation rule to a lease which provided that upon the insolvency of the tenant, the current year’s rent and the succeeding year’s rentwould be due and payable. The landlord argued that the additional year’s rent was intended as compensation for his loss of a tenant.

Ifthe test the Court of Appeal applied had been focused solely on the effects of the provision, it would not have had to address thisargument. Nonetheless, it did. The court rejected the landlord’s argument, noting that it was “discredited by the circumstance that asurrender by a tenant, who had become insolvent, imports advantage rather than loss” for the landlord: p. 384.

At p. 385, the courtquoted with approval the decision of Lord Chancellor Redesdale in Murphy, a Bankrupt (1803), 1 Ch. 44, at p. 49, which has often beencited in Canada: The question is, whether a person can be admitted to prove as a creditor, on the foundation of an instrument contrived for the purpose ofdefeating the effect of the bankrupt laws; where the only ground of the claim is an instrument executed for the purpose of giving a rightagainst creditors, which would not exist against the bankrupt if he were solvent.

All the cases in England have held this to be a fraudupon the bankrupt laws, which cannot be supported . . . . [Emphasis added.] [81] Applying Murphy, the Court of Appeal concluded that the provision stipulating the payment of an additional year’srent to the landlord was invalid. In essence, the court found that there was no legitimate commercial purpose for the landlord to receivewhat would effectively be a gratuitous payment of an additional year’s worth of rent long after the tenancy had come to an end.

[82] The same Court of Appeal applied the anti-deprivation rule to void an agreement in Watson v. Mason (1876), 22 Gr.574 (U.C. Ch.). A partnership and the creditors of an insolvent business entered into an arrangement which permitted the partnership topurchase the assets of the business, with the stipulation that, upon the insolvency of the partnership, the partnership would then owe thecreditors the balance of the business’s unpaid debt.

Justice Burton (as he then was) held that there was no authority to support thevalidity of an agreement “where the only ground of the claim is an instrument executed for the purpose of giving a right againstcreditors”: p. 588 (emphasis added). Justice Patterson (then a member of the Court of Appeal) noted there was no evidence that thepartnership had paid a discounted price on the assets in exchange for this quid pro quo and Burton J.A. was of the view that thepartnership had paid the full value of the assets, rendering the contingent debt obligation essentially gratuitous.

When I consider thesecomments in conjunction with the various judges’ approving citations of English authorities referring to intention or purpose (pp. 583-84,for example), I take the court to have found that there was no legitimate commercial interest in conjuring the insolvent business’s debtinto existence upon the insolvency of the partnership after the partnership had already agreed to pay the creditors the full value of thegoods which had belonged to the business. [83] The anti-deprivation rule was also applied by Meyer J. in Re Frechette (1982), (QC CS), 138D.L.R. (3d) 61 (Que. Sup. Ct.).

The bankrupt was a shareholder in a private company. The shareholders’ agreement provided for a rightof first refusal should a shareholder voluntarily wish to dispose of his shares to a third party, and also included a right to purchase theshares of any shareholder who became bankrupt.

The agreement further provided that the price to be paid on the forced sale of abankrupt’s shares was to be 80 percent of the price which would otherwise be paid if the shares were sold voluntarily through the right offirst refusal. [84] Justice Meyer concluded that the provision requiring the sale of a bankrupt shareholder’s shares for 80 percent oftheir value was contrary to public policy because it granted the shareholders a special reduction in the price to be paid for those shares.

Ifthe standard he was applying had looked only to the effects of the provision on bankruptcy, he could have ended his analysis there.However, he went on to consider the shareholders’ purpose in entering into the arrangement. [85] While Meyer J. accepted that the discount of 20 percent might have been agreed upon in good faith, he considered thatit was essentially a gratuitous benefit granted by the shareholders to one another. Indeed, he analogized it to a “gift”: p. 69.

He observedthat there “was no evidence before the court as to the existence of any consideration for such a reduction, other than a desire to confer abenefit on one’s fellow shareholders in the event of one’s bankruptcy”: p. 69. In effect, this was a finding that there was no objectivelyascertainable commercial interest behind the provision. A desire to give gifts to friends is plainly not a legitimate commercial interestwhich the law should protect over the interests of third party creditors in bankruptcy. Finally, I note that Meyer J. quoted and followed anEnglish decision, Borland’s Trustee v.

Steel Brothers & Co., Limited, [1901] 1 Ch. 279, the significance of which I examine below whendiscussing another Canadian decision. [86] Justice Saunders considered the anti-deprivation rule in Re Knechtel Furniture Ltd. (1985), 56 C.B.R. (N.S.) 258(Ont. S.C.). The bankrupt, Knechtel Furniture, had an employee pension plan that had been wound up on the company’s bankruptcy witha surplus of $471,300, after all the beneficiaries had been fully paid in accordance with the terms of the plan.

The plan stated that in theevent of its termination, any surplus would be paid over to the company, provided, however, that, in the event that the company hadbecome bankrupt or insolvent, the surplus would be allocated to the beneficiaries. The company’s trustee in bankruptcy argued that theprovision entitling the beneficiaries to the funds was contrary to public policy. [87] The beneficiaries argued that the provision had not been inserted to defeat the bankrupt’s creditors.

They submittedthat its purpose was to provide additional benefits to employees who would probably suffer great hardship if the plan were to be woundup after the company became bankrupt. In other words, they argued that the provision had a bona fide commercial purpose. JusticeSaunders rejected this argument, not because he regarded it as irrelevant to his analysis, but rather because he found it “difficult to seewhy the hardship would necessarily be any less if the plan had been terminated when Knechtel was solvent”: p. 264.

In other words, hedid not accept that there was a legitimate commercial interest in giving the beneficiaries what would amount to gratuitous pensionbenefits. He observed that the beneficiaries had already been paid their benefits in full under the plan, and that, if the plan had beenterminated while the company was solvent, the beneficiaries would have had no entitlement to the surplus.

As enforcing the provisionwould redirect funds which would otherwise have gone into the bankrupt’s estate, the provision was contrary to public policy. [88] The anti-deprivation rule was also considered by Blair J. (as he then was) in Canadian Imperial Bank of Commerce v.Bramalea Inc. (1995), (ON SC), 33 O.R. (3d) 692 (C.J. (Gen. Div.)). Bramalea and the Canadian Imperial Bank ofCommerce were in a partnership formed to develop and operate a shopping mall.

A clause in their partnership agreement provided that,in the event of the insolvency of one of the partners, the solvent partner could purchase the insolvent partner’s interest at the lesser ofbook value or fair market value. Bramalea entered into bankruptcy proceedings, and the bank sought to exercise its right under thepartnership agreement. The book value of Bramalea’s interest was estimated at $200,000, and the evidence suggested that the fair marketvalue might exceed the book value by as much as $2 million to $3 million.

Thus, the clause would have given the bank a ratherstaggering discount on the value of Bramalea’s partnership interest.

Justice Blair neither expressly accepted nor rejected these figures forthe fair market valuation, but he did find that the difference in price was “more than minimal”: p. 694. [89] Justice Blair stated that it was “clear from the provisions of the partnership agreement itself that the parties hadcontemplated a transfer to one of the partners of the other partner’s partnership interest, solely in the event of insolvency of the latter, at aprice which was less than what could be obtained for that interest on the market”: p. 695 (emphasis deleted).

Although he was at pains topoint out that there was no suggestion of a fraudulent or dishonest intent in this case, he also observed that the parties had intended to sellan asset at an undervalue. As a result, he found that the clause was contrary to public policy.

Thus, while Blair J. did not expresslydiscuss whether there was an absence of an objective commercial purpose, he clearly did engage in a search for an objective purpose. [90] In addition, I take Blair J.’s statement that the rule encompasses “fraud in the effect” as meaning no more than that asubjective intent to defraud the bankrupt’s creditors does not have to be shown in order for the anti-deprivation rule to apply: p. 694.

InBelmont, Lord Mance explained that references in the jurisprudence to “fraud” of the bankruptcy law are not references to fraud “in astrict sense” or to “morally opprobrious” conduct: para. 151. Lord Brett also made this point clear at p. 459 of Voisey. Thus, a showing ofsubjective dishonesty or deceit is unnecessary. However, Lord Mance, at para. 151 of Belmont, and Lord Brett, at p. 461 of Voisey, both

held that the anti-deprivation rule requires an assessment of whether there was a legitimate purpose behind a transaction. I see nothing contradictory in holding that deceit, dishonesty, or impropriety need not be shown, while also holding that the anti-deprivation rule does not apply to transactions or contractual provisions which serve a bona fide commercial purpose.

I therefore do not see Blair J.’s comments regarding “fraud in the effect” as inconsistent with the view I put forward. [ 91 ] Further, Blair J., at p. 695, like Meyer J. in Frechette , at p. 68, quoted directly from the English case of Borland , in which Farwell J. stated the following in the context of a share purchase agreement: If I came to the conclusion that there was any provision in these articles compelling persons to sell their shares in the event of bankruptcy at something less than the price that they would otherwise obtain, such a provision would be repugnant to the bankruptcy law . . . . [p. 291] This leaves open the question, however, of whether the repugnancy would arise because the provision would amount to a deprivation “in effect”, notwithstanding the parties’ bona fide intentions, or whe

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