Priority Of Receivership Charges Over Construction Trusts – Ontario Court Maintains The Status Quo

In an April 30, 2019 endorsement accompanying a receivership order made in the matter of Royal Bank of Canada and D.M. Robichaud Associates Ltd. ("D.M. Robichaud"), Justice Hainey of the Ontario Superior Court of Justice, Commercial List (the "Court") held that the receiver's charge and the receiver's borrowings charge should have priority over deemed trusts under provincial construction legislation.1

The debtor, D.M. Robichaud Associates Ltd. ("DMR"), provided sewer, pipeline and culvert repairs to municipal, industrial and commercial clients in Ontario and other provinces. A number of DMR's projects were bonded either on a payment or performance basis.

Having previously obtained an interim receivership order, DMR's secured lender, Royal Bank of Canada (the "Bank"), now sought a full receivership order pursuant to subsection 243(1) of the Bankruptcy and Insolvency Act (the "BIA") and section 101 of the Courts of Justice Act (Ontario). As part of that receivership order, the Bank sought a receiver's charge and a receiver's borrowings charge over all DMR's property, including accounts receivable, with priority over, among other things, any trust, statutory or otherwise. Such priority for the charges was consistent with the language of the Commercial List Model Receivership Order (the "Model Order").2

One of DMR's bonding companies ("Bondco") objected to the priority of the charges over the deemed trusts created by section 8 of the Construction Act (Ontario) on the basis that funds on hand and receivables subject to the construction trust were trust property and, as such, did not form part of DMR's estate. Bondco conceded that the Court had discretionary jurisdiction to make an order charging the trust property, but that such discretion should, in general, only be "sparingly exercised" and should not be exercised in this case.3

In response, the Bank argued successfully that: (i) the foundational purpose of the federal corporate bankruptcy regime is the equitable distribution of assets, which purpose is achieved through the single proceeding model; (ii) the single proceeding model also applies in a receivership; and (iii) the first-ranking priority of the receiver's charge and receiver's borrowings charge flows directly from the single proceeding model.

The authority for the first proposition cited by Justice Hainey was the decision of the Supreme Court of Canada (the "SCC") in Alberta (Attorney General) v. Moloney, wherein Justice Gascon for the majority stated:

"33 The first purpose of bankruptcy, the equitable distribution of assets, is achieved through a single proceeding model. Under this model, creditors of the bankrupt wishing to enforce a claim provable in bankruptcy must participate in one collective proceeding. This ensures that the assets of the bankrupt are distributed fairly amongst the creditors. As a general rule, all creditors rank equally and share rateably in the bankrupt's assets: s. 141 of the BIA; Husky Oil, at para. 9. In Ted Leroy Trucking Ltd., Re, 2010 SCC 60, [2010] 3 S.C.R. 379 (S.C.C.), at para. 22, the majority of the Court, per Deschamps J., explained the underlying rationale for this model:

The single proceeding model avoids the inefficiency and chaos that would attend insolvency if each creditor initiated proceedings to recover its debt. Grouping all possible actions against the debtor into a single proceeding controlled in a single forum facilitates negotiation with creditors because it places them all on an equal footing, rather than exposing them to the risk that a more aggressive creditor will...