Statutory Liens In Insolvency: Converging Principles

There has long been contention around the characterization of monies received where an owner of a construction project pays a contractor who subsequently enters insolvency proceedings. The question is whether the funds received properly belong to subcontractors under provincial lien legislation or are distributable in accordance with the priorities determined under the federal bankruptcy regime. Recently, the Alberta Court of Appeal offered guidance on the issue in the Iona Contractors case.1

Distinguishing Statutory Liens & Trusts

Provincial legislation is clear that it is of fundamental importance for the construction industry that contractors, subcontractors and suppliers receive payment for their contributions, being typically either work performed or materials furnished. 2 Liens are an effective tool in this regard, since these parties gain a right similar to that of a creditor, over an owner's property where there would otherwise be no privity of contract. 3 Liens allow qualified parties to register a claim against property related to their contributions and even to sell such collateral property.

In addition to the general lien and its creation, there is also the statutory creation of a deemed trust for certain funds provided that the preconditions are met (a "BLA Trust").4 The prerequisites include the issuance of a certificate of substantial performance and payment by the owner to a person. If this person (e.g. the general contractor), owes money to other parties (e.g. subcontractors and suppliers) that provided work or furnished materials, it then holds the owed amounts in trust for the benefit of those other parties. These trust obligations apply to any funds received from the owner, until the beneficiaries are paid out.

In Stuart Olson, the Supreme Court of Canada ("SCC") affirmed that in such instances, the right to file lien claims is a separate and distinct remedy from the statutorily-created BLA Trust. 5 These are additional remedies to the still existing cause of action for breach of contract. As a result, the SCC held that parties may pursue both lien and trust claims concurrently. The Court also noted how payment of a lien bond does not satisfy the trust obligations, whereas payment of security of the trust satisfies both claims.

As to funds rightfully within a BLA Trust, a question arises over the treatment of these funds in bankruptcy.

Timely registration of liens is important to maintain priority in the event of...