December 3, 2019
Remedies and the insolvent debtor
BY ROBERT KENNALEY
In the event you have been retained by a company that owes you money and is at risk of going (or has already gone) insolvent, care should be taken to ensure you preserve and pursue the remedies that may be available to ensure you get paid. First, in most Canadian jurisdictions, a lien remedy will be available to secure amounts owing for the provision of construction and construction-related services and materials. In the event the debtor is placed under protection under either the Bankruptcy and Insolvency Act (BIA) or the Companies’ Creditors Arrangements Act (CCAA), lien claimants who prove their claims for lien will generally receive priority over other secured creditors to the extent of the lien holdbacks. This is significant as, absent the lien security, the contractors and subcontractors owed monies will almost always be classed as unsecured creditors who, in most BIA/CCAA scenarios, will receive little or nothing upon a distribution under those pieces of legislation. It is therefore important for unpaid contractors and subcontractors to ensure, so far as is possible, that their lien rights do not expire where insolvency appears to be a possibility.
In addition, in the event of an insolvency, unpaid contractors and subcontractors should consider the extent to which a statutory trust is available to assist them in recovery against both the debtor corporation and its officers, directors or others responsible for the day-to-day financial operations of the company. More specifically, construction or builder’s lien legislation in most provinces imposes trust obligations on any payer in the construction ladder to ensure funds received for the purposes of paying for the work are paid to those beneath them before they are used for other purposes. The legislation also generally provides that a failure to account for the trust funds amounts to breach of trust and that officers, directors and others who acquiesce in or consent to the conduct amounting to the breach of trust will be personally liable for those breaches.
In an insolvency situation, the potential trust obligations of officers and directors will generally be addressed by the Court under BIA or CCAA proceedings. Accordingly, anyone with a potential trust claim needs to bring it forward for evaluation as part of those proceedings. Further, trust claimants will need to be active in those proceedings as the trustee in bankruptcy, or monitor in CCAA proceedings, will have a lot on their plates and may not be focused on a full vetting of potential trust claims.
Lastly, in an insolvency situation, subcontractors should take care to ensure that any labour and material payment bond remedies are preserved and pursued. The applicable limitation period will be set out on the face of the bond itself, and in most jurisdictions a supplier of construction-related services and materials is entitled to request a copy of the bond from those above them in the pyramid (if one has been given). In Ontario, recent changes to the Construction Act have made the provision of labour and material payment bonds under public contracts worth $500,000 or more mandatory. It is anticipated that similar provisions may become mandatory in other jurisdictions as they consider adopting the changes introduced in Ontario, in some way, shape or form.
We note that, in an insolvency situation, the surety who gave the bond will be aware of the debtor’s financial circumstances and will recognize it has obligations to pay out the proper claims of the unpaid subcontractors and suppliers of the debtor. Accordingly, while it may take some time for the surety to perform an investigation and satisfy itself as to the amount that is owing, unpaid subcontractors will often receive payment long before the insolvency proceedings are resolved under BIA or CCAA proceedings. Again, it is accordingly important for unpaid subcontractors and suppliers, where the debtor who owes them money is potentially insolvent, to ensure they obtain a copy of any bond and make a timely claim in that regard.
Finally, if the surety denies a labour and material payment bond claim in an insolvency situation, and where the creditor is under BIA or CCAA protection, the stay of proceedings which will apply under those proceedings will not always stay a claim against the surety under the labour and material payment bond. Thus, while it can take years for insolvency situations to be resolved in BIA or CCAA proceedings, labour and material payment bond claimants will often be able to pursue their claims against the surety outside the insolvency proceedings.
In the end, there are options and remedies available to contractors and subcontractors who are owed monies by a corporation or person who appears to be insolvent. Care, however, must be taken to preserve and pursue those remedies in a timely fashion if they are to result in recovery.
Robert Kennaley speaks and writes on construction law and can be reached for comment at 416-700-4142 or rjk@kennaley.com. This material is not intended to provide legal advice.