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Urbancorp Cumberland 2 GP Inc., (Re)., 2017 ONSC 7156 (Myers) — CRA HST payment before bankruptcy proposal OK because paid from 3d party loan

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“The Issue

[1]               The Monitor asks the court, under s. 36.1 of the Companies’ Creditors Arrangement Act, RSC 1985, c.C-36, to declare void as an unjust preference, under s. 95 of the Bankruptcy and Insolvency Act, RSC 1985, c.B-3, two payments of HST made to the Canada Revenue Agency by an insolvent debtor less than three months before it commenced a proposal proceeding.

[2]               The question as presented could raise a number of difficult issues:

a.         Do the Crown’s deemed trusts under s. 222 of the Excise Tax Act, RSC 1985, c.E-15, cease to apply in proposal proceedings under the BIAbefore the debtor is formally bankrupt? Put another way, does Century Services Inc. v. Canada Attorney General2010 SCC 60 (CanLII) apply to proposals?

b.         If so, then when the court looks back to the three month period prior to the commencement of the proposal process to review payments under s. 95, are the Crown’s deemed trusts disregarded retrospectively pursuant to s. 67 (2) of the BIA as it applies in proposals pursuant to ss. 66 (1) and 101.1 of the BIA?

c.         If the CRA is required to refund taxes paid because they are found to have been unjust preferences, will the CRA be able to recover those taxes from secured creditors of the debtor despite the commencement of proceedings under the BIA? If so, is it appropriate to interpret the BIA so that secured creditors would then effectively be funding unsecured creditors’ recovery in face of s. 136 of the BIA that provides that unsecured creditors’ rights are subject to the rights of secured creditors? This brings into issue the correctness of the recent decision of the Federal Court of Appeal in Canada v. Callidus Capital Corporation2017 FCA 162 (CanLII)

[3]               As it turns out however, for the reasons explained below, on the particular facts of this case, none of these issues need to be resolved. Based on the manner by which the insolvent debtor funded its HST payments, the unsecured creditors’ recovery cannot have been affected or prejudiced. There cannot have been a preferential payment in fact no matter what the outcome might be on the issues of law argued. Moreover, as tempting as it may be to embark upon a review of the very interesting legal issues presented, in my view, it is best to decline to do so in obiter dicta.

[4]               Therefore the motion is dismissed.”

Edge was a special purpose corporation that built a condominium in Toronto. It was part of the Urbancorp group. It failed to remit $12 million of HST that arose from its sale of 590 condominium units.  That would have meant that the ultimate controlling shareholder of Urbancorp would have personal liability for the debt. So he had Urbancorp borrow the money from an arm’s length party and lend it to Edge to pay the CRA.

Urbancorp itself then also became insolvent.

There were two grounds for Justice Myers’ decision. First, even assuming that the CRA’s claim was effectively unsecured (retroactively), before the payment to CRA, there was a $12 million unsecured debt due to the CRA, an “unsecured” creditor (despite its statutory trust, for purposes of the analysis).  After the payment, there was an equivalent liability of $12 million but due to Urbancorp.  So Edge’s financial position (balance sheet liabilities) were the same before and after, as far as unsecured creditors were concerned.

Second, “[34]           The loan from Terra Firma to Urbancorp was expressly conditioned on the funds being used to pay HST. Neither Edge nor its unsecured creditors had any basis to expect to receive those funds or for the funds to fall into Edge’s assets generally.”  So they couldn’t claim to suffer any loss of assets and the arrangement, though “one might question the corporate appropriateness of the overall transaction whose purpose seems to have been to protect the shareholder rather than the companies”, didn’t offend the intent of the bankruptcy law and its requirement for equal sharing among unsecured creditors.

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