COVID-19 Resource Centre : McInnes Cooper’s Commitment in Action Read More
October 5, 2020
On October 2, 2020, the Supreme Court of Canada clarified the existence and application of the anti-deprivation rule in Canadian bankruptcy law. In Chandos Construction Ltd. v. Deloitte Restructuring Inc., the Court firmly established that any contractual provision that removes value from a bankrupt’s estate upon an insolvency (or bankruptcy) is unenforceable. In essence, the common law anti-deprivation rule prohibits parties from contracting in a manner that circumvents the operation of bankruptcy laws. The rule aims to prevent unsecured creditors from taking property directly from the bankrupt upon a bankruptcy. Instead, this property must be remitted to the bankrupt’s estate and divided amongst all creditors. The Court’s decision is significant because it provides parties with clear guidance on the enforceability of contractual clauses triggered by insolvency:
As a result of this decision, parties are wise to consider taking security, acquiring insurance or requiring a third-party guarantee instead of relying on contractual provisions as protection from risk of counterparty insolvency.
Background. The general contractor on a condominium project, Chandos, subcontracted certain work on the project to Capital Steel. The subcontract agreement between the parties contained a clause that 10% of the subcontract price would be forfeited if the subcontractor became insolvent, bankrupt or ceased operations “as a fee for the inconvenience of completing the work using alternate means and/or for monitoring the work during the warranty period.” The enforceability of the clause took centre stage when Capital Steel filed an assignment in bankruptcy prior to completing the subcontract. When Chandos sought to rely on the clause, Deloitte, as trustee, made a court application for a determination of whether it would offend the common law anti-deprivation rule. The application judge determined the clause was enforceable as a bona fide commercial transaction that was not predominately designed to deprive the subcontractor’s property in bankruptcy. In January 2019, a majority of the Alberta Court of Appeal reversed the application judge’s decision, holding the provision conflicted with the operation of bankruptcy legislation by removing assets that would otherwise form part of the bankrupt’s estate and was unenforceable.
Supreme Court of Canada. A majority of the Supreme Court of Canada upheld the Alberta Court of Appeal’s ruling that the clause was unenforceable for violating the anti-deprivation rule. The Court provided four important insights into the existence and application of the common law anti-deprivation rule:
Please contact your McInnes Cooper lawyer or any member of the Bankruptcy & Insolvency Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2020. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
Apr 22, 2021
The future of the North American Free Trade Agreement (NAFTA), including NAFTA’s immigration-related provisions allowing cross-border mobility…
Apr 13, 2021
On April 7, 2021, the Nova Scotia government introduced Bill 97, amendments to the N.S. Electricity Act aimed at growing the solar industry in…
Mar 31, 2021
Close to five million Canadians who didn’t usually work from home, did so in 2020 because of the COVID-19 pandemic. Even as public health…
Mar 26, 2021
Merger and acquisition deals are still happening across all sectors, perhaps at an even higher rate than pre-COVID-19 pandemic, even if the…
Mar 19, 2021
Recently, New Brunswick temporarily broadened the eligibility for its Skilled Worker Stream through its Provincial Nominee Program (PNP),…
Subscribe to McInnes Cooper to stay current with our leading insights on legal updates, trends, news, events, and services.