Inside "Debt and Federalism": An Introduction to Bankruptcy and Insolvency in Canada

Posted: Thursday, May 12, 2022


Debt and Federalism is the latest in our series about Landmark Cases in Canadian Law. Authors Thomas Telfer and Virginia Torrie introduce us to the four cases discussed in the book, illuminating why these cases form our foundation for understanding bankruptcy and insolvency in Canada.

Written by Thomas Telfer and Virginia Torrie

Book cover for Debt and Federalism

Chapter 1 considers Attorney General of Ontario v Attorney General for the Dominion of Canada ([1894] AC 189 (PC) [Voluntary Assignments Case]). Parliament’s repeal of the Insolvent Act in 1880 left Canada with no federal bankruptcy law until 1919. Ontario’s Act Respecting Assignments and Preferences by Insolvent Persons provided a debtor-creditor remedy and filled the void in the Canadian bankruptcy system. In the Voluntary Assignments Case, Canada claimed that the Act was ultra vires for infringing upon their federal bankruptcy and insolvency power under section 91(21) of the British North America Act, while Ontario contended that it was within their jurisdiction over property and civil rights under section 92(13) of the BNA Act. Lord Herschell, writing the decision of the Privy Council, declared the Ontario Act intra vires. The decision had the immediate impact of preventing a “legislative vacuum” in which creditors would lack a legislative remedy against debtors. The ruling also effectively delayed a new federal bankruptcy law for decades. Significantly, Lord Herschell’s obiter dicta would go on to shape the future of bankruptcy law in Canada. The seminal statement expressed the federal bankruptcy power in the strongest of terms, making it clear that this power could be extended to matters that may typically fall under provincial jurisdiction. Lord Herschell’s dicta elevated the case to landmark status, by strengthening the federal bankruptcy power and influencing the interpretation of this constitutional power in the 1920s and beyond.

Chapter 2 focuses on the 1928 Privy Council decision of Royal Bank of Canada v Larue ([1928] AC 187 (PC)). After nearly forty years of provincial regulation over debtor-creditor matters, Parliament reasserted its jurisdiction over bankruptcy law in 1919 with the Bankruptcy Act. Section 11(10) of the Bankruptcy Act effectively abolished judicial hypothecs from the Civil Code of Québec, altering creditor priorities established through provincial law. In Larue, Quebec challenged the constitutionality of section 11(10), maintaining that it was ultra vires because it interfered with the provincial power over property and civil rights. Viscount Cave expressed a strong view of the federal bankruptcy power and referenced Lord Herschell’s obiter in the Voluntary Assignments Case, which effectively entrenched it in Canadian constitutional law. The Privy Council found that Parliament was permitted to determine creditor priorities under a bankruptcy assignment and that Quebec’s judicial hypothec was not to be given preferred status. The authors argue that Larue is deserving of landmark status because it broadened federal bankruptcy power and affirmed Parliament’s ability to regulate the priority of creditors in bankruptcy, marking the end of a near-five-year dispute over the treatment of Quebec’s judicial hypothecs in light of the Bankruptcy Act.

Chapter 3 examines the third landmark case, the Reference re Companies’ Creditors Arrangement Act (Canada) ([1934] SCR 659 [CCAA Reference]). The Companies’ Creditors Arrangement Act [CCAA] was enacted by Parliament in 1933 for the purpose of providing secured creditors with a mechanism for restructuring corporate debtors. Prior to the CCAA’s existence, federal bankruptcy laws only provided for the liquidation and winding-up of insolvent companies. The CCAA purported to bind secured creditor claims on a compulsory basis, which many speculated was ultra vires of the Parliament because it interfered with the provincial power over property and civil rights. The CCAA was referred to the Supreme Court of Canada by Prime Minister Bennett to determine if it was constitutional. The SCC declared the CCAA intra vires under the federal bankruptcy power. The reasoning resulted in an interpretation of the federal power in terms of the debtor’s financial condition and extended Parliament’s jurisdiction over property rights when the debtor was insolvent. However, the SCC failed to fully address the CCAA’s impact on secured creditors’ property rights, a central issue in determining its constitutional validity. The CCAA Reference is a landmark case because it re-conceptualized the Canadian bankruptcy system by broadening the federal power to bind secured creditors under bankruptcy and insolvency law.

Chapter 4 reviews the fourth landmark case, the Reference re The Farmers’ Creditors Arrangement Act, 1934 ([1936] SCR 384, Duff CJC [FCAA Reference]). The Farmers’ Creditors Arrangement Act [FCAA], was enacted by Parliament in response to the economic hardship that farmers faced during the Great Depression and Dust Bowl. The FCAA’s purpose was to “keep the farmer on the farm” through a reduction of debt (106). Prime Minister King referred the FCAA to the SCC, as uncertainty remained over the breadth of Parliament’s bankruptcy power following the CCAA Reference. The two reference cases go hand in hand. The central issue that was neglected by the SCC in the CCAA Reference – whether Parliament had the power to bind secured creditors to bankruptcy and insolvency law – was subsequently resolved in the FCAA Reference. The SCC upheld the FCAA under the federal bankruptcy power, including the adjustment of secured claims and Crown claims. Chief Justice Duff, writing the majority decision, was bound by the precedent set by the CCAA Reference, establishing that bankruptcy and insolvency law includes compositions and arrangements under the FCAA. On appeal, the Privy Council affirmed the SCC’s decision. The FCAA Reference expanded the notion of bankruptcy and insolvency from a creditor remedy, under legislation such as the CCAA, to a debtor remedy under the FCAA. The FCAA Reference is deserving of landmark status because it resolved four years of uncertainty following the CCAA Reference through an expansion of the federal bankruptcy power.

These four cases provide the basis of the modern Canadian view of bankruptcy and insolvency. From the repeal of federal bankruptcy law in 1880, to the Privy Council’s decision in the FCAA Reference in the late 1930s, the Canadian bankruptcy system experienced progressive, albeit radical, change over the historical six-decade period. Each of the four cases are deserving of landmark status for shaping the boundaries of federal jurisdiction over bankruptcy law. Together, they re-characterized the federal field of bankruptcy and insolvency law as we know it today.

Thomas Telfer is a professor and teaching fellow in the Faculty of Law at Western University. Virginia Torrie is an associate processor in the Faculty of Law at the University of Manitoba.

Posted by Megan M.
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