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Ontario Court of Appeals ruling good news for design and construction sector

Statutory trusts can survive bankruptcy – so long as funds remain identifiable and traceable

Ontario’s Court of Appeals has ruled that a statutory trust created under Section 8 of the Construction Lien Act/Construction Act can survive a bankruptcy.  The January 14, 2019 decision was made in the case of The Guarantee Company of Canada v. Royal Bank of Canada, 2019 ONCA 9 and overturns the lower court’s decision.

Until this ruling legal precedent in Ontario had established that monies coming to a contractor after it had entered into bankruptcy would first be distributed to secured creditors leaving all other parties, such as professional services providers, subcontractors and suppliers without payment.  Rules that have come into effect with new legislation recognize more directly the linkages of project agreements among contractors, professional service providers and subcontractors.  As a result, entities owed money for completed work will be paid so long as funds are available through the trust.

Historically, Canada’s Bankruptcy Insolvency Act provides secured creditors first access to all funds being held by an entity in bankruptcy.  The recent Appeals Court ruling maintains provincially created statutory trusts, in this case created under Section 8, will continue to exist in bankruptcy.  This is a departure from established practice.  Previously, such trusts containing co-mingled, or non-segregated, funds from different creditors prevented these trusts from being recognized as valid in bankruptcy by the court.  As a result, any funds held would be directed to secured creditors.

The Appeals Court decision has determined that the co-mingling of creditor funds in the context of a provincially created statutory trust being held under an established system of holdbacks and liens by those parties who provide value to a property should be protected, so long as those funds have not been converted to another use.

This ruling represents a substantial victory for Ontario’s design and construction sector as it provides some certainty for recovery of monies placed in trust should a bankruptcy be initiated.

Should you have questions about this or any other issue relating to the Construction Act and your business, do not hesitate to contact David Zurawel at dzurawel@ceo.on.ca or 416-620-1400 ext. 222.