Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1
S.C.R. 411
Her Majesty The Queen Appellant
v.
Royal Bank of Canada Respondent
Indexed as: Royal Bank of Canada v. Sparrow
Electric Corp.
File No.: 24713.
1996: June 19; 1997: February 27.
Present: La Forest, Sopinka, Gonthier, Cory,
McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for alberta
Crown -- Priority -- Employee source deductions not
paid by company in receivership -- Company’s inventory subject to fixed charge
and to Bank Act security -- Whether bank had priority to proceeds of sale of
inventory over statutory trust in favour of Her Majesty -- Bank Act, S.C. 1991,
c. 46, s. 427 -- Income Tax Act, R.S.C., 1985, c. 1
(5th Supp .), ss. 153 , 227(4) , (5) -- Personal Property Security Act,
S.A. 1988, c. P‑4.05, s. 28(1).
.
Banks and banking operations ‑‑
Security -- Company’s inventory subject to fixed charge and to Bank Act
security -- Employee source deductions not paid by company in receivership --
Whether bank had priority to proceeds of sale of inventory over statutory
trust in favour of Her Majesty -- Bank Act, S.C. 1991, c. 46, s. 427
-- Income Tax Act, R.S.C., 1985, c. 1 (5th Supp .), ss.
153 , 227(4) , (5) -- Personal Property Security Act, S.A. 1988, c. P‑4.05,
s. 28(1).
The Royal Bank secured a loan made to Sparrow Electric
with a general security agreement (GSA) covering Sparrow’s present and after‑acquired
property and with Bank Act security (BAS) created by an assignment of
inventory under s. 427 of the Bank Act . When Sparrow experienced
financial difficulties, a standstill agreement was executed. This agreement
allowed Sparrow to continue its business but permitted the bank, on default, to
appoint a receiver and enforce its security. A receiver was appointed in
November 1992 at which time it was discovered that Sparrow had not been
remitting its payroll deductions as required by s. 153 of the Income
Tax Act (ITA ). It is probable that these defaults had occurred in
1992. In January 1993, the receiver received court permission to sell
Sparrow’s assets. An amount from the proceeds of sale equivalent to that owing
the federal government was ordered to be held in trust pending resolution as to
entitlement. The bank claimed priority based on its GSA and its BAS, which
entitled it to inventory proceeds. The federal government’s claim was based on
the s. 227 ITA deemed trust provisions, which created a deemed
statutory trust in the moneys deducted from wages but not remitted to Her
Majesty.
On the first application to determine priority, the
deemed trust was held to take priority over the GSA. On a subsequent
application by the bank for a determination of whether its BAS took priority
over the deemed trust, the Court of Queen’s Bench found that the deemed trust
took priority. The Court of Appeal found that the BAS took priority over the
deemed trust. At issue here is whether the s. 227(5) ITA deemed
trust takes priority over a previously executed GSA and a previously executed
BAS with respect to the proceeds of the sale of the inventory.
Held (La Forest,
Gonthier and Cory JJ. dissenting): The appeal should be dismissed.
(1) Section 227(4) and (5) of the Income Tax Act
Although the employer, at the point of withholding,
becomes the trustee of a fund which is in law the property of its employee,
s. 227(4) ITA has the effect of making Her Majesty the beneficiary
under that trust. A conceptual difficulty arises when the tax debtor fails to
set aside moneys which are to be remitted. The subject of Her Majesty's
beneficial interest at that point becomes intermingled with the general assets
of the tax debtor and Her Majesty's claim then becomes that of a beneficiary under
a non‑existent trust. Subsections (4) and (5) of s. 227 resolve this
conceptual dilemma by clearly and unambiguously rendering amounts unremitted as
held in trust for Her Majesty. In particular, s. 227(5) is designed to, upon
liquidation, assignment, receivership or bankruptcy, seek out and attach Her
Majesty's beneficial interest to property of the debtor which is in existence
at that time. The trust is not a real trust, as its subject matter cannot be
identified from the date of the trust’s creation. However, s. 227(5) has
the effect of revitalizing the trust whose subject matter has lost all
identity. This identification of the subject matter of the trust therefore
occurs ex post facto. Her Majesty has a statutory right to access
whatever assets the employer then has, and may realize from those assets the
original trust debt. This interpretation is consistent with the scheme of
distribution under the Bankruptcy and Insolvency Act .
The s. 227(5) deemed trust operates to Her
Majesty’s benefit in a secondary manner. Under it, Her Majesty’s interest can
attach retroactively to disputed collateral if the competing security interest
has attached after the deductions giving rise to Her Majesty’s claim in fact
occurred. Conceptually, the s. 227(5) deemed trust allows that claim to
go back in time and attach its outstanding s. 227(4) interest to the
collateral before that collateral became subject to a fixed charge. The same
result occurs when a statutory lien attaches prior to the mortgaging of
disputed collateral. Here, the deductions of tax from the employees' pay
cheques occurred after the attachment of the bank's fixed charge to the
inventory, so this second aspect of s. 227(5)'s operation did not arise.
The mechanism of s. 227(5) cannot accurately be
described as a means of “tracing”; indeed, this subsection is antithetical to
tracing in the traditional sense in that it requires no link at all between the
subject matter of the trust and the fund or asset into which the subject matter
is being traced. Section 227(5) is more accurately described as a
“relaxation of the equitable tracing rules”.
Section 227(5) does not permit Her Majesty to attach
Her beneficial interest to property which, at the time of liquidation,
assignment, receivership or bankruptcy, in law belongs to a party other than
the tax debtor. Subsections (4) and (5) of s. 227 are manifestly directed
towards the property of the tax debtor, and it would be contrary to well‑established
authority to stretch the interpretation of s. 227(5) to permit the
expropriation of the property of third parties who are not specifically
mentioned in the statute.
Therefore, the proper analysis in determining whether
Her Majesty is entitled to priority pursuant to these subsections must utilize
principles of property law. The nature of the interests competing with those
of Her Majesty must be scrutinized in order to determine whether and to what
extent such interests have title in the disputed fund. If it is found that
legal title in the collateral is in the bank, and not Sparrow, Her Majesty’s
deemed trust could only attach to Sparrow's equity of redemption.
The “statutory trust” approach can be distinguished
from other legislative methods, such as an explicit “Crown priority” provision,
used to secure an interest to unremitted payroll deductions. The application
of such a provision to a priority competition can proceed without regard to the
quality of the “security interest” which competes with Her Majesty’s claim.
Such a provision simply transfers title in the collateral to Her Majesty
regardless of whose interest may compete with it, so long as its requirements
are met.
(2) Characterization of the Bank’s Interests
The bank's interest in Sparrow's inventory must be
characterized as either a floating charge or a fixed and specific charge. A
specific charge is one that, without more, fastens on ascertained and definite
property or property capable of being ascertained and defined. A floating
charge floats with the property which it is intended to affect until it
crystallizes. Crystallization occurs upon the default of the debtor and
transforms the interest into a fixed and specific charge over the inventory.
The critical significance of the characterizing of an interest as being fixed
or floating is that it describes the extent to which a creditor can be said to
have a proprietary interest in the collateral. During the period in which
a charge over inventory is floating, the creditor possesses no legal title to
that collateral and a statutory trust or lien attaching during this time will
attach to the debtor's interest and take priority over a subsequently
crystallized floating charge. A security interest characterized as a fixed and
specific charge, however, will take priority over a subsequent statutory lien
or charge because all that the lien can attach to is the debtor's equity of
redemption in the collateral.
Common law principles did not alter the effect that
legislation may have on the characterization of security interests. Here, the
Alberta Personal Property Security Act (PPSA) and the Bank Act
are determinative of the characterization of the bank's GSA and BAS,
respectively. The PPSA explicitly removes statutory trusts from its
operation and accordingly does not govern the priority competition between a
statutory trust and a security interest. The Act’s effect, however,
fundamentally changes the characterization of security interests. Generally
speaking, absent an express intention to the contrary, a security interest in
all present and after‑acquired personal property will attach when that
agreement is executed by the parties. Once attachment has occurred, the GSA
becomes in law a fixed and specific charge over the collateral. For these
reasons, the GSA held by the respondent bank must be characterized as a fixed
and specific charge with a licence to deal with the inventory that arose
because of the bank’s granting Sparrow permission to sell the encumbered
inventory. The fixed charge attached on the agreement’s execution.
Similarly, security taken under the Bank Act is
in the nature of a fixed and specific charge. The concept of the fixed charge
is correlative to the notion of a creditor’s having legal proprietary rights in
the collateral. It is misleading to suggest that s. 427 security is
in the nature of a floating charge because the bank effectively acquires legal
title. Unlike a floating charge which may apply to all property of a specified
kind held by the borrower from time to time but does not affix itself
specifically upon any particular item of property until it crystallizes upon
default by the borrower, s. 427 security is a fixed charge on each item of
assigned property held from time to time whether or not the loan is in
default. This gives a bank significantly greater rights than it would hold
under a floating charge debenture on inventory. For this reason, the security
interest of the bank in the form of BAS should be characterized as a fixed and
specific charge with a licence to sell the inventory.
The traditional concept of the fixed charge seems to
be at odds with the notion of having a proprietary right over collateral such
as after‑acquired inventory which is not yet in existence at the time the
security agreement is executed. A fixed charge over all present and future
inventory represents a proprietary interest over a dynamic collective of present
and future assets. The conception of this form of charge must change to meet
the modern realities of commercial law and in particular the legislative
provisions which have been brought to bear in this appeal. In effect, the
fixed and specific charge gives to the secured creditor the title (subject to
the debtor's equitable right of redemption) to the present inventory of the
debtor, as well as the after‑acquired inventory of the debtor. In this
way, the secured creditor becomes the legal owner of inventory as it comes into
possession of the debtor.
Where a secured creditor holds a fixed charge over a
debtor's inventory, that charge will have the effect of ensuring the creditor
has legal title to any and all inventory subject to the charge at any given time,
subject to the caveat (not operative here) that no outstanding statutory
payroll deductions had in fact been made prior to the attachment of the fixed
charge. Here, the inventory which was subject to the liquidation sale belonged
in law to the respondent bank: both under its GSA and its BAS the bank held a
fixed charge over Sparrow's inventory. Her Majesty’s beneficial interest
accordingly could only attach, before its sale, to Sparrow's equity of
redemption in the property.
(3) Licence Theory
Per Sopinka, McLachlin,
Iacobucci and Major JJ.: The security interests that the respondent has under
the Bank Act and the PPSA take priority over the deemed trust
that arises in favour of Her Majesty by operation of s. 227(4) ITA .
While the former interests are subject to a licence to sell, that licence is
not nearly so broad as to encompass the satisfaction of income tax
obligations. A licence to sell inventory authorizes at most only the
satisfaction of obligations that are immediately incidental to an actual sale
of the inventory.
The licence theory holds that a bank’s security
interest in a debtor’s inventory, whether fixed and specific, is subject to a
licence in the debtor to deal with that inventory in the ordinary course of
business. The point is that the bank’s claim to the inventory must as a
consequence give way to any debts incurred in the ordinary course of business.
In theory, a creditor who has granted a licence to sell inventory has thereby
consented to his security interest’s being subject to other obligations that
may arise “in the ordinary course of business”. The licence is thus supposed
to afford evidence of the respondent’s intention to take less than an entire
security interest in the inventory.
The licence affords no such evidence. The potential
sale of the inventory does not amount to an actual limitation of the security
interest. A great difference exists between saying, on the one hand, that if a
debtor sells inventory and applies the proceeds to a debt to a third party,
then the third party takes the proceeds free of any security interest and
saying, on the other hand, that because a third party could take the proceeds
free of any security interest, no security interest exists in the proceeds as
against that third party. A licence to sell inventory in the ordinary course
of business is a condition of the former kind. The consequent (defeasance of
the security interest) follows only if the antecedent (sale of the inventory
and application of proceeds to an obligation to a third party) is satisfied.
The security interest in the inventory disappears only if the debtor actually
sells the inventory and applies the proceeds to a debt to a third party.
In accordance with s. 28(1) PPSA, the result of
a sale of inventory is to give the purchaser an unencumbered interest in the
inventory and the licensor a continuing security interest in the proceeds of
the sale. Only if the debtor subsequently uses the proceeds to satisfy an
obligation to a third party will the proceeds be removed from the scope of the
licensor’s security interest in them. Accordingly, a security agreement with a
licence to sell creates a defeasible interest; but the event of defeasance is
the actual sale of the inventory and the actual application of the proceeds
against an obligation to a third party.
By itself, s. 28(1) PPSA does not necessarily compel
rejection of the broad interpretation of the licence to sell. However, the
maxim expressio unius est exclusio alterius is appropriately invoked
here to complete the argument. The statute prescribes certain consequences for
the security interest that follow a dealing with inventory, and in particular,
it prescribes the defeasance of the interest if the debtor actually sells the
inventory and applies the proceeds to an obligation to a third party.
Significantly, the statute does not contemplate a defeasance on the happening
of any other event. The statute occupies the field and crowds out other
possible interpretations of the licence.
Because the inventory in question was not sold
pursuant to the licence, here the licence can have had no effect on the
respondent’s security interest. What the debtor might have done with the
licence does not matter. If it were otherwise, the licence to sell inventory
would entirely eviscerate the respondent’s GSA.
The argument might be made that the deemed trust works
by deeming an actual sale of the inventory to have been made. It this were
correct, then it would not matter that the inventory was not actually sold
pursuant to the licence. However, the deeming is not a mechanism for undoing
an existing security interest, but rather a device for going back in time and
seeking out an asset that was not, at the moment the income taxes came due,
subject to any competing security interest. The deemed trust provision cannot
be effective unless it is first determined that there is some unencumbered
asset out of which the trust may be deemed. In this case the inventory was
encumbered by the GSA.
The debtor’s covenant in the GSA to pay all taxes was
not part of the licence and was merely a covenant to obey the law. It adds
nothing to s. 153(1) ITA and does not prescribe the outcome of a
priority contest.
A number of policy considerations support this
conclusion. Judicial innovation in this field risks legal uncertainty.
Inventory financiers would have to provide against the risk that their security
interest might be defeated by some rival claim. There is also a real
possibility that recognition of a broad licence theory would obliterate the PPSA
charge against inventory. If Parliament wishes to do so, it may step in and
assign absolute priority to the deemed trust. But in the absence of clear
statutory language to that effect, the bank’s GSA must prevail.
Per La Forest, Gonthier
and Cory JJ. (dissenting): The critical issue here was the scope of the
contractual licence. In particular, if the bank's consent included the right
to sell the inventory in order to pay wages, then that consent by necessity
included the right to sell inventory to remit payroll deductions. In such a
situation, Her Majesty’s interest would be able to attach to the proceeds of
the inventory and so take priority over the bank's interest.
The licence theory operates, in the context of the
statutory scheme at issue here, as an exception to the general rule that at the
time of “liquidation, assignment, receivership or bankruptcy” Her Majesty’s
interest cannot attach to property which is at that time the property of a
secured creditor. Where a secured creditor has consented to the use of its
collateral when deductions are made in order to pay the statutory deductions
which are the object of a deemed trust, that creditor has bound itself by the
statutory requirements relating to those deductions. Here, therefore, the wage
deductions at issue were made at a time when the bank had permitted the sale of
inventory in order to pay wages (and thus wage deductions), and the bank’s
inventory existent at the time of receivership can accordingly be attached
under s. 227(5).
The critical factor in the “licence to sell” argument
is the permission which must be found to have been granted with respect to the
usage of the proceeds of the disputed collateral. While licences are
often expressed in terms of a “right to sell in the ordinary course of
business”, this permission is made with respect to the usage of proceeds, which
is the proper focus of the inquiry, and not necessarily the circumstances of
sale. Here, Sparrow was permitted to sell its inventory in the ordinary course
of its business and “use” the proceeds generated therefrom.
The licence to sell inventory in the ordinary course
of business in this case necessarily included a licence to sell inventory to
pay wages, and remit wage deductions, in the course of Sparrow’s business.
Where, as here, the secured party has security over the majority of the assets
of the debtor, the security interest over the inventory must permit the debtor
to sell the inventory and put it to the general use of its business, including
towards the payment of wages. The scope of the licence can be ascertained
either from the express terms of the security agreement or from the nature of
the agreement and the conduct of the parties. The licence here was to sell
inventory in the “ordinary course of [Sparrow's] business . . . and
use [the proceeds]” which renders it of such a quality as to include a right to
use the proceeds to pay wages. A licence to sell inventory may in certain
circumstances be circumscribed so as not to include a right to use the proceeds
to pay wages.
The true test of whether the licence to sell inventory
includes the right to pay wages is a matter of interpreting the contractual
arrangement between the parties. The focus is not so much on the circumstances
of the selling of inventory, but rather the permitted usage of the proceeds of
inventory. Where the licence has a limited scope, that licence may not include
the right to use proceeds to pay wages. However, the expression of a limited
use for proceeds of inventory cannot prevail if the arrangement between the
parties is such as to allow, in practice, the debtor to use the inventory
proceeds in the course of its business. The test should be whether the debtor
had the freedom to use these funds in the ordinary course of business as
opposed to being under an obligation to remit them to the secured party.
The GSA contained an express licence permitting
Sparrow to sell inventory in the course of its business and use the proceeds
available; the BAS contained an implied licence to this effect. While it is
true that the GSA contained a trust proceeds clause, this clause cannot have
the effect of limiting the scope of the licence where the real arrangement
between the parties was, as expressly stated, that Sparrow could use the
proceeds of inventory in the course of its business. The bank in this case was
not a small inventory financier who required Sparrow to remit proceeds of
inventory to it immediately. To the contrary, the bank was a large scale
lender who permitted Sparrow to use inventory sales to maintain the viability
of its enterprise. Under the licence at issue here, the bank permitted Sparrow
to sell inventory to pay wages and, necessarily, payroll deduction obligations.
The appellant’s s. 227(5) deemed trust must take
priority over the bank’s security interests in the disputed collateral.
The trust fund representing the deducted amounts, while without identified
subject matter from the date of its inception, is capable of identifying
property subject to that trust ex post facto. This result is
not precluded with respect to the BAS by virtue of s. 428(1) of the Bank
Act . Although s. 428(1) secures the respondent bank’s proprietary
right to the disputed collateral, the bank nevertheless consented to the
divestment of this interest. Such a waiver of priority renders s. 428(1)
of no assistance to the bank.
The licence theory, in addition to providing certainty
in disputes between consensual and non‑consensual security interests,
achieves fairness in commercial law. In essence, the bank is willing to accept
the benefits of Sparrow’s non‑payment of statutory deductions and has
permitted the use of its collateral to pay these deductions, but refuses to
accept the burden of Sparrow’s unlawful action at the time of its
receivership. It should be the policy of the law that the respondent bank
be held accountable for Sparrow’s outstanding statutory obligations. The
licence theory ensures that in appropriate circumstances this result will
obtain.
The licence theory does not go so far as to mean that
every subsequent claim should prevail over the GSA because every rival claim
might have to be satisfied out of the proceeds of a hypothetical sale of the
inventory. The consent to pay wages is a necessary but not sufficient
condition. It did not simpliciter lead to the conclusion that Her
Majesty’s interest must prevail. What is significant is that the bank
consented to payment of wages, including deductions, out of inventory which, at
the time of the deductions and upon actual payment of wages, were deemed by
statute to be taken out of the estate of the debtor. The unique nature of the statutory provisions
applicable to wage deductions, and the bank’s consent thereto, are integral to the success of the s. 227(5) claim in the case at bar. In this way, the
licence theory is circumscribed in its ability to defeat prior secured
interests.
In addition, the licence theory as applied here is not
inimical to the integrity of commercial law. It operates narrowly, in
conjunction with unique statutory provisions, so as to actualize legally
performed obligations. It does not create uncertainty in commercial
transactions.
Cases Cited
By Iacobucci J.
Referred to: R. in
Right of B.C. v. F.B.D.B., [1988] 1 W.W.R. 1; Alberta (Treasury
Branches) v. M.N.R.; Toronto-Dominion Bank v. M.N.R., [1996] 1 S.C.R. 963.
By Gonthier J. (dissenting)
Royal Bank v. Sparrow Electric Corp., Alberta Court of Queen’s Bench, Edmonton, November 24, 1993,
unreported; R. in Right of B.C. v. F.B.D.B., [1988] 1 W.W.R. 1; Dauphin
Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182; Bank
of Montreal v. Hall, [1990] 1 S.C.R. 121; Board of Industrial Relations
v. Avco Financial Services Realty Ltd., [1979] 2 S.C.R. 699; Royal Bank
of Canada v. G.M. Homes Inc. (1984), 52 C.B.R. (N.S.) 244; Roynat Inc.
v. Ja‑Sha Trucking & Leasing Ltd., [1992] 2 W.W.R. 641; Ford
Motor Co. of Canada Ltd. v. Manning Mercury Sales Ltd. (Trustee of),
[1994] 6 W.W.R. 372; National Bank of Canada v. Director of Employment
Standards (1986), 5 P.P.S.A.C. 326; Abraham v. Coopers & Lybrand
Ltd. (1993), 13 O.R. (3d) 649; Armstrong v. Coopers & Lybrand Ltd.
(1986), 53 O.R. (2d) 468, aff'd (1987), 61 O.R. (2d) 129, leave to appeal
refused, sub nom. National Bank of Canada v. Armstrong, [1988] 1 S.C.R.
xii; Manitoba (Minister of Labour) v. Omega Autobody Ltd. (Receiver of)
(1989), 59 D.L.R. (4th) 34; Re Deslauriers Construction Products Ltd.,
[1970] 3 O.R. 599; Pembina on the Red Development Corp. Ltd. v. Triman
Industries Ltd. (1991), 85 D.L.R. (4th) 29; Alberta (Treasury Branches)
v. M.N.R.; Toronto-Dominion Bank v. M.N.R., [1996] 1 S.C.R. 963; Friesen
v. Canada, [1995] 3 S.C.R. 103; Illingworth v. Houldsworth,
[1904] A.C. 355; Re Urman (1983), 44 O.R. (2d) 248; North Sky Trading
Inc. (Bankrupt), Re (1994), 158 A.R. 117; Royal Bank of Canada v.
Workmen's Compensation Board of Nova Scotia, [1936] S.C.R. 560; C.I.B.C.
v. Klymchuk (1990), 74 Alta. L.R. (2d) 232.
Statutes and Regulations Cited
Bank Act, R.S.C. 1927, c. 12, s. 88.
Bank Act, R.S.C., 1985, c. B-1, ss. 2(1), 178, 179(1), 185(2), 186(2).
Bank Act, S.C. 1991, c. 46, ss. 425(1) “goods, wares and
merchandise”, 427(1), (2), 428(1), 434(2), 435(2).
Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3, s. 67 [am. 1992, c. 27, s.
33].
Canada Pension Plan, R.S.C. 1970, c. C‑5.
Canada Pension Plan, R.S.C., 1985, c. C‑8, s. 23(3) , (4) .
Canada Pension Plan, S.C. 1964‑65, c. 51, s. 24(3), (4).
Income Tax Act, R.S.C., 1985, c. 1 (5th Supp .), ss. 153(1) (a),
(3) , 224(1.2) [ad. 1987, c. 46, s. 66; am. 1990 c. 34, s.1], (1.3)
[ad. 1987, c. 46, s.66], 227(4), (5).
Personal Property Security Act, S.A. 1988, c. P‑4.05, ss. 4(a), 10(1), 12(1),
13(1), 28(1).
Personal Property Security Act, S.B.C. 1989, c. 36.
Personal Property Security Act, R.S.O. 1990, c. P.10.
Unemployment Insurance Act,
1971, S.C. 1970‑71‑72, c. 48.
Unemployment Insurance Act, R.S.C., 1985, c. U‑1, s. 57(2), (3).
Workmen's Compensation Act, R.S.N.S. 1923, c. 129, s. 79(2).
Authors Cited
Cuming, Ronald C. C. “Commercial
Law -- Floating Charges and Fixed Charges of After‑Acquired Property: The
Queen in the Right of British Columbia v. Federal Business Development
Bank” (1988), 67 Can. Bar Rev. 506.
Cuming, Ronald C. C., and
Roderick J. Wood. Alberta Personal Property Security Act Handbook, 2nd
ed. Toronto: Carswell, 1993.
Cuming, Ronald C. C., and Roderick
J. Wood. British Columbia Personal Property Security Handbook,
2nd ed. Toronto: Carswell, 1993.
Moull, William D. “Security
Under Sections 177 and 178 of the Bank Act ” (1986), 65 Can. Bar Rev.
242.
Waters, D. W. M. Law of Trusts
in Canada, 2nd ed. Toronto: Carswell, 1984.
Wood, Roderick J. “The Floating Charge in Canada”
(1989), 27 Alta. L. Rev. 191.
Wood, Roderick J. “Revenue
Canada's Deemed Trust Extends Its Tentacles: Royal Bank of Canada v.
Sparrow Electric Corp.” (1995), 10 B.F.L.R. 429.
Wood, Roderick J., and Michael
I. Wylie. “Non‑Consensual Security Interests in Personal Property”
(1992), 30 Alta. L. Rev. 1055.
Ziegel, Jacob S. “Symposium:
Recent and Prospective Developments in the Personal Property Security Law Area”
(1985), 10 Can. Bus. L.J. 131.
Ziegel, Jacob S., Benjamin Geva
and R. C. C. Cuming. Commercial and Consumer Transactions, Rev. 2nd
ed. Toronto: Emond Montgomery, 1990.
APPEAL from a judgment of the Alberta Court of Appeal
(1995), 28 Alta. L.R. (3d) 153, 165 A.R. 132, 89 W.A.C. 132, [1995] 6 W.W.R.
718, 33 C.B.R. (3d) 34, 10 P.P.S.A.C. (2d) 1, allowing an appeal from
judgments of Agrios J. (1993), 19 Alta. L.R. (3d) 183, 10 P.P.S.A.C. (2d) 1, at
p. 3, [1995] 1 C.T.C. 101, and (1994), 21 Alta. L. R. (3d) 275, 156 A.R. 187,
[1994] 9 W.W.R. 338. Appeal dismissed, La Forest, Gonthier and Cory JJ.
dissenting.
Edward R. Sojonky,
Q.C., and Michael J. Lema, for the appellant.
Ray C. Rutman, for
the respondent.
The reasons of La Forest, Gonthier and Cory JJ. were
delivered by
1 Gonthier J. (dissenting) -- This case involves a
determination of priority between a deemed statutory trust and various security
instruments in regard to the proceeds of a liquidation sale of inventory. In
particular, the appeal requires a determination of the priority status of Her
Majesty's deemed trust under s. 227(4) and (5) of the Income Tax Act,
R.S.C., 1985, c. 1 (5th Supp .) (hereinafter “ITA ”), these
provisions becoming operative in this case because of the misappropriation of
unremitted payroll deductions lawfully belonging to Her Majesty. In
competition to this claim, the Royal Bank of Canada asserts priority under both
a general security agreement and an assignment of inventory under s. 427
of the Bank Act, S.C. 1991, c. 46 .
I - Facts
2 The debtor, Sparrow
Electric Corporation (hereinafter “Sparrow”), carried on business as an
electrical contractor in Alberta. The enterprise was of a substantial size,
employing 200 to 300 employees in its business operations. To finance these
operations, Sparrow borrowed heavily from the respondent Royal Bank of Canada
(hereinafter the “bank”). The bank secured Sparrow's borrowing with various
forms of security, covering most of the assets utilized in Sparrow's business.
Of particular relevance to this appeal, however, the bank held a general
security agreement over all of Sparrow's present and after-acquired personal
property, as well as an assignment of inventory under s. 178 (now
s. 427 ) of the Bank Act, R.S.C., 1985, c. B-1.
3 In 1992, it became apparent
to the bank that Sparrow was having financial difficulties. On two occasions,
August 5, 1992 and September 30, 1992, the bank wrote to
Sparrow advising its management that Sparrow was in default on its loan
obligations. On October 16, 1992, in order to give Sparrow some time
to correct its default situation, the bank and Sparrow entered into a
“Standstill Agreement”. This agreement permitted Sparrow to continue carrying
on business under the proviso that, should Sparrow's position fail to improve,
the bank would be entitled to appoint a receiver and enforce its security.
4 Sparrow's financial
position did not improve. For this reason, on November 19, 1992, the
bank appointed a receiver to take over Sparrow's business, and on December 8, 1992,
the bank successfully petitioned Sparrow into bankruptcy. The order appointing
the receiver empowered the receiver to, among other things, carry on Sparrow’s
business as it deemed necessary. The receiver did in fact carry on Sparrow’s
business for some time, employing approximately 200 employees in order to
fulfil Sparrow's outstanding contractual obligations. These employees were
terminated effective January 15, 1993.
5 In addition to the failure
to pay the loan obligations which inevitably led to its bankruptcy and
receivership, Sparrow had failed to honour other obligations in its attempt to
remain in business. In particular, Sparrow failed to remit payroll deductions
as required by s. 153 ITA . While the record does not disclose the
exact date of these failures, it appears that the first instance of
non-remittance could have occurred no later than August 7, 1992.
Having regard to the amount of payroll deductions outstanding as of August 7,
and to the average number of Sparrow's employees on the payroll, we can
conclude that the actual payroll deductions which give rise to Her Majesty's
claim in all likelihood occurred some time in the year 1992. In any
event, by the time of its receivership, in addition to substantial amounts
outstanding to the bank, Sparrow was indebted to the appellant (“Her Majesty”)
in the amount of $625,990.86 for unremitted income tax payroll deductions.
6 On
January 12, 1993, the receiver applied to the Alberta Court of
Queen's Bench for authorization to sell various Sparrow assets. Part of the
pool of assets to be sold included Sparrow’s inventory which is the subject of
this appeal. On January 15, 1993, Wilson J. authorized both the
sale of the assets and remittance of its proceeds to the bank in partial
repayment of its claims, but ordered that an amount equal to Her Majesty’s
claim for unremitted payroll deductions be held in trust pending a resolution
as to the entitlement to this portion of the proceeds. At some later date, the
assets were in fact sold, and the amount of $625,990.86 set aside. It has been
held in judicial proceedings that the amount held is constituted entirely of
proceeds from inventory (Royal Bank v. Sparrow Electric Corp., Alberta
Court of Queen’s Bench, Edmonton, November 24, 1993, unreported). That ruling
is not at issue in this appeal.
7 At present, the fund being
held and constituting the proceeds of inventory is sufficient to satisfy either
Her Majesty's claim, or part of the outstanding claims owing to the bank. The
determination of priority in this appeal will therefore be determinative as to
which party is entitled to the entirety of the disputed fund.
II - The Competing Interests
8 For convenience, I will at
the outset outline the claims of the bank and of Her Majesty which are advanced
as being entitled to the proceeds of the inventory.
(A) The Bank
9 The respondent bank
advances two distinct security instruments in order to establish its claim to
the disputed fund. First, the bank argues that its general security agreement
(“GSA”), executed on February 25, 1992, and perfected pursuant to the
Alberta Personal Property Security Act, S.A. 1988, c. P‑4.05
(“PPSA”), is entitled to priority. By this agreement, Sparrow assigned
to the bank a security interest in all of its present and after-acquired
personal property, including “all inventory of whatever kind and wherever
situate” (para. 1(a)(i)). In addition, para. 7 of that agreement
provided that proceeds of the collateral received by Sparrow would be received
and held in trust for the bank. Of significance to this appeal, however,
para. 4 of the GSA contained two express covenants, providing:
So long as this Security Agreement
remains in effect Debtor covenants and agrees:
(a) to defend the Collateral
against the claims and demands of all other parties claiming the same or an
interest therein; to keep the Collateral free from all Encumbrances ...; provided
always that, until default, Debtor may, in the ordinary course of Debtor's
business, sell or lease inventory and, subject to Clause 7 hereof, use
Money available to Debtor,
...
(e) to pay all taxes,
rates, levies, assessments and other charges of every nature which
may be lawfully levied, assessed or imposed against or in respect of
Debtor or Collateral as and when the same become due and payable; [Emphasis
added.]
Additionally, under the credit facilities agreement between Sparrow
and the bank, dated January 22, 1992, Sparrow covenanted as follows:
(3) it will promptly
pay when due all business, income and other taxes properly levied on its
operations and property and remit all statutory employee deductions when due;
[Emphasis added.]
10 The bank's second claim is
that its Bank Act security (“BAS”) entitles it to priority to the
inventory proceeds. That security instrument was executed on two occasions,
January 29, 1990 and December 12, 1990. Under the General
Assignment, Sparrow assigned to the bank, inter alia, “all goods
inventory, [and] stock-in-trade” as continuing security for the payment of
loans to the bank. In addition, as part of the Agreement as to Loans and
Advances, Sparrow granted security in both its inventory and its proceeds. At
the time these instruments were executed, s. 178 of the Bank Act,
R.S.C., 1985, c. B-1, was in effect. However, on June 1, 1992,
that Act was replaced with the Bank Act, S.C. 1991, c. 46 . The
relevant portions of these two acts are identical. However, as the facts
giving rise to this case occurred while the latter Act was in force, I will
refer to the provisions of this new Act for the purposes of this appeal. As
such, the bank's claim for security under its BAS is grounded in s. 427
(formerly s. 178 ) of the Bank Act , which provides:
427.
(1) A bank may lend money and make advances
(a) to any wholesale or retail purchaser or
shipper of, or dealer in, products of agriculture, products of aquaculture,
products of the forest, products of the quarry and mine, products of the sea,
lakes and rivers or goods, wares and merchandise, manufactured or
otherwise, on the security of such products or goods, wares and merchandise and
of goods, wares and merchandise used in or procured for the packing of such
products or goods, wares and merchandise,
...
(2) Delivery of a document giving
security on property to a bank under the authority of this section vests in the
bank in respect of the property therein described
(a) of which the person giving security is the
owner at the time of the delivery of the document, or
(b) of which that person becomes the owner at
any time thereafter before the release of the security by the bank, whether or
not the property is in existence at the time of the delivery,
the following rights and powers, namely,
(c) if the property is property on which
security is given under paragraph (1)(a), (b), (g), (h),
(i), (j) or (o), under paragraph (1)(c) or (m)
consisting of aquacultural implements, under paragraph (1)(d) or (n)
consisting of agricultural implements or under paragraph (1)(p)
consisting of forestry implements, the same rights and powers as if the bank
had acquired a warehouse receipt or bill of lading in which that property was
described, ...
...
and all such property in respect of which such rights
and powers are vested in the bank under this section is for the purposes of
this Act property covered by the security. [Emphasis added.]
Section 425(1) (formerly contained within s. 2(1))
provides that:
425.
(1) ...
“goods, wares and merchandise”
includes products of agriculture, products of aquaculture, products of the
forest, products of the quarry and mine, products of the sea, lakes and rivers,
and all other articles of commerce; [Emphasis added.]
And s. 435(2) (formerly s. 186(2)) provides:
435.
...
(2) Any warehouse receipt or bill
of lading acquired by a bank under subsection (1) vests in the bank, from
the date of the acquisition thereof,
(a) all the right and title to the warehouse receipt
or bill of lading and to the goods, wares and merchandise covered thereby of
the previous holder or owner thereof; and
(b) all the right and title to the goods,
wares and merchandise mentioned therein of the person from whom the goods,
wares and merchandise were received or acquired by the bank, if the warehouse
receipt or bill of lading is made directly in favour of the bank, instead of to
the previous holder or owner of the goods, wares and merchandise.
11 In addition, the respondent
directed this Court's attention to s. 428(1) (formerly s. 179(1)),
which it was submitted affected the priority position of the bank's BAS:
428.
(1) All the rights and powers of a bank in respect of the property mentioned
in or covered by a warehouse receipt or bill of lading acquired and held by the
bank, and the rights and powers of the bank in respect of the property covered
by a security given to the bank under section 427 that are the same as if the
bank had acquired a warehouse receipt or bill of lading in which that property
was described, have, subject to subsection 427(4) and subsections (3) to
(6) of this section, priority over all rights subsequently acquired in, on
or in respect of that property, and also over the claim of any unpaid vendor.
[Emphasis added.]
Finally, s. 434(2) (formerly s. 185(2)) provides:
434.
...
(2) Nothing in any charter, Act
or law shall be construed as ever having been intended to prevent or as
preventing a bank from acquiring and holding an absolute title to and in
any mortgaged or hypothecated real property, whatever the value thereof, or
from exercising or acting on any power of sale contained in any mortgage given
to or held by the bank, authorizing or enabling it to sell or convey any
property so mortgaged. [Emphasis added.]
12 While no provision in the BAS
explicitly permitted Sparrow to sell its inventory, the respondent bank has
conceded that such a licence existed, as a practical matter, as between the
parties. In any event, I would have thought that once a licence to sell
inventory had been granted under the GSA, it would be impossible to grant a
more restricted licence to deal with the same collateral under the
provisions of the BAS.
(B) Her Majesty's Interest
13 Her Majesty’s claim arises
under the s. 227 deemed trust provisions of the ITA .
Section 153(1)(a) of that Act requires employers to withhold from
the pay cheques of its employees and remit to the Receiver General amounts on
account of the payee's tax for the year:
153.
(1) Every person paying at any time in a taxation year
(a) salary or wages or other remuneration,
...
shall deduct or withhold therefrom such amount as may
be determined in accordance with prescribed rules and shall, at such
time as may be prescribed, remit that amount to the Receiver General on
account of the payee's tax for the year.... [Emphasis added.]
Such amounts are deemed to be held in trust for Her Majesty by
virtue of s. 227(4) and (5) ITA , which provide:
227.
...
(4) Every person who deducts or
withholds any amount under this Act shall be deemed to hold the amount so
deducted or withheld in trust for Her Majesty.
(5) Notwithstanding any provision
of the Bankruptcy Act, in the event of any liquidation, assignment,
receivership or bankruptcy of or by a person, an amount equal to any amount
(a) deemed by subsection (4) to be held in
trust for Her Majesty, ...
...
shall be deemed to be separate from and form no part
of the estate in liquidation, assignment, receivership or bankruptcy, whether
or not that amount has in fact been kept separate and apart from the person's
own moneys or from the assets of the estate.
As of June 15, 1994, these provisions have been repealed
and replaced by a revised s. 227(4) : S.C. 1994, c. 21,
s. 104(1). However, as this amendment was not effective at the time the
facts of this appeal arose, I decline to comment on the application of the new
s. 227(4) to this case.
III - Judgments of the Courts Below
Alberta Court of Queen's Bench (1993), 19 Alta. L.R. (3d) 183
14 The first application
brought to determine the priority over the inventory proceeds involved the
competing claims under the GSA advanced by the bank, and Her Majesty's deemed
trust. Agrios J. held that the deemed trust took priority over the GSA.
In characterizing the statutory trust, Agrios J. concluded at p. 189
that the trust attaches to “whatever assets are left” upon bankruptcy. With
regard to the GSA security interest, Agrios J. was of the view that it
took the form of a fixed charge on the inventory with a licence to sell in the
ordinary course of business. However, this latter characterization was not
necessary to reach his decision, as the learned chambers judge ultimately
reasoned, at p. 188, “[w]hether the charge is floating or fixed, if there
is an ability to deal with an asset such as inventory, the asset becomes
exposed to the normal market incidents of carrying on business”. Relying on
the decision of McLachlin J.A. (as she then was) in R. in Right of B.C.
v. F.B.D.B., [1988] 1 W.W.R. 1 (B.C.C.A.) (hereinafter “FBDB”),
Agrios J. found that a normal incident of selling inventory was the
payment of statutory liens. The sale of the inventory therefore permitted the
statutory trust to attach.
Alberta Court of Queen's Bench (1994), 21 Alta. L.R. (3d) 275
15 The bank subsequently
applied for a determination of whether their BAS over Sparrow's inventory took
priority over Her Majesty's deemed trust. For substantially similar reasons,
Agrios J. held that the deemed trust once again took priority. Whether
the BAS could be characterized as a fixed charge with a licence to sell, or a
floating charge, the sale of the inventory subjected the bank's interest in it
to the “normal incidents of business” (at p. 283). And, in Agrios J.'s
view, one of these incidents was the paying of wages and withholdings. As
these proceeds were impressed with the deemed trust, whatever interest the bank
had could not attach to them, as they were no longer the property of Sparrow.
Alberta Court of Appeal (1995),
28 Alta. L.R. (3d) 153
16 Both the decisions of
Agrios J. were appealed to the Alberta Court of Appeal. As such, the
priority of both the GSA and the BAS were at issue before that court. However,
the Court of Appeal, unanimously deciding to dispose of the appeal solely on
the grounds that the BAS took priority over the statutory trust, neither heard
oral argument nor ruled with regard to the priority of the GSA.
17 The Court of Appeal began
with the premise that BAS was a fixed and specific charge transferring legal
title to the bank and not a floating charge over inventory. For this
proposition, the court relied upon two judgments of this Court, Dauphin
Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182,
and Bank of Montreal v. Hall, [1990] 1 S.C.R. 121, both decisions which
the court considered binding upon it. As the claim of Her Majesty arose
subsequent to the execution of the BAS, in the court's opinion, the deemed
trust could have nothing to attach to. In addition, the court rejected the
argument that the inventory was subject to a licence to sell which would
provide Her Majesty with an opportunity to attach its interest. The Court of
Appeal found FBDB, supra, relied upon by Agrios J. to be
distinguishable on the basis that the intimacy in that case between the sale of
inventory and the statutory trust was not present in the case before it. In
contrast, in the present case, the court found no conceptual or evidentiary
link between the sale of inventory and the withholding of payroll deductions.
In any event, the court found that any licence to sell inventory only lasted
until default, and as the sale in this case occurred well after any default by
Sparrow, the licence must therefore have been extinguished at the relevant
time. For these reasons, the Court of Appeal found that the BAS took priority
over Her Majesty's deemed trust.
IV - Issues
18 There are two issues to be
resolved in this appeal: (1) whether, on the facts of this case, Her Majesty's
s. 227(5) ITA deemed trust takes priority over a previously
executed GSA with respect to the proceeds of the sale of inventory; and (2)
whether, on the facts of this case, Her Majesty's s. 227(5) ITA
deemed trust takes priority over a previously executed BAS with respect to the
proceeds of the sale of inventory?
V - Analysis
(A) Introduction
19 The law reports are replete
with cases involving competing claims between statutory liens and deemed
trusts, such as the one found in s. 227 ITA , and other previously
executed consensual security interests: Dauphin Plains Credit Union Ltd. v.
Xyloid Industries Ltd., supra; Board of Industrial Relations v.
Avco Financial Services Realty Ltd., [1979] 2 S.C.R. 699; Royal Bank of
Canada v. G. M. Homes Inc. (1984), 52 C.B.R. (N.S.) 244 (Sask. C.A.); Roynat
Inc. v. Ja-Sha Trucking & Leasing Ltd., [1992] 2 W.W.R. 641 (Man.
C.A.); FBDB, supra; Ford Motor Co. of Canada Ltd. v. Manning Mercury
Sales Ltd. (Trustee of), [1994] 6 W.W.R. 372 (Sask. Q.B.); National Bank
of Canada v. Director of Employment Standards (1986), 5 P.P.S.A.C. 326
(Ont. Div. Ct.); Abraham v. Coopers & Lybrand Ltd. (1993), 13 O.R.
(3d) 649 (Gen. Div.) (under appeal); Armstrong v. Coopers & Lybrand Ltd.
(1986), 53 O.R. (2d) 468 (H.C.), aff'd (1987), 61 O.R. (2d) 129 (C.A.), leave
refused, sub nom. National Bank of Canada v. Armstrong, [1988] 1 S.C.R.
xii. The ubiquitousness of this legal dilemma in our courts speaks no doubt,
at least in part, to the prevalence of the unfortunate factual situation which
such statutory trusts and liens were meant to counter. Namely, such deemed trusts
or liens are devices which legislators often employ in order to recover moneys
which ought to have lawfully been paid to them but have been unlawfully
misappropriated by a debtor who subsequently encounters financial difficulty
and is forced into winding up its business, e.g., Canada Pension Plan,
R.S.C., 1985, c. C‑8, s. 23(3) and (4) ; Unemployment
Insurance Act, R.S.C., 1985, c. U‑1, s. 57(2) and (3); and
the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp .), s. 227(4)
and (5) . Indeed, it is perhaps more accurate to speculate that this sort of
misappropriation of public funds is often a manifestation of an
already-existing financial difficulty in a debtor's business, as a debtor
foregoes statutory payments as required of it in order to increase artificially
its supply of working capital.
20 At the same time that
legislators have sought to protect the fiscal integrity of public institutions
through the devices of statutory trusts and liens, however, they have also
endeavoured to protect the security interests of those private institutions who
are involved in providing credit to Canadian businesses. For example, the Bank
Act has historically provided for the protection of the collateral of
banking institutions. The current provision of the Bank Act granting a
security interest in a debtor's inventory, s. 427 , can be traced back over
one hundred years to the enactment of its predecessor section, s. 74 , in
1890 (S.C. 1890, c. 31). The historical and societal importance of this
form of security was observed by this Court in Hall, supra,
where, at p. 139, La Forest J. commented that “[i]n a word, the
creation of the Bank Act security interest has been a key factor in the
evolution of banking in this country”. Later, at p. 140,
La Forest J. concluded:
The above considerations establish,
to my satisfaction, that the s. 178 security interest, which originated as
a policy response to structural deficiencies in the lending regimes of the
nascent Canadian economy, has, since its inception, played a primordial role
in facilitating access to capital by several groups that play a key role in the
national economy. [Emphasis added.]
21 More recently, provincial
legislatures have moved to protect secured creditors generally through the
enactment of personal property security legislation: e.g. Personal Property
Security Act, R.S.O. 1990, c. P.10; Personal Property Security Act,
S.B.C. 1989, c. 36; and the PPSA. These statutory regimes have
been implemented to increase certainty and predictability in secured
transactions through the creation of a coherent system of priorities: Ronald
C. C. Cuming and Roderick J. Wood, British Columbia Personal Property
Security Act Handbook (2nd ed. 1993), at pp. 4‑5; G.M.
Homes Inc., supra, at p. 252. The benefits of such certainty in
commercial transactions, on basic economic principles, are intended to accrue
to the health of the economy in general.
22 It can be seen from the
foregoing, therefore, that the priority competition between statutory trusts
and consensual security interests represents, in a broad sense, a clash between
conflicting legislative objectives. To this extent, then, a resolution of the
priority competition in the present case requires a sensitivity to the
differing legislative objectives here at play. In particular, however, to the
extent that the aim of personal property security regimes is to effect certainty
in commercial transactions, the interpretation by the courts of such
legislation and the development of the jurisprudence generally in this area
must, to every extent possible, seek to achieve predictable results.
23 It has been unfortunate that
the development of the case law, to this point, has not inspired the degree of
certainty which is so manifestly desirable in this area of commercial law.
Indeed, the jurisprudence has been referred to as a “troubled area of the law”
(Manitoba (Minister of Labour) v. Omega Autobody Ltd. (Receiver of)
(1989), 59 D.L.R. (4th) 34 (Man. C.A.), at p. 36), and has been the subject of,
at times, scathing academic criticism (Roderick J. Wood, “Revenue Canada's
Deemed Trust Extends Its Tentacles: Royal Bank of Canada v. Sparrow
Electric Corp.” (1995), 10 B.F.L.R. 429, and Roderick J. Wood and
Michael I. Wylie, “Non-Consensual Security Interests in Personal Property”
(1992), 30 Alta. L. Rev. 1055). The general view, I believe, has been
summarized by Professor Wood in his most helpful case commentary, “Revenue
Canada's Deemed Trust Extends Its Tentacles: Royal Bank of Canada v.
Sparrow Electric Corp.”, supra, at p. 430: “[i]t is somewhat
of an embarrassment that after more than two decades we still cannot
confidently predict the outcome of a priority dispute between a deemed trust
and a security interest”. The above judicial and academic commentary, I
believe, invites this Court to proceed steadfastly towards the pronouncement of
clear principles to be applied in determining the priority between statutory
trusts and consensual security interests.
24 With these general
observations in mind, I will now proceed to analyze the specific aspects of the
competing claims advanced by the parties in the present case.
(B) The Nature of Section 227(4) and (5) Statutory
Trusts
25 Section 153(1) (a) ITA
places an affirmative duty upon employers to deduct and withhold amounts from
their employees' pay cheques, and remit those withholdings to the Receiver
General on account of the employees' tax payable. By virtue of s. 153(3) ITA ,
these withholdings are deemed to become the property of the employee:
153. ...
(3) When an amount has been
deducted or withheld under subsection (1), it shall, for all the purposes
of this Act, be deemed to have been received at that time by the person to whom
the remuneration, benefit, payment, fees, commissions or other amounts were
paid.
In a perfect world, these deductions would be made, a cash fund
would be set aside by the employer, and the withheld amounts would be promptly
remitted to the Receiver General when due. The deducted amounts, lawfully the
property of the employee, would in this way be transferred to Her Majesty
to be set against his overall tax payable.
26 As a practical reality,
however, these deductions are often not remitted as required under the ITA .
Instead, the withholdings are commonly made solely as a book entry, and therefore
the deduction of taxes from wages becomes merely a notional transaction; no
cash is actually set aside for remittance and, often, the deductions are not
transferred to the Receiver General: see, e.g., Re Deslauriers Construction
Products Ltd., [1970] 3 O.R. 599 (C.A.), at p. 601. It is at this point
which a business becomes indebted to Her Majesty for the amount of moneys
only fictionally deducted. I hasten to add, however, that while it can be said
Her Majesty at this point becomes de facto, if not de jure,
a creditor of the non-remitting employer, the arrangement is dissimilar to an
ordinary debtor-creditor situation in two fundamental respects. First, in
contrast to usual negotiated credit arrangements, this transaction is of
manifestly a non-consensual nature. Second, by virtue of s. 153(3) , the
debtor can in law be considered to be utilizing an asset which is the property
of its employees. In this sense, it is not inaccurate to characterize the
non-remittance of payroll deductions as a “misappropriation” of the property of
another. Indeed, the authorities, correctly in my view, commonly refer to the
conduct of the tax debtor in this manner: Roynat, supra, at p.
646, per Twaddle J.A.; and Pembina on the Red Development Corp.
Ltd. v. Triman Industries Ltd. (1991), 85 D.L.R. (4th) 29 (Man. C.A.), at
p. 48, per Lyon J.A. dissenting.
27 The economic reality of this
sort of misappropriation of statutory deductions is artificially to increase
the working capital of the tax debtor. By foregoing a cash payment to
Her Majesty in the amount of the payroll deductions, the tax debtor is
able to utilize the freed resources elsewhere in its business. The effect of
non-remittance was summarized by Lyon J.A. in his dissenting reasons in Pembina
on the Red Development, supra, at p. 48:
... either the tax debtor used the misappropriated
deductions for its own purposes or the pool of moneys available for
distribution to the tax debtor's creditors ... has been increased by the amount
which the tax debtor failed to remit to the Receiver-General.
28 It is against the backdrop
of this unfortunate factual scenario that the provisions of s. 227(4) and
(5) can be seen to have been enacted. While it can be said that at the point
of withholding the employer becomes the trustee of a fund which is in law the
property of its employee, s. 227(4) has the effect of making
Her Majesty the beneficiary under that trust. I agree with the
observation of the mechanics of s. 227(4) made by Twaddle J.A. in Roynat,
supra, at p. 646, where he states:
Although [s. 227(4) ] calls the trust created by
it a deemed one, the trust is in truth a real one. The employer is required to
deduct from his employees' wages the amounts due by the employees under the
statute. This money does not belong to the employer anymore. It belongs to
the employees. The employer holds it in a statutory trust to satisfy their
obligations.
The conceptual difficulty arises, of course, when the tax debtor
fails to set aside moneys which are to be remitted. At this point, the subject
of Her Majesty's beneficial interest becomes intermingled with the general
assets of the tax debtor. As Twaddle J.A. rightly observed in Roynat,
supra, at p. 646, “Her Majesty's claim ... then be[comes] that of a
beneficiary under a non-existent trust”. In short, the misappropriation of
statutory deductions conceptually problematizes the legal vehicle -- the
concept of the trust -- which Parliament has invoked in order to regain the
moneys lawfully owed to Her Majesty.
29 This conceptual dilemma is
resolved by s. 227(5) . That provision states that:
227.
...
(5) Notwithstanding any provision
of the Bankruptcy Act, in the event of any liquidation, assignment,
receivership or bankruptcy of or by a person, an amount equal to any amount
(a) deemed by subsection (4) to be held
in trust for Her Majesty, ...
...
shall be deemed to be separate from and form no part
of the estate in liquidation, assignment, receivership or bankruptcy, whether
or not that amount has in fact been kept separate and apart from the person's
own moneys or from the assets of the estate.
The effect of s. 227(5) naturally falls to be determined through a
proper interpretation of the language contained in that subsection.
30 This Court recently had
occasion to review the principles of law to be applied to the interpretation of
tax legislation. In Alberta (Treasury Branches) v. M.N.R.; Toronto-Dominion
Bank v. M.N.R., [1996] 1 S.C.R. 963, at pp. 975-76, Cory J.
quoted this Court's decision in Friesen v. Canada, [1995] 3 S.C.R. 103,
at pp. 112-14, where the relevant principles were summarized as follows:
In interpreting sections of the Income
Tax Act , the correct approach, as set out by Estey J. in Stubart
Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, is to apply the plain
meaning rule. Estey J. at p. 578 relied on the following passage
from E. A. Driedger, Construction of Statutes (2nd ed. 1983), at
p. 87:
Today there is only one principle
or approach, namely, the words of an Act are to be read in their entire context
and in their grammatical and ordinary sense harmoniously with the scheme of the
Act, the object of the Act, and the intention of Parliament.
The principle that the plain
meaning of the relevant sections of the Income Tax Act is to prevail
unless the transaction is a sham has recently been affirmed by this Court in Canada
v. Antosko, [1994] 2 S.C.R. 312. Iacobucci J., writing for the Court,
held at pp. 326-27 that:
While it is true that the courts must view discrete
sections of the Income Tax Act in light of the other provisions of the
Act and of the purpose of the legislation, and that they must analyze a given
transaction in the context of economic and commercial reality, such techniques
cannot alter the result where the words of the statute are clear and plain and
where the legal and practical effect of the transaction is undisputed: Mattabi
Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at
p. 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.
I accept the following comments on the Antosko
case in P. W. Hogg and J. E. Magee, Principles of
Canadian Income Tax Law (1995), Section 22.3© “Strict and purposive
interpretation”, at pp. 453-54:
It would introduce intolerable uncertainty into the
Income Tax Act if clear language in a detailed provision of the Act were to be
qualified by unexpressed exceptions derived from a court's view of the object
and purpose of the provision.... (The Antosko case) is simply a
recognition that “object and purpose” can play only a limited role in the
interpretation of a statute that is as precise and detailed as the Income Tax
Act . When a provision is couched in specific language that admits of no doubt
or ambiguity in its application to the facts, then the provision must be
applied regardless of its object and purpose. Only when the statutory language
admits of some doubt or ambiguity in its application to the facts is it useful to
resort to the object and purpose of the provision.
At pp. 976-77 of Alberta (Treasury Branches), supra,
Cory J. concluded:
Thus, when there is neither any
doubt as to the meaning of the legislation nor any ambiguity in its application
to the facts then the statutory provision must be applied regardless of its
object or purpose. I recognize that agile legal minds could probably find an
ambiguity in as simple a request as “close the door please” and most certainly
in even the shortest and clearest of the ten commandments. However, the very
history of this case with the clear differences of opinion expressed as between
the trial judges and the Court of Appeal of Alberta indicates that for able and
experienced legal minds, neither the meaning of the legislation nor its
application to the facts is clear. It would therefore seem to be appropriate
to consider the object and purpose of the legislation. Even if the ambiguity
were not apparent, it is significant that in order to determine the clear and
plain meaning of the statute it is always appropriate to consider the “scheme
of the Act, the object of the Act, and the intention of Parliament”.
31 In the present case, I find
the language in s. 227(5) to be clear and unambiguous, especially when
viewed as a provision directly following s. 227(4) , which renders amounts
unremitted as held in trust for Her Majesty. In my view, this section is
designed to, upon liquidation, assignment, receivership or bankruptcy, seek out
and attach Her Majesty's beneficial interest to property of the debtor
which at that time is in existence. The trust is not in truth a real one, as
the subject matter of the trust cannot be identified from the date of creation
of the trust: D. W. M. Waters, Law of Trusts in Canada (2nd ed.
1984), at p. 117. However, s. 227(5) has the effect of revitalizing the
trust whose subject matter has lost all identity. This identification of the
subject matter of the trust therefore occurs ex post facto. In this
respect, I agree with the conclusion of Twaddle J.A. in Roynat, supra,
where he states the effect of s. 227(5) as follows, at p. 647:
“Her Majesty has a statutory right of access to whatever assets the
employer then has, out of which to realize the original trust debt due to Her”.
32 I add that this approach was
taken to a provision substantially similar to s. 227(5) by Gale C.J.
in Re Deslauriers Construction Products Ltd., supra, at
p. 601, whose reasoning was affirmed by this Court in Dauphin Plains,
supra. The Deslauriers case, supra, involved a priority
competition between a trustee-in-bankruptcy and a statutory deemed trust
provision created under the Canada Pension Plan, S.C. 1964-65,
c. 51. Section 24(3) and (4) of that Act stated:
24.
...
(3) Where an employer has deducted
an amount from the remuneration of an employee as or on account of any
contribution required to be made by the employee but has not remitted such
amount to the Receiver General of Canada, the employer shall keep such amount
separate and apart from his own moneys and shall be deemed to hold the amount
so deducted in trust for Her Majesty.
(4) In the event of any
liquidation, assignment or bankruptcy of an employer, an amount equal to the
amount that by subsection (3) is deemed to be held in trust for Her Majesty
shall be deemed to be separate from and form no part of the estate in
liquidation, assignment or bankruptcy, whether or not that amount has in fact
been kept separate and apart from the employer's own moneys or from the assets
of the estate.
This Court in Dauphin Plains, supra, at p. 1198,
approved of Gale C.J.'s conclusion as to the interpretation of
s. 24(4) (at p. 601 of Deslauriers, supra):
It seems to us that s-s. (4), and particularly
the concluding six words thereof, were inserted in the Act specifically for the
purpose of taking the moneys equivalent to the deductions out of the estate of
the bankrupt by the creation of a trust and making those moneys the property of
the Minister.
33 This interpretation of
s. 227(5) also has the virtue of being consistent with the scheme of
distribution under the Bankruptcy and Insolvency Act, R.S.C., 1985,
c. B-3 . Section 67 of that Act expressly removes claims for
unremitted payroll deductions, which are held in trust (inter alia)
pursuant to s. 227 ITA , from the bankrupt's estate:
67.
(1) The property of a bankrupt divisible among his creditors shall not
comprise
(a) property held by the bankrupt in trust for
any other person,
...
(2) Subject to subsection (3),
notwithstanding any provision in federal or provincial legislation that has the
effect of deeming property to be held in trust for Her Majesty, property
of a bankrupt shall not be regarded as held in trust for Her Majesty for
the purpose of paragraph (1)(a) unless it would be so regarded in
the absence of that statutory provision.
(3) Subsection (2) does not apply
in respect of subsections 227(4) and (5) of the Income Tax Act ,
subsections 23(3) and (4) of the Canada Pension Plan or subsections
57(2) and (3) of the Unemployment Insurance Act....
34 It is to be observed that in
addition to attaching Her Majesty's interest to the debtor's property upon
the triggering of any of the events mentioned in s. 227(5), the deemed
trust operates to the benefit of Her Majesty in a secondary manner.
Namely, s. 227(5) permits Her Majesty's interest to attach to collateral
which is subject to a fixed charge if the deductions giving rise to
Her Majesty's claim arose before that charge attached to that collateral.
This proposition flows from the decision of this Court in Dauphin Plains,
supra. Dauphin Plains involved a determination as to priority in
respect of the proceeds of a liquidation sale of a receiver-manager. In that
case, the claims of Her Majesty (inter alia) arose by virtue of the
non-remittance of payroll deductions in regard to payments under the Canada
Pension Plan, R.S.C. 1970, c. C-5, and the Unemployment Insurance
Act, 1971, S.C. 1970-71-72, c. 48. Those Acts provided
Her Majesty with claims pursuant to deemed trusts whose language is
substantially similar to the version of s. 227(4) and (5) at issue in this
appeal. In finding that these claims took precedence over a floating charge
which had crystallized after the deductions at issue were actually made,
Pigeon J. stated at p. 1199:
It should first be observed that,
for reasons similar to those on which the decision in the Avco case, supra,
was based, the claim for Pension Plan and Unemployment Insurance deductions
cannot affect the proceeds of realization of property subject to a fixed and
specific charge. From the moment such charge was created, the assets subject
thereto, were no longer the property of the debtor except subject to that
charge. The claim for the deductions arose subsequently and thus cannot
affect this charge in the absence of a statute specifically so providing.
However, the floating charge did not crystallize prior to the issue of the writ
and the appointment of the receiver. In the present case it makes no
difference which of the two dates is selected, both are subsequent to the
deductions. [Emphasis added.]
Thus, s. 227(5) alternatively permits Her Majesty's
interest to attach retroactively to the disputed collateral if the competing
security interest has attached after the deductions giving rise to
Her Majesty's claim in fact occurred. Conceptually, the s. 227(5)
deemed trust allows Her Majesty's claim to go back in time and attach its
outstanding s. 227(4) interest to the collateral before that collateral
became subject to a fixed charge. The same result occurs when a statutory lien
attaches prior to the mortgaging of disputed collateral. In Avco, supra,
this Court per Martland J. commented upon just such a scenario, at
p. 706:
From that date, the lien attaches to the employer's
property and, as provided in subs. (1), it will take priority over any
other claim, including an assignment or mortgage. In other words, after the
lien attaches, its priority is unaffected by a disposition of his property made
by the employer. Where a mortgage has been made prior to the lien
attaching, it is not affected. The lien will only attach to the employer's
equity in that property. [Emphasis added.]
See also G.M. Homes Inc., supra, at p. 250.
35 In this appeal, however, the
deductions of tax from the employees' pay cheques occurred after the attachment
of the bank's fixed charge to the inventory. As such, this second aspect of
s. 227(5)'s operation is not at issue in this case.
36 I find support for the
interpretation of s. 227(5) that I have taken in as much as it is
consistent with the overall purpose of s. 227(4) and (5) . In Pembina
on the Red Development, supra, Lyon J.A. (dissenting) had
occasion to comment upon the purpose of the predecessor section to the current
s. 224(1.2) ITA , namely s. 224(1.2) and (1.3) of the Income
Tax Act , S.C. 1970-71-72, c. 63, which were added by S.C. 1987,
c. 46, s. 66. I find that Lyon J.A.'s comments in this respect
to be fully applicable to the articulation of the purpose of s. 227(5) .
At p. 51, Lyon J.A. stated:
One must always remember that the
withholding tax or source deduction to which s. 224 applies is at the
heart of the collection procedures for personal income taxation in Canada.
Indeed, if one makes a calculation from the statistics reported in “Taxation
Statistics, 1987”, a publication of Revenue Canada Taxation, Catalogue No. RV-1987,
one finds that 87% of all personal income taxes paid in Canada are collected by
source deductions. It can thus be seen that Parliament in passing
s. 224(1.2) made it as all-encompassing as it is in order to ensure its
continued viability. No other system is so crucial to the overall collection
procedure adopted by the Crown. Parliament clearly meant to protect this
system. Using the employer as a tax collector requires such extra protection
in cases such as the one at bar where the employer converts the withheld tax
money to its own purposes. Understandably, that conversion cannot be
countenanced if the integrity of that system is to be preserved. Parliament,
therefore, acting within its constitutional authority, has taken this
extraordinary remedy to protect a major collection source.
Similarly, Parliament has clearly sought to protect the collection
of unremitted payroll deductions through the device of the statutory deemed
trust. Accordingly, s. 227(5) must be interpreted in light of this
purpose. To summarize, it operates in a twofold manner: upon the triggering
of an event specified in s. 227(5), Her Majesty's beneficial interest
(i) attaches to the tax debtor's property then in existence; or (ii) attaches
to collateral subject either to a fixed charge, or a crystallized floating
charge, if the actual deductions giving rise to Her Majesty's claim
occurred before the fixed charge attached, or the floating charge crystallized,
respectively.
37 One further point with
respect to terminology is necessary before leaving the present discussion. The
method of attachment of Her Majesty's beneficial interest pursuant to
s. 227(5) has been referred to at times as a “mechanism for tracing”: Roynat,
supra, at p. 647. This was indeed how it was presented by counsel for
Her Majesty in his submissions before this Court. During the hearing of
this case, it was questioned whether this was not an awkward usage of the word
“tracing”. After considering the matter, it is my view that it is not accurate
to describe the mechanism of s. 227(5) as a means of “tracing”; indeed, it
would seem that this subsection is antithetical to tracing in the traditional
sense, to the extent that it requires no link at all between the subject matter
of the trust and the fund or asset which the subject matter is being traced
into: D. W. M. Waters, Law of Trusts in Canada, supra, at
pp. 1037-53. For this reason, I find Professor Wood's description of the
operation of s. 227(5), namely, a “relaxation of the equitable tracing
rules”, to be most accurate: Roderick J. Wood, “The Floating Charge
in Canada” (1989), 27 Alta. L. Rev. 191, at p. 221; see also Omega,
supra, at p. 43; and Re Deslauriers Construction Products Ltd., supra,
at p. 603.
38 In conclusion,
s. 227(5) is a provision designed to minimize the adverse effect upon
Her Majesty from the misappropriation of trust funds held by tax debtors
on account of their employees' tax payable. The provision contemplates an
intermingling of Her Majesty's property with that of a tax debtor's, such
that the subject matter of the trust cannot be (or indeed never was)
identifiable. To address this conceptual problem, s. 227(5) allows
Her Majesty to attach its interest to any property which lawfully belongs
to the debtor at the time of liquidation, assignment, receivership or
bankruptcy; this property is then deemed to exist “separate” and apart from the
tax debtor's estate. The ITA thus permits Her Majesty to transfer
title in the property from the tax debtor to Herself in order to satisfy the
tax debtor's outstanding unremitted payroll obligations.
39 I would hasten to add to
this, however, that this provision does not permit Her Majesty to attach
Her beneficial interest to property which, at the time of liquidation,
assignment, receivership or bankruptcy, in law belongs to a party other than
the tax debtor. Section 227(4) and (5) are manifestly directed towards
the property of the tax debtor, and it would be contrary to well-established
authority to stretch the interpretation of s. 227(5) to permit the
expropriation of the property of third parties who are not specifically
mentioned in the statute. As Martland J. stated in Avco, supra,
at p. 706:
The property to which a s. 5A lien attaches is
not defined nor identified. In the absence of a specific statutory provision
to that effect, in my view it should not be construed in a manner which could
deprive third parties of their pre-existing property rights.
Similarly, in Pembina on the Red Development, supra,
Scott C.J. stated the presumption against expropriation of property, at
p. 38:
In Cross, Statutory Interpretation (London:
Butterworths, 1987), the author writes at p. 180:
There is a general presumption that Parliament does
not intend to take away private property rights unless the contrary is clearly
indicated. Lord Atkinson stated that there is a canon of interpretation
“that an intention to take away the property of a subject without giving to him
a legal right to compensation for the loss of it is not to be imputed to the
legislature unless that intention is expressed in unequivocal terms.” After
all, the protection of property is generally regarded as one of the fundamental
values of a liberal society. [Emphasis added.]
Later in that same case, Twaddle J.A., in separate concurring
reasons, articulated this same principle as follows, at p. 46, “[i]t is a
long-established principle of law that, in the absence of clear language to the
contrary, a tax on one person cannot be collected out of property belonging to
another”.
40 Thus, while s. 227(5)
can be seen as a provision enacted to solve the conceptual dilemma precipitated
by an intermingling of unremitted payroll deductions with a tax debtor's
general assets, it is a legal vehicle not without its own conceptual
limitations. Namely, while the s. 227(5) deemed trust permits
Her Majesty to attach Her beneficial interest to property of the tax
debtor upon liquidation (assignment, receivership or bankruptcy), it does not
permit the expropriation of property which may belong to a third party creditor
at the time the subsection becomes engaged.
41 However, as will be discussed in
further detail, infra, it is my opinion that the licence theory may, in
certain cases, create an exception to this general principle. In particular,
where a secured creditor consents to the disposition of his collateral in order
to pay wage deductions, that consent, coupled with the statutory trust
provisions here at issue, may act to divest that creditor of its proprietary
interest in that collateral at the time of liquidation, assignment,
receivership or bankruptcy. Indeed, it is my view that this exception is
engaged in the present case such that the s. 227(5) claim of
Her Majesty must prevail.
(C) The Nature of the Bank's Security Interests
42 I begin from the observation
that Parliament, in enacting s. 227(4) and (5) , has chosen to secure
Her Majesty's claims to unremitted payroll deductions through employing
the concept of a deemed trust. Therefore, the proper analysis to follow in
determining whether Her Majesty is entitled to priority pursuant to these
subsections must utilize principles of property law. For this reason, it
becomes relevant and indeed essential to scrutinize the nature of the interests
which compete with Her Majesty's trust in order to determine whether and
to what extent such interests have title in the disputed fund. As I mentioned
previously, Her Majesty's trust can attach to the disputed collateral only
to the extent that that collateral is not in law the property of a party other
than the tax debtor at the time the deemed trust is engaged. More
specifically, subject to the application of the licence theory, if it is found
that legal title in the collateral is in the bank, and not Sparrow,
Her Majesty's deemed trust could only attach to Sparrow's equity of
redemption: see Avco, supra, at p. 706.
43 This “statutory trust”
approach can be distinguished from other legislative methods which are used to
secure an interest to unremitted payroll deductions, namely, through employing
an explicit “Crown priority” provision. An example of such a provision can be
found in s. 224(1.2) ITA , a subsection which was recently the
subject of consideration of this Court in Alberta (Treasury Branches), supra.
That provision reads:
224.
...
(1.2) Notwithstanding any other
provision of this Act, the Bankruptcy Act, any other enactment of
Canada, any enactment of a province or any law, where the Minister has
knowledge or suspects that a particular person is or will become, within
90 days, liable to make a payment
(a) to another person ... who is liable to
pay an amount assessed under subsection 227(10.1) or a similar provision, or
(b) to a secured creditor who has a right to
receive the payment that, but for a security interest in favour of the secured
creditor, would be payable to the tax debtor,
the Minister may, by registered letter or by a letter
served personally, require the particular person to pay forthwith, where the
moneys are immediately payable, and in any other case, as and when the moneys
become payable, the moneys otherwise payable to the tax debtor or the secured
creditor in whole or in part to the Receiver General on account of the tax
debtor's liability under subsection 227(10.1) or a similar provision, and
on receipt of that letter by the particular person, the amount of those
moneys that is required by that letter to be paid to the Receiver General shall,
notwithstanding any security interest in those moneys, become the property of
Her Majesty and shall be paid to the Receiver General in priority to any
such security interest. [Emphasis added.]
In contrast to the “deemed trust” approach, the application of this
section to a priority competition can proceed without regard to the quality of
the “security interest” which competes with Her Majesty's claim. Indeed,
s. 224(1.2) simply transfers title in the collateral to Her Majesty
regardless of whose interest may compete with it, so long as the requirements
of s. 224(1.2) are met: see, e.g., Alberta (Treasury Branches), supra.
For a general discussion of these two distinct analytical methods of
determining priority between non-consensual security interests (such as
statutory trusts) and consensual security interests, see Wood and Wylie,
“Non-Consensual Security Interests in Personal Property”, supra, at
pp. 1072-83.
44 In the present case, it
therefore becomes necessary to characterize the bank's interest in Sparrow's
inventory as either a floating, or a fixed and specific charge.
45 The basic distinction
between fixed and floating charges was articulated by Lord Macnaghten in Illingworth
v. Houldsworth, [1904] A.C. 355 (H.L.), at p. 358:
A specific charge, I think, is one that without more
fastens on ascertained and definite property or property capable of being
ascertained and defined; a floating charge, on the other hand, is ambulatory
and shifting in its nature, hovering over and so to speak floating with the
property which it is intended to affect until some event occurs or some act is
done which causes it to settle and fasten on the subject of the charge within
its reach and grasp.
The “event ... or ... act” to which Lord Macnaghten refers to as
causing the floating interest to “settle and fasten” is described in the modern
authorities as “crystallization”. Generally speaking, crystallization occurs
upon the default of the debtor. Once the floating interest has been said to
crystallize, that interest is transformed into a fixed and specific charge over
the inventory. See Wood, “The Floating Charge in Canada”, supra, at
pp. 204-8.
46 The critical significance of
the characterization of an interest as being fixed or floating, of course, is
that it describes the extent to which a creditor can be said to have a
proprietary interest in the collateral. In particular, during the period in
which a charge over inventory is floating, the creditor possesses no legal
title to that collateral. For this reason, if a statutory trust or lien
attaches during this time, it will attach to the debtor's interest and take
priority over a subsequently crystallized floating charge. However, if a
security interest can be characterized as a fixed and specific charge, it will
take priority over a subsequent statutory lien or charge; in such a case, all
that the lien can attach to is the debtor's equity of redemption in the
collateral: Avco, supra, at p. 706. This correlative
relationship between fixed charges and legal ownership was articulated by this
Court in Dauphin Plains, supra, at p. 1199, where
Pigeon J. stated:
It should first be observed that,
for reasons similar to those on which the decision in the Avco case, supra,
was based, the claim for Pension Plan and Unemployment Insurance deductions
cannot affect the proceeds of realization of property subject to a fixed and
specific charge. From the moment such charge was created, the assets
subject thereto, were no longer the property of the debtor except subject to
that charge. [Emphasis added.]
See also Avco, supra.
47 There has been much debate
as to whether it is appropriate to characterize a security interest over
inventory which permits the debtor to sell that inventory in the ordinary
course of business as a floating charge. The debate centres around the ability
to characterize a security interest as fixed, in the presence of a licence
given to the debtor to sell the collateral, where such an arrangement involves
“no final and irrevocable appropriation of property to the creditor”: FBDB,
supra, at p. 33. McLachlin J.A. (as she then was) in FBDB, supra,
fully considered the conflicting authorities on this point and concluded at
pp. 37-38 and 40:
In short, the answer to the question of whether the
courts have recognized a fixed charge subject to a licence to sell in the ordinary
course of business is no, with the exception of the line of cases confirming
the right of a chattel mortgagor to sell mortgaged stock in the ordinary course
of business.
...
If a charge conferred on the debtor the right to deal
with the goods in the ordinary course of business then, regardless of what the
parties chose to call it, it was regarded as floating, with the result that
third party interests acquired prior to crystallization of the charge had
priority over the chargeholder.
Adopting this “either-or” doctrine, McLachlin J.A. chose to
characterize the security agreement in FBDB, which permitted the debtor
to sell the secured collateral in the ordinary course of the debtor's business,
as a floating charge.
48 I note also that this Court
very recently referred to the decision of McLachlin J.A. in FBDB, supra,
with approval: Alberta (Treasury Branches), supra. While the
issue in that case was different from that in FBDB, the comments of
Cory J. can, I think, be taken as affirming the “either-or” doctrine as
applied in FBDB.
49 The relevance of the
“either-or” doctrine to the present case, of course, lies in the fact that
Sparrow had been granted by the bank, both expressly and impliedly, a licence
to sell the inventory over which the bank held a security interest. It
therefore could be argued that such a licence renders the interest of the bank
in the nature of a floating charge, an interest which must yield to a statutory
trust which attaches prior to the charge's crystallization.
50 I do not find it necessary
to comment on FBDB to the extent that that decision suggests that in the
present case the interests of the bank should be characterized as a floating
charge. It should be noted that the decision of McLachlin J.A. in the FBDB
case predated the enactment of personal property security legislation in
British Columbia, and so does not speak to the state of the law in a PPSA
jurisdiction. Nor did that case deal with any other statutory enactment, such
as the Bank Act , which could affect the characterization of the security
agreement there at issue. For these reasons, I consider the comments of
McLachlin J.A. in FBDB to be directed to the common law position
with regard to the characterization of fixed and floating charges. Whatever
those common law principles may be, they cannot be taken to alter the effect
that legislation may have on the characterization of security interests. As it
is my view that the Alberta PPSA and the Bank Act are
determinative of the characterization of the bank's GSA and BAS, respectively,
I do not need to address the common law view articulated in FBDB.
51 I turn now to consider each
of the bank's security interests.
(i) The General Security
Agreement (GSA)
52 Counsel for the appellant,
Her Majesty, argued in his factum that the bank's GSA is to be considered
in the nature of a floating charge. In support of this proposition, counsel
advances the decision of the Ontario Court of Appeal in Re Urman (1983),
44 O.R. (2d) 248. In that case, involving a general assignment of book debts
perfected under the Ontario Personal Property Security Act, the security
interest was characterized as a floating charge.
53 For the reasons which
follow, I cannot accept this submission. In my view, the general security
agreement in this case, which was subject to the Alberta personal property
security legislation, must be characterized as a fixed and specific charge
subject to a licence to sell the inventory.
54 It is of course true that
the PPSA does not govern the priority competition between a statutory
trust and a security interest. Subsection 4(a) explicitly removes
statutory trusts such as the one created by s. 227 ITA from the
province of the Alberta PPSA:
4 Except as
otherwise provided in this Act, this Act does not apply to the following:
(a) a lien, charge or other
interest given by an Act or rule of law in force in Alberta;
However, this does not mean that the PPSA does not affect the
characterization of a charge executed in a jurisdiction which is subject to
such an Act. To the contrary, the effect of personal property security
legislation has been said to have “fundamentally changed the characterization
of security interests”: Wood and Wylie, “Non-Consensual Security Interests in
Personal Property”, supra, at p. 1082. In particular, while pre-PPSA,
a security agreement purporting to create a floating charge could be said to
remain unattached to the collateral until crystallization, s. 12(1) of the
Alberta PPSA manifestly alters this situation. That subsection reads:
12(1) A security
interest, including a security interest in the nature of a floating charge,
attaches when
(a) value is given,
(b) the debtor has rights in the collateral, and
(c) except for the purpose of enforcing rights
between the parties to the security agreement, the security interest becomes
enforceable within the meaning of section 10,
unless the parties specifically agree in writing to
postpone the time for attachment, in which case the security interest attaches
at the time specified in the agreement.
The relevant portion of s. 10 for our purposes states:
10(1) Subject to
subsection (2), a security interest is enforceable against a third party
only where
(a) the collateral is in
the possession of the secured party, or
(b) the debtor has signed a
security agreement that contains
...
(ii) a statement that a security interest is taken in
all of the debtor's present and after-acquired personal property ....
Generally speaking, therefore, absent an express intention to the
contrary, a security interest in all present and after-acquired personal
property will attach when that agreement is executed by the parties. Once
attachment has occurred, in my view, the GSA then becomes in law a fixed and
specific charge over the collateral.
55 I find support in this
conclusion as to the effect of personal property security legislation upon
security interests from the fact that the academic literature is unanimous on
this point. For example, Professor Jacob S. Ziegel in his article “Symposium:
Recent and Prospective Developments in the Personal Property Security Law Area”
(1985), 10 Can. Bus. L.J. 131, commented as follows, at p. 152:
It is of the first importance to determine whether a
security interest under the PPSA retains any of the common law characteristics
of a floating charge and if so which. My own view is that once a security
interest has attached under the PPSA it has no “floating” attributes even
though the security agreement, expressly or impliedly, gives the debtor
considerable powers to dispose of the collateral in the course of his
business. In brief, the PPSA only recognizes specific or fixed security
interests although admittedly the collateral itself may often change its
character because of the express or implied powers of disposition given the
debtor. [Emphasis added.]
This opinion is echoed by Professor Wood in his recent article
“Revenue Canada's Deemed Trust Extends Its Tentacles: Royal Bank of Canada
v. Sparrow Electric Corp.”, supra, at p. 433:
Under pre-PPSA law, a plausible
argument could be made that a security interest in the form of a fixed charge
combined with a licence to deal is, in effect nothing more than a floating
charge. However, this argument [is] untenable in the cases involving PPSA
security interests....
Similarly, Professor Ronald C. C. Cuming, in “Commercial Law --
Floating Charges and Fixed Charges of After-Acquired Property: The Queen in
the Right of British Columbia v. Federal Business Development Bank”
(1988), 67 Can. Bar Rev. 506, at pp. 510-11, opined:
In effect, [PPS] legislation treats all charges,
including floating securities, as fixed charges. The legislatures that
have enacted Personal Property Security Acts have implicitly declared that, as
a matter of public policy, there is nothing objectionable to having a fixed
charge on stock-in-trade of a debtor coupled with a licence to deal with the
collateral in the ordinary course of business. [Emphasis added.]
At p. 519, the learned author concludes “there can be no such
thing as a floating charge under a Personal Property Security Act”.
56 Applying this principle to
the case at bar, the GSA held by the respondent bank must certainly be
characterized as a fixed and specific charge. It attached at the time the
agreement was executed, February 25, 1992. More specifically,
however, because of the permission granted by the bank which allowed Sparrow to
sell the encumbered inventory, the GSA is in the nature of a fixed charge with
a licence to deal with the inventory.
(ii) Bank Act Security (BAS)
57 The appellant has further
submitted that the respondent bank's BAS is in the nature of a floating charge
over the inventory. Several lower court decisions have been relied upon in
support of this proposition: Abraham, supra (under appeal); Armstrong,
supra; and North Sky Trading Inc. (Bankrupt), Re (1994), 158 A.R.
117 (Q.B.) (under appeal).
58 The earliest authority to
comment upon the nature of BAS is the decision of this Court in Royal Bank
of Canada v. Workmen's Compensation Board of Nova Scotia, [1936]
S.C.R. 560. That case involved a priority competition between security under
s. 88 of the Bank Act, R.S.C. 1927, c. 12, the predecessor of
s. 427 , and a lien created by s. 79(2) of The Workmen's
Compensation Act, R.S.N.S. 1923, c. 129. In his concurring judgment,
Davis J. observed the effect of s. 88 security as follows, at
p. 567:
. . . the security [does] not operate to transfer
absolutely the ownership in the goods but ... the transaction [is] essentially
a mortgage transaction and subject to the general law of mortgages except
where the statute has otherwise expressly provided.... Section 88 set up by
the Bank Act enables manufacturers, who desire to obtain large loans
from their bankers in order to carry on their industrial activities, to give to
the bank a special and convenient form of security for the bank's protection in
the large banking transactions necessary in the carrying on of industry
throughout the country. Until the moneys are repaid, the bank is the legal
owner of the goods but sale before default is prohibited and provision is
made for the manufacturer regaining title upon repayment. To say that
Parliament did not use language to expressly provide that the bank shall have a
first lien on the goods is beside the mark. The bank acquires ownership in
the goods by the statute. [Emphasis added.]
59 More recently, this Court
had occasion to consider the attributes of Bank Act security in Hall,
supra. In that case, La Forest J. underlined this Court's
previous ruling in Workmen's Compensation Board of Nova Scotia, supra,
that BAS gives to the lender legal title in the collateral. At
pp. 133-34, La Forest J. stated:
By section 178(2) [now
s. 427(2)], a bank may take security in property owned by the borrower at
the time of the loan transaction, and any property acquired during the pendency
of the security agreement. The rights and powers of the bank with respect to the
secured property are set out in s. 178(2)(c). By the terms of
s. 178(2)(c), these rights and powers are stated to be “the same
rights and powers as if the bank had acquired a warehouse receipt or bill of
lading in which such property was described”. These powers are defined, in
turn, in s. 186 [now s. 435] of the Act where it is specified that
any warehouse receipt or bill acquired by a bank as security for the payment of
a debt, vests in the bank all the right and title to goods, wares and
merchandise covered by the holder or owner thereof.
The nature of the rights and powers
vested in the bank by the delivery of the document giving the security interest
has been the object of some debate. Argument has centred on whether the
security interest should be likened to a pledge or bailment, or whether it is
more in the nature of a chattel mortgage. I find the most precise description
of this interest to be that given by Professor Moull in his article “Security
Under Sections 177 and 178 of the Bank Act ” (1986), 65 Can. Bar Rev.
242, at p. 251. Professor Moull, correctly in my view, stresses that
the effect of the interest is to vest title to the property in question in the
bank when the security interest is taken out. He states, at p. 251:
The result, then, is that a bank
taking security under section 178 effectively acquires legal title to
the borrower's interest in the present and after-acquired property assigned to
it by the borrower. The bank's interest attaches to the assigned property when
the security is given or the property is acquired by the borrower and remains
attached until released by the bank, despite changes in the attributes or
composition of the assigned property. The borrower retains an equitable
right of redemption, of course, but the bank effectively acquires legal title
to whatever rights the borrower holds in the assigned property from time to
time. [Emphasis added.]
60 It follows from the comments
of this Court regarding the ownership rights in inventory conferred by the Bank
Act that security taken under that Act must be considered to be in the
nature of a fixed and specific charge. As stated above, the concept of the
fixed charge is correlative to the notion of a creditor’s having legal
proprietary rights in the collateral. I add that this view has been adopted by
academic literature in this area: R. J. Wood, “Revenue Canada's Deemed Trust
Extends Its Tentacles: Royal Bank of Canada v. Sparrow Electric Corp.”,
supra, at p. 433; and William D. Moull, “Security Under Sections
177 and 178 of the Bank Act ” (1986), 65 Can. Bar Rev. 242. I find this
following passage, at p. 251, from the article written by Professor Moull which
was cited with approval by this Court in Hall, supra,
particularly persuasive:
Because of its scope and flexibility,
some commentators have suggested that section 178 [now 427] security is in the
nature of a floating charge. This can be misleading, however. Because the
bank effectively acquires legal title, section 178 security is really in the
nature of a fixed charge on the present and after-acquired property of the
borrower assigned to the bank. One attribute that section 178 security may be
said to share with a floating charge is its application to all property of a
specified class held by the borrower from time to time. But while a floating
charge may apply to all property of a specified kind held by the borrower from
time to time, it does not affix itself specifically upon any particular item of
property until it crystallizes upon default by the borrower. Conversely, a
section 178 security is a fixed charge on each item of assigned property held
from time to time whether or not the loan is in default. This gives a bank
significantly greater rights than it would hold under a floating charge
debenture on inventory.
61 For these reasons, I
consider the security interest of the bank in the form of BAS to be in the
nature of a fixed and specific charge with a licence to sell the inventory.
(iii) Summary -- Fixed and
Specific Charge Over Inventory
62 It would seem appropriate at
this point, before leaving the present discussion, to comment briefly upon this
novel and perhaps abstract notion of possessing a fixed charge over all of the
present and future inventory of a debtor. To begin with, I note that
traditional definitions of the fixed charge, as for example the one I
previously quoted above from Illingworth, supra, emphasize the
ability to “settle and fasten” upon ascertainable and defined property as being
an integral attribute to this particular form of charge. This type of
attachment to tangible and ascertainable property, of course, is impossible to
achieve in the case of an assignment of inventory, where that collateral is
changing constantly. In short, the traditional concept of the fixed charge
seems to be at odds with the notion of having a proprietary right over
collateral such as after-acquired inventory which, by definition, is not yet in
existence at the time the security agreement is executed.
63 In my view, however, a fixed
charge over all present and future inventory represents a proprietary interest
over a dynamic collective of present and future assets. To this extent,
as stated above, this form of security interest challenges our traditional
conception of a fixed charge; to the same extent, in my opinion, our conception
of this form of charge must change to meet the modern realities of commercial
law, and in particular the legislative provisions which have been brought to
bear in this appeal.
64 In effect, the fixed and
specific charge gives to the secured creditor the title (subject, of course, to
the debtor's equitable right of redemption) to the present inventory of the
debtor, as well as the after-acquired inventory of the debtor. In this way,
the secured creditor becomes the legal owner of inventory as it comes into
possession of the debtor. I note that the Alberta PPSA contains a
specific provision securing a creditor's proprietary right to after-acquired
property in this way:
13(1) Except as
provided in subsection (2), where a security agreement provides for a security
interest in after-acquired property, the security interest attaches in
accordance with section 12, without the need for specific appropriation.
[Emphasis added.]
Professors Cuming and Wood, in their published annotation of the
Alberta PPSA, observe that by virtue of this subsection “the security
interest in after-acquired property has equal status with a security
interest in collateral in existence at the time the security agreement is
executed”: Cuming and Wood, Alberta Personal Property Security Act Handbook
(2nd ed. 1993), at p. 121 (emphasis added). Similarly, the BAS has the
effect of presently attaching the secured creditor's interest to the
after-acquired inventory of the debtor. In Hall, supra,
La Forest J. approved of Professor Moull's description of the effect
of the relevant provisions of the Bank Act , at p. 134, which is
particularly apposite to the present discussion:
The result, then, is that a bank
taking security under section 178 [now s. 427 ] effectively
acquires legal title to the borrower's interest in the present and after-acquired
property assigned to it by the borrower. The bank's interest attaches to
the assigned property when the security is given or the property is acquired by
the borrower and remains attached until released by the bank, despite
changes in the attributes or composition of the assigned property. The
borrower retains an equitable right of redemption, of course, but the bank effectively
acquires legal title to whatever rights the borrower holds in the assigned
property from time to time. [Emphasis added.]
65 It follows from these
observations that where, as here, a secured creditor holds a fixed charge over
a debtor's inventory, that charge will have the effect of ensuring the creditor
has legal title to any and all inventory subject to the charge at any given
point in time. This, of course, is subject to the caveat (not operative in
this case) that no outstanding statutory payroll deductions had in fact been
made prior to the attachment of the fixed charge. Thus, in the present case,
the inventory which was subject to the liquidation sale belonged in law to the
respondent bank: both under its GSA and its BAS the bank held a fixed charge
over Sparrow's inventory. As such, all that Her Majesty's beneficial
interest could attach to, before its sale, was Sparrow's equity of redemption
in the property: Avco, supra; C.I.B.C. v. Klymchuk
(1990), 74 Alta. L.R. (2d) 232 (C.A.), at p. 240.
66 But this of course does not
end the matter. While it is true that the bank held legal title in the
inventory which is the subject of the dispute in this case, it is also true
that at the time the deductions were made the bank had given its permission to
Sparrow to sell this inventory in the course of its business. The GSA
contained an express licence to this effect; and the BAS impliedly contained
such a licence. In this way, the bank had consented, contractually, to the
divestment of their interest in the collateral taken in inventory and the usage
of the proceeds of that collateral for certain purposes. The critical issue
which falls to be decided is, then, what is the scope of this contractual licence?
In particular, if this bank's consent included the right to sell the inventory
in order to pay wages, then that consent by necessity included the right to
sell inventory to remit payroll deductions. In such a situation, for the
following reasons, Her Majesty's interest would be able to attach to the
proceeds of the inventory, and in this way take priority over the bank's
interest.
67 As stated previously, at
para. 41, it is my opinion that the licence theory may operate, in the
context of the statutory scheme at issue in the present appeal, as an exception
to the general rule that at the time of “liquidation, assignment, receivership
or bankruptcy” Her Majesty’s interest cannot attach to property which is
at that time the property of a secured creditor. More specifically, where it
can be said that at the time the deductions were made a secured creditor had
consented to the use of its collateral in order to pay the statutory deductions
which are the object of a deemed trust, it may also be said that that creditor
has bound itself by the statutory requirements relating to those deductions.
Here, therefore, if it can be said that at the time the wage deductions at
issue were made the bank had permitted the sale of inventory in order to pay
wages, and thus wage deductions, it will be possible for s. 227(5) to
attach to the bank’s inventory existent at the time of receivership. With
regard to this approach to the licence theory, see FBDB, supra,
at pp. 40-41, Roynat, supra, at pp. 649-50, and G.M.
Homes Inc., supra, at pp. 252-54.
68 In short, where the bank has
consented to the reduction in the value of its security in order to pay
statutory deductions at the time those deductions are made, they have to the
same extent, by virtue of s. 227(5), consented to the reduction in their
security at the time of receivership. The critical question which falls to be
decided in this case, then, is what was the scope of the bank’s consent to sell
inventory at the time the deductions were made?
(D) Whether
on the Facts the Licence to Sell Included the Right to Use the Proceeds to Pay
Wages?
69 I underline at the outset
that the critical factor in the “licence to sell” argument is the permission
which must be found to have been granted with respect to the usage of the
proceeds of the disputed collateral. Thus, while licences may often be mouthed
in terms of a “right to sell in the ordinary course of business”, it must not
be forgotten that it is permission with respect to the usage of proceeds,
and not necessarily the circumstances of sale, which is the proper focus
of the inquiry.
70 When interpreting the
contractual provisions which gave Sparrow the right to sell the encumbered
inventory, it is necessary to look at the words of the contract, the nature of
the transaction which the parties entered into, and all of the surrounding
circumstances.
71 The express provisions of
the GSA establishes that Sparrow was granted a licence to sell the encumbered
inventory. In particular, the licence stated that:
. . . until default, Debtor may, in the ordinary
course of Debtor's business, sell or lease inventory and, subject to
Clause 7 hereof, use Money available to Debtor. [Emphasis added.]
Therefore, Sparrow was permitted to sell its inventory in the
ordinary course of its business and “use” the proceeds generated therefrom.
The critical question is what “us[age]” this licence to sell in the “ordinary
course of ... business” contemplated. In this connection, I find two of the
express covenants in Sparrow's contractual arrangements to be salient.
Paragraph 4(e) of the GSA required Sparrow:
(e) to pay all taxes,
rates, levies, assessments and other charges of every nature which
may be lawfully levied, assessed or imposed against or in respect of
Debtor or Collateral as and when the same become due and payable; [Emphasis
added.]
In addition, in the Credit Facilities Agreement, Sparrow covenanted
to the bank as follows:
(3) it will promptly pay when
due all business, income and other taxes properly levied on its operations and
property and remit all statutory employee deductions when due; [Emphasis
added.]
72 Looking at these express
provisions of the contractual arrangements between Sparrow and the bank, I
conclude that the payment of payroll deductions would be a usage to which the
bank contemplated Sparrow would use the proceeds of inventory sold in the
“ordinary course of ... business”. My conclusion in this respect is buttressed
when the nature of the dealings between Sparrow and the bank, and all the
surrounding circumstances, are observed.
73 The bank was Sparrow's
primary lender; it held a security interest in most, if not all, of Sparrow's
assets. In particular, the bank held various security interests in Sparrow's
inventory. It was of course in the bank's best interest that Sparrow function
as a viable economic unit. To do so, Sparrow was required to sell its services
as an electrical contractor and, necessarily, sell its inventory. From the
sales of the inventory, Sparrow could generate revenues to, inter alia,
pay its outstanding operating debts. If it failed to do so, Sparrow could be
petitioned into bankruptcy, with the result that Sparrow could no longer
generate the profits necessary to pay its loan obligations to the bank in the
long term. One of Sparrow's ongoing obligations, its costs of doing business,
was the paying of wages. In order to stay in business, and operate as a
profitable business enterprise, Sparrow would have to pay its employees. This
is a necessary requirement of continuing in business. It would be reasonable that
the bank expect, taking into consideration all the circumstances of this
arrangement, that revenue from the sale of inventory would be used to pay
wages.
74 From these observations, I
consider the licence to sell inventory in the ordinary course of business in
this case necessarily included a licence to sell inventory to pay wages, and
remit wage deductions, in the course of its business. Where, as here, the
secured party has security over the majority of the assets of the debtor, the
security interest over the inventory must permit the debtor to sell the
inventory and put it to the general use of its business, including towards the
payment of wages. Indeed, the express terms of the licence intimates this,
providing Sparrow could, “in the ordinary course of ... business, ... use Money
available”. The scope of the licence can thus be ascertained either from the
express terms of the security agreement, or from the nature of the agreement
and the conduct of the parties. To be clear, however, the scope of the licence
in this case flows not merely from a right to sell inventory per se.
Instead, it is the licence to sell inventory in the “ordinary course of
[Sparrow's] business ... and use [the proceeds]” which renders it of such a
quality as to include a right to use the proceeds to pay wages. As Professor
Wood has correctly observed in “Revenue Canada’s Deemed Trust Extends Its
Tentacles: Royal Bank of Canada v. Sparrow Electric Corp.”, supra,
at p. 435, a licence to sell inventory may in certain circumstances be
circumscribed so as to not include a right to use the proceeds to pay wages:
The fact that the secured party permits the debtor to
sell the inventory does not in itself imply that the secured party permits the
debtor to use these proceeds to pay employees. In some cases the secured party
will not restrict the debtor's ability to use the proceeds in the ordinary
course of business, but this depends entirely on the security arrangement
negotiated between the debtor and the secured party. Consider the following
scenario:
SP finances the acquisition of inventory by an
automobile dealer (D), and is granted a security interest in the inventory.
The wholesale security agreement provides that D may sell the inventory in the
ordinary course of business and that upon doing so D must immediately remit the
wholesale purchase price of the automobile to SP.
In this scenario, SP clearly does not permit the
debtor to use the proceeds of inventory to pay its employees. Indeed, it is
common for SP to regularly monitor the debtor to ensure that the debtor is not
“out of trust” by failing to remit the proceeds of sale.
75 In summary, the true test of
whether the licence to sell inventory includes the right to pay wages must
therefore be a matter of interpreting the contractual arrangement between the
parties. The focus is not so much on the circumstances of the selling of inventory,
but rather the permitted usage of the proceeds of inventory. As in Professor
Wood's example, where the licence has a limited scope, that licence may not
include the right to use proceeds to pay wages. However, the expression of a
limited use for proceeds of inventory cannot prevail if the arrangement between
the parties is such as to allow, in practice, the debtor to use the inventory
proceeds in the course of its business. In this respect, I agree with
Professor Wood's comments regarding the appropriate test for determining
whether a licence to sell inventory includes permission to pay wages with the
proceeds (“Revenue Canada's Deemed Trust Extends Its Tentacles: Royal Bank
of Canada v. Sparrow Electric Corp.”, supra, at pp. 435-36):
This is not to say that the
analysis should hinge on the existence of a trust proceeds clause or other
contractual provision requiring the debtor to remit proceeds. A contractual
provision of this type should not govern if the real arrangement between the
parties is such that the debtor has the freedom to use the proceeds of
inventory in the ordinary course of business.
...
To make any sense at all, the licence theory must, at
the very least, be restricted to cases where the secured party permits the debtor
to pay employees either out of its collateral or out of the proceeds of its
collateral. This permission cannot be derived merely from the existence of a
licence to sell inventory. The test should be whether the debtor had the
freedom to use these funds in the ordinary course of business as opposed to
being under an obligation to remit them to the secured party. [Emphasis
added.]
76 In the case at bar, the GSA
contained an express licence permitting Sparrow to sell inventory in the course
of its business and use the proceeds available; the BAS contained an implied
licence to this effect. While it is true that the GSA contained a trust
proceeds clause, I find that this cannot have the effect of limiting the scope
of the licence where the real arrangement between the parties was, as expressly
stated, that Sparrow could use the proceeds of inventory in the course of its
business. The bank in this case was not a small inventory financier who
required Sparrow to immediately remit proceeds of inventory to it. To the
contrary, the bank was a large scale lender who permitted Sparrow to use
inventory sales to maintain the viability of its enterprise. For these
reasons, applying Professor Wood's test, I find that under the licence to “sell
... inventory” “in the ordinary course of ... business” and “use [the] [m]oneys
available” the bank permitted Sparrow to sell inventory to pay wages and, necessarily,
payroll deduction obligations.
77 For all these reasons,
through the application of the licence theory, it is my conclusion that the
appellant’s s. 227(5) deemed trust must take priority over the bank’s security
interests in the disputed collateral. The trust fund representing the deducted
amounts, while without identified subject matter from the date of its
inception, is capable of identifying property subject to that trust ex post facto.
To reiterate, the bank consented to the reduction in its security in inventory
in order to pay wage deductions at the time those deductions were made, and
s. 227(5) ITA has the effect of carrying forward that consent to
the time of receivership. By consenting to the payment of wages out of the
proceeds of inventory during the course of Sparrow’s business, the bank ipso
facto consented to the statutory scheme under the ITA designed to
cover unpaid wage deductions. In short, in the present case the licence to
deal with inventory proceeds coupled with the statutory scheme in
s. 227(4) and (5) ITA gives priority to Her Majesty’s claims for
statutory wage deductions. This result is obtained both in regard to the
bank’s GSA, and its BAS.
78 The respondent bank has
submitted that this result is necessarily precluded with regard to their BAS by
virtue of s. 428(1) of the Bank Act , which provides as follows:
428.
(1) All the rights and powers of a bank in respect of the property mentioned in
or covered by a warehouse receipt or bill of lading acquired and held by the
bank, and the rights and powers of the bank in respect of the property covered
by a security given to the bank under section 427 that are the same as if the
bank had acquired a warehouse receipt or bill of lading in which that property
was described, have, subject to subsection 427(4) and subsections (3) to
(6) of this section, priority over all rights subsequently acquired in, on
or in respect of that property, and also over the claim of any unpaid vendor.
[Emphasis added.]
I cannot agree with this submission. It is true that s. 428(1)
secures the respondent bank’s proprietary right to the disputed collateral.
However, for the reasons I have expressed, the fact remains that the bank has
consented to the divestment of this interest. Such a waiver of priority, in my
view, renders s. 428(1) of no assistance to the respondent bank.
79 I add as a final matter that
in addition to providing certainty in disputes between consensual and
non-consensual security interests, the licence theory has the virtue of
achieving fairness in commercial law. Here, the respondent bank had permitted
Sparrow to sell its inventory in the course of its business in order to, among
other things, pay wages and wage deductions. To this extent, therefore, the
bank permitted the reduction in the value of its security interest in Sparrow’s
inventory, during the ordinary course of Sparrow’s business. Implicit in the
bank’s consent is the assumption that in so doing, Sparrow would generate
profits from the conversion of inventory into revenues; this economic process,
as I noted above, ensures that interest payments owing to the bank would be
paid to them on a sustainable basis. In short, the bank benefitted in a
general sense from Sparrow’s carrying on its business operations, an endeavour
which required Sparrow to pay wages and wage deductions. More specifically,
however, when Sparrow stopped paying its wage deductions, as required, the bank
could be said to benefit from the artificial increase in Sparrow’s working
capital, allowing an extension of the life of Sparrow’s business.
80 Now, when Sparrow’s business
is no longer a viable enterprise, the bank says that it is entitled to the very
payments which allowed Sparrow, in part at least, to stay in business longer
than was legally economical. In essence, the bank is willing to accept the
benefits of Sparrow’s non-payment of statutory deductions, and can be said to
have reasonably permitted the use of its collateral to pay these deductions at
the time they should have lawfully been paid, but refuses to accept the burden
of Sparrow’s unlawful action at the time of its receivership. In my view, it
should be the policy of the law that the respondent bank be held accountable
for Sparrow’s outstanding statutory obligations. The licence theory, as I have
developed it, ensures that in appropriate circumstances this result will
obtain. In this way, in my opinion the licence theory is grounded not only in
legal principles, but also in sound policy.
81 Since writing the foregoing,
I have had the benefit of reading the careful reasons of my colleague, Mr.
Justice Iacobucci. With deference however, I do not share his views or his
concerns.
82 I note that Iacobucci J., in
his reasons, has taken me to have adopted the licence theory in extremely broad
terms. Specifically, when summarizing the conceptual basis of my reasoning, he
states at para. 91:
Consequently, says the [licence] theory, the bank’s
claim to the inventory must give way to any debts incurred in the
ordinary course of business. [Emphasis added.]
Similarly, Iacobucci J. writes at para. 97:
The satisfaction of any legitimate debt or obligation,
whenever incurred, is arguably “in the ordinary course of business”.
Certainly, the payment of creditors is a permissible “use” of the proceeds of a
sale of inventory. Following my colleague’s reasoning, this would mean that every
subsequent claim should prevail over the respondent’s general security
agreement, because every rival claim might have been satisfied out of the
proceeds of a hypothetical sale of the inventory. [Emphasis added.]
83 With respect, as he
acknowledges, my reasons do not go this far. It is not the consent to payment
of wage deductions from the proceeds of inventory simpliciter which
drives me to the conclusion that Her Majesty’s interest must prevail. This is
a necessary, but not sufficient, condition. In addition, however, what is
significant to the outcome of this case is that the bank has consented to
payment of wages including deductions, out of inventory which, at the time
of the deductions, are by statute deemed to be taken out of the estate of the
debtor (see ss. 153(3) and 227(4) ITA ). Section 227(5)
carries that consent forward to the time of liquidation, assignment,
receivership or bankruptcy, to realize Her Majesty’s claim out of the bank’s
inventory.
84 Therefore, the unique nature
of the statutory provisions applicable to wage deductions, and the bank’s
consent thereto, are integral to the success of the s. 227(5) claim in the
case at bar. In this way, the licence theory, as I have employed it, is
circumscribed.
85 It must be stressed that the
issue relates to wages actually paid to employees -- not a simple obligation to
pay wages -- a portion of which has been deducted from the amount remitted to
the employee and must be remitted to Her Majesty. Pending such remittance, the
amount deducted is deemed under s. 227(4) to be held in trust for Her
Majesty. By virtue of these ITA provisions, and unlike ordinary debts
and obligations, unpaid wage deductions are, in law, performed
obligations. The consent by the bank to the payment of wages out of the
proceeds of the sale of inventory must be taken to cover the wages paid
according to law including that portion which has been deducted from the
remittance to the employee, pursuant to the ITA , in order that it be
remitted to Her Majesty. While the value of the bank’s security in the
inventory may be thereby reduced, this is by virtue of specific statutory
requirements under well-defined rules limited in their application to actual
payment of wages. These requirements are well known and are encompassed by the
bank’s consent to the payment of wages in the ordinary course of business and
do not open the door to uncertainty as to the value of security. Any risk to
the bank’s security is part of the very risk involved in consenting to the
payment of wages. This does not open the door to any uncertainty as to the
value of the bank’s security arising from unperformed obligations incurred by
the debtor in the ordinary course of business.
86 For these reasons, I cannot
agree with the premise underlying Iacobucci J.’s reasons, namely, that the
licence theory as I have employed it is inimical to the integrity of commercial
law. It does not have the extensive application suggested by my colleague; it
does not create uncertainty in commercial transactions. Instead, the licence
theory operates narrowly, in conjunction with unique statutory provisions, so
as to actualize legally performed obligations when they, in fact, exist.
VI - Conclusion
87 It is possible to summarize
my conclusions in this case into the following five propositions:
1. Priorities between
statutory trusts and consensual security interests are resolved by determining
which interest has an attached interest in the disputed collateral at the time
the statutory trust becomes operative.
2. The s. 227(5) ITA
deemed trust attaches to any property of the debtor which exists upon
liquidation, assignment, bankruptcy or receivership.
3. For example, if deductions
are made prior to the attachment of a fixed charge over collateral, the
s. 227(5) deemed trust will engage to retroactively attach
Her Majesty's beneficial interest to that collateral. The fixed charge
over that collateral will thereafter be subject to Her Majesty's
pre-existing claims for unremitted payroll deductions.
4. Otherwise, if a security
interest is in the nature of a fixed and specific charge, that interest gives
the holder legal title to the collateral, such that a subsequent competing
statutory trust will not be able to attach its interest. In such a case, all
the statutory trust can attach to is the equity of redemption in the
collateral.
5. However, as an exception
to propositions 2 and 4, where the holder of a fixed security interest permits
the debtor to sell the collateral, this may provide an opportunity for the
statutory trust to attach. Whether this actually occurs depends entirely on
the facts of each case. The test is whether, at the time the deductions
occurred, the debtor had the right to sell the collateral and use the proceeds
to pay the obligation to which the statutory trust is related.
88 I have found that, on the
facts of this case, the licence invoked to sell inventory included the
permission to use its proceeds to pay wages or wage deductions. The test in
proposition 5 has therefore been made out. Accordingly, I would allow the
appeal with costs.
The judgment of Sopinka, McLachlin, Iacobucci and
Major JJ. was delivered by
89 Iacobucci J. -- I have read the lucid
reasons of my colleague, Justice Gonthier, and although I agree with much of
his reasoning, I cannot, with respect, accept the conclusion that he reaches.
In particular, I do not accept that the deemed trust that arises in favour of
the Crown by operation of s. 227(4) of the Income Tax Act, R.S.C., 1985,
c. 1 (5th Supp .) (hereinafter “ITA ”), takes priority over the security
interests that the respondent has under the Bank Act, S.C. 1991, c. 46 ,
and the Personal Property Security Act, S.A. 1988, c. P-4.05
(hereinafter “PPSA”). Even conceding that the latter interests are
subject to a licence to sell, the licence is not nearly so broad as to
encompass the satisfaction of income tax obligations. As I will discuss below,
a licence to sell inventory authorizes at most only the satisfaction of
obligations that are immediately incidental to an actual sale of the inventory.
90 Because my only
disagreement with my colleague is in his application of the licence-to-sell
approach to this case, I do not propose to discuss the facts or background that
he has so ably described or to dwell on any other part of his reasons. I need
not say anything more about the character of the respondent’s security interests
than that they are fixed and specific.
91 My colleague disposes
of this appeal on the basis of the so-called “licence theory”. Briefly, the
licence theory holds that a bank’s security interest in a debtor’s inventory,
though it be fixed and specific, is subject nevertheless to a licence in the
debtor to deal with that inventory in the ordinary course of business.
Consequently, says the theory, the bank’s claim to the inventory must give way
to any debts incurred in the ordinary course of business. The leading
articulation of the licence theory appears in McLachlin J.A.’s (as she then
was) reasons in R. in Right of B.C. v. F.B.D.B., [1988] 1 W.W.R. 1
(B.C.C.A.) (hereinafter “FBDB”), at p. 40.
92 The theoretical basis
of the licence theory seems to be that a creditor who has granted a licence to
sell inventory has thereby consented to the subjection of his security
interest to other obligations that may arise “in the ordinary course of
business”. My colleague says this in his reasons, at para. 68:
In short, where the bank has
consented to the reduction in the value of its security in order to pay
statutory deductions at the time those deductions are made, they have to the
same extent, by virtue of s. 227(5) [ITA ], consented to the reduction in
their security at the time of receivership.
This is sensible, because it is only if the licence is understood as
a kind of tacit lessening of the creditor’s security interest that the
appellant’s cause is advanced. Certainly the actual operation of the licence
is not relevant, because in this case the inventory in question was never
actually sold pursuant to the licence. Rather, the receiver sold it by court
order. If the licence is to have anything to do with the disposition of this
appeal, it must be by virtue of the evidence it affords of the respondent’s
intention to take less than an entire security interest in the inventory.
93 In my view, the
licence affords no such evidence. My colleague seems to think that the
potential sale of the inventory amounts to an actual limitation of the security
interest. For my part, I do not see what the one thing has to do with the
other. There is a great difference between saying, on the one hand, that if
a debtor sells inventory and applies the proceeds to a debt to a third party, then
the third party takes the proceeds free of any security interest and saying, on
the other hand, that because a third party could take the proceeds free
of any security interest, no security interest exists in the proceeds as
against that third party. A licence to sell inventory in the ordinary course
of business is a condition of the former kind. The consequent (defeasance of
the security interest) follows only if the antecedent (sale of the inventory
and application of proceeds to an obligation to a third party) is satisfied.
In other words, the security interest in the inventory disappears only if
the debtor actually sells the inventory and applies the proceeds to a debt to a
third party.
94 That this is so is
suggested by s. 28(1) PPSA, which provides:
28(1) Subject to this
Act, where collateral is dealt with or otherwise gives rise to proceeds, the
security interest
(a) continues in the collateral, unless the secured
party expressly or impliedly authorized the dealing, and
(b) extends to the proceeds,
but where the secured party enforces a security
interest against both the collateral and the proceeds, the amount secured by
the security interest in the collateral and the proceeds is limited to the
market value of the collateral at the date of the dealing.
In accordance with this provision, the result of a sale of inventory
is to give the purchaser an unencumbered interest in the inventory and the
licensor a continuing security interest in the proceeds of the sale. It is
only if the debtor subsequently uses the proceeds to satisfy an obligation to a
third party that the proceeds will be removed from the scope of the licensor’s
security interest in them. Accordingly, what a security agreement with a
licence to sell creates is a defeasible interest; but the event of defeasance
is the actual sale of the inventory and the actual application of
the proceeds against an obligation to a third party.
95 I recognize that the
operation of s. 28(1) PPSA is not necessarily inconsistent with the
broad interpretation of the licence to sell that my colleague advances.
However, it seems to me that this is an appropriate case for the invocation of
the maxim expressio unius est exclusio alterius. The statute prescribes
certain consequences for the security interest that follow a dealing with
inventory. In particular, the statute contemplates defeasance of the interest
if the debtor actually sells the inventory and applies the proceeds to an
obligation to a third party. Significantly, the statute does not contemplate a
defeasance on the happening of any other event. In my view, the statute
occupies the field and crowds out other possible interpretations of the
licence, including the one that Gonthier J. favours.
96 Because in this case
there was no actual sale of the inventory in question, let alone any
disposition of the proceeds, the licence can have had no effect on the
respondent’s security interest. What the debtor might have done with
the licence does not matter.
97 If it were otherwise,
the licence to sell inventory would entirely eviscercate the respondent’s
general security agreement. The satisfaction of any legitimate debt or
obligation, whenever incurred, is arguably “in the ordinary course of
business”. Certainly the payment of creditors is a permissible “use” of the
proceeds of a sale of inventory. Following my colleague’s reasoning, this
would mean that every subsequent claim should prevail over the respondent’s
general security agreement, because every rival claim might have been satisfied
out of the proceeds of a hypothetical sale of the inventory. Moreover, the
priority rules of the PPSA, whose general policy is to assign priority
to the earliest registered security interest, would be turned on their head.
Presuming that every charge against inventory is subject to a licence to sell
-- a presumption that accords with the interest of creditors in ensuring the
debtor’s continued vitality -- the last security interest would take priority
over all earlier ones, because only the last interest would not be subject to
some charge arising in the ordinary course of business. In answer to this
objection, it might be said that as between two PPSA securities, the
rules in the Act should be applied to determine priority. However, such an
answer would not be consistent with the licence theory, which supposes that the
original security interest in the inventory ends where obligations incurred in
the ordinary course of business begin. The subsequent interest would prevail
because the earlier interest would disappear before it.
98 It is open to my
colleague to distinguish the fact situation in this appeal from the
hypothetical priority contests I have mentioned on the ground that the Crown’s
interest in the inventory is unlike other charges against inventory in that it
depends on the fictional device of deeming. What makes this case different, it
might be said, is that the ITA deems to have been done what could have
been done. On this understanding, it does not matter that the inventory was
not actually sold and the proceeds were not actually remitted to the Receiver
General, because s. 227(4) and (5) ITA deem these things to have been
done. But in my view, this answer cannot succeed because the inventory was not
an unencumbered asset at the moment the taxes came due. It was subject to the
respondent’s security interest and therefore was legally the respondent’s and
not attachable by the deemed trust. As Gonthier J. himself says (at para. 39):
. . . [s. 227(4) ] does not permit Her Majesty to
attach Her beneficial interest to property which, at the time of liquidation,
assignment, receivership or bankruptcy, in law belongs to a party other than
the tax debtor.
99 The deeming is thus
not a mechanism for undoing an existing security interest, but rather a device
for going back in time and seeking out an asset that was not, at the moment the
income taxes came due, subject to any competing security interest. In short,
the deemed trust provision cannot be effective unless it is first determined
that there is some unencumbered asset out of which the trust may be deemed.
The deeming follows the answering of the chattel security question; it does not
determine the answer.
100 Indeed, Gonthier J.
does seize on the peculiar nature of the deemed trust as a possible ground for
distinguishing the Crown’s interest from rival interests. However, his
argument differs from the one I have outlined to the extent that it emphasizes
the deemed performance of the obligation to the Crown. It appears to be my
colleague’s position that the licence to sell represents a reduction in the
value of the security interest only with respect to performed obligations but
not with respect to unperformed ones. In his view, this represents a
sufficient check on the licence theory. I agree that, if the distinction
between performed and unperformed obligations were maintainable, then the
likelihood of the licence consuming the security interest would be greatly
reduced. However, in my view, the distinction cannot be maintained. As
Gonthier J. says more than once in his reasons, the licence theory rests on the
consent of the parties. But the parties to this case consented to the sale of
inventory “in the ordinary course of Debtor’s business”. The language is
unqualified. No distinction is drawn between performed and unperformed
obligations. The only performance that is contemplated in the licence is the
actual sale of the inventory and the application of the proceeds to a debt.
And, as I have already argued, the deeming mechanism does not furnish the
needed actual sale. Accordingly, I conclude that if the words of the licence
are to be given their due as an indicium of the parties’ intent, then
there can be no distinction between performed and unperformed obligations.
101 My colleague places
great emphasis on the fact that the debtor covenanted, in the general security
agreement, “to pay all taxes, rates, levies, assessments and other charges of
every nature which may be lawfully levied, assessed or imposed against or in
respect of Debtor or Collateral as and when the same become due and payable”.
But this covenant is not part of the licence. And in any event, it is merely a
covenant to obey the law. It adds nothing to s. 153(1) ITA .
Furthermore, it does not prescribe the outcome of a priority contest. What is
more, the covenant to pay taxes is only one of several in the agreement.
Another covenant provides that the debtor shall “carry on and conduct the
business of Debtor in a proper and efficient manner”. Presumably the debtor
might incur subsequent debts in the course of carrying on and conducting its
business. Gonthier J. advances no principle that might permit the settlement
of priority disputes as between the Crown and subsequent lenders. In the event
of a dispute, both would have the benefit of the licence to sell inventory and
of express covenants, so that some other criterion would have to be found to determine
which takes priority. Here, as before, the prospect of a reversal of the
ordinary priority rules is immediate and troubling.
102 My colleague also
relies on comments made in FBDB. In that case, the British Columbia
Court of Appeal said, after having disposed of the appeal on another ground,
that a licence to sell inventory carries with it a requirement that the
licencee should satisfy obligations incurred in “dealing with the stock in the
ordinary course of business”: FBDB, supra, at p. 40. Because
the obligation to set aside provincial sales taxes is a “legal incident” of the
sale of inventory, a lien for unpaid sales taxes comes within the scope of the
licence and so is excepted from any security interest that is subject to it: idem.
103 As I understand the
comments in FBDB, a licence to sell inventory permits the satisfaction
of obligations out of the proceeds only to the extent of the “legal incidents”
of the sale. In itself, this greatly limits the scope of the theory. Because
the payment of wages, except perhaps to the sales agent, is not a “legal
incident” of the sale of inventory, deduction of income taxes from wages does
not come within the scope of the licence. This alone would appear sufficient
to distinguish FBDB from the instant appeal.
104 However, I think that
on closer examination it turns out that FBDB does not even depend on a
licence theory, or at least does not depend on a licence theory of the kind
advanced by my colleague. I say this because his reasons posit a charge that
arises against the value of the inventory as a result of the operation
of the licence. But the sales taxes that were at issue in FBDB were not
against the value of the inventory. Rather, they were superadded to the
underlying value, which is to say that they were calculated on the basis of the
sale price of the inventory. Thus, the sales taxes that attend a sale of
inventory represent something over and above the value of the inventory.
Because a bank’s charge is against the inventory, it does not extend so
far as the sales taxes generated by a sale of inventory. But income taxes are
not like sales taxes in that they are not as directly related to sales of
inventory as sales taxes are. To the extent that income taxes have anything to
do with the proceeds of a sale of inventory, they are payable out of the monies
received for the value of the inventory. A bank’s charge against the inventory
is therefore adequate to defeat subsequent claims for the payment of income
taxes. For this reason, McLachlin J.’s reasoning in FBDB is not
contrary to what I am advancing herein.
105 I should also mention
that in 1988, when the FBDB case was decided, British Columbia’s Personal
Property Security Act, S.B.C. 1989, c. 36, was not in force. As a
consequence, the British Columbia Court of Appeal did not have to contend with
the legislative considerations that we face in this appeal. In particular,
there was at the time no equivalent in British Columbia law to s. 28(1) of
Alberta’s PPSA. The Court of Appeal therefore had greater latitude than
we have to interpret a licence to sell as a tacit consent to a reduction of the
security interest in the inventory. It seems to me that as a result of the
enactment of the PPSA, something more than an unadorned licence to sell
is needed to justify the conclusion that a creditor intended to abridge
considerably its security interest in inventory.
106 And so I conclude that
the licence to sell inventory is not an exception to the respondent’s fixed and
specific charge against the debtor’s inventory. To hold otherwise would be to
eviscerate the respondent’s security interest. This is not to say, however,
that Parliament could not legislate otherwise. Parliament has shown that it
knows how to assert priority over rival security interests. See Alberta
(Treasury Branches) v. M.N.R.; Toronto-Dominion Bank v. M.N.R., [1996] 1
S.C.R. 963, at p. 975. All that is needed to overtake a fixed and specific
charge is clear language to that effect.
107 Though I consider the
above legal arguments sufficient to dispose of this appeal, I observe that
policy considerations also tell in favour of the conclusion I have reached.
108 In this respect, the
first thing to notice is that the security agreement that the debtor and the
respondent had in this case is an example of a very common and important
financing device. To a considerable extent, commerce in our country depends on
the vitality of such agreements. As several leading academics have observed,
the amounts at stake run into the billions of dollars each year. And though
not every creditor seeks security, the incentives to do so are powerful. See
Jacob S. Ziegel, Benjamin Geva and R. C. C. Cuming, Commercial and Consumer Transactions
(Rev. 2nd ed. 1990), at pp. 957-60. Accordingly, tinkering with security
interests is a dangerous business. The risks of judicial innovation in this
neighbourhood of the law are considerable.
109 Chief among these is
the risk that attends legal uncertainty. If the legal rule is not clear, then
inventory financiers will have to provide against the risk that their security
interest might be defeated by some rival claim. The danger is particularly
acute where as here, the language is as broad as “in the ordinary course of
business”. In this regard, I agree with what Professor Roderick J. Wood said
in his article (“Revenue Canada’s Deemed Trust Extends Its Tentacles: Royal
Bank of Canada v. Sparrow Electric Corp.” (1995), 10 B.F.L.R. 429,
at p. 429) that my colleague cites:
. . . there is little controversy with the proposition
that a priority rule should be capable of producing reasonably predictable
results. An unclear priority rule imposes a number of social costs. It means
that creditors must plan their affairs against less certain outcomes.
Uncertain rules generate more litigation than clear rules. Over time an
uncertain rule is sometimes transformed into a clear rule through the process
of judicial interpretation. However, this is a piecemeal approach which often
occurs at a glacial pace.
110 Indeed, the
consequences of my colleague’s approach might be more dire than even Professor
Wood supposes. For, as I have observed, almost any subsequent financial
arrangement might be in the ordinary course of business. Accordingly, the
possibility is real that my colleague’s proposed rule would effectively
obliterate the PPSA charge against inventory. As insurance against this
outcome, the costs of financing would presumably increase. I agree that if
Parliament mandated this outcome, the courts must perforce accept it. However,
judges should not rush to embrace such a weighty consequence unless the statutory
language requiring them to do so is unequivocal.
111 Moreover, and for
reasons I have already given, there is every likelihood that a broad
interpretation of the licence theory would do violence to the PPSA. The
Act clearly contemplates that inventory financing will be an important
commercial device. But allowing the mere potential operation of a licence to
sell to defeat a security interest in inventory would deprive the interest of
all efficacy. It would not be any sort of security against subsequent
obligations.
112 Finally, I wish to
emphasize that it is open to Parliament to step in and assign absolute priority
to the deemed trust. A clear illustration of how this might be done is
afforded by s. 224(1.2) ITA , which vests certain moneys in the Crown
“notwithstanding any security interest in those moneys” and provides that they
“shall be paid to the Receiver General in priority to any such security
interest”. All that is needed to effect the desired result is clear language
of that kind. In the absence of such clear language, judicial innovation is
undesirable, both because the issue is policy charged and because a legislative
mandate is apt to be clearer than a rule whose precise bounds will become fixed
only as a result of expensive and lengthy litigation.
113 It remains to make a
few remarks by way of conclusion. Because I believe that the respondent’s
general security agreement gave it a fixed and specific charge against the
debtor’s inventory, and because I conclude that the licence to sell that
inventory does not derogate from the respondent’s security interest, I conclude
that this appeal should be dismissed. I do not need to decide whether the Bank
Act security would have priority over the deemed trust as well; though given
that the licence to sell inventory under the Bank Act security is only
implied, I do not see how the Crown could have a greater claim under the Bank
Act than it has under the PPSA.
114 Therefore I would dismiss the
appeal with costs.
Appeal dismissed with costs, La Forest, Gonthier and
Cory JJ. dissenting.
Solicitor for the appellant: The
Attorney General of Canada, Ottawa.
Solicitors for the respondent: Milner,
Fenerty, Edmonton.