Re Zurich Insurance Co., 84 DTC 6232, [1984] CTC 639 (Ont CA)

Weatherston, JA:—Zurich Insurance Company insured Troy Woodworking Limited against loss by fire. There was a fire in the insured premises on March 1, 1981, and we are concerned in this appeal with that part of the insurance money that was payable for business interruption, as to which The Bank of Nova Scotia and the Department of National Revenue each claim priority. The bank’s claim is under one or more of the securities it took for the repayment of its loans to Troy; the Department claims under a Third Party Demand for Payment for unpaid excise tax. The bank’s equitable charge on the insurance money is older than the claim of the Department, but the Department claims priority because its demand was served before the insurance company was given notice of the bank’s charge.

The insurance money was paid into court pursuant to the Insurance Act, RSO 1980, c 218. On motion before him, Linden, J held that the Department of National Revenue was entitled to be paid the amount of its claim, and that the balance should be paid out to The Bank of Nova Scotia.

As security for money loaned and agreed to be loaned, Troy Woodworking Limited gave to The Bank of Nova Scotia a demand debenture on all its present and future assets, a general assignment of book debts and a security agreement by which it granted to the bank a security interest in described collateral, including present and future choses in action. The latter two documents were duly registered under the Personal Property Security Act, RSO 1980, c 375. The debenture was expressed to create a floating charge; the assignment of book debts and the security agreement were not, in form, floating securities but one could say as to either document what Lord Halsbury LC said in Illingworth v Houlds- worth, [1904] AC 355 at 358:

It appears to me, notwithstanding the argument we have heard, that it is impossible to doubt that the bargain between the parties which is evidenced by this instrument is one which could only be carried out at all by its being a floating security such as I have indicated, and which must comprehend those incidents.

The effect of these several security instruments was therefore to create a present equitable charge on existing assets, and on future assets as soon as they came into being. That equitable charge remained dormant so long as the security remained floating, but became a specific or fixed charge on all existing assets as soon as the floating charge crystallized.

According to the agreed statement of facts, Troy defaulted under its loan agreement, and the bank demanded payment of its loans. Then, on May 7, 1981, the bank appointed a receiver under the debenture, who took possession of the assets and undertaking of Troy the same day.

On the appointment of the receiver, the company ceased to be a going concern. The floating charge crystallized, and became a specific charge on all the assets of the company, with priority over unsecured creditors, but subject to any liens and specific charges validly created by the company before crystallization.

In MacKay and Hughes (1973) Ltd v Martin Potatoes Inc and Dominion Stores Ltd (1981), 40 CBR 80, O’Brien, J, sitting as a single judge of the Divisional Court, held that notice of the appointment of a receiver had to be given to a fundholder before a crystallization was effected. I do not agree. The fundholder could safely pay the fund to a competing creditor if he had no knowledge of the charge, and it is for this reason alone that notice of the appointment of a receiver is necessary to protect the security. See: Ward v Duncombe, [1893] AC 369; Industrial Development Bank v Valley Dairy Limited and MacDonald, [1953] OR 70.

After the appointment of the receiver, but before notice of his appointment had been given to Zurich Insurance Company, the Department of National Revenue served Zurich with a Third Party Demand for Payment, under the authority of section 52 of the Excise Tax Act, RSC 1970, c E-13, section 52, the relevant parts of which are as follows:

52. (1) All taxes or sums payable under this Act shall be recoverable at any time after the same ought to have been accounted for and paid, and all such taxes and sums shall be recoverable, and all rights of Her Majesty hereunder enforced, with full costs of suit, as a debt due to or as a right enforceable by Her Majesty, in the Exchequer Court of Canada or in any other court of competent jurisdiction.

(6) When the Minister has knowledge or suspects that any person is or is about to become indebted to a licensee he may, by registered letter, demand of such person that the moneys otherwise payable to the licensee be in whole or in part paid over to the Receiver General on account of the licensee’s liability under this Act.

(7) The receipt of the Minister therefor constitutes a good and sufficient discharge of the liability of such person to the licensee to the extent of the amount referred to in the receipt.

(8) Any person discharging any liability to a licensee after receipt of the registered letter referred to is personally liable to the Receiver General to the extent of the liability discharged as between him and the licensee or to the extent of the liability of the licensee for taxes and penalties, whichever is the lesser amount.

This Court interpreted a provision of the Income Tax Act identical to subsection 52(6) in the Bank of Montreal v Union Gas Co of Canada Ltd, [1969] 2 OR 776. The assignment of book debts on which the bank there relied was not in form a floating charge, but the debt which was the subject matter of the dispute was a “future debt” and so the bank’s charge was an equitable one. The Department had given its Third Party Demand before the bank gave notice of its assignment, and the debtor had paid part of the debt. I do not disagree with that part of the judgment that held that the debtor, in the absence of notice of a prior assignment, could with impunity pay that part of the debt that it did pay in response to the Demand. The section expressly so provides, and seems to go further than the equitable rule. But, in my opinion, the rights given to the Department under section 52 of the Excise Tax Act (or subsection 120(1) [now 224(1)] of the Income Tax Act) are purely statutory rights. Neither section creates an equitable charge. In so far as the court said otherwise in the Union Gas case, I respectfully disagree. As to the alternate ground of the decision in that case, I respectfully agree with the decision of the Alberta Court of Appeal in Attorney General of Canada v Royal Bank of Canada (1978), 29 CBR (NS) 227 when McGillivray, CJA said at 229:

We are all of the view that the decision of this court in Re Lamarre; University of Calgary v Morrison, [1978] 2 WWR 465, 27 CBR (NS) 41, 78 DTC 6155, 85 DLR (3d) 392, 8 AR 533 (sub nom University of Calgary v Receiver Gen of Can), enunciated two propositions: firstly, a demand made under s 224 does not convey the indebtedness to the Crown, nor does it impress it with a trust; and secondly, the Minister does not, by virtue of the demand, become a holder of a security. In short, the Crown does not acquire an equitable interest in the indebtedness.

In this regard, we respectfully differ from the alternate reasons for judgment given by the Ontario Court of Appeal in Bank of Montreal v Union Gas Co, [1969] 2 OR 776 at 781, [1969] CTC 686, 69 DTC 5441.

The debt in question in the Union Gas case was payable at the time of service of the Third Party Demand. It had not been paid only because the debtor had not yet checked and approved the remaining vouchers. That is sufficient to distinguish the case from the present one. For although the fire which gave rise to the insurance loss had occurred on March 1, a proof of loss was not filed with the insurance company until September 14. By section 113 of the Insurance Act, RSO 1980, c 218, no action shall be brought for the recovery of money payable under a contract of insurance until the expiration of sixty days after proof of the loss. So, even if service of a Third Party Demand created an equitable interest in the debt, it was an equitable interest in a debt not yet payable. Union Gas does not stand in the way of my holding that, as between the two equitable charges on the insurance money, the older charge of the bank should prevail.

Subsection 52(6) authorizes the Minister to demand only that “the moneys otherwise payable to the licensee’’ be paid over to the Receiver General of Canada. In the present case, the moneys were payable, not to Troy, but to the receiver for the bank, by reason of its fixed security interest following crystallization of its security on the appointment of the receiver.

For these reasons I would allow the appeal with costs. The order below should be varied to provide that all the insurance money, which was paid into Court, should be paid out to The Bank of Nova Scotia, and that the bank should be paid its costs of the motion.