Banque Royale v. Canada, [1999] 2 CTC 303, 99 DTC 5196

Décary J.A.:

The main issue in this appeal from a decision of the Trial Division [1] is whether two requirements to pay served on some third parties by Revenue Canada pursuant to subsection 224(1.2) of the Income Tax Act (‘the Act”) have priority over the rights of the appellant Bank, a secured creditor. The Bank claims that because of various arrangements made with the tax debtor, the tax debtor’s trustee in bankruptcy and a company that had purchased the tax debtor’s accounts receivable prior to the bankruptcy, the debts in question had changed hands and were no longer part of the patrimony of the tax debtor.

The circumstances of this case, simplified in the extreme for ease of understanding, are the following.

The Hôtel-Dieu de Roberval and the town of Mascouche (hereinafter “the debtors”) owe, respectively, $44,009.98 and $50,503.03 to Groupe LMB Experts Conseils Inc. (hereinafter “the Groupe” or “the tax debtor”). The Groupe in turn owes some $390,000.00 to Revenue Canada.

On June 6, 1972, the Groupe sold its assets to Le Groupe LMB Experts Conseils (1992) Inc. (hereinafter “LMB (1992)” or “the purchaser”) (Exhibit D-4). That same day, in a separate agreement, the Groupe assigned its accounts receivable or entrusted the management thereof for collection pur- poses (and this is the dispute) to LMB (1992). This was contract D-5, to which the appellant Bank was a party.

On June 8, 1992, the Groupe made an assignment of property under the Bankruptcy Act. A trustee in bankruptcy was appointed. That same day, the trustee filed in the Superior Court sitting in bankruptcy a ""[Translation] Request for permission to sell assets prior to the first meeting” based on section 19 of the Bankruptcy Act. Also on June 8, 1992, the request was allowed by the Registrar.

On June 9, 1992, the trustee and LMB (1992) signed the agreement authorized by the Registrar in relation to the sale of the assets and the assignment (or the management) of the accounts receivable (Contract D-11).

On September 29, 1992, Revenue Canada served some requests for payment on the Hôtel-Dieu de Roberval and the town of Mascouche. These two debtors paid the money requested on December 18, 1992 and November 26, 1992 respectively.

On December 10, 1993, the appellant Bank filed in the Federal Court an ""[Translation] action for a declaratory judgment and judgment for payment of money” in which it sought a declaration that the money collected by Revenue Canada had been unlawfully collected and an order enjoining Her Majesty the Queen and the Minister of National Revenue to deliver this money to it. The appropriateness of this unusual proceeding has not been questioned by the defendants.

On June 16, 1997, Denault J. ruled that the above-mentioned agreements in reality constituted, not a final assignment of debts but a contract to manage accounts receivable:

In short, it can be seen from an analysis of the agreement “for the sale of accounts receivable” (D-5) dated June 6, 1992, which was the basis for the agreement between the trustee and LMB (1992) (D-11) after being approved by the Registrar in Bankruptcy, and from the way it was characterized, or in other words from the circumstances surrounding the agreement, that it did not concern a final sale of accounts receivable, but was a contract to manage accounts receivable. Thus, there was no dispossession of the patrimony of Groupe LMB, which continued to be a tax debtor within the meaning of the Act.

[Supra, note I, at p. 225]

The parties agree that if it was a final assignment of debts, subsection 224(1.2) of the Act is inapplicable, since the disputed claims against the Hotel-Dieu de Roberval and the town of Mascouche are no longer part of the patrimony of the “tax debtor”, the Groupe, but are in the patrimony of the purchaser of the debts, LMB (1992).

The conclusion reached by Denault J. is, in my opinion, the right one.

Although the appellant submitted that the terms of contracts D-5 and D- 11 were clear and expressed the common intention of the parties to sign an agreement for the sale of accounts receivable, such is not the case. While it is true that the nature of a contract is determined by its content and not by the legal characterization that the parties have given it, and that the judge erred in relying on the words used by some third persons (“contract to manage accounts receivable”) in order to characterize the contract as such, nevertheless the only reason cited by the appellant in arguing that the parties’ common intention was clear is that the parties themselves characterized their agreement as a “sale of accounts receivable”. But once this characterization, which as I said is not decisive, is disregarded, it is obvious that the contracts lack the clarity attributed to them by the appellant.

For example, the fact that the price of the alleged assignment is expressed in terms of “market value” (which presupposes that there will be no price, and thus no sale, if there is no collection), the fact that the price is a percentage of the amount collected, the fact that the so-called purchaser of the debts undertakes to pay the vendor the receivables not collected within six months of the date of the contract for one dollar and other consideration, and the fact that the so-called purchaser has the Bank, the vendor’s creditor, assume all of the legal costs associated with the recovery of the receivables, suggest that this supposed assignment is made much more in the interest of the vendor or the trustee or the Bank than that of the purchaser. When one examines the contract in terms not of the words it uses but of the effects it produces, which reveal and reflect the actual intention of the parties, one can only conclude that this was a contract to manage accounts receivable.

This conclusion suffices to dispose of the appeal.

The respondents, in their defence, raised two additional arguments, should their main argument fail.

The first is addressed to the lack of service of the assignment of debts, and the second, the fact that the Bank is essentially pleading on behalf of another.

In regard to service, the respondents submitted, and the trial judge found in their favour on this point, that the assignment could not be raised against them because it had not been served on them. This is an erroneous interpretation of article 1571 of the Civil Code of Lower Canada, which requires service (signification) on the debtor, not on third persons. In any event, since the Bank neither alleged in its statement of claim nor proved that there had been service on the debtors or acceptance by the debtors of the assignment within the meaning of article 1571, its action, on this ground alone, could fail, as the article in question stipulates that the buyer of a debt, in such circumstances, “has no possession available against third persons”.

The argument in relation to pleading on behalf of another appears not to have been argued at trial and it was not argued in this court. It is hard to see how the appellant Bank could counter it. Indeed, if this were an assignment of debts duly served on the two debtors, these debtors paid Revenue Canada in error and the Bank in reality was suing Revenue Canada on behalf of another in an action for restitution.

The appeal shall accordingly be dismissed with costs.

Appeal dismissed.