Citation:
2014 TCC 198
Date:20140617
Docket: 2013-1150(GST)G
BETWEEN:
INTERNATIONAL
HI-TECH INDUSTRIES INC. ,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Bocock J.
[1]
There are two motions in this GST appeal before
the Court: one brought by the Respondent to quash the appeal under paragraph
53(3)(c) of the Tax Court of Canada Rules (General Procedure)
(the “Rules”) for want of legal capacity and the other brought by the
Appellant, which is a corporation, for the Court to allow agents, rather than
counsel, to represent it under subsection 30(2) of the Rules.
I.
Facts:
[2]
The following facts were before the Court
through uncontroverted, affidavit evidence of the Appellant’s creditors and/or
accountants. The Appellant is a bankrupt corporation. Prior to bankruptcy, it
granted a generic, fulsome general security agreement dated December 8, 2001 (the
“GSA”) to its holding body corporate and other related companies (the “Garmenco
Group”). On the strength of the GSA security, the Garmenco Group advanced sums
to the Appellant approaching $6 million. The appeal relates to alleged GST miscalculations
of input tax credits (“ITCs”) made by the Canada Revenue Agency (the “CRA”)
during a GST audit and subsequent reassessments.
[3]
The relevant Trustee in Bankruptcy has accepted
the validity of the GSA, waived redemption of the security and released its
interest in the collateral charged by the GSA. A consent order of Pizzitelli J.
of this Court dated July 10, 2013, granted the Appellant an extension to file a
notice of appeal. The Respondent, after receipt of the Notice of Appeal, then
discovered that the Trustee in Bankruptcy had not “authorized” the legal
procedure constituting the appeal. When the Appellant brought its subsection
30(2) motion to the Court to seek representation by an agent in September of
2013, the Respondent advised that it would bring a cross motion to quash the
appeal on the basis of the absence of legal capacity.
[4]
The two issues before the Court are:
a) Should the Appellant be allowed representation by two persons who
are not counsel?; and
b) Do the secured parties’ security interests and other realization
rights enumerated in the GSA supersede the authority of a Trustee in Bankruptcy
(the “Trustee”) to commence or continue a legal proceeding on behalf of a
bankrupt estate?
II.
Representation by an Agent
[5]
The motion for alternative representation other
than by counsel is dismissed; the Appellant must be represented by legal counsel.
It was clear at the motion that the two persons seeking to be agents for the
Appellant, Mr. Bencze and Mr. Abou-Rached, are two knowledgeable, factual
witnesses in what will be largely a factual, documentary based appeal. Neither
is, nor was, a director of the Appellant. Both were thoroughly involved in the
audit and objection phase of the present reassessment, but nonetheless benefitted
greatly at the hearing of the motion from the limited retainer services of
counsel. Both admit they are not knowledgeable in the processes of the Court or
in the methods of best framing, presenting or arguing the facts they possess
and the relevant law applicable to this General Procedure matter. While
representation by counsel will not only partly assist the Court’s process, the
Court observes it will mostly assist the Appellant’s appeal. Moreover, the parties,
who will stand to recoup the ITCs arising from a successful appeal, have not
provided any evidence of any inability to pay: Chase Bryant Inc. v The Queen,
2003 DTC 145.
III.
Legal Capacity of Secured Creditor to Bring an Appeal
a) Respondent’s Position
[6]
The Respondent, in seeking to quash the appeal, argues
that the Appellant was bankrupt at the time of filing the Notice of Appeal, such
legal proceeding was neither authorized nor filed by the Trustee and,
therefore, there is no legal capacity under paragraph 53(3)(c) of the Rules
by which anyone other than the Trustee may bring such an appeal.
[7]
The expanded legal logic by which the Respondent
seeks to strike the appeal is that the combined effect of subsection 301(1.1)
and section 306 of the Excise Tax Act (the “ETA”) provide
that any person who has been assessed may file a notice of objection and once
the assessment is confirmed (or deemed confirmed) may appeal the assessment.
Further, all property, including the chose in action comprising the ITCs, is
broadly defined in the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (the “BIA”). The sole
authority to bring, institute or defend a legal proceeding (paragraph 30(1)(d)
of the BIA), in respect of any property vesting in the Trustee upon
bankruptcy, shall immediately “pass to and vest in the trustee,” but “subject
to this Act and the right of secured creditors”(section 71 of the BIA).
The Respondent argues that only the Trustee may commence an action (in this
case an appeal relating to the ITCs) and, if the persons presently before the
Court disagreed with the inaction of the Trustee in bringing such an appeal,
they ought to have availed themselves of the statutory right of creditors in
disagreement with a Trustee’s reticence by bringing an application before the
British Columbia Supreme Court to authorize the appeal related to the ITCs
(subsections 38(1), (2), (3) and (4) of the BIA).
[8]
The Respondent further argues that the case law
provides authority to this Court that a secured creditor cannot commence an
appeal in its own name or that of the Appellant. An un-discharged bankrupt
cannot commence an ETA appeal because the sole right to litigate is that
of the Trustee and the reassessment was otherwise part of the administration of
the bankrupt estate to be dealt with in that process: 475830 Alberta Ltd. v
Canada, [1998] TCJ No. 805 (QL) at paragraph 5. All property passing to the
Trustee under the bankrupt estate is subject to the Trustee’s sole right,
subject to section 38 of the BIA, to initiate an appeal and the bankrupt
retains no residual rights: 4028490 Canada Inc. v Canada, [2005] TCJ No.
95(QL). While aggrieved creditors may bring an appeal where a section 38 order
is issued, an alleged creditor cannot commence an action to vary a taxpayer’s
assessment on the basis of the taxpayer’s improvident consent to pay tax to the
alleged prejudice of a creditor; a creditor has no standing to challenge an
assessment or enforcement unless brought by the taxpayer who has filed the
proper form of appeal within the appropriate prescribed time limits: Nova
Ban-Corp Ltd. v Tottrup, [1989] FCJ No. 828 (QL) at paragraphs 1 and 3 on
page 5.
[9]
Therefore, on this basis these authorities, in
the absence of the Trustee’s direction or authorization by Court order under
section 37 or 38, respectively, the Respondent contends no appeal may be
brought.
b) Trustee’s Authority relating to assets subject
to the GSA
[10]
The Court manifestly agrees that if the entity
seeking to enforce the taxpayer’s rights of appeal were a general creditor of
the estate, a bankrupt or an alleged indemnitee under some pari passu or
unliquated claim, then no right to institute an appeal would exist in the
absence of the Trustee’s consent (section 37 of the BIA) or a Court
order (section 38, idem). Factually, however, this is not the present case.
[11]
The persons seeking to prosecute the presently
filed appeal seeks to do so pursuant to the GSA, granted and delivered to the
secured creditors by the bankrupt prior to any assignment or petition under the
BIA. Additionally, the GSA, as is standard practice, was vetted, verified,
approved and not redeemed by the Trustee. Saying so in his letter of October
5, 2012, the Trustee recounted several things: receipt of the secured creditors’
claim, receipt of a copy of the GSA and supporting documentation, valuation of
the secured creditors’ claim in excess of the value of the bankrupt estate, an
election to not redeem the security and, by re-delivery of the security to the secured
creditors, confirmation of his release of the estate’s interest (that of the
general creditors whom the Trustee represents) in the “listed real property,
equipment, a certain lawsuit, “the receivables” and any shares held by the
bankrupt”. Further, this release was expressed to be effected so that the
secured creditors could commence “realization as you see fit”. To this, the
Respondent says such evidence is insufficient to establish a specific
assignment of the receivable or receivables represented by the ITCs, at least
to the extent of permitting the requisite authority for the commencement and continuation
of this appeal.
[12]
The Court agrees that the Trustee did not specifically
authorize the commencement of this appeal, did not specifically list the assigned
accounts receivable and did not authorize the filing of a notice of appeal, but
the Court disagrees with the Respondent as to the reason. The Trustee did not
have an interest in the chose in action comprising the ITCs. Moreover, the
specific assignment of the chose in action which the Respondent suggests the
secured creditors ought to have obtained from the Trustee, would be a legal
fiction: nemo dat quod non habet. The most the Trustee could do was
value the security, opine that he accepted it, confirm it surmounted his own
rights and signify that the Trustee was releasing and delivering the encumbered
and assigned assets to their consequentially rightful owners, the secured creditors,
to whom the bankrupt had previously conveyed its and, by extension, the Trustee’s
interest. This is precisely what the Trustee did and why the Trustee legally
did not and could not authorize the bringing of this appeal.
c) Sufficient power under the GSA for
the Bringing of an Appeal?
[13]
There is, however, a critical question which
remains: does the GSA provide sufficient authority to commence and maintain the
appeal vis-a-vis the Rules, the ETA and the BIA?
[14]
The following relevant excerpts from the GSA will
assist in that analysis (with emphasis added):
1. Security Interest
As security for the payment and
performance of the obligations (as defined in paragraph 3), the Debtor, subject
to the exceptions set out in paragraph 2, does:
1.1 Grant to the Secured Party a
security interest in, and mortgages, chargers, transfers and assigns
absolutely, all of the debtor’s present and after acquired personal
property, and all personal property in which the Debtor has rights, of
whatever nature or kind and wherever situate, including, without limitation,
all of the following now owned or in future owned or acquired by or on behalf
of the Debtor:
[…]
(b) all book accounts and book
debts and generally accounts, debts, dues, claims, choses in action, […] which
are now due, owing or accruing, or growing due to, or owned by, or which
may in future become due, owing, or accruing, or growing due to, or owned by
the Debtor […]
(c) […] all other choses in
action of the Debtor of every kind which now are, or which may in future
be, due or owing by the Debtor, and all other intangible property of the
Debtor
[…]
(h) all proceeds, […]
(i) all
[…] writings, papers, books of account, and other books and electronically
recorded data relating to any of the foregoing or by which any of the foregoing
is or may in future be secured, evidenced, acknowledged, or made payable.
[…]
11. Collection of Debts
[…] the Secured Party may notify all
or any account debtors of the Debtor of the Security Interest and may also
direct such account debtors to make all payments on Collateral received by the
Debtor from account debtors, whether before or after notification of this
Security Interest to account debtors, and whether before or after default under
this Agreement, shall be received and held by the Debtor in trust for the
Secured Party. […]
22.
Appointment of Attorney and Deed
22.1
The Debtor irrevocably appoints the Secured
Party or the receiver, as the case may be, with
full power of substitution, to be the attorney of the Debtor for and in the
name of the Debtor to sign, endorse, or execute under seal or otherwise any
deeds, documents, transfers, cheques, instruments, demands, assignments,
assurances, or consents that the debtor is obliged to sign, endorse, or
incidental to the exercise of all or any of the powers conferred on the Secured
Party or the receiver, as the case may be, under this Agreement.
[…]
34.1 The Debtor authorizes the Secured
Party to file such financing statements, financing change statements, and
other documents, and do such acts, matters, and things as the Secured Party
may deem appropriate, to perfect on an ongoing basis and continue the Security
Interest, to protect and preserve the Collateral, and to realize upon the
Security Interest. .
[15]
The release by the Trustee of his rights in the
collateral charged and assigned under the GSA fully recognizes the distinction
maintained in the BIA between a general, unsecured creditor and that of
a secured creditor: both are defined and used separately in the definition
sections of the BIA. This distinction is further continued in section 37
(rights of disgruntled bankrupts and general creditors), section 38 (creditors
right to obtain a court order), section 70 (precedence of bankruptcy orders over
rights of creditors, excluding rights of secured creditors), section 71
(property vesting in Trustee subject to rights of secured creditors) and
subsection 72(1) (BIA not deemed to abrogate or supersede laws or statutes
relating to property and civil rights not in conflict).
[16]
Moreover, all of the authorities referenced by
the Respondent contain attempted appeals by bankrupts, general creditors or
those holding alleged unliquidated claims against the bankrupt estate. None
involved a secured creditor, holding valid security, authenticated and released
by a Trustee in the context of a duly administered bankrupt estate. The present
and future accounts receivables and choses in action of the Appellant were
assigned to the secured creditors. The secured creditors were to be seized of
all present and future books and records including the GST returns, had power
to direct payment of such debts to the secured creditors upon default and were nominated
as attorneys to do all things necessary to exercise all such incidental powers
in the Appellant’s name.
[17]
Respondent’s counsel argues that only a Trustee
in Bankruptcy or receiver referenced under the ETA could possibly be an agent
for the purposes of perfecting an appeal under the deeming definitions of the ETA.
Although the Court would likely have concluded in this instance that the
prior assignment of the book debts (choses in action) under the GSA has otherwise
validly transferred the rights to the referable property enumerated under
sections 301 (person assessed may file an objection) and 306 (objector
receiving or deemed to receive a confirmation may file an appeal), nonetheless,
a close reading of the definition of “receiver” in section 266 of the ETA
indicates that Parliament anticipated that a receiver could be an agent of a
debtor for the purposes of a portion of the property on a contemporaneous basis
with the administration of a bankrupt estate by a Trustee in Bankruptcy. The
relevant excerpted sections read as follows (with emphasis added):
266. (1) In
this section,
“business”
«
entreprise »
“business” includes a part of a
business;
“receiver”
« séquestre
»
“receiver”
means a person who
(a) under
the authority of a debenture, bond or other debt security, of a
court order or of an Act of Parliament or of the legislature of a province, is
empowered to operate or manage a business or a property of
another person,
[…]
“relevant assets”
« actif pertinent »
“relevant assets” of a receiver
means
(a) where the
receiver’s authority relates to all the properties, businesses, affairs and
assets of a person, all those properties, businesses, affairs and assets, and
(b) where
the receiver’s authority relates to only part of the properties,
businesses, affairs or assets of a person, that part of the properties,
businesses, affairs or assets, as the case may be.
(2) For the
purposes of this Part, where on a particular day a receiver is vested with
authority to manage, operate, liquidate, or wind up any
business or property, or to manage and care for the affairs and assets,
of a person,
(a) the
receiver shall be deemed to be an agent of the person and any supply made
or received and any act performed by the receiver in respect of the relevant
assets of the receiver shall be deemed to have been made, received or
performed, as the case may be, by the receiver as agent on behalf of the person;
[…]
[18]
At law, “other debt security” would encompass
the GSA which contains broad powers of appointment for a secured party or agent
to act as receiver for the purposes of realizing upon various and limited types
of property. This situation in fact and at law has occurred in this present
matter. Additionally, there is no legal authority which suggests this logical interpretation
is not correct. The Respondent has identified that such a “receiver” could at
law be an agent of the Appellant for the purposes of objecting and filing an
appeal under the ETA. The Court agrees with this view and finds that a
secured creditor, acting as a “receiver” in respect of part of the property of
the debtor under a “debt security”, becomes an agent under subsection 266(1) and
is not precluded from objecting to a GST assessment or reassessment in respect
of certain property assigned (the book debt) and maintaining thereafter the
appeal which follows.
[19]
Similarly, the plain wording of the exclusive
power granted to the Trustee in paragraph 30(1)(d) of the BIA in
respect of litigation clearly limits that power to the property of the
bankrupt:
30. (1) The trustee may,
with the permission of the inspectors, do all or any of the following things:
(d) bring,
institute or defend any action or other legal proceeding relating to the
property of the bankrupt;
[20]
In the absence of any directly applicable case
law to the contrary, the prior assignment of the Bankrupt’s interest in certain
property to the secured creditors, as recognized by the Trustee, removes the
property described in this paragraph from the Trustee’s authority: upon
assignment it is no longer “property of the bankrupt”. This is also consistent
with the existing authorities cited by the Respondent dealing exclusively with the
prohibition of attempted legal proceedings brought by creditors and bankrupts
(but not secured creditors) whose rights and interests otherwise statutorily
devolve upon the Trustee and require the Trustee’s consent or a Superior Court
order to bring legal proceedings.
[21]
This totality of these ownership, enforcement
and realization rights clearly fall within Rule 29 of the Rules which
provides (with emphasis added):
Transfer or Transmission of Interest
29. (1) Where at any stage of a proceeding the interest or liability
of a person who is a party to a proceeding in the Court is transferred
or transmitted to another person by assignment, bankruptcy, death or
other means, no other proceedings shall be instituted until the Registrar is
notified of the transfer or transmission and the particulars of it.
(2) On
receipt of the notice and particulars referred to in subsection (1) the
Registrar shall consult with the parties regarding the circumstances under
which the proceeding shall continue and he shall report on these
consultations to the Chief Justice.
(3) The
Chief Justice or a judge designated by him to deal with the matter may direct
the continuation of the proceeding or give such other direction as is just.
[22]
Legally, the secured creditors would be the
parties exclusively entitled to the proceeds arising from any ITCs emanating
from a successful appeal. It is legally certain that no other party could be:
the Trustee has already confirmed this, as the only other entitled party, by
releasing the collateral charged by the GSA to the secured creditors. Since
entitlement to such proceeds subsists in the secured creditors through the GSA’s
valid assignment, section 29 affords this Court the power to provide the procedural
remedy to these validly, subsisting rights in the choses in action which
comprise the alleged ITCs exclusively collectible from the Respondent through
an appeal before this Court.
[23]
Therefore, on the basis of the GSA, authenticated
by the Trustee as a prior ranking interest in the collateral (including the ITCs)
and the delivery of the collateral to the secured creditors by release of all
other creditors’ claims by the Trustee, the secured creditors may continue the
appeal before this Court to have it heard on its merits. By implication, the
Respondent’s motion to quash is dismissed. Under the discretion afforded the
Court under subsection 29(3) of the Rules, notification of the
assignment has been made and proved, the appeal shall be continued and the style
of cause shall be amended as follows:
International Hi-Tech
Industries Inc.
by its Secured Creditors, Receivers in part and Lawful Attorneys,
ihi international holdings ltd., Garmeco International Consulting, Garmeco
Canada International, IHI Holdings LTD. and Earthquake Resistant Structures
Appellant,
and
Her Majesty the Queen
Respondent.
[24]
The Appellant shall be represented by counsel.
Such counsel shall advise the Court of such appointment in writing within 30
days of the date of this Order. The Respondent shall have 60 days thereafter to
file the Reply.
[25]
In light of the dismissal of both motions, there
shall be no award for costs.
Signed at Ottawa, Ontario, this 17th day of June 2014.
“R.S. Bocock”
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