Supreme Court of Canada
Reference re constitutional validity of the Companies
Creditors Arrangement Act (Dom.), [1934] S.C.R. 659
Date: 1934-06-06.
In the Matter of a Reference
Concerning the Constitutional Validity of the Companies’ Creditors Arrangement Act.
1934: March 27, 28, 29; 1934: June 6.
Present: Duff C.J. and Rinfret, Lamont,
Cannon, Crocket and Hughes JJ.
Constitutional law—The Companies’ Creditors
Arrangement Act, 1933, 23-24 Geo.
V, c. 36 (Dom.)—Constitutional
validity—“Bankruptcy and Insolvency” (B.N.A. Act, s. 91 (21)).
The Companies’ Creditors Arrangement Act,
1933, 23-24 Geo. V, c. 36, is intra vires of
the Parliament of Canada. The matters dealt with come within the domain of “bankruptcy and insolvency” within the intendment of s. 91 (21) of
the B.N.A. Act.
[Page 660]
The Act discussed with regard to its aim, its
features, its comparison with existing bankruptcy or insolvency legislation,
and the history of bankruptcy and insolvency law.
REFERENCE to the Supreme Court of Canada for
hearing and consideration pursuant to the authority of s. 55 of the Supreme
Court Act (R.S.C., 1927, c. 35) of the following question:
Is The Companies’ Creditors Arrangement
Act, 1933, 23-24 Geo. V, chapter 36, ultra vires of the Parliament
of Canada, either in whole or in part, and, if so, in what particular or
particulars, or to what extent?
L. E. Beaulieu K.C. and F. P. Varcoe K.C. for the Attorney-General for Canada.
C. Lanctôt K.C. and
L. St. Laurent K.C. for the
Attorney-General for Quebec.
I. A. Humphries K.C. for the Attorney-General for Ontario.
The judgment of Duff C.J. and Rinfret, Crocket
and Hughes JJ. was delivered by
Duff C.J.—The history of the law seems to show clearly enough that
legislation in respect of compositions and arrangements is a natural and
ordinary component of a system of bankruptcy and insolvency law.
Under the Bankruptcy Act, as it now
exists, proposals for compositions and arrangements cannot be dealt with before
a receiving order or assignment has been made. This, however, was not always
the case. Under the Bankruptcy Act of 1919, a proposal for composition
or arrangement could be made prior to an assignment or receiving order.
The Winding-up Act contains brief
provisions, in sections 65 and 66, which, in substance, differ very little
indeed from the legislation now before us; although this, no doubt, is subject
to the important qualification, that the provisions of the Winding-up Act apply
only in the case of a company which is in course of being wound up. Similar
provisions affecting the subject matter of this legislation are to be found in
Canadian legislation before and after Confederation.
[Page 661]
The powers conferred upon the court under the Companies’
Creditors Arrangement Act, 1933, come into operation when a compromise or arrangement
is proposed between a “company which is bankrupt or insolvent or which has
committed an act of bankruptcy within the meaning of the Bankruptcy Act or
which is deemed insolvent within the meaning of the Winding-up Act,” and
its “unsecured creditors or any class of them.” The important difference, as
already observed, between the provisions of the Companies’ Creditors
Arrangement Act and those of the Bankruptcy Act itself in relation
to compromises and arrangements is that the powers of the first named Act may
be exercised notwithstanding the fact that no proceedings have been taken under
the Bankruptcy Act or the Winding-up Act. The Act, however,
creates powers, which can be exercised in case, and only in case, of
insolvency.
Furthermore, the aim of the Act is to deal with
the existing condition of insolvency, in itself, to enable arrangements to be
made, in view of the insolvent condition of the company, under judicial
authority which, otherwise, might not be valid prior to the initiation of proceedings
in bankruptcy. Ex facie it would appear that such a scheme in principle
does not radically depart from the normal character of bankruptcy legislation.
As Lord Cave impliedly states in Royal Bank of Canada v. Larue, “the exclusive legislative authority to
deal with all matters within the domain of bankruptcy and insolvency is vested
in Parliament.”
Matters normally constituting part of a
bankruptcy scheme, but not in their essence matters of bankruptcy and
insolvency may, of course, from another point of view and in another aspect be
dealt with by a provincial legislature; but, when treated as matters pertaining
to bankruptcy and insolvency, they clearly fall within the legislative
authority of the Dominion.
The argument mainly pressed upon us in opposition
to the validity of the legislation was that
It does not endeavour to treat equally all
contracts of debts between the debtor and his creditors but allows the interest
of some of them to be sacrificed in the interest of the company and of other
classes of creditors.
[Page 662]
We think an adequate answer to this objection is
put forward in the argument on behalf of the Attorney-General for the Dominion.
Apart altogether from the judicial control over the proceedings, there is the
circumstance that the legislation applies to insolvent companies only; and,
consequently, that it is within the power of any creditor to apply for a
winding-up order or a receiving order. It seems difficult, therefore, to
suppose that the purpose of the legislation is to give sanction to arrangements
in the exclusive interests of a single creditor or of a single class of
creditors and having no relation to the benefit of the creditors as a whole.
The ultimate purpose would appear to be to enable the court to sanction a
compromise which, although binding upon a class of creditors only, would be
beneficial to the general body of creditors as well as to the shareholders. We
think it is not unimportant to note the circumstance to which our attention was
called by counsel for the Attorney-General for the Dominion that the court may
order shareholders to be summoned although they are not authorized to vote.
The judgment of Lamont and Cannon JJ. was
delivered by
Cannon J.—This is a reference by the Governor General in Council
submitting for hearing and consideration of this Court the following question:
Is The Companies’ Creditors Arrangement
Act, 1933, 23-24 Geo. V, chapter 36, ultra vires of the Parliament
of Canada, either in whole or in part, and, if so, in what particular or
particulars, or to what extent?
This Act is designed to apply to insolvent or
bankrupt companies; and it is contended on behalf of the Dominion that
Parliament could pass this legislation under section 91, par. 21, which gives
it paramount jurisdiction to make laws concerning bankruptcy and insolvency.
The provinces represent that in enacting it Parliament disregarded their
exclusive jurisdiction under section 92, par. 13, in relation to property and
civil rights in the province.
The whole argument before us was finally
directed to one point: Are the proceedings contemplated by the Act, in pith and
substance, bankruptcy or insolvency enactments within the fair
and ordinary meaning of these words? One of the features which distinguishes
this Act from the Bankruptcy Act now in force is that, under the latter,
a
[Page 663]
composition or arrangement cannot be proceeded
with before a receiving order or assignment has been made. Another difference
is that under the Bankruptcy Act the secured creditor is dealt with on
the footing that he may realize his security or value or surrender the same; it
is only in respect of what he claims apart from the security that he is
affected by the composition or arrangement. It was pointed out also that
similar provisions giving binding effect to this approval by a certain majority
of creditors are found in our legislation before and after Confederation.
The Insolvent Act of 1864, 27-28 Vict., ch. 17, sec. 9;
The Insolvent Act of 1869, Canada, 32-33 Vict., ch. 16, secs. 94 et seq.;
The Insolvent Act of 1875, Canada, 38 Vict., c. 16, secs. 54 et seq.
As far as Lower Canada is concerned, it may be
of interest to note that chapter 87 of the Consolidated Statutes of Lower
Canada, 1859, allowed the issue of a capias if the debtor “had refused to
compromise or arrange with his creditors, or to make a cession de biens,” and
provides that the debtor may be discharged if, when the affidavit for capias
was made, he had “not refused to compromise or arrange with his creditors.”
Moreover, I find that, before and since
Confederation, arrangements with the creditors have always been of the very
essence of any system of bankruptcy or insolvency legislation. Civil rights and
the sanctity of contracts are certainly affected by clause 5 under which a
minority of creditors would be bound by the vote of a majority in number
representing three-fourths in value of creditors present and voting, either in
person or by proxy, if the agreement or compromise to which they agreed be
sanctioned by the court. I find that this feature existed long before
Confederation and was at that time generally accepted.
Pardessus, Droit
Commercial, vol. 3, éd. 1843, p.
92, no. 1232, says:
1232. Les créanciers
d’un failli ont presque toujours intérêt à faire avec lui un arrangement quelconque,
plutôt que d’éprouver les lenteurs et les embarrass d’une union qui finit souvent par consumer la fortune du débiteur.
Mais, comme rarement tous sont d’accord, et qu’il est naturel de présumer qu’un
grand nombre prendra les arrangements les plus convenables à l’intérêt commun,
on a cru devoir faire céder la volonté de la
[Page 664]
minorité à celle de la majorité; les
créanciers présents ont donc été admis
à décider pour les absents.
Cette minorité, ces absents, doivent au moins
avoir l’assurance que de mûres réflexions ont dirigé ceux dont le voeu doit
devenir une loi pour eux. Tel est l’objet des règles prescrites pour la
validité du concordat.
Under number 1236, classes or categories having
different interests are already recognized by this author, and he adds (No.
1237):
Le concordat est valablement consenti par la
majorité des créanciers présents, pourvu que les sommes dues aux personnes qui
forment cette majorité égalent les trois quarts de la totalité des créances
vérifiées et affirmées, ou admises par provision, dues à des créanciers ayant
droit de prendre part à la délibération du concordat.
Therefore, the very clause objected to in our
Act of 1933 seems to be copied from the law of bankruptcy as it existed in
France in 1843, when this work was published.
Under our system and the English Bankruptcy
Act of 1914, bankruptcy legislation deals with the proceedings necessary
for the distribution, under judicial authority, of the property of an insolvent
person among his creditors. It assumes the commission of an “act of bankruptcy”
followed by a petition to the court for a receiving order for the protection of
the estate. The property of the debtor then vests in an official receiver. The
debtor must submit a statement of affairs to the official receiver who calls a
meeting of the creditors. The debtor is examined; and if no composition or
scheme of arrangement is approved, he is adjudged bankrupt; and his
property becomes divisible among his creditors and vests in a trustee.
Therefore, if the proceedings under this new Act
of 1933 are not, strictly speaking, “bankruptcy” proceedings, because they had
not for object the sale and division of the assets of the debtor, they may,
however, be considered as “insolvency proceedings” with the object of preventing
a declaration of bankruptcy and the sale of these assets, if the creditors
directly interested for the time being reach the conclusion that an opportune
arrangement to avoid such sale would better protect their interest, as a whole
or in part. Provisions for the settlement of the liabilities of the insolvent
are an essential element of any insolvency legislation and were incorporated in
our Insolvent Act of 1864; and such a deed of composition and discharge
could be validly made either before, pending or after proceedings upon an
assignment, or for the compulsory liquidation
[Page 665]
of the estate of the insolvent. What was
considered as being within the scope of the word “insolvency” when it was used
in section 91 of the B.N.A. Act is to be found in the preamble of the
1864 Insolvency Act, which reads:
Whereas it is expedient that provision be
made for the settlement of the estates of insolvent debtors, for giving
effect to arrangements between them and their creditors, and for the
punishment of fraud.
See also: Cushing v. Dupuy (1); Royal
Bank of Canada v. Larue (2).
I therefore reach the conclusion that
arrangements as provided for by this Act are and have been, before and since
Confederation, an essential component part of any system devised to protect the
creditors of insolvents and, at the same time, help the honest debtor to
rehabilitate himself and obtain a discharge.
I would, therefore, answer the question
submitted to us in the negative.
The question submitted is answered in
the negative.
Solicitor for the Attorney-General of
Canada: W. Stuart Edwards.
Solicitor for the Attorney-General of
Quebec: Charles Lanctôt.
Solicitor for the Attorney-General of
Ontario: I. A. Humphries.
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