Property ‑‑ Immovables in co-ownership ‑‑ Indivision agreements ‑‑ Validity ‑‑ Effect of winding‑up on obligations under agreements.
D and C, a mutual life insurance society, are undivided co‑owners of two immovables. Each immovable is the subject of a contract establishing undivided co‑ownership and of an unregistered indivision agreement providing, inter alia, for a waiver of the right to demand a partition of the immovable property for a period of 35 years and for the mandatory sale of the interest of one undivided co‑owner to the other in certain circumstances, including where one of the undivided co‑owners applies to a court for the appointment of a liquidator for his or its property. In the event of a mandatory sale, the purchase price of the undivided share is the price offered by the purchasing co‑owner. If that price is refused, the purchase price is set at 75 percent of the fair market value of the undivided interest, established on the basis of the value of the immovable as a whole, without regard to the fact that it is held in undivided co‑ownership. In 1992, C applied for the appointment of a liquidator and D initiated the procedure set out in the indivision agreements for purchasing C’s share by mandatory sale. The liquidator refused D’s offers and brought a motion for a declaratory judgment seeking to have the clauses in the indivision agreements limiting its powers declared ineffective or unenforceable against it. The Superior Court declared that the two indivision agreements were lawful and that their clauses could be set up against the liquidator. The Court of Appeal reversed this judgment.
Held: The appeal should be allowed.
The indivision agreements, including the waiver of partition clauses, are valid. The parties are free to organize the exercise of their undivided rights and the terms and conditions for terminating the indivision by agreement. Under art. 689 C.C.L.C., they may even agree to suspend their right to demand partition temporarily for a justifiable reason of utility. In this case, a 35‑year waiver of partition is not unjustified on its face in view of the 30‑ to 35‑year amortization period for the hypothecary financing. Absent fraudulent preferences, indivision agreements can in principle be set up against a liquidator. From the perspective of the legal winding‑up scheme, the liquidator is an officer of the court whose function it is to close up the company’s business and distribute its assets to its creditors. The liquidator is not a third party in relation to the insolvent company, but is the person designated by the court to act in place of the directors of the company being wound up. Accordingly, D’s interest in the immovables -- an interest created purely by agreement in this case -- need not be registered to be set up against the liquidator, because the liquidator is acting for C.
The imposition of a winding‑up scheme, however, may affect the future performance of obligations agreed on earlier that have some effect on what assets are to be distributed to the other creditors. The purpose of the federal winding‑up legislation is to arrange for the closing down of the company’s business in an orderly and expeditious manner while minimizing, as far as possible, the losses and harm suffered by the creditors and other interested parties and by distributing the assets in accordance with the legislation. In the present case, an application has been made for the specific performance of an obligation under a bilateral contract, more particularly an obligation to give, the subject of which is a unique, non‑fungible and indivisible property with respect to which D, as co‑owner, has a specific interest and is liable to suffer specific harm. These assets cannot be wound up except by disposing of them for a price and, for the same price, there is no advantage in selling to a purchaser other than D. The assets available for distribution to the other creditors are not diminished. In deciding on the course to take in such a situation, the liquidator and the court, in the exercise of its discretion, must take into account both the benefits to be obtained and the harm caused in order to distribute them as equally as possible. The pari passu rule among unsecured creditors can be fully applied only for fungible obligations. In other cases, it must be tempered with equity to ensure that the burdens imposed on unsecured creditors are minimized and distributed as fairly as possible. The principle that must guide the court in exercising its discretion in such a case is that of respect for contracts signed in good faith prior to the winding‑up, unless the obligations contained therein are prejudicial to the other creditors and give rise to an unjust preference in light of all the circumstances, in which case equitable relief will be available. In this case, the liquidator has not established that an appraisal at 75 percent on the basis of the immovable's value without regard to the undivided co‑ownership is less than the market value of the undivided rights and is therefore prejudicial to the other creditors’ interests. Since the clauses providing for the mandatory sale of the undivided interests in the immovables may be set up against C and the liquidator, which represents it, the liquidator must comply with them provided that they do not create an unjust preference in favour of D. Their implementation remains subject to the controlling discretionary power of the court to which the parties may apply, if necessary, to clarify the terms and conditions of such implementation in the context of the winding‑up.
Cases Cited
Referred to: McCarter v. York County Loan Co. (1907), 14 O.L.R. 420; Jolic{oe}ur v. Boivin et Cie, [1951] R.P. 369; Partington v. Cushing (1906), 1 E.L.R. 493; Re J. McCarthy & Sons Co. of Prescott Ltd. (1916), 38 O.L.R. 3; Maranda‑Desaulniers v. Peckham, [1953] B.R. 163; Brault v. Langlois, [1954] B.R. 41; In re Palais des Sports de Montréal Ltée, [1960] B.R. 1012.
Statutes and Regulations Cited
Bankruptcy and Insolvency Act , R.S.C., 1985, c. B‑3 [am. 1992, c. 27, s. 2], ss. 71(2), 74(1).
Civil Code of Lower Canada, arts. 689, 1981, 1982.
Civil Code of Québec, S.Q. 1991, c. 64, art. 1013.
Winding‑up Act, R.S.C., 1985, c. W‑11, ss. 19 , 21 , 22 , 33 , 35(1) (b), (c), (h), 38 , 93 , 94 , 95 , 96 to 102 .
Authors Cited
Bohémier, Albert. Faillite et insolvabilité, t. 1. Montréal: Thémis, 1992.
De Page, Henri. Traité élémentaire de droit civil belge, vol. 6. Brussels: Bruylant, 1953.
Deschamps, Marie. “Vers une approche renouvelée de l'indivision” (1984), 29 McGill L.J. 215.
Fraser & Stewart Company Law of Canada, 6th ed. By Harry Sutherland et al. Scarborough, Ont.: Carswell, 1993.
APPEAL from a judgment of the Quebec Court of Appeal, [1994] R.J.Q. 55, reversing a decision of the Superior Court, [1992] R.J.Q. 2574. Appeal allowed.
Richard Wagner and Odette Jobin‑Laberge, for the appellant.
Robert Tessier and Paul Paradis, for the respondent.
//Gonthier J.//
English version of the judgment of the Court delivered by
1 Gonthier J. ‑‑ This appeal relates to indivision agreements between undivided co‑owners of immovables and to the effect of a winding‑up on the obligations set out in those agreements. There are two main issues: (1) whether unregistered indivision agreements may be set up against a liquidator appointed under the Winding‑up Act, R.S.C., 1985, c. W‑11 ; and (2) whether a clause in an indivision agreement providing that the undivided share of a company being wound up must be sold to the undivided co‑owner for 75% of its market value may be set up against the liquidator.
I ‑ Facts
2 The appellant and Coopérants, Mutual Life Insurance Society (the "debtor") are undivided co‑owners of two immovables situated in Laval, with shares of 49% and 51% respectively. Each immovable is the subject of a contract establishing undivided co‑ownership and an agreement governing the rights and obligations of the two undivided co‑owners. The undivided co‑ownership titles are registered, but the indivision agreements are not.
3 Under the agreements, the undivided co‑owners have waived the right to demand a partition of the immovable property for a period of 35 years. The agreements also provide for the sharing of disbursements and expenses and contain a default clause stating that the interest of one undivided co‑owner must be sold to the other in certain circumstances, inter alia, where one of the undivided co‑owners applies to a court for the appointment of a liquidator for his or its property.
4 Under the default and mandatory sale clause, the non‑defaulting party may give a 30‑day default notice to rectify the default. At the end of that period, the non‑defaulting party may offer to purchase the defaulting party's undivided share of the immovable. If the defaulting party refuses this offer within 10 days after it is delivered, the purchase price is then set at 75% of the fair market value of the undivided interest, established on the basis of the value of the immovable as a whole. The appraisers are required to appraise the immovable as a whole without considering the fact that it is held in undivided co‑ownership.
5 The debtor applied for the appointment of a liquidator on January 3, 1992, on the ground of insolvency. That same day, Martin J. of the Superior Court granted the application and appointed the respondent liquidator of the debtor's property under the Winding‑up Act.
6 On January 10, 1992, the appellant initiated the procedure for purchasing the debtor's interest by mandatory sale, pursuant to the indivision agreements. He sent the respondent two default notices in respect of the two immovables in question. With these notices, he included two offers to purchase the debtor's undivided interest in the immovables, for an amount equal to the greater of $3,000,000 or 51% of the balance of the hypothecary debt for one immovable and an amount equal to the greater of $4,000,000 or 51% of the balance of the hypothecary debt for the other.
7 The respondent refused these offers on January 23, 1992. The appellant claims that this refusal was out of time, being more than 10 days after the offer was delivered. This claim is unfounded since, under the indivision agreements, the 10‑day period does not begin to run until after the initial 30‑day period has expired. The appellant in fact renewed his offers on February 10, 1992 and the respondent refused them the following day. The sale price in the event of refusal therefore applied, namely 75% of the fair market value of these undivided interests, established on the basis of the immovable appraised as a whole.
8 In the meantime, the respondent refused to pay its share of the disbursements and expenses related to the two immovables, contrary to the requirements of the indivision agreements.
9 On June 9, 1992 the respondent brought a motion in the Superior Court for a declaratory judgment seeking to have the default and mandatory sale clauses, the clauses providing for partition and sale by licitation, the clauses providing for sharing of disbursements and expenses and any other clauses in the indivision agreements limiting the liquidator's powers declared ineffective or unenforceable against the liquidator. The respondent argues that it is not bound by these provisions, either because it is a third party with respect to these contracts, or because it has an obligation to protect the interests of the debtor’s creditors.
II ‑ Judgments of the Courts Below
Superior Court, [1992] R.J.Q. 2574
10 Dealing with the respondent’s motion for a declaratory judgment, Trudel J. declared that the two indivision agreements were lawful and binding on the debtor, the respondent and the appellant. He stated the following (at pp. 2577‑78):
[translation] In this case, the undivided co‑owners took care that disorder would not ensue and protected themselves from the difficulties that would result should one of them become insolvent. They thus contemplated remedial measures, including measures to protect themselves from the coerciveness of a judicial sale and at the same time to avoid having a new partner imposed on them. They limited or eliminated the right to assign their shares and included in the contracts a mechanism and conditions for terminating the indivision.
There was no reason they could not provide in this manner for the future resolution of the contract in the event that either of them failed to fulfil his or its obligations. Bankruptcy and winding‑up are events upon which an obligation may validly be conditional and there was nothing to prevent the co‑owners from providing in advance for the termination of indivision in such a case. Moreover, there is no rule in the Civil Code of Lower Canada limiting the right to enjoy, benefit from the fruits or alienate an undivided portion.
In addition, the clauses in the agreements relating to default, mandatory or default sale and partition or sale by licitation are in no way contrary to public order or good morals (art. 13 C.C.).
Finally, unless I am mistaken, there are no decisions declaring these clauses unwritten.
Accordingly, the court must confine itself to a contractual approach and finds that these clauses are lawful.
11 The trial judge was also of the view that these clauses could be set up against the liquidator. He noted that a company being wound up does not lose its juridical personality and that the respondent is not a third‑party purchaser but is identified with the debtor. The provisions could thus be set up against the respondent. The trial judge noted that the debtor and the respondent could not unilaterally modify the terms of the agreements in their own interests. The clauses had in fact been included at the behest of the debtor, which wanted to protect itself in the event that the appellant experienced financial difficulties.
Court of Appeal, [1994] R.J.Q. 55
12 The Court of Appeal reversed the trial judgment. Beauregard J.A., writing for the court, found that the undertaking to assign an undivided interest at 75% of its market value violated the fundamental legal principle that a debtor's property is the common pledge of the debtor’s creditors, apart from security provided for by law. Since the indivision agreements were unregistered, they could not take precedence over the creditors’ interests in the debtor’s property.
13 Beauregard J.A. wrote (at p. 57):
[translation] It may first be asked whether parties can be in good faith when they provide, other than in an instrument creating a valid real security, that if one of them becomes insolvent the other can obtain a preference over other creditors. In any event, an assignment by an insolvent debtor to one of its creditors at a reduced price, which causes harm to the other creditors, is not made valid by the fact that, much earlier when the debtor was solvent, it promised that creditor preferential treatment should the debtor ever be declared insolvent. If this way of proceeding were allowed, security law would serve no purpose.
14 Beauregard J.A. was of the view that the fundamental principle concerning the protection of creditors [translation] "is applicable whenever an orderly distribution of the proceeds of a debtor’s property is to be made" (p. 58), and is therefore as applicable to a winding‑up as it is to a bankruptcy.
15 Beauregard J.A. also attempted to characterize the legal status of a liquidator, compared with a trustee in bankruptcy. In his view, the two functions have much in common, although a company that is being wound up retains its juridical existence. He concluded that a liquidator is more than a representative of the company being wound up and is above all the "trustee" for the company's creditors, with the same rights that they have. For this reason, the obligations in the indivision agreements between the appellant and the debtor could not be set up against the liquidator.
III ‑ Issues
16 The appellant submitted a series of questions to be resolved. In my view, they may be summed up in three fundamental issues: (1) whether the indivision agreements are valid; (2) whether the indivision agreements may in general be set up against the liquidator; and (3) whether, in particular, the clause providing for the mandatory sale of the share of a defaulting undivided co‑owner at 75% of its market value may be set up against the liquidator.
IV ‑ Statutory Provisions
17 The Winding‑up Act contains the following provisions:
19. A company, from the time of the making of a winding‑up order, shall cease to carry on its business, except in so far as is, in the opinion of the liquidator, required for the beneficial winding‑up thereof, but the corporate state and all the corporate powers of the company, notwithstanding that it is otherwise provided by the Act, charter or instrument of incorporation of the company, continue until the affairs of the company are wound up.
21. After a winding‑up order is made in respect of a company, no suit, action or other proceeding shall be proceeded with or commenced against the company, except with the leave of the court and subject to such terms as the court imposes.
22. Every attachment, sequestration, distress or execution put in force against the estate or effects of a company after the making of a winding‑up order is void.
33. A liquidator, on his appointment, shall take into his custody or under his control all the property, effects and choses in action to which the company is or appears to be entitled, and shall perform such duties with reference to winding‑up the business of the company as are imposed by the court or by this Act.
35. (1) A liquidator may, with the approval of the court, and on such previous notice to the creditors, contributories, shareholders or members of the company as the court orders,
. . .
(b) carry on the business of the company so far as is necessary to the beneficial winding‑up of the company;
(c) sell the real and personal property, effects and choses in action of the company, by public auction or private contract, and transfer the whole thereof to any person or company, or sell them in parcels for such consideration as may be approved by the court;
. . .
(h) do and execute all such other things as are necessary for winding‑up the affairs of the company and distributing its assets.
38. A liquidator may, with the approval of the court, make such compromise or other arrangements with creditors or persons claiming to be creditors of the company as he deems expedient.
93. The property of the company shall be applied in satisfaction of its debts and liabilities, and the charges, costs and expenses incurred in winding‑up its affairs.
94. All costs, charges and expenses properly incurred in the winding‑up of a company, including the remuneration of the liquidator, are payable out of the assets of the company, in priority to all other claims.
95. The court shall distribute among the persons entitled thereto any surplus that remains after the satisfaction of the debts and liabilities of the company and the winding‑up charges, costs and expenses, and unless otherwise provided by law or by the Act, charter or instrument of incorporation of the company, any property or assets remaining after the satisfaction shall be distributed among the members or shareholders according to their rights and interests in the company.
18 Unlike the Civil Code of Québec, S.Q. 1991, c. 64, the Civil Code of Lower Canada, which is applicable here, does not deal with undivided co‑ownership, although it contains the following provision on indivision:
689. No one can be compelled to remain in undivided ownership; a partition may always be demanded notwithstanding any prohibition or agreement to the contrary.
It may however be agreed or ordered that the partition shall be deferred during a limited time, if there be any reason of utility which justifies the delay.
19 The Civil Code of Lower Canada also contains the following provisions:
1981. The property of a debtor is the common pledge of his creditors, and where they claim together they share its price rateably, unless there are amongst them legal causes of preference.
1982. The legal causes of preference are privileges and hypothecs.
V ‑ Analysis
(A) Validity of the Indivision Agreements
20 Undivided co‑ownership is a special mode of ownership that arises by operation of law or the will of the parties. Marie Deschamps (now a Quebec Court of Appeal judge) described it very accurately as follows in her article "Vers une approche renouvelée de l'indivision" (1984), 29 McGill L.J. 215, at p. 221:
[translation] Undivided co‑ownership is the situation in which two or more persons hold property in common and none of them can claim any right to a specific portion of the property. Undivided co‑ownership will be said to exist where two or more persons have the same type of rights in a property. Each of the undivided co‑owners has rights in a fraction of the property, without that share being crystallized in a specific portion of the thing. Their right is abstract and incorporeal. It is only as a body that the undivided co‑owners have a right in the physical object.
From the outset, therefore, a distinction must be drawn between the rights that an undivided co‑owner may claim in the thing or physical object and the rights he or she has in his or her share, which is incorporeal property. The undivided co‑owner may not claim an exclusive right in the thing or physical object since his or her share has not crystallized in a specific portion. The participation of all the undivided co‑owners is needed to take any action whatsoever with respect to the thing considered as a whole.
21 The Civil Code of Lower Canada deals only very briefly with undivided ownership, unlike the new Civil Code of Québec, a number of articles of which concern undivided co‑ownership, which is now much more common in Quebec. Under art. 689 C.C.L.C., which is under the title on successions but is generally applicable, undivided ownership is exceptional; one cannot be compelled to remain in it, although for reasons of utility it may be agreed to defer partition of undivided co‑ownership during a limited time.
22 Like Marie Deschamps, we can draw a distinction between the case of imposed undivided ownership, which occurs most often in matters of succession, when the heirs become undivided co‑owners by operation of law or the will of the testator, and the case of undivided ownership resulting from the will of the parties. She wrote the following, at pp. 235‑36:
[translation] [I]n the case of undivided ownership by agreement, the terms and conditions for terminating the indivision may have been the subject of an agreement. If so, the parties may have agreed on the manner in which they could terminate the indivision without necessarily resorting to an action in partition. . . .
The strictness of articles 689 and 746 of the Civil Code can be explained only by the fact that the legislature anticipated that this situation would be unwanted, undesirable and a source of conflict. However, this rule should be relaxed in cases where the parties have chosen to place themselves in this situation. Having made this choice, it would be unfair and inequitable to allow those same parties to use these rules to frustrate a project in which others have invested with them.
We therefore believe that the prohibition in article 689 of the Civil Code does not prevent those who agree to become undivided co‑owners from providing for terms and conditions for terminating the indivision.
23 Like the trial judge, I adopt this opinion and agree that the parties are free to organize the exercise of their undivided rights and the terms and conditions for terminating the indivision by agreement.
24 Under art. 689 C.C.L.C., undivided co‑owners may agree to suspend their right to demand partition temporarily, but only for a justifiable reason of utility. The appellant and the debtor thus agreed in the indivision agreements to postpone the partition of their undivided interests for a period that would be the lesser of 35 years or the maximum term allowed by law. Under the Civil Code of Lower Canada, which applies here, there is no maximum term stipulated, unlike art. 1013 C.C.Q., which sets the maximum term of an agreement to postpone partition at 30 years.
25 The indivision agreements include the following reference to reasons of utility justifying the postponement of partition:
[translation] 10.3 The undivided co‑owners recognize that they have thus waived an action in partition or for a sale by licitation for a number of reasons of common utility, including the possibility of obtaining hypothecary financing on the office tower and the desire to avoid the costs, delays, administrative difficulties and low realized prices that would result from an action in partition or for a sale by licitation.
(Indivision contract entered into between 119855 Canada Inc. and Coopérants on January 8, 1986, with respect to 3090 boul. Le Carrefour, Laval, Quebec (Exhibit R‑9).)
26 In the case at bar, the parties expressly agreed on the terms and conditions of partition and sale by licitation. Moreover, in their agreements they explained the reasons of utility justifying the postponement of partition. A 35‑year waiver of partition is not unjustified on its face, especially in view of the 30‑ to 35‑year amortization period for the hypothecary financing. In my view, the contractual will of the two parties, both of whom were knowledgeable about real estate investments, must prevail and the Court must not intervene in these agreements. The waiver of partition clause is therefore valid.
(B) Whether the Indivision Agreements Can Be Set Up Against the Liquidator
27 Given that the agreements are valid, can they be set up against the liquidator? To decide this question, it is necessary properly to define and situate the liquidator’s legal status.
28 Section 19 of the Winding‑up Act provides that a company in respect of which a winding‑up order has been made must cease to carry on its business, "except in so far as is, in the opinion of the liquidator, required for the beneficial winding‑up thereof". This section establishes that the corporate state and all the corporate powers of the company "continue until the affairs of the company are wound up". As explained in McCarter v. York County Loan Co. (1907), 14 O.L.R. 420 (H.C.), at p. 422:
The only effect of the winding‑up order is to prevent the company from carrying on its business except in so far as is, in the opinion of the liquidator, required for the beneficial winding up thereof; the corporate state and all the corporate powers of the company continue until the affairs of the company are wound up . . . .
29 Similarly, in Jolic{oe}ur v. Boivin et Cie, [1951] R.P. 369, at p. 372, the Superior Court stated:
[translation] [T]he defendant company does not cease to exist when it is being wound up. Winding‑up requires the company to cease carrying on its business, but does not deprive it of its legal existence, its corporate state or status or even the powers it has as a corporation. The defendant company will not cease to exist until its affairs have been wound up and the proceeds of the winding‑up distributed to its creditors and its shareholders, where applicable.
30 Contrary to what occurs in the case of bankruptcy, the company continues to own its property, which is not transferred to the liquidator. Under s. 33 of the Winding‑up Act, the liquidator takes all the company's property, effects and choses in action "into his custody or under his control", whereas under s. 71(2) of the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B‑3 , the property of a bankrupt "shall . . . forthwith pass to and vest in the trustee" and under s. 74(1) of that statute a receiving order or assignment may be registered by or on behalf of the trustee in respect of any real property that the bankrupt owns. As Professor Bohémier explained in Faillite et insolvabilité (1992), vol. 1, at p. 726:
[translation] Bankruptcy entails the divestment of the debtor in favour of the trustee. The trustee’s primary responsibility as administrator is to determine what property is part of the bankruptcy and to take the necessary steps to obtain possession thereof and ensure its protection.
. . .
The trustee must immediately take possession of the bankrupt’s property, deeds and documents and make an inventory thereof.
31 He added, at p. 732, that [translation] "the primary purpose of such registration is to enable the trustee to appear as owner of the immovable", free of the charges mentioned elsewhere in the statute, including judicial hypothecs.
32 The difference between the two schemes was described as follows in Partington v. Cushing (1906), 1 E.L.R. 493 (N.B.S.C.), at pp. 494‑95:
There is in reality but little analogy between a winding‑up of a company and a bankruptcy. The property of a bankrupt vests by operation of law in his assignee; the title as well as the control is completely divested from the one and vested in the other. Nothing of the kind takes place in the case of a winding‑up. The title to the company's property remains in the company; the control and management and disposal of it is taken from the directors and placed in the liquidators, who simply are officers of the Court, receivers and managers acting under the direction of the Court, for the purpose of closing up the company's business, realizing its assets and making a legal distribution thereof among the creditors and shareholders. . . . Every statutory power conferred upon the liquidators is given with a view to the speedy, inexpensive and effectual accomplishment of this object.
33 See also McCarter, supra, at p. 422:
The liquidator seems to be somewhat in the position of a receiver or agent appointed by the Court to represent the company for the purposes of the Act; not as an assignee, but as the statutory representative of the company for the purposes of winding up. The liquidator has power, with the approval of the Court, to sell the real estate of the company; in this case it was authorized to sell the property in question; it could sell only subject to the terms and conditions of the plaintiff's lease; possession could be given only upon expiry of the plaintiff's term; and the provision regarding the plaintiff's right to purchase was, I think, equally binding upon the liquidator.
Authors have expressed the same view. In Fraser & Stewart Company Law of Canada (6th ed. 1993), we find the following at p. 845:
The liquidator is an officer of the court, appointed by the court to perform the functions prescribed by the Act and exercising his powers and performing his duties under the court's supervision. The corporate state and all the powers of the corporation continue after a winding‑up order is made; but from the time of such order the corporation is to cease to carry on business, except in so far as the liquidator considers it necessary for its beneficial winding up (s. 19). Even then, the liquidator must have the court's approval to do so under s. 35.
34 From the perspective of the legal winding‑up scheme, therefore, the liquidator is an officer of the court whose function it is to close up the company’s business and distribute its assets to its creditors. The liquidator is not a third party in relation to the insolvent company, but is the person designated by the court to act in place of the directors of the company being wound up. Accordingly, the appellant's interest in the immovables (an interest created purely by agreement in this case) need not be registered to be set up against the liquidator, because the liquidator is acting for the debtor.
35 Even though the contracts previously entered into between the appellant and the debtor can in principle be set up against the liquidator because no fraudulent preference has been alleged, in particular under the relevant provisions of the Winding‑up Act (ss. 96 to 102), there remains the question of whether, and to what extent, the imposition of a winding‑up scheme may affect the future performance of obligations agreed on earlier that have some effect on what assets are to be distributed to the other creditors. It is necessary to refer to the purpose of the statute in this regard.
36 In Re J. McCarthy & Sons Co. of Prescott Ltd. (1916), 38 O.L.R. 3, at p. 9, the Ontario Court of Appeal described this purpose as follows:
The purpose of the Act is to wind up, finally, the affairs of the company as inexpensively and speedily as possible, in the interests of the creditors, and all others concerned in it, primarily; and, for the common good, all are equally deprived of some of their ordinary rights, including a right of action, and all that may follow upon that right, such as mode of trial, right of appeal, etc., and all are confined to the remedies which the Act provides or permits.
37 The purpose of the statute is to arrange for the closing down of the company’s business in an orderly and expeditious manner while minimizing, as far as possible, the losses and harm suffered by both the creditors and other interested parties and by distributing the assets in accordance with the Act. The mechanism provided consists in requiring the court's leave for proceedings by the creditors (ss. 21 and 22) and giving responsibility for the company's affairs to a court‑appointed liquidator, who acts as an officer of the court, under its control and in accordance with its directives (s. 19). The court and the liquidator must respect and give effect to the creditors' rights as much as possible, taking their nature into account and not disregarding the other interests involved. As Galipeault C.J.Q. stated in Maranda‑Desaulniers v. Peckham, [1953] B.R. 163, at p. 172, the court has a discretionary power in this regard:
[translation] In making decisions, a liquidator acting under the Winding‑up Act is subject only to the orders of the court (R.S.C., c. 213, s. 35), since the duty of an inspector appointed by court order for the winding‑up is merely to assist and advise the liquidator in the winding‑up of the company's business (s. 41).
In selling the property of a company that is being wound up, the liquidator is subject to the court's control (s. 35), and nothing in the Act itself limits the court's discretion in exercising such control. The liquidator must of course take into account the creditors' interests and wishes, but he is not bound by what the creditors want. It is up to him to determine what actions are most likely to protect the creditors’ interests.
38 In performing this task and choosing how to dispose equitably and most beneficially of the property of the company being wound up, there may be several factors to consider. It is in this regard that the court may be called upon to intervene in the exercise of its discretion. In the present case, an application has thus been made for the specific performance of an obligation under a bilateral contract. That obligation differs from a monetary debt for which the consideration has already been received and which, subject to the prior claims provided for by law, is resolved in the event of insolvency by the pari passu ranking of the creditors' claims to the proceeds of the winding‑up. It is therefore an obligation to do, and more particularly an obligation to give, the subject of which is a unique, non‑fungible and indivisible property with respect to which the appellant, as co‑owner, has a specific interest and is liable to suffer specific harm. He made commitments in a context of continuity over time and reciprocity and has fulfilled and is offering to fulfil his obligations. The obligations involved are comparable in a number of respects to those under a lease of an immovable granted by the insolvent owner thereof. It has been recognized that such a lease may be set up even against a trustee in bankruptcy (McCarter, supra; Brault v. Langlois, [1954] B.R. 41; and In re Palais des Sports de Montréal Ltée, [1960] B.R. 1012). It is advisable to respect such contracts and ensure that they are as stable as possible. (See Henri de Page, Traité élémentaire de droit civil belge (1953), vol. 6, Nos. 721‑22, at pp. 621‑22, on the application of the principle of pari passu ranking of claims, under Belgian statutory provisions similar to arts. 1981 and 1982 C.C.L.C., to obligations to do in respect of which specific performance is available.)
39 Moreover, these assets cannot be wound up except by disposing of them for a price. The liquidator will have to sell the debtor’s undivided share in the two immovables in any event. The amount realized from that sale will be part of the common pledge of the company being wound up and will be distributed to the creditors. By selling the debtor’s undivided share to the appellant, the liquidator will avoid the administrative expenses of a forced sale of the immovable and the risks of sale at a loss.
40 It is therefore clear that, at least for the same price, there is no advantage in selling to a purchaser other than the appellant. The assets available for distribution to the other creditors are not diminished. Even if this may mean that the appellant's claim is satisfied while unsecured monetary claims are not, the other unsecured creditors cannot complain because they will not be suffering any harm. On the other hand, a refusal to sell to the appellant may cause him harm related to the nature and object of his rights, harm that is completely gratuitous since it does not benefit the other creditors in any way. In deciding on the course to take in such a situation, the liquidator and the court, in the exercise of its discretion, must take into account both the benefits to be obtained and the harm caused in order to distribute them as equally as possible. The pari passu rule among unsecured creditors can be fully applied only for fungible obligations. In other cases, it must be tempered with equity to ensure that the burdens imposed on unsecured creditors are minimized and distributed as fairly as possible.
41 The principle that must guide the court in exercising its discretion in such a case is that of respect for contracts signed in good faith prior to the winding‑up, unless the obligations contained therein are prejudicial to the other creditors and give rise to an unjust preference in light of all the circumstances, in which case equitable relief will be available.
(C) Harm to the Other Creditors
42 The indivision agreements provide that if one of the parties is wound up the other will be entitled, on the terms and conditions specified, to purchase the undivided share held by the company being wound up. The purchase price of this undivided share is either the price offered by the purchaser or, if the other party refuses it, a price determined by appraisers appointed by both parties or a Superior Court judge in accordance with the procedure established. The method for determining the price is as follows: the appraisers must appraise the immovable as a whole without regard to the fact that it is held in undivided co‑ownership and must determine the fair market value of the undivided interest as a fraction ‑‑ half in this case ‑‑ of the whole. The price to be paid for the undivided interest is 75% of that market value as determined in this manner.
43 Certain comments should be made about this method for determining the price. The price to be paid is not 75% of the market value of the debtor’s undivided interest in light of the restrictions to which the ownership of that undivided portion is subject. Such restrictions should normally be reflected in the price the liquidator can obtain for such an interest. It therefore cannot be concluded that, on the face of it, the price provided for is less than the market value of the undivided share in undivided co‑ownership or is liable to harm the other creditors. Nor, a fortiori, has it been established that the harm caused to the other unsecured creditors would be disproportionate to the harm caused to the appellant, given the nature of his claim, by a failure to comply with the agreements and would create an unjust preference in his favour.
44 The value of the debtor’s undivided shares is not in evidence. The parties have not had the immovable appraised in accordance with the indivision agreements, since the liquidator applied to a court rather than giving effect to them; hence there is also no evidence as to the price that the appellant would have to pay under the agreements. In the absence of such evidence, which would permit a comparison between the price payable under the agreements and the market value in undivided co‑ownership of the debtor’s shares, it cannot be concluded that complying with the mandatory sale clauses in the indivision agreements would harm the other creditors. The respondent argues that an appraisal at 75% on the basis of the immovable's value without regard to the undivided co‑ownership is less than the market value of the undivided rights and is therefore prejudicial to the other creditors’ interests. It has not established this, however.
45 Since the clauses providing for the mandatory sale of the undivided interests in the immovables may be set up against the debtor and the respondent, which represents it, the respondent must comply with them provided that they do not create an unjust preference in favour of the appellant.
46 Their implementation remains subject to the controlling discretionary power of the court to which the parties may apply, if necessary, to clarify the terms and conditions of such implementation in the context of the winding‑up. The parties’ rights in this regard should be reserved.
VI ‑ Disposition
47 For these reasons, I would allow the appeal and declare that the clauses providing for the mandatory sale to the appellant of the undivided shares of the two immovables at the prices provided for in the indivision agreements (Exhibits R‑9, R‑10 and R‑11) are valid and may be set up against the respondent, subject to the parties' right to apply to court, if necessary, to clarify the terms and conditions of the implementation of those clauses in the context of the winding‑up, the whole with costs throughout.
Appeal allowed with costs.
Solicitors for the appellant: Lavery, de Billy, Montréal.
Solicitors for the respondent: Guy & Gilbert, Montréal.
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