Her Majesty the Queen v. Continental Bank of Canada, [1985] 2 CTC 134, 85 DTC 5332

Cullen, J:—On Monday, January 24, 1985, counsel for the defendant filed with this Court

(1) Joint Application for Leave of Court to set down hearing for special case; and

(2) Joint Application for Time and Place for Hearing of special case.

Both applications were allowed, the necessary order signed, and the hearing took place in Vancouver on Wednesday, June 26. The parties hereto agreed that the determination by the Court of three questions will fully determine the matters in issue, namely:

1. Do the provisions of the Bankruptcy Act, RSC 1970, c B-3, subordinate the claim of the Crown under the Excise Tax Act, RSC 1970, c E-13, to the security held by the Bank with respect to the proceeds of sale of the assets of Landmark?

2. Did the receipt of moneys by Coopers & Lybrand Limited, pursuant to the sale of assets to Canwest, amount to a receipt of moneys as is contemplated by the Excise Tax Act .

3. Is the Bank responsible for the payment of outstanding taxes owing by Landmark to the Crown amounting to $4,883.60?

The defendant, Continental Bank of Canada (hereinafter called the "Bank"), is a chartered bank having its head office in the City of Toronto, in the Province of Ontario, and having a branch office at 4800 No 3 Road, in the District of Richmond, in the Province of British Columbia.

Landmark Cabinets Ltd (hereinafter called "Landmark") was a licensed manufacturer of goods as defined in section 26 of the Excise Tax Act, RSC 1970, Chap E-13, as amended.

In June of 1982, the Bank made an offer of credit to Landmark, which offer was subsequently accepted. In consideration for the extension of credit the Bank required from Landmark, in addition to other security, a fixed and floating charge debenture securing payment to the Bank of the principal sum of $750,000, a registered general assignment of book debts and an assignment of inventory pursuant to section 178 of the Bank Act (enacted pursuant to the Banks and Banking Law Revision Act, 1980 SC, c 40).

During the period from August 1, 1982 through to November 24, 1982, Landmark manufactured and sold goods in Canada and by virtue of the fact that some purchasers did not pay for the said goods at the time of delivery, an entry was made in the books of Landmark showing such sales to be accounts receivable.

Pursuant to section 27 of the Excise Tax Act, a sales tax of nine per cent was levied on the goods manufactured by Landmark, such tax being payable, in the case of goods sold on credit, when payment became due in accordance with the terms of the sale.

Landmark failed to pay $4,883.60 owing to Her Majesty The Queen in Right of Canada pursuant to Landmark's obligation under section 27 of the Excise Tax Act.

Landmark defaulted in its obligations under the security it had granted to the Bank and on November 12, 1982, by a letter dated the same day, the Bank made demand on Landmark to repay its indebtedness to the Bank.

On November 17, 1982, the Bank received a demand from Her Majesty The Queen in Right of Canada pursuant to subsection 52(10) and subsection 52(11) of the Excise Tax Act, directing that the Bank pay over to the Receiver-General of Canada, out of any moneys received by the Bank on account of Landmark's book debts, a sum equivalent to the amount of the tax imposed by the Excise Tax Act.

Upon the failure of Landmark to repay its indebtedness to the Bank, on November 20, 1982, by a document entitled Appointment of Receiver Manager of Landmark Cabinets Ltd, the Bank appointed Coopers & Lybrand Limited as receiver-manager of all the undertaking, property and assets of Landmark charged under the debenture issued by Landmark to the Bank.

On November 20, 1982, by documents executed by the Bank, Coopers & Lybrand Limited was appointed by the Bank as its agent pursuant to the general assignment of book debts executed by Landmark in favour of the Bank and as its agent for realizing upon the inventory of Landmark pursuant to the Section 178 security granted by Landmark to the Bank under the Bank Act.

On November 24, 1982, Landmark assigned itself into bankruptcy and Coopers & Lybrand Limited was appointed the trustee in bankruptcy of Landmark. The Official Receiver prepared and filed a Certificate of Official Receiver of Appointment of Trustee.

On December 1, 1982, by a document entitled Offer to Purchase and dated November 30, 1982, Coopers & Lybrand Limited, as receiver-manager of Landmark, sold all its right, title and interest in and to the assets of Landmark, including the accounts receivable referred to in paragraph 5 herein, to Canwest Industries Ltd (“Canwest"), the proceeds of which were paid to the Bank.

The Bank is a secured creditor pursuant to the Bankruptcy Act, RSC 1970, Chapter B-3.

It is clear that on the date of the assignment in bankruptcy, the book debts did not belong to the manufacturers but to the defendant Bank, pursuant to the general assignment of book debts.

In Christopher Henry Flintoft, as Trustee in Bankruptcy of Canadian Western Millwork Ltd v The Royal Bank of Canada, [1964] SCR 631, Judson, J at 633 says:

The judge of first instance declared that the trustee in bankruptcy was entitled to all book debts of the bankrupt unpaid at the date of the bankruptcy. The Manitoba Court of Appeal held that to the extent that the book debts of the customer outstanding at the time of the bankruptcy represented debts owing to the customer for goods sold and covered by the bank’s s 88 security, these accounts went to the bank. (Underlining mine) . . . My opinion is that the majority judgment is correct. . . . The property rights of the bank are defined by ss 88(2) and 86(2) of the Bank Act (now 186 and 178). Under 88(2) the bank gets the same rights and powers as if it had acquired a warehouse receipt or bill of lading in which the property was described. Under 86(2) it acquires all the right and title of the customer. .. . Section 88 is a unique form of security. I know of no other jurisdiction where it exists. It permits certain classes of persons not of a custodier character, in this case a manufacturer, to give security on their own goods with the consequences above defined. Notwithstanding this, with the consent of the bank, the one who gives the security sells in the ordinary course of business and gives a good title to purchaser from him. But this does not mean that he owns the book debts when he has sold the goods. (Emphasis mine.)

and later at 634:

When the debts, the proceeds of the sale of the section 88 security come into existence they are subject to the agreement between the bank and the customer. As between these two the customer has nothing to assign to the bank. The actual assignment of book debts which was signed does no more than facilitate collection.

ind at 636:

The majority judgment is founded squarely on the grounds that the claims against the buyers of the goods became the property of the bank by virtue of its section 88 security and never were the property of the customer so as to be affected by the assignment in bankruptcy.

In this case, it is clear that at the date of the assignment in bankruptcy, namely November 24, 1982, the book debts were the property of the defendant, and not the property of the bankrupt, and so the assignment in bankruptcy did not affect the book debts in question.

The agreed statement of facts indicate the plaintiff moved pursuant to the requirements of subsections 52(10) and 52(11) of the Excise Tax Act giving appropriate notice to the defendant. Whether the defendant Bank realized on the book debts through payment directly to them by the customer of the manufacturer or realized, as is the case here, by selling to Canwest Industries Ltd through its agent Coopers & Lybrand, it is a receipt of moneys as is contemplated by the Excise Tax Act. The Bank received the proceeds of the sale pursuant to the earlier registered assignment of book debts from the manufacturer on July 22, 1982. On November 17, 1982 the demand was served pursuant to subsection 52(10) of the Excise Tax Act, the assignment in bankruptcy occurred November 24, 1982 and the sale to Canwest occurred December 1, 1982 and as indicated in the Offer to Purchase, Coopers & Lybrand are described as:

Coopers & Lybrand

Receiver-Manager of Landmark Cabinets Ltd

and Agent of the Continental Bank pursuant

to section 178 Bank Act Security and General

Assignment of Book Debts.

Clearly here they could only act as agent for the defendant Bank and not the manufacturer.

In Prowest Fabrications Ltd, and Balzer's Mechanical (1978) Ltd v The Queen, we have an unreported case dealing with subsection 52(10) of the Excise Tax Act which is helpful in the circumstances here.

The facts are:

This is an application for directions as authorized by The Business Corporations Act, RSS 1980, c B-10, s 95(c), to determine if the Receiver Manager is required to remit excise tax to the respondent, the Department of National Revenue Customs and Excise, on the accounts receivable of the applicants collected by the Receiver Manager subsequent to its appointment by the court. Price Waterhouse Limited was appointed Receiver Manager by the debenture holders, Canadian Imperial Bank of Commerce and Saskatchewan Development Corporation, on January 12, 1983, and by the Court on January 27, 1983.

The applicants take the position that the Receiver Manager should not be required to remit the excise tax.

The applicants had obtained loans from the Canadian Imperial Bank of Commerce at Regina, the principal amount of which totalled $1,003,109.43 together with interest at 24th May 1983 of more than $70,000.00. The applicants had executed debentures which constituted a first floating charge on the undertaking and all the property and assets of the applicants. This constituted an assignment of the book debts which is the only matter with which we are concerned in this application. Revenue Canada Customs and Excise sent a demand for tax on assigned accounts to the Canadian Imperial Bank of Commerce on December 29, 1982 with respect to Prowest and a similar demand with respect to Balzer’s on January 19, 1983. These demands were sent pursuant to the Excise Tax Act, RSC 1970 c E-13 s 52(10).

On January 12, 1983, the Bank made formal demand in writing for the payment of its loans from the applicants pursuant to the terms of the debentures and payment was refused.

Mr Justice Forbes of the Queen’s Bench Judicial Centre of Regina said:

It follows that the floating charge was crystalized on that date and the Bank was then entitled to realize on the accounts receivable of the applicants. It follows that if the Bank had collected any of the accounts receivable subsequent to receipt of the notices sent by the Department the Bank would have been required to pay over to the Receiver General a sum equivalent to the amount of any tax imposed by the Excise Tax Act upon the transaction giving rise to the debt assigned. It also follows that the Bank when it receives from the Receiver Manager the proceeds of the accounts receivable which attract excise tax, the Bank will be required to remit to the Department a sum equivalent to the tax owing on taxable transactions.

and later:

It would not be proper for the Bank to frustrate the efforts of the tax collector by electing to appoint, or arranging for the court to appoint a receiver manager rather than collecting the accounts receivable on its own behalf and thus receiving a benefit to which it was not entitled.

Accordingly to question (a) the answer is no, to questions (b) and (c) the answers are yes.

The Department of National Revenue Customs and Excise is entitled to an order directing the defendant to pay over to the Department the appropriate excise tax payable together with interest and the plaintiff’s costs. I hereby direct counsel for the plaintiff to prepare a draft order, in a form acceptable to counsel for the defendant and to submit same to the Registry for execution by myself.

Order accordingly.