The Court of Appeal Clarifies that Trusts under the Construction Lien Act are Protected from Distribution to Creditors
A decision of Ontario’s highest court last month has provided significant rights to suppliers and subcontractors who find that their contractor has become insolvent after receiving payment from the owner but leaving the suppliers and sub-contractors unpaid. The court found that the trust provisions of the former Construction Lien Act can mean that the monies received from the owner by the contractor are a trust for the projects creditors and that these funds are not available to secured creditors or non-project creditors. The new accounting requirements for trust monies in the new Construction Act should make it easier to establish the three certainties that are required to establish a trust, and thus reinforce the reasoning in the Courts decision in favour of trade suppliers and subcontractors.
The Guarantee Company of North America v Royal Bank of Canada, 2019 ONCA 9 9 involved a priority dispute between creditors and employees of a bankrupt company in the paving business, A-1 Asphalt Maintenance Ltd. (“A-1”). A-1 had four major ongoing paving projects when it was deemed bankrupt, three with the City of Hamilton (the “City”) and one with the Town of Halton Hills (the “Town”). All four contracts had outstanding accounts receivable for work completed by A-1. The bankruptcy judge ordered that all receipts from the paving projects be deposited into the ‘Paving Projects Account’. The receiver deposited $675,372.27 into the Paving Projects Account (the “Funds”). The Funds were “trust funds” pursuant to s. 8 of the Construction Lien Act, R.S.O., c. C. 30, now the Construction Act (the “CA”) which states:
8 (1) All amounts,
(a) owing to a contractor or subcontractor, whether or not due or payable; or
(b) received by a contractor or subcontractor, on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or material to the improvement who are owed amounts by the contractor or subcontractor.
(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.
The Priority Dispute: Parties and their Positions
1. The Royal Bank of Canada, (“RBC”), a secured creditor of A-1 under a general security agreement;
2. The Guarantee Company of North America (“GCNA”), a bond company and secured creditor of A-1 that had paid twenty CLA lien claims (totalling $1,851,852.29) to suppliers and subcontractors of A-1 and is subrogated to those claims; and
3. Employees that worked on the four projects, represented by LIUNA Local 183 and IUOE Local 793 (together, the “Unions”) (claiming a total of $511,949.14).
RBC claimed that the Funds were a part of A-1’s estate available to creditors. However, GCNA and the Unions maintained that the Funds were s. 8(1) trust funds which must be excluded from A-1’s property on bankruptcy pursuant to s. 67(1)(a) of the Bankruptcy Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) which provides:
67 (1) The property of a bankrupt divisible among his creditors shall
(a) property held by the bankrupt in trust for any other person;
Decision on the Motion
The motion judge concluded that the Funds were not excluded from A-1’s estate available to creditors. The motion judge found that the amounts owing for the various projects had been comingled, which destroyed the certainty of subject matter required for a trust. As such the BIA s. 67(1)(a) exemption for trust property did not apply.
Conclusion - Statutory Trusts May Preserve Assets from Distribution to Creditors
On appeal Justice Sharpe concluded that provincially created statutory trusts preserve assets from distribution to ordinary creditors under the BIA, s. 67(1), as long as the statutory trust satisfies the general principle of trust law1. The general principle of trust law is that to establish a trust, three elements must be present: (1) certainty of intention, (2) certainty of subject matter, and (3) certainty of object2.
Justice Sharpe considered the Supreme Court decision, British Columbia v Henfrey Samson Belair Ltd., 1989 SCC,  2 S.C.R. 24, along with GMAC Commercial Credit Corporation – Canada v. T.C.T. Logistics Inc., 2005 ONCA, 74 O.R. (3d) 382.
CA s. 8(1) Protects the Rights of Construction Workers for Debts Owed
The CA’s section 8(1) trust is a vital part of the scheme of holdbacks, liens and trusts, designed to protect the rights and interests of those working in the construction industry and minimizes unjust enrichment to those at the top of the construction pyramid3. Certainty of object is clarified in the statute which specifies that the trust fund is “for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor.”
Section 8(1) includes all amounts owing to a contractor or subcontractor, whether or not due or payable. The debts which A-1 owed to the subcontractors and employees constituted choses in action, which are a form of property over which a trust may be imposed. When A-1 became bankrupt, the trust created by s. 8(1) was imposed on the debts owed by the City and the Town to A-14.
The CA Trust does not Give Rise to an Operation Conflict with the BIA
Justice Sharpe rejected the contention that CA s.8(1) created an operational conflict between CA s. 8(1) and BIA s.67(1)(a), invoking the doctrine of federal paramountcy. Henfrey contemplated that a provincial statute can provide the required element of certainty of intention and such a statutory trust does not give rise to an operational conflict5.
Funds Deposited in Same Account Remained Traceable
The motion judge found that the comingling of funds destroyed the element of certainty of subject matter. Contrarily, Justice Sharpe found that the funds paid for each of the paving projects were readily ascertainable and identifiable6. The funds were only commingled to the extent they had all been paid into the same account but they had not been converted to other uses and remained traceable to the specific project for which they had been paid7. Justice Sharpe noted that commingling of trust monies only destroys the element of certainty where it is impossible to identify or trace the trust property.
Held – The Funds Were Not Available for Distribution to Creditors
The statutory trust created by the CA, s. 8(1) satisfies the requirement for certainty of intention to create a trust as well as certainty of object. The debts for a project subject to the CA are choses in action which meet the required element of certainty of subject matter. The Funds in the Paving Project Accounts satisfied the requirements for a trust at law and were therefore not available for distribution to A-1’s creditors.
Take away for Contractors- your trust obligations will survive an insolvency.
Take away for suppliers and sub-contractors- don’t give up when the Notice to Creditors arrives in the mail from a bankruptcy trustee.
|Shawn O'Connor||Sasha Willms, Articling Student|
- The Guarantee Company of North America v Royal Bank of Canada, 2019 ONCA 9 at para 3 [Guarantee Company of North America].
- Ibid at para 32.
- Ibid at para 84.
- Ibid at para 78.
- Ibid at paras 83-85.
- Ibid at para 86.