HARMONIZATION OF FEDERAL LEGISLATION WITH QUEBEC CIVIL LAW: SOME EXAMPLES FROM THE BANKRUPTCY AND INSOLVENCY ACT

2. Issues raised in the B.I.A.

2.1. Definition of secured creditors

The definition of the expression "secured creditor" is one of the most important provisions in the B.I.A. The harmonization of this definition with Quebec civil law clearly has appreciable economic repercussions for creditors involved in bankruptcies. This definition raises a number of issues: outdated terminology, the type of mechanisms that confer secured creditor status, ownership security mechanisms, trust security mechanisms. We shall also see what constituted the draft amendments contained in the initial harmonization bills.

Outdated terminology

The definition of secured creditors contained in section 2 of the B.I.A. includes private law concepts, specifically that of security,[38] including hypothec and privilege. Under the C.C.L.C., inclusion of the words "nantissement" and "privilege" in this definition, as well as the treatment of these terms in case law, allowed for some degree of correlation between the C.C.L.C. and the B.I.A. As well, the real security mechanisms recognized by the C.C.L.C. were recognized by the B.I.A., subject to subsection 70(1) and section 136 of the B.I.A. and to the interpretation of the expression "on or against the property of the debtor or any part thereof as security for a debt".

The coming into force of the C.C.Q. on January 1, 1994 significantly changed Quebec law on security. Subject to the transitional provisions contained in the Act respecting the implementation of the reform of the Civil Code,[39] privileges under the C.C.L.C. and special statutes were eliminated. For the benefit of certain creditors, the Quebec National Assembly introduced the new concept of prior claims, not to be confused with privileges. Prior claims, which need not be registered for holders to benefit from them, confer a right of preference that theoretically supplants the right of preference of hypothecary creditors, regardless of the registration date of the hypothec.[40] As a result, the terminology contained in the definition of secured creditors in the B.I.A. is outdated.

Real security

The definition of secured creditors lists a series of security mechanisms "on or against the property of the debtor or any part thereof as security for a debt", and thus this definition applies only to real security. Since prior claims do not constitute real rights,[41] holders of prior claims do not have secured creditor status. This point is made clear in the Quebec Court of Appeal decision in Château d'Amos.[42] In response to this decision, the Quebec National Assembly immediately tabled a bill to amend the C.C.Q. and to include in it the concept of prior claims constituting real rights for the benefit of municipalities and school boards,[43] for which the issue seems to be resolved.[44]

The same cannot be said for other prior claim creditors, however. For example, it has never been clearly established in case law whether holders of a right of retention were considered as secured creditors because of the nature of the right itself or because of the result of the accompanying privilege. Professor Jacques Deslauriers describes this uncertainty as a serious problem, and goes on to say: [translation] "[a]lthough prior to 1994 holders of a right of retention were given secured creditor status in bankruptcies, following the amendments of the new Code this secured creditor status has become very uncertain and can even be said to have become non-existent."[45]

As well, the priority of legal costs and Crown tax claims, governed respectively by section 136, 86 and 87 of the B.I.A., can no longer be applied to property liquidated by trustees.

Ownership security and trust security mechanisms

In addition to prior claims and hypothecs, mechanisms involving ownership rights can also be used to secure the performance of obligations. Examples include instalment sales,[46] sales subject to a resolutory clause,[47] and sales with right of redemption.[48] These mechanisms are referred to as "ownership security" mechanisms.[49]

Subject to certain formalities prescribed by provincial private law, the procedure set out in section 81 of the B.I.A. allows beneficiaries of these mechanisms to claim possession of the property from trustees. In a sense these creditor-owners are unaffected by bankruptcies, even less affected than secured creditors, who are in fact subject to certain procedures that do not affect creditor-owners.

When the C.C.L.C. was in force, treatment of creditor-owners under the B.I.A. was similar to that under Quebec civil law, which did not prohibit the use of ownership rights to secure the performance of obligations and thus provided creditors with security mechanisms that were often more effective than actual security.

The coming into force of the C.C.Q. brought substantial change in this regard: rights resulting from instalment sales and sales with right of redemption, in the case of debtors who ran businesses, as well as rights resulting from sales of immovables subject to a resolutory clause, became subject to the rules governing the exercise of hypothecary rights. The same became true for an onerous trust established to secure the performance of obligations.[50] As a result, according to Professors Jacques Auger, Albert Bohémier and Roderick A. Macdonald, the gap between traditional security mechanisms on the one hand and certain ownership security and trust security mechanisms on the other hand is becoming much narrower, to the point where these writers conclude as follows:

[translation] In this context, with security ownership and security trusts being increasingly considered by the jus commune to be primarily security mechanisms, it may seem paradoxical that the B.I.A. would continue to ignore this trend by placing them under a different set of rules from those that apply to secured creditors. Harmonization between the B.I.A. and the C.C.Q. may therefore demand that the very concept of secured creditor be revisited and extended to include owner creditors and trustee creditors, who would then be subject to the same restrictions as those placed on secured creditors; the trustee could have the same rights with regard to them, with certain adjustments, as with regard to secured creditors.[51]

Harmonization Bill

The definition of secured creditors was the subject of proposed legislative amendments in Bill C-50 in 1998 and Bill S-22 in 2000. These amendments introduced the prior claim constituting real rights for the benefit of municipalities and school boards, as well as ownership security mechanisms, trust security mechanisms, and right of retention. The purpose of these amendments was not to make new law, but to re-establish the balance that had existed before the C.C.Q. and to cover the situation that had prevailed since that time. Unfortunately, both these bills died on the Order Paper.[52]

2.2. Courts vested with jurisdiction in equity

The B.I.A. vests certain courts with jurisdiction to hear bankruptcy and insolvency cases; these courts, which are listed in full in the B.I.A., correspond generally to ordinary courts of law in the provinces and territories, whose inherent jurisdiction is recognized in the act.[53] The B.I.A. also vests these courts with jurisdiction in equity.[54] A number of clauses of the B.I.A. explicitly refer to matters in equity.[55]

This vesting of jurisdiction raises the question whether the Quebec Superior Court has jurisdiction over equity law matters. Indeed, some judges have turned to equity law doctrines in constructing certain B.I.A.'s sections.[56]

Section 183 of the B.I.A. have also been constructed as enabling "fairness" and "good conscience" discretion.[57] However, according to De Blois J. of the Quebec superior Court, the word "equity" used by the federal Parliament in section 183 refers solely to equity as part of the common law.[58]

The vesting of jurisdiction in equity and the recognition of the inherent jurisdiction of jus commune courts may raise some issues concerning Quebec civil law. The initial harmonization bills included proposed amendments to subsections 183(1) and 183(2) of the B.I.A., the purpose of which was to indicate clearly that the B.I.A. did not have the effect of vesting Quebec courts with jurisdiction in equity.

Indeed, the concept of equity, derived as it is from English law, forms part of a tradition and a terminology that are foreign to Quebec civil law. All the equity proceedings referred to in the B.I.A. raise the issue of how a Quebec Superior Court judge may apply them without having the jurisdiction to do so. On this point, in the decision in Castor Holding Ltd., Guthrie J. of the Quebec Superior Court stated:

[translation] The Superior Court is the court of original general jurisdiction; it hears at the trial level all proceedings that formal provisions of the law have not allocated exclusively to other courts (art. 31 C.C.P.). The Superior Court has all the powers required to exercise this jurisdiction (art. 46 C.C.P.). It is not necessary to import jurisdiction in equity in order to broaden this Court's jurisdiction. The purpose of subsection 183(1) of the B.I.A. is merely to ensure that the superior courts in the common law provinces can exercise their jurisdiction in law and in equity in exercising their general jurisdiction. This section does not give the Quebec Superior Court, in exercising its jurisdiction in bankruptcy matters, a power in addition to the power it already has [emphasis added].[59]

That said, although the jurisdiction in equity conferred by the B.I.A. is directed only at the superior courts in the common law provinces, in the decision in Structal (1982) inc. v. Fernand Gilbert Ltée, the Quebec Court of Appeal did apply the concept of "equitable set-off" set out by the Supreme Court of Canada in Holt v. Telford,[60] a ruling strongly criticized by André Bélanger.[61]

2.3. Petitioning in bankruptcy and other procedural issues

Petitioning in bankruptcy, the procedure that initiates bankruptcy proceedings, raises a number of conceptual issues, particularly concerning the supplementary law to be applied.[62] We shall look first at the special characteristics of petitioning in bankruptcy, its common law derivation, and its use in the context of Quebec civil law. At the end of this part, we shall look at the special characteristics of other procedures provided for in federal bankruptcy legislation.

Special characteristics of petitioning in bankruptcy

Petitioning in bankruptcy is derived from a set of rules intended to be complete; the purpose of this accelerated, exceptional, quasi-criminal procedure is to obtain a receiving order.

(i) Set of rules intended to be complete

According to the case law indexed in the Canadian Encyclopedic Digest, the procedure provided for in the B.I.A. forms a complete set of rules adopted in order to provide quick, effective, less costly ways of settling issues raised in the administration of bankrupts' property.[63] Although some cases that we shall see at the end of this part may require the application of rules of supplementary law, petitioning in bankruptcy is a procedure derived from a set of rules intended to be complete.

(ii) Accelerated procedure

The progress through the courts of petitions in bankruptcy ought to be expeditious. In the reasons for dismissing an appeal concerning a receiving order issued by the Quebec Superior Court, Owen J. of the Quebec Court of Appeal stated as follows:

In dealing with a bankruptcy, it is necessary to keep in mind the underlying philosophy that matters should be dealt with and the assets realized and distributed as expeditiously and economically as possible. Bankruptcy proceedings are primarily for the benefit of the creditors and are not intended to be dragged out by the technicalities, procedural and otherwise, for the advantage of the debtor and the friends of the debtor.[64]

(iii) Exceptional procedure

Petitioning in bankruptcy is an exceptional procedure; its purpose is to divest debtors of their property and thus of the administration of their patrimony.[65] In fact, under the rules set out in the jus commune, insolvency is exceptional: when debtors become insolvent, in a way their relationships with others become unbalanced. In order to re-establish balance, federal bankruptcy legislation allows discharge from indebtedness so debtors can create new contractual ties with others again.

(iv) Quasi-criminal procedure

Bankruptcy proceedings were originally designed to penalize insolvent debtors; the debtors' prison was a byword. Later, bankruptcy laws allowed for discharge from indebtedness.[66] Methods gradually became more humane, and options introduced included proposals,[67] summary administration,[68] the orderly payment of debts,[69] and consumer proposals.[70] As well, just recently the federal Parliament introduced mediation, a procedure aimed at allowing creditors and debtors to resolve situations of insolvency without going through the legal procedure.[71]

Despite this slow evolution in search of kinder ways of resolving situations of insolvency, the B.I.A. is still considered punitive in nature, if only by courts in the common law provinces.[72] However, this view does not appear to be unanimously held by all common law judges. For example, we quote the remarks by Sutherland J. of the Supreme Court of Ontario in Re Bookman:

Proceedings under the Bankruptcy Act are sometimes referred to as "quasi-criminal" doubtless because they involve the state, affect status and cannot, in the case of a petition, be simply discontinued at the behest of the parties. The term "quasi-criminal" is employed in cases such as Re Elkind; Samuel Hart & Company v. Elkind (1966), 9 C.B.R. (N.S.) 274 where strict compliance with the provisions relating to bankruptcy petitions is being insisted upon by the Court. However, in essence the proceedings under the Bankruptcy Act are civil proceedings and so not themselves directly affected by s. 11(c) of the Charter.[73]

This concept seems to be completely ignored by Quebec courts. Only one short passage by Kaufman J. of the Quebec Court of Appeal in the reasons for the decision in Gilbert v. Gilbert designates the B.I.A. as at best quasi-criminal.[74] In fact, according to Professor Bohémier, this concept appears to have fallen into disuse and has seemingly been replaced with the patrimonial aspect of the B.I.A.[75]

Common law derivation of petitioning in bankruptcy

Petitioning in bankruptcy is an old procedure derived from the common law tradition. The word "petition" was already used in 19th-century English law to designate the procedure under which creditors' rights could be recognized in bankruptcy cases.[76] This word can also designate a procedure to initiate primary civil proceedings in the common law provinces. As such, it is one of the procedures used to initiate actions.[77]

Where terminology is concerned, the word "pétition" is usually used to render the word "petition". That said, examples of the use of the word "requête" can be found in the French versions of certain statutes,[78] including some in the federal legislative corpus.[79]

Although theoretically petitioning is derived from the common law tradition, in the context of bankruptcy the nature of this procedure raises some issues. In Re Ristimaki, the Ontario Registrar in Bankruptcy was to decide whether a third party (in this case, the Canada Customs and Revenue Agency) could obtain leave to intervene in a petitioning in bankruptcy; the Agency claimed that the receiving order would have the effect of jeopardizing its claim. At issue, then, was the application of Rule 13.01(1) of the Ontario Rules of Civil Procedure, which provided for an application for leave to intervene as an added party. The Registrar dismissed the application, considering that Rule 13.01(1) did not apply in the case. The Registrar added that the receiving order could not be considered a judgment within the meaning of Rule 13.01(1)(b) since the petition in bankruptcy to obtain the order was neither an action nor an application. The Registrar wrote as follows:

[…] I question whether a receiving order is a "judgment". "Judgment" is defined in the RCP as "a decision that finally disposes of an application or action on its merits […]" "action" in turn is defined as a proceeding that is not an application and includes a statement of claim, notice of action, counterclaim and divorce petition, among other processes. "Application" is defined as a proceeding commenced by notice of application. A petition is neither an action nor an application, by these definitions [emphasis added].[80]

Why did Owen J. not recognize petitioning in bankruptcy as one of the "other processes"? Are we to understand from this decision that petitioning in bankruptcy is an autonomous procedure to which no supplementary law in provincial private law applies? The above-quoted passage illustrates the issues raised by the very nature of petitioning in bankruptcy, in a common law context. We shall now consider the issues raised by the use of petitioning in bankruptcy in a civil law context.

Use of petitioning in bankruptcy in Quebec civil law

In Quebec, the word "pétition" has been used to mean a judicial proceeding, for example a "pétition de droit" or an "action pétitoire". Today, this word is used only in the expression "pétition d'héridité", or petition for inheritance, an application for recognition of heredity.

(i) "Pétition de droit"

The "pétition de droit" designated an application for leave, submitted to the Sovereign by a person initiating proceedings against the state.[81] Articles 94ff. of the C.C.P. now govern proceedings against the state, which must be initiated by means of declarations or motions.

(ii) "Action pétitoire"

Under the C.C.L.C., the purpose of an "action pétitoire" was to ensure judicial protection of property. The articles of the C.C.P. governing the "action pétitoire" were repealed by the Quebec National Assembly with the introduction of article 912 of the C.C.Q., which provides that owners may take legal action to have their right acknowledged.[82]

(iii) Petition of inheritance

The word "pétition" is still used today in the expression "pétition d'héridité", or petition for inheritance, designating successors' right to have their heirship recognized.[83] Although petitions of inheritance have the nature of claims, this expression does not designate the procedure used in court.

In Quebec law, only two types of procedures initiate primary proceedings. Under the C.C.P., "[u]nless otherwise provided, every judicial proceeding is introduced by a declaration."[84] This is the general procedure; injunctions, for example, are initiated by declarations.[85] Also under the C.C.P., certain proceedings relating to persons and property are initiated by motions;[86] motions are used to apply for declaratory judgments[87] and extraordinary recourses.[88] Petitions of inheritance are initiated in court by motions.[89]

In Quebec case law, there does not seem to be a standard expression in French designating the procedure for forcing debtors into bankruptcy. A brief search of Quebec case law revealed the use of the following expressions in French:[90]

  • "demande d'ordonnance de séquestre",
  • "demande de mise en faillite",
  • "requête pour mise en faillite",
  • "requête en vue d'obtenir une ordonnance de séquestre",
  • "requête pour obtenir une ordonnance de séquestre",
  • "requête en faillite",
  • "requête de mise en faillite",
  • "requête en vue de l'émission d'une ordonnance de séquestre",
  • "requête de faillite",
  • "requête en vue d'une ordonnance de séquestre",
  • "requête pour une ordonnance de séquestre",
  • "requête présentée en vertu de l'article 43 L.F.I.",
  • "pétition de faillite",
  • "pétition en faillite",
  • "pétition en vue d'une ordonnance de séquestre",
  • "pétition pour mise en faillite".

Some of these expressions are often used in the same decision by the same judge. However, use of the word "requête" is constant, a fact that indicates that this term is not repugnant to judges in the civil law tradition. Authorities also use the word "requête" and the expressions "requête de mise en faillite" and "requête en faillite".[91] In fact, some points of correspondence can be established between petitioning in bankruptcy and the civil law "requête":

  • the form the procedure must take,[92]
  • the attestation by affidavits,[93]
  • service of petitions and affidavits,[94]
  • the accelerated nature of procedures,
  • the fact that the procedures are expressly provided for in law.[95]

It may be concluded from the foregoing observations that petitioning in bankruptcy in a civil law context raises a number of issues about what terminology designates this procedure. That said, bankruptcy petitions do not seem, a priori, to constitute autonomous proceedings; on the contrary, they are quite similar to "requêtes". One way of learning more is to extend our analysis to supplementary law.

Supplementary law

The main issue regarding the designation of bankruptcy petitions is the determination of the supplementary law. This issue is raised although petioning in bankruptcy is said to form a complete set of rules. Indeed, the federal Parliament itself provides quite a clear indication of the opposite possibility; section 3 of the B.I.G.R. provides as follows: "[i]n cases not provided for in the Act or these Rules, the courts shall apply, within their respective jurisdictions, their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules."

What is this "ordinary procedure"? In Quebec, this expression seems to refer to the preliminary exceptions for which general provision is made in the C.C.P., particularly in cases where debtors contest the extrinsic legality of a motion.[96] The dilatory exceptions and exceptions to dismiss actions provided for in the C.C.P. could also be used;[97] other examples may exist. It should be borne in mind that, in Quebec, article 763(2) of the C.C.P. provides as follows:

Except to the extent provided in this Title or in other provisions of this Code applicable to applications introduced by motion, applications follow the general rules applicable to applications made by declaration, including the rules relating to service or notification and to the designation of the parties and property as well as those relating to proof.

In the common law provinces, a brief search reveals that parties actually use a wide range of rules of civil procedure, both general and specific, to supplement silence by the B.I.A. Examples include:

  • motion to obtain an order for security for costs,[98]
  • motion seeking an interpleader order,[99]
  • motion to for leave to intervene in a petition for a receiving order,[100]
  • application of rules of civil procedure governing offers to settle,[101]
  • motion to amend petition for a receiving order,[102]
  • motion to add the names of three additional creditors as petitioners,[103]
  • calculation of deadlines,[104]
  • substitution of petitioner and amendment of petition for a receiving order.[105]

This situation is not surprising, since the Ontario Rules of Civil Procedure, for example, include both general rules and rules that apply only in certain situations. As a result, the same rule is used to make motions in proceedings initiated by statements of claim and in proceedings initiated by applications. This is true in particular for:

  • citations, application and interpretations,[106]
  • non-compliance with the Rules,[107]
  • time,[108]
  • court documents,[109]
  • joinders of claims and parties,[110]
  • consolidation or hearing together,[111]
  • parties under disability,[112]
  • representations by solicitor,[113]
  • service of documents.[114]

On the other hand, some rules of civil procedure apply only in certain instances depending on whether an action or a motion is involved. Examples include the rules governing written proceedings in actions, counterclaims and crossclaims, and discovery of documents applicable only to actions.

In conclusion to this part, it can be said that using the word "requête" to designate petitioning in bankruptcy does not seem to cause any more real problems in the civil law context than does use of the rules set out in the C.C.P. One wonders what possible repercussions in the common law provinces might ensue from a simple terminological change with no intention of changing the substance of the law.

Other procedures raise certain conceptual issues. These procedures include the receiving order, pending litigation, and interpleader procedures.

Receiving order procedure

Receiving orders are issued by courts after petitions in bankruptcy (sometimes referred to as petitions for receiving orders) are filed, and hearings held, at which creditors state that the debtors' insolvency jeopardizes their claims, and debtors may state that their financial situation does not call for them to be divested of their property. Receiving orders place debtors in bankruptcy and operate as applications for discharge from indebtedness.[115]

Federal Parliament borrowed the English judicial mechanism of receiving orders and incorporated it in the Insolvency Act of 1919. Under the 1914 English bankruptcy legislation, receiving orders gave official receivers the power to receive debtors' property, which included the right to suspend recourse by creditors.[116] Debtors were divested of their property, and the property transferred to trustees, only when debtors were declared bankrupt,[117] at which point trustees were in turn considered receivers and took possession of bankrupt debtors' property. It may be helpful to point out that receiving orders do not simply transfer the right to possess and retain bankrupt debtors' property; they divest debtors of the property.[118]

Since the procedure of receiving orders did not originate in civil law, it raises a number of conceptual issues. Would the expression "déclaration de mise en faillite" be more understandable in civil law? Also to be considered is the concept of trustees' liability for administering the property; one may wonder what supplementary law is applicable. It should be noted in that regard that a sequestrator is, in fact, a depositary within the meaning of the C.C.Q.[119] Another point still to be explored is the possibility that receiving orders are a legal fiction, a vestige of an old British tradition used to describe the transfer of bankrupts' property to trustees whose role itself, as has been seen, is highly complex.

Pending litigation procedure

In common law, when proceedings involve real property such as a parcel of land, applicants must file a certificate of pending litigation (lis pendens) with the land registry office. The purpose of this procedure is to notify the general public, and good-faith third parties in particular, that proceedings involving the property, or the outcome of the proceedings, could affect title to the property.[120] Briefly, third parties may purchase the property, but at their risk and peril.[121] Since this procedure protects the public interest, it forms an integral part of the legal process.

The federal Parliament felt it necessary to include this common law rule in federal bankruptcy legislation; section 107 of the B.I.G.R. reads as follows:

Where land, any structure on land, or any interest relating thereto is the object of litigation under sections 91 to 100 of the Act, the registrar may, once a copy of the statement of claim, signed by the plaintiff's legal counsel, is filed with the court, issue a certificate of lis pendens and, if the plaintiff is unsuccessful in whole or in part, a certificate of disallowance.

Here again, including this procedure in national legislation has the effect of introducing a rule from the common law tradition into a civil law tradition. Application of this Rule, although rare, seems to give rise to some degree of unease.[122]

It should be noted that since 1994 Quebec civil law has included a seemingly similar procedure:[123] any judicial demand concerning a real right that shall or may be published in the land register may, by means of a notice, be the subject of an advance registration. This advance registration procedure has no immediate effect; it is conditional on a possible second registration, registration of the judgment.

However, this advance registration procedure differs from the pending litigation procedure in three ways. Firstly, advance registration is optional; applicants are not required to pre-register their rights in the land register. Secondly, advance registration is a conditional priority that must be confirmed by registration of the judgment; at that point the applicant's rights to the property take effect retroactively to the date of advance registration, thus taking precedence over rights registered after that date. In comparison, registration of a certificate of pending legislation, from which no party benefits, simply notifies good-faith third parties that a decision involving the property is being made and may alter the title to the property. Thirdly, advance registration does not form an integral part of the Quebec legal process, but is merely a procedure available to applicants.

As well, use of the French word "litispendance" to designate the pending legislation procedure may give rise to some degree of confusion in the minds of civil law practitioners, since article 165 of the C.C.P. provides for exceptions to dismiss actions if there is "litispendance". Here, this expression designates situations in which two proceedings involving the same facts and the same parties are initiated in two separate jurisdictions, and the purpose of exceptions to dismiss actions is to have one set of proceedings dismissed; of course, this is another procedure altogether than the pending litigation procedure.

Interpleader procedure

The interpleader procedure is an equity procedure to determine claimants' rights to property held by third parties.[124] The B.I.A. uses this concept: under paragraph 42(1)(e), if there are interpleader proceedings opposing seizure of debtors' property, time elapsed is not taken into account in determining whether debtors have committed acts of bankruptcy.

If the federal Parliament intended the B.I.A. to apply uniformly to all creditors, why include this provision for a strictly common law procedure? Can the interpleader procedure, deriving from an equity law doctrine, be introduced, understood and used in Quebec law by means of the B.I.A.? If not, why include this provision, which benefits only creditors in the common law provinces?

Would it be appropriate, regarding civil law audience, to refer to the opposition to seizure in execution, by third parties who have a right to claim any part of property seized?[125] We are considering these issues.

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