Chapter : Priorities and Distribution
carving out exceptions and establishing various classes of preferred and special claims. In
the absence of such exceptions, these claims would rank as ordinary unsecured claims. In
practice, therefore, unsecured creditors do not truly rank pari passu. The priority ranking of
claims is discussed in further detail below in Part II.
In addition to the preferred status that section accords to certain types of claims,
there are circumstances in which courts will permit certain ordinary unsecured creditors to
collect ahead of others. For example, if the bankrupt is a contractor who failed to complete
a job, the party that hired the bankrupt is entitled to perform the work and deduct the costs
of the work from any outstanding amounts that it owes to the bankrupt. Importantly, how-
ever, pre-bankruptcy contractual terms giving a party discretion to pay amounts owing to the
bankrupt directly to creditors of the bankrupt are ineective in bankruptcy, as demonstrated
in the following excerpt from Iona Contractors Ltd v Guarantee Company of North America,
 There is nothing objectionable about a provision in a contract allowing the owner
to complete work that was not performed by a bankrupt contractor, and to deduct the
amount from what was otherwise owing to the contractor. Section () of the Bankruptcy
and Insolvency Act allows such set-os. After a bankruptcy, however, no such clause is
eective to the extent that it gives a discretion to the owner to pay creditors of the bank-
rupt contractor otherwise than as authorized in the Bankruptcy and Insolvency Act: AN
Bail Co v Gingras,  SCR at pp. –. It is at this stage of the analysis that it
is relevant that the owner has no “obligation” to pay the subcontractors, but only the
“right” or “discretion” under clause ..(d). After bankruptcy, that discretion cannot be
exercised in such a way that it disturbs the priorities in the Bankruptcy and Insolvency Act.
In AN Bail Co v Gingras,  SCR , Bail, a construction company, had subcontracted
the bankrupt, Maçonnerie Montmorency Inc, to perform masonry work in a construction
project. Upon Montmorency’s bankruptcy, Bail still owed ,. to Montmorency. At the
same time, Montmorency owed money to a third party supplier of construction materials.
Bail therefore paid the supplier the ,. instead of paying Montmorency. The Supreme
Court of Canada, at –, held that Bail was not entitled to pay the supplier and was
obliged to pay Montmorency’s trustee:
The payment made by appellant to Tuyaux Vibrés Inc. remains a payment made on
behalf of the bankrupt company, which as of the date of the bankruptcy can make no
further payments (Bankruptcy Act, s. ()).
From the date of the bankruptcy also, the debt of Maçonnerie Montmorency Inc.
against appellant passed into the hands of the trustee as part of the property of the bank-
rupt company, and only the trustee can obtain payment of it (Bankruptcy Act, ss. , ).
It would be to disregard the Bankruptcy Act and deprive it of all meaning if the debtor
of a bankrupt, instead of paying the trustee, were authorized, by contract or some other
means, to pay one or other of the creditors of the bankrupt as he saw t.
I adopt the conclusion of Montgomery JA, speaking for the Court of Appeal:
The above clause of the general conditions may be perfectly valid and eective where
there is no question of bankruptcy. I cannot, however, agree with Appellant that it can
supplant the provisions of the Bankruptcy Act and entitle one unsecured creditor to be
paid by preference, which would almost necessarily operate to the detriment of the other
unsecured creditors. I regard this as contrary to the policy of the Bankruptcy Act.