Royal Bank of Canada v. Sparrow Electric Corp., (1997) 208 N.R. 161 (SCC)

• Judge: McLachlin, Iacobucci and Major, JJ.
• Court: Supreme Court (Canada)
• Case Date: February 27, 1997
• Jurisdiction: Canada (Federal)
• Citations: (1997), 208 N.R. 161 (SCC);69 ACWS (3d) 295;51 DTC 5089;[1997] SCJ No 25 (QL);12 PPSAC (2d) 68;1997 CanLII 377 (SCC);44 CBR (3d) 1;193 AR 321;[1997] 2 WWR 457;208 NR 161;143 DLR (4th) 385;46 Alta LR (3d) 87;[1997] 1 SCR 411

Royal Bk. v. Sparrow Electric Corp. (1997), 208 N.R. 161 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Her Majesty the Queen (appellant) v. Royal Bank of Canada (respondent)

(24713)

Indexed As: Royal Bank of Canada v. Sparrow Electric Corp.

Supreme Court of Canada

La Forest, Sopinka, Gonthier, Cory,

McLachlin, Iacobucci and Major, JJ.

February 27, 1997.

Summary:

A receiver held proceeds of inventory in trust. Revenue Canada claimed priority to the money for unpaid employee source de­ductions. The Royal Bank, which held se­curity under the Bank Act and Personal Property Security Act, also claimed priority.

The Alberta Court of Queen's Bench, in a decision reported 156 A.R. 187, determined that Revenue Canada's claim had priority. The Bank appealed.

The Alberta Court of Appeal, in a decision reported 165 A.R. 132; 89 W.A.C. 132, allowed the Bank's appeals. Revenue Canada appealed.

The Supreme Court of Canada, La Forest, C.J.C., Gonthier and Cory, JJ., dissenting, dismissed the appeal.

Banks and Banking - Topic 5236

Loans - Secured loans, s. 427 loans - Priorities - Revenue Canada and the Royal Bank disputed priority to funds realized by a receiver from inventory - The Bank held security under s. 427 of the Bank Act - The Bank also had a general security agreement, perfected under the Personal Property Security Act (PPSA), which gave the debtor a licence to sell inventory in the ordinary course of busi­ness - Section 28(1) of the PPSA pro­vided for defeasance of a security interest if a debtor, with the secured party's express or implied authority, sold col­lateral and applied the proceeds to an obligation to a third party - The Supreme Court of Canada held that the licence did not derogate from the Bank's security interest and the Bank had priority - The court stated that "I do not have to decide whether the Bank Act security would have priority over the deemed trust as well; though given that the licence to sell in­ventory under the Bank Act is only implied, I do not see how the Crown could have a greater claim under the Bank Act than it had under the PPSA" - See para­graph 113.

Income Tax - Topic 9228

Enforcement - Collection - Source de­ductions - Revenue Canada and the Royal Bank disputed priority to funds realized by a receiver from inventory - The Bank had a general security agreement, perfected under the Personal Property Security Act (PPSA), which gave the debtor a licence to sell inventory in the ordinary course of business - Section 28(1) of the PPSA provided for defeasance of a security in­terest if a debtor, with the secured party's express or implied authority, sold col­lateral and applied the proceeds to an obligation to a third party - Revenue Canada's claim was based on the deemed trust under ss. 227(4) and 227(5) of the Income Tax Act for unremitted employee source deductions - The Supreme Court of Canada rejected the argument that the licence caused the Bank to lose its priori­ty, that it did not matter that the inventory was not actually sold and the proceeds were not actually remitted to the Receiver General because ss. 227(4) and 227(5) deemed these things to be done - The court stated that "... the inventory was not an unencumbered asset at the moment the taxes came due. It was subject to the [Bank's] security interest and therefore was legally the [Bank's] and not attachable by the deemed trust" - See paragraph 98.

Personal Property - Topic 6218

Security interests - Priorities - Bank Act, s. 427 loans - [See Banks and Banking - Topic 5236 ].

Personal Property - Topic 6467

Security interests - Loss of title to third parties - Application of sale proceeds - Revenue Canada and the Royal Bank disputed priority to funds realized by a receiver from inventory - Revenue Cana­da's claim was based on the deemed trust under the Income Tax Act for unremitted employee source deductions - The Bank's general security agreement gave the debtor a licence to sell inventory in the ordinary course of business - The Supreme Court of Canada held that the Bank's security interest was fixed and specific, the licence to sell the inventory did not derogate from the Bank's security and the Bank had priority - The court stated that "... what a security agreement with a license to sell creates is a defeasible interest; but the event of defeasance is the actual sale of the inventory and the actual application of the proceeds against an obligation to a third party ... What the debtor might have done with the licence does not matter" - See paragraphs 94 to 96.

Receivers - Topic 3586

Claims - Priorities - Secured creditor v. Crown (Revenue Canada) - [See Personal Property - Topic 6467 ].

Statutes - Topic 1554

Interpretation - Construction where mean­ing is not plain - Implied meaning - Stating one thing implies exclusion of another - Section 28(1) of the Alberta Personal Property Security Act provided for defeasance of a security interest if a debtor, with the secured party's express or implied authority, sold collateral and applied the proceeds to an obligation to a third party - The Supreme Court of Canada applied the maxim "expressio unius est exclusio alterius" - The court stated that "... the statute contemplates defeasance if the debtor actually sells the inventory and applies the proceeds to an obligation to a third party. Significantly, the statute does not contemplate a defeasance on the happening of any other event. In my view, the statute occupies the field and crowds out other possible inter­pretations of the licence ..." - See para­graph 95.

Cases Noticed:

British Columbia v. Federal Business Development Bank, [1988] 1 W.W.R. 1 (B.C.C.A.), dist. [paras. 14, 91].

Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd. and Minister of National Revenue, [1980] 1 S.C.R. 1182; 31 N.R. 301; 3 Man.R.(2d) 283, refd to. [para. 17].

Bank of Montreal v. Hall, [1990] 1 S.C.R. 121; 104 N.R. 110; 82 Sask.R. 120; [1990] 2 W.W.R. 193; 65 D.L.R.(4th) 361; 9 P.P.S.A.C. 117, refd to. [para. 17].

Board of Industrial Relations v. Avco Financial Services Realty Ltd. and Homeplan Realty Ltd., [1979] 2 S.C.R. 699; 28 N.R. 140, refd to. [para. 19].

Royal Bank of Canada v. G.M. Homes Inc. et al. (1984), 34 Sask.R. 195; 52 C.B.R.(N.S.) 244 (C.A.), refd to. [para. 19].

Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd. (Receivership)(No. 1), [1992] 2 W.W.R. 641; 76 Man.R.(2d) 211; 10 W.A.C. 211 (C.A.), refd to. [para. 19].

Manning Mercury Sales Ltd. (Bankrupt), Re, [1994] 6 W.W.R. 372; 121 Sask.R. 128 (Q.B.), refd to. [para. 19].

Ford Motor Co. of Canada Ltd. v. Manning Mercury Sales Ltd. (Trustee of) - see Manning Mercury Sales Ltd. (Bankrupt), Re.

National Bank of Canada and Price Waterhouse Ltd. v. McArthur et al. (1986), 13 O.A.C. 321; 5 P.P.S.A.C. 326 (Div. Ct.), refd to. [para. 19].

National Bank of Canada v. Director of Employment Standards - see National Bank of Canada and Price Waterhouse Ltd. v. McArthur et al.

Abraham v. Canadian Admiral Corp. (Receiver of) (1993), 13 O.R.(3d) 649 (Gen. Div.), refd to. [para. 19].

Abraham v. Coopers & Lybrand Ltd. - see Abraham v. Canadian Admiral Corp. (Receiver of).

Armstrong v. Canadian Admiral Corp. (Receiver of) (1986), 24 D.L.R.(4th) 516 (H.C.), affd. (1987), 61 O.R.(2d) 129 (C.A.), leave to appeal refused [1988] 1 S.C.R. xii; 87 N.R. 398; 28 O.A.C. 399, refd to. [para. 19].

National Bank of Canada v. Armstrong - see Canadian Admiral Corp. (Receiver of).

Manitoba (Minister of Labour) v. Omega Autobody Ltd. (Receivership) and Minister of National Revenue (1989), 59 Man.R.(2d) 68; 59 D.L.R.(4th) 34 (C.A.), refd to. [para. 23].

Deslauriers Construction Products Ltd., Re, [1970] 3 O.R. 599 (C.A.), refd to. [para. 26].

Pembina on the Red Development Corp. v. Triman Industries Ltd. (1991), 75 Man.R.(2d) 175; 6 W.A.C. 175; 85 D.L.R.(4th) 29 (C.A.), refd to. [para. 26].

Minister of National Revenue v. Alberta (Treasury Branches) et al., [1996] 1 S.C.R. 963; 196 N.R. 105; 184 A.R. 1; 122 W.A.C. 1, refd to. [paras. 30, 106].

Friesen v. Minister of National Revenue, [1995] 3 S.C.R. 103; 186 N.R. 243, refd to. [para. 30].

Illingworth v. Houldsworth, [1904] A.C. 355, refd to. [para. 45].

Urman, Re (1983), 1 O.A.C. 339; 44 O.R.(2d) 248 (C.A.), refd to. [para. 52].

North Sky Trading Inc. (Bankrupt), Re (1994), 158 A.R. 117 (Q.B. Bktcy.), refd to. [para. 57].

Royal Bank of Canada v. Workmen's Compensation Board (N.S.), [1936] S.C.R. 560, refd to. [para. 58].

Canadian Imperial Bank of Commerce v. Klymchuk and Canadian Wheat Board (1990), 106 A.R. 179; 74 Alta. L.R.(2d) 232 (C.A.), refd to. [para. 65].

Statutes Noticed:

Bank Act, R.S.C. 1985, c. B-1, sect. 2(1), sect. 178 [para. 10]; sect. 179(1), sect. 185(2) [para. 11]; sect. 186(2) [para. 10].

Bank Act, S.C. 1991, c. 46, sect. 425(1), sect. 427 [para. 10]; sect. 428(1) [paras. 11, 78]; sect. 434(2) [para. 11]; sect. 435(2) [para. 10].

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 153(1)(a) [paras. 13, 101]; sect. 153(3) [para. 25]; sect. 227(4) [paras. 13, 98]; sect. 227(5) [paras. 13, 29, 98].

Personal Property Security Act, S.A. 1988, c. P-4.05, sect. 4(a), sect. 10(1), sect. 12(1) [para. 54]; sect. 13(1) [para. 64]; sect. 28(1) [para. 94].

Authors and Works Noticed:

Cuming, Ronald C.C., and Wood, Roderick J., Alberta Personal Property Security Act Handbook (2nd Ed. 1993), p. 121 [para. 64].

Cuming, Ronald C.C., and Wood, Roderick J., British Columbia Personal Property Security Act Handbook (2nd Ed. 1993), pp. 4, 5 [para. 21].

Cuming, Ronald C.C., Commercial Law - Floating Charges and Fixed Charges of After-Acquired Property: The Queen in the Right of British Columbia v. Federal Business Development Bank (1988), 67 Can. Bar Rev. 506, pp. 510, 511, 519 [para. 55].

Moull, William D., Security Under Sec­tions 177 and 178 of the Bank Act (1986), 65 Can. Bar Rev. 242, p. 251 [para. 60].

Waters, D.W.M., The Law of Trusts in Canada (2nd Ed. 1984), pp. 117 [para. 31]; 1037 to 1053 [para. 37].

Wood, Roderick J., and Wylie, Michael I., Non-Consensual Security Interests In Personal Property (1992), 30 Alta. L. Rev. 1055, pp. 1072 to 1081 [para. 43]; 1082 [paras. 43, 54]; 1083 [para. 43].

Wood, Roderick J., Revenue Canada's Deemed Trust Extends Its Tentacles: Royal Bank of Canada v. Sparrow Elec­tric Corp. (1995), 10 B.F.L.R. 429, pp. 429 [para. 109]; 430 [para. 23]; 433 [paras. 55, 60]; 435 [paras. 74, 75]; 436 [para. 75].

Wood, Roderick J., The Floating Charge in Canada (1989), 27 Alta. L. Rev. 191, pp. 204 to 208 [para. 45]; 221 [para. 37].

Ziegel, Jacob S., Geva, Benjamin, and Cuming, Ronald C.C., Commercial and Consumer Transactions (Rev. 2nd Ed. 1990), pp. 957 to 960 [para. 108].

Ziegel, Jacob S., Symposium: Recent and Prospective Developments in the Per­sonal Property Security Law Area (1985), 10 Can. Bus. L.J. 131, p. 152 [para. 55].

Counsel:

Edward R. Sojonky, Q.C. and Michael J. Lema, for the appellant;

Ray C. Rutman, for the respondent.

Solicitors of Record:

The Attorney General of Canada, Ottawa, Ontario, for the appellant;

Milner, Fenerty, Edmonton, Alberta, for the respondent.

This appeal was heard on June 19, 1996, by La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci, and Major, JJ., of the Supreme Court of Canada.

On February 27, 1997, the judgment of the court was rendered and the following opinions were filed:

Gonthier, J., dissenting (La Forest and Cory, JJ., concurring) - see paragraphs 1 to 88;

Iacobucci, J. (Sopinka, McLachlin and Major, JJ., concurring) - see para­graphs 89 to 114.