The treatment of ipso facto clauses in Canada.

• Author: Ho, Adrienne
• Position: III. The Treatment of Ipso Facto Clauses in Canada B. The Anti-Deprivation Rule in Canadian Jurisprudence through Conclusion, with footnotes, p. 165-189

2. The Anti-Deprivation Rule in Canadian Jurisprudence

   As briefly highlighted in Part III.A., neither the BIA nor the CCAA prevents non-defaulting parties from relying on ipso facto clauses when a debtor files for corporate bankruptcy, is placed in receivership, or is a party to an eligible financial contract. The common law becomes relevant in these situations. Canadian courts still refer to the concept as the fraud upon the bankruptcy law principle, as the practice of using the term "deprivation" in this context was not, as explained in Part II.D., adopted in England until 2002. To maintain consistency, though, this article will continue to refer to the principle as the anti-deprivation rule.

   Although the Supreme Court of Canada first recognized the anti-deprivation rule as early as 1890, (149) the modern application of this principle in Canadian jurisprudence largely stems from Canadian Imperial Bank of Commerce v. Bramalea Inc., (150) a decision from the Ontario Court of Justice (General Division). Canadian courts have gone on to consider the anti-deprivation rule in cases relating to the distribution of property, (151) the transfer of shares at a discounted value, (152) and the distribution of pension plan surpluses. (153) The following section will begin by outlining Bramalea and then examine what effect, if any, the Supreme Court of Canada's ruling in Cooperants, Mutual Life Insurance Society (Liquidator of) v. Dubois (154) has on the principle's validity in Canadian law. This section will also discuss some of the jurisprudence following Bramalea, culminating in the recent Ontario Court of Appeal decision, Aircell Communications Inc. (Trustee of) v. Bell Mobility Cellular Inc. (155)

   In Bramalea, a group of companies (referred to as "the moving parties") were in a partnership agreement with Trizec to develop and operate a shopping mall. Bramalea Inc. would later succeed to Trizec's interest in the partnership, but, in 1995, Bramalea was placed into receivership and bankruptcy. (156)

   At issue before the court was a provision in the partnership agreement that provided that if a partner became insolvent, a non-insolvent partner could purchase the insolvent partner's interest at the lesser of book or fair market value. (157) The moving parties argued that the partnership agreement was an arm's-length commercial transaction that was freely entered into in good faith. They also submitted that the court's interference was not warranted simply because the contract contained onerous obligations that may not have been considered when the contract was signed. (158)

   Justice Blair agreed with Bramalea's receiver. He found a contractual provision purporting to give certain parties something of value that would have been otherwise available to creditors to be void; his reasoning was that such an arrangement would violate "the public policy of equitable and fair distribution amongst unsecured creditors in insolvency situations." (159) Here, Justice Blair seems to be referring to the pari passu principle rather than the anti-deprivation rule, illustrating how easily the two principles can be confused. He then refers to the English case, Borland's Trustee, where Justice Farwell stated that a provision that allowed for the purchase of shares at a price less than fair market value in the event of bankruptcy was repugnant to bankruptcy law. (160) Justice Blair characterized the anti-deprivation rule as follows:

   [T]he principle which underlies the notion is the deprivation of the creditors' interests in a bankruptcy as a result of a contractual provision that is triggered only in the event of bankruptcy or insolvency and which results in property that would otherwise be available to the bankrupt and the creditors, for its value, being diverted to which is in effect, a preferred unsecured creditor. (161) Although Justice Blair recognized that the impugned provision in the partnership agreement may have made sense between the contracting parties to protect their interests, the provision was void as it violated the anti-deprivation rule. (162) Justice Blair's language from the quoted passage implies that the principle could be applied to creditors; however, the moving parties were not Bramalea's creditors but its partners in a partnership agreement. The decision in Bramalea demonstrates one significant difference between Canadian and English law. As explained in Part II.B., the anti-deprivation rule in England is not applied to creditors. Justice Blair's remarks, however, suggest that in Canada, the anti-deprivation can be applied to creditors and non-creditors alike--an issue that will be further discussed in Part III.C.2.

   In addition to Bramalea, another notable Canadian decision is Cooperants. (163) Whereas the United Kingdom Supreme Court engaged in a detailed discussion on the development of the anti-deprivation rule in Belmont, the Supreme Court of Canada did not make an explicit reference to the principle. Akin to the situation in Bramalea, at issue in Cooperants was whether a transfer, triggered by insolvency, at below fair market value was void. (164) In Cooperants, an agreement provided that if one of the co-owners defaulted and refused a counter-offer from a co-owner, he must sell his interest in the immovable to the other co-owner at seventy-five per cent of its value. (165) The Supreme Court of Canada upheld the impugned provision on the basis that contracts signed in good faith should be respected unless they contain provisions that would prejudice other creditors. (166)

   The impact of the Cooperants decision is less clear. In Bramalea, Justice Blair references the scenario in Cooperants as an example of where the anti-deprivation rule has been applied to cases involving transfers, triggered by insolvency, at below fair market value. (167) It is important to note, however, that at the time Bramalea was decided, the Supreme Court of Canada had yet to issue a decision in Cooperants. One can only speculate whether the result in Bramalea might have been different had Justice Blair had the benefit of knowing the result in Cooperants.

   Subsequent jurisprudence has also disagreed about the validity of the anti-deprivation rule after the Supreme Court of Canada's decision in Cooperants. A situation similar to Bramalea arose a few years later in Alberta. In Re Westerman, a law firm's partnership agreement provided that in the event of a partner's bankruptcy, the partner would be expelled and would only receive half of the value in his capital account. (168) The result in this case is of less importance than the comments made by the court. As Justice Agrios pointed out, the facts in Re Wester man were unusual in that a bank also had a security interest in the bankrupt partner's capital account, and there was some dispute as to whether the bank had the authority to discharge its security interest. (169)

   Agreeing with the decision in Bramalea, Justice Agrios held that, were it not for the issue over the bank's authority to discharge its security interest, the contractual arrangements between the law firm and the bankrupt partner would have been invalid. (170) What is striking is how Justice Agrios' view on Cooperants differs from that of Registrar Quinn, who heard Re Westerman at first instance. The Cooperants decision was decided with respect to the Winding-up and Restructuring Act. (171) Registrar Quinn suggests that if Cooperants were extended to cases falling under the BIA, the anti-deprivation principle as established by the Bramalea line of cases was effectively overruled. (172) Justice Agrios disagreed, holding that the judgment in Cooperants was confined to the WURA and not the BIA. (173) Justice Agrios' stance is bolstered by the fact that the Supreme Court of Canada in Cooperants did not mention the line of Canadian cases that have applied the anti-deprivation rule. (174)

   Both judgments in Westerman, however, mischaracterize the Cooperants decision. The Supreme Court of Canada did not overrule the anti-deprivation rule. Although the WURA differs from both the BIA and the CCAA as it applies to only certain entities such as federal corporations and banks, (175) the decision in Cooperants did not turn on a provision unique to the WURA. Rather, the Supreme Court of Canada's comments could be confined to the specific facts in Cooperants; it observed that the subject matter was "a unique, non-fungible and indivisible property." (176) It also found that the sale of the asset to this particular co-owner would not diminish the assets available to creditors and that the failure to sell the asset to the co-owner would only harm him without any benefits to the bankrupt's other creditors. (177) The Supreme Court of Canada held that it could not determine whether the selling price was necessarily below fair market value since the contract required the appraisers to determine the value of the immovable as a whole, despite the fact it was held in undivided co-ownership. (178) Finally, the Supreme Court of Canada held that it was not established creditors would be harmed as no evidence was brought forward demonstrating that the proposed selling price would be less than fair market value. (179)

   Given the Supreme Court of Canada's language and the facts in Cooperants, an analogy can be drawn between this case and Borland's Trustee. As noted above, Borland's Trustee was the English decision that underpinned the formulation of the anti-deprivation rule in the Ontario Court of Appeal's judgment in Bramalea. In Borland's Trustee, Justice Farwell stated that shares were incapable of being valued by ordinary means, but he held that the contract provided for a fair way to arrive at a price. (180) Similarly, in Cooperants, the unique property could only be valued by reference to the partnership agreement. There was nothing before the Supreme Court of Canada that illustrated that either a deprivation had taken place or that the...