| Case-Name: | Chandos Construction Ltd v Deloitte Restructuring Inc |
| Full-Case-Name: | Chandos Construction Ltd v Deloitte Restructuring Inc in its capacity as Trustee in Bankruptcy of Capital Steel Inc, a bankrupt |
| Heard-Date: | 20 January 2020 |
| Decided-Date: | 2 October 2020 |
| Citations: | 2020 SCC 25 |
| Docket: | 38571 |
| History: | APPEAL from Capital Steel Inc v Chandos Construction Ltd. 2019. abca. 32. 2019-01-29., setting aside a decision of Nielsen J, Alta. Q.B., Edmonton, No. 24‑2169632, 17 March 2017. Leave to appeal granted, Chandos Construction Ltd v Deloitte Restructuring Inc in its capacity as Trustee in Bankruptcy of Capital Steel Inc, a bankrupt. 2019. scc-l. 62565. canlii. 2019-07-11. auto. |
| Ruling: | Appeal dismissed, Côté J dissenting |
| Ratio: | Any contract clause by which value is removed from the reach of the insolvent person’s creditors which would otherwise have been available to them, and places that value in the hands of others, is void by virtue of the anti-deprivation rule. This rule has existed in Canadian common law since before federal bankruptcy legislation existed, and has not been eliminated by any decision of the Court or by Parliament. |
| Majority: | Rowe J |
| Joinmajority: | Wagner CJ and Abella, Moldaver, Karakatsanis, Brown, Martin and Kasirer JJ |
| Dissent: | Côté J |
| Lawsapplied: | Bankruptcy and Insolvency Act |
Chandos Construction Ltd v Deloitte Restructuring Inc. 2020. scc. 25. is a landmark case of the Supreme Court of Canada concerning the position of the anti-deprivation rule within Canadian insolvency law. It held that, because of differences in Canadian law, the rule has wider application relative to the English rule applied by the UK Supreme Court in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd.
Chandos, hired as the general contractor for a condominium project in St. Albert, Alberta, subcontracted Capital Steel to supply steel-related work for it. Before making an assignment in bankruptcy in September 2016, Capital had completed the majority of its work, and Chandos owed it an outstanding balance of $149,618.[1] Chandos had to incur $22,800 of costs on its own account to complete the work, which it was entitled to deduct.[2] The contract also contained another clause, which stated (in relevant part):
The amount to be forfeited amounted to $137,330, and Chandos argued that it was entitled to offset this against its amount owing, thus resulting in a net $10,512 claim provable in the bankruptcy proceedings.[3] In March 2017, Deloitte, (as the trustee in bankruptcy), applied to the Alberta Court of Queen's Bench, seeking advice and directions on whether Chandos was entitled to rely on that clause.[4]
Nielsen J, acting as chambers judge, found that the clause was a genuine pre-estimate of damages, which imposed liquidated damages and not a penalty. It was therefore not in conflict with the anti-deprivation rule, and Chandos could enforce clause VII Q(d) against Deloitte.[5]
On appeal to the Alberta Court of Appeal, Rowbotham JA, in a 2-1 decision, held that the chambers judge had erred in using the purpose-based approach adopted by the UK Supreme Court in Belmont Park,[6] because the Canadian authorities have generally supported an effects-based approach instead.[7]
Wakeling JA, in a lengthy dissent, asserted that "[t]he fraud-on-the-bankruptcy-law principle is not now and likely never has been part of the common law of Canada."[8] In voicing his support for the decision of the chambers judge, he stated:
[124] A corporate bankruptcy ipso facto term is enforceable if its most important feature is the advancement of a reasonable and defensible commercial purpose and its enforcement provides a benefit for the nonbankrupt party that is not significantly greater than is necessary to promote the nonbankrupt party’s legitimate commercial interests.
[125] Section VII Q(d) meets this new common law standard.
Chandos appealed to the Supreme Court of Canada.
In an 8–1 decision, the appeal was dismissed with costs throughout.[9]
In his judgment, Rowe J held that:
With respect to the issue of setoff of debts, Rowe J noted that it only applies to enforceable debts and claims that are not triggered by the bankruptcy. That was not the case here.[16]
While she agreed with Rowe J "that the anti-deprivation rule has a longstanding and strong jurisprudential footing in Canadian law and that it has not been eliminated by this Court or through legislation", Côté J argued that, as in Belmont Park, it should not apply where contractual provisions have a bona fide commercial purpose.[17] There have only been several instances of obiter comments in Supreme Court jurisprudence in that respect, but she argued that there were many instances of that occurring in the lower courts.[18] She also asserted that s. 71 of the BIA is not as clear as Rowe J stated, and thus there is a principled basis for adopting a purpose-based approach such as seen in Belmont Park and British Eagle.[19] As the clause in question in this case had a bona fide purpose, it should be upheld.[20]
Unlike the situation in the United States, where its Bankruptcy Code generally voids ipso facto clauses, Canada has done so only where bankruptcy proposals and notices of intention to do so,[21] consumer proposals[22] and individual bankruptcies[23] have been filed under the Bankruptcy and Insolvency Act, or where proceedings have begun under the Companies' Creditors Arrangement Act.[24] The anti-deprivation rule is therefore relevant only with respect to corporate bankruptcies and receiverships.
Canadian legal commentators have pointed out several consequences of the SCC's decision: