Canada: Don't Believe What You've Heard: Provincial Statutory Trusts Do Survive Bankruptcy

Last Updated: January 21 2019
Article by Matthew B. Lerner and Scott Rollwagen

A five-judge panel of the Court of Appeal for Ontario has upset the long-standing conventional wisdom among bankruptcy and insolvency practitioners in Ontario about the fate of provincially-created statutory trusts in bankruptcy.

In reasons released on January 14, 2019, Sharpe J.A. on behalf of a unanimous five-judge panel, overturned a decision of the Commercial List in The Guarantee Company of North of America v Royal Bank of Canada and affirmed that provincially created statutory trusts do qualify as trusts pursuant to section 67 of the Bankruptcy and Insolvency Act and thus preserve assets from distribution to ordinary creditors in bankruptcy, provided that the statutory trust aligns with general principles of trust law. In particular, the Court held that section 8 of the Ontario Construction Lien Act creates a valid trust that will survive bankruptcy provided that the property subject to the trust remains indentifiable and traceable.

A-1 Asphalt filed a Notice of Intention to make a proposal under the BIA in November, 2014 and was deemed bankrupt one month later. At that time it was undertaking four major paving projects for the City of Hamilton and the Town of Halton Hills. At the time of the bankruptcy A-1 was owed nearly $700,000 by the municipalities for work already completed. The municipalities were directed by the Court to pay these funds to A-1's Receiver ("the Funds").

The Receiver brought a motion for directions to resolve a dispute regarding entitlement to the Funds between Guarantee Company of North America ("GCNA") and Royal Bank of Canada ("RBC"). GCNA asserted that the Funds were trust property pursuant to section 8 of the CLA. GCNA had paid nearly $1.9 million in bond claims to A-1's CLA lien claimants and was subrogated to those claims. RBC asserted that it was entitled to the Funds as A-1's secured creditor pursuant to a general security agreement. In response to a Notice of Constitutional Question served by the Receiver, the Attorney General of Ontario intervened.

The motions judge delivered a handwritten endorsement and held that GCNA had failed to establish a trust claim and that the Funds were not excluded from A-1's estate available for distribution to creditors pursuant to the BIA. In reaching this conclusion, the motions judge concluded that:

  • the Funds were not segregated by the municipalities prior to payment to the Recevier; and
  • notwithstanding the accounting maintained by the Receiver post-bankruptcy, A-1 (prior to its bankruptcy) had no established means to hold receipts separate from other funds in order to maintain their character as trust funds.

The Court of Appeal for Ontario reversed this ruling and clarified the applicable principles in a very important decision that will have significant implications for participants in the construction industry and lenders.

First, the Court rejected the lender's position that section 8 of the CLA was, in pith and substance, an attempt to reorder priorities in bankruptcy and therefore unconstitutional. The Court clarified that the section 8 trust was properly a matter of property and civil rights and therefore valid provincial legislation. The Court was clear that provincial legislation can properly satisfy the certainty of intention requirement for a valid trust pursuant to general principles of law. The doctrine of paramountcy was not engaged and the Court specifically rejected the suggestion that the CLA trust frustrates the purpose of the BIA.

Second, the Court held that the CLA trust did not purport to create a general priority over all of the bankrupt's assets but was specific to the debts owed to bankrupt by the owner municipalities to the extent of any unpaid obligation to subcontractors (i.e. here GCNA through its subrogated rights).

Finally, the Court rejected a line of recent jurisprudence from the Commercial List (eg Bank of Montreal v Kappeler and Royal Bank of Canada v Atlas Block Co.) suggesting that commingling of trust property is fatal to the certainty of subject matter requirement for a surviving trust at law. Expanding on its own decision in Re Graphicshoppe, the Court held unequivocally that "commingling of trust money with other money can destroy the element of certainty of subject matter, but only where commingling makes it impossible to identify or trace the trust property". In doing so, the Court resolved lingering confusion concerning the scope and application of its decision in GMAC Commercial Credit Corp. v TCT Logistics Inc.

In the result, the Court held that provincial statutory trusts can and will survive bankruptcy where they exhibit the features of a trust according to general principles of law, and that the terms of the a provincial enactment can determine the question whether the three certainties are satisfied.

This decision has significant implications for participants in the construction industry and bankruptcy and insolvency practitioners alike. The Court of Appeal has upset conventional wisdom among certain bankruptcy practitioners that deemed trusts are categorically invalid after bankruptcy. In doing so, the Court has protected the integral nature of the provincial scheme of holdbacks, liens and trusts, designed to protect the rights and interests of those engaged in the construction industry and to avoid unjust enrichment of those higher up in the construction pyramid. The Court has made it clear that these protections are important and remain undisturbed after a bankruptcy occurs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions