Construction Lien Rights in a CCAA (“We’re not in Kansas Anymore”)

Literature is filled with instances when the characters are taken from one world in which they are comfortable and understand what to expect, and are then transported into a very different world where the “rules” are suddenly very different.  A trade with rights under the Construction Lien Act (the “CLA“) could be forgiven for feeling very much like they have been put in that situation if a proceeding under the Companies’ Creditors Arrangement Act (the “CCAA“) affects a project on which they are working.  Hence the perhaps colourful literary reference.

The purpose of this paper is to briefly outline some of the salient ways in which a CCAA proceeding may impact the rights and obligations of a trade involved in a project, and to offer suggestions on options for how a trade might be able to better its position in such circumstances.  Much of this is derived from the recent CCAA proceedings involving Comstock Canada Ltd. and its affiliated companies.

While brief mention may be made about construction lien rights in other insolvency situations (receiverships, proposals, or bankruptcies), those are not the focus of this paper.  Those situations deserve consideration on their own, because they do not involve the same impact of the insolvency statute at issue as discussed in this paper under the CCAA (either at all, or to the same extent).

This paper is broken into four sections[1], as follows:

1. A CCAA changes the focus or paradigm for the Court, and how that impacts the trades.
2. The changes in procedural rights of trades that can result from CCAA orders.
3. The changes in substantive rights of trades that can result from CCAA orders.
4. Ways that a trade can try to protect itself.

Chapter 1 – The paradigm shift under a CCAA (“waking up after the tornado”)

Arguably, the most significant change that may occur for a trade when a CCAA occurs is in the approach taken by the Courts to the interests of the trades, or – more to the point – to the interests of the company, or debtor, under CCAA protection.  This paradigm shift is important to understand, as it explains why the changes to substantive and procedural rights (to be discussed further below) may be ordered by the Court.

In the absence of a CCAA proceeding, it would be fair to say that a trade’s interests receive a considerable amount of protection from the Courts, both through the enhanced remedies for trades under the CLA and also through common law principles.

When a CCAA proceeding takes place, on the other hand, it invokes a set of wider and different considerations for the Court.  This is reflected in the considerable case law since CCAA applications started being used again in the 1980’s[2] about the purpose of that Act.  One of the most recent articulations of this was in Indalex, where the Supreme Court of Canada put it this way last year:[3]

[205]    First, it is important to remember that the purpose of CCAA proceedings is not to disadvantage creditors but rather to try to provide a constructive solution for all stakeholders when a company has become insolvent. As my colleague, Deschamps J. observed in Century Services, at para. 15:

. . . the purpose of the CCAA . . . is to permit the debtor to continue to carry on business and, where possible, avoid the social and economic costs of liquidating its assets.

In the same decision, at para. 59, Deschamps J. also quoted with approval the following passage from the reasons of Doherty J.A. in Elan Corp. v. Comiskey (1990), 41 O.A.C. 282, at para. 57 (dissenting):

The legislation is remedial in the purest sense in that it provides a means whereby the devastating social and economic effects of bankruptcy or creditor initiated termination of ongoing business operations can be avoided while a court-supervised attempt to reorganize the financial affairs of the debtor company is made.

In effect, the interests of creditors become (at best) one of many factors for the Court to consider among other stakeholders, such as employees, pensioners, customers and governmental authorities.  Where a proceeding has been accepted under the CCAA,[4] there is often considerable emphasis placed on keeping the debtor company going for a period.  The objective of that continued operation is to either have the company restructure its affairs with creditors and other stakeholders so that it can emerge from CCAA protection,[5] or to try to conduct an orderly sale of assets so that the business is carried on by one or more purchasers and the proceeds of such sale(s) are distributed to the stakeholders of the debtor.[6]  Either objective can be considered by the Courts as satisfying the purpose of CCAA’s as described by the Supreme Court in Indalex.

Part of this difference in focus by the Courts in a CCAA might be explained by the size requirement to qualify for protection under the CCAA.  The CCAA mandates that an applicant for protection must have debt of more than $5,000,000 in order to qualify under that statute.[7]  In contrast, there is no minimum size requirement to qualify for the protection of the proposal provisions of the Bankruptcy and Insolvency Act (the “BIA”), but the legislative provisions and case law under the proposal provisions is arguably less debtor-centric than the CCAA.[8]  This may therefore be an example of “too big to fail” thinking.[9]

With this backdrop in mind, the next area for consideration is the substantive changes in rights that can occur to trades in a CCAA.

Chapter 2 – Procedural changes in rights for trades (“winged monkeys”)

In the Comstock matter, the main procedural problem posed by the orders made by the Court was the inability to use lien remedies.  The issue was orders staying the right to register a lien and related remedies under the CLA[10]

Before getting into the detail of this problem, it may be important to emphasize two points: (1) this type of order is not made in every CCAA proceeding, and (2) there were reasons why Comstock could seek and was granted that remedy.  More will be said about the extent to which this second point may provide comfort following a discussion of the details.

The Stay

The model form of CCAA initial order that has been adopted for use in the Commercial List at Toronto did (and still does) not prevent the registration of claims for lien when a debtor files under the CCAA.  For example, the standard form stay provisions of that model order provide as follows:[11]

1. THIS COURT ORDERS that during the Stay Period, all rights and remedies of any individual, firm, corporation, governmental body or agency, or any other entities (all of the foregoing, collectively being “Persons” and each being a “Person”) against or in respect of the Applicant or the Monitor, or affecting the Business or the Property, are hereby stayed and suspended except with the written consent of the Applicant and the Monitor, or leave of this Court, provided that nothing in this Order shall (i) empower the Applicant to carry on any business which the Applicant is not lawfully entitled to carry on, (ii) affect such investigations, actions, suits or proceedings by a regulatory body as are permitted by Section 11.1 of the CCAA, (iii) prevent the filing of any registration to preserve or perfect a security interest, or (iv) prevent the registration of a claim for lien.  (emphasis added)

Paragraph 15(iv) in that draft provision specifically exempts it from applying to claims for lien under the CLA.  The perfection of a claim for lien through an action is still stayed (except with the consent of the debtor and its monitor, or leave of the court), but in the ordinary course the practice has been to allow such actions to proceed to meet the requirements of the CLA and then otherwise stay them with claims to be proven in the CCAA (or bankruptcy, or receivership) process.  Even with the stay applying to perfection of a lien, this model order’s standard provision is obviously of some help for trades, because the worst of the rush to meet the first 45 day period under the CLA can be avoided.

In Comstock, however, the initial order dated July 9, 2013 provided as follows:

22.      THIS COURT ORDERS that, except as provided in paragraph 17 herein, during the Stay Period, all rights and remedies of any individual, firm, corporation, governmental body or agency, or any other entities (all of the foregoing, collectively being “Persons” and each being a “Person”) against or in respect of the Applicants or the Monitor, or affecting the Business or the Property, are hereby stayed and suspended except with the written consent of the Applicants and the Monitor, or leave of this Court, provided that nothing in this Order shall (i) empower the Applicant to carry on any business which the Applicant is not lawfully entitled to carry on, (ii) affect such investigations, actions, suits or proceedings by a regulatory body as are permitted by Section 11.1 of the CCAA, or  (iii) prevent the filing of any registration to preserve or perfect a security interest.

In other words, what is paragraph 15(iv) in the model order was removed.

There was some question in the Comstock proceeding whether this change to the initial order truly prevented the registration of a claim for lien,[12] but it soon became apparent that the debtor and the Court meant to do so.  A subsequent restated initial order dated July 26, 2013 added the following paragraph:

25.       THIS COURT ORDERS AND DECLARES that no Person shall be permitted to preserve or perfect a lien under the Construction Lien Act, R.S.O. 1990 C.30 as amended (the “Ontario CLA) [or other provincial statutes – references deleted]… including without restricting the generality of the foregoing, (a) registering a Claim for Lien under s. 34(1)(a) of the Ontario CLA, …  with respect to any lands to which the Applicants have supplied services or materials, (b) registering a Certificate of Action under s. 36 of the Ontario CLA … with respect to any lands to which the Applicants have supplied services or materials, and (c) serving a Claim for Lien under s. 34(1)(b) of the Ontario CLA … or delivering a Notice of Lien under s. 24(2) of the Ontario CLA, with respect to any project(s) to which any of the Applicants is a contracting party and/or is supplying goods and/or services except with the written consent of the Applicants and the Monitor, or with leave of this Court…

The message was therefore quite loudly “no lien”, or any of the other remedies available to a trade to try to intercept the payment stream.

How did Comstock get a wider stay

The question is then why did Comstock ask for this and, more to the point, why did they get it?

The answer in the Comstock proceedings is precisely the importance of the payment stream.  Its entire business was comprised of construction work, and it argued – with some validity – that the continued viability of the company and any ongoing operations would be jeopardized by the exercise of CLA rights for pre-CCAA filing debts.  All payments due to Comstock on each project would cease if a lien was filed, or would at least be put in limbo until that lien was bonded off.  For a company struggling with significant financial pressures, that interruption of cash flow would itself be the end.  So Comstock was able to convince the Court that, because all of its business was on projects governed by the CLA or equivalent legislation in other provinces, those CLA remedies had to be stayed.

That answer, as noted earlier, can both provide some comfort but also has its drawbacks.  It comforts because that rationale clearly does not apply to a debtor whose income and cash flow is not entirely or mostly tied in with construction projects.  Its drawback is obviously that this logic would seem to apply to any entity that is primarily in the construction business with people below it in the construction pyramid whose exercise of CLA remedies would bog down the payment stream.

Given the concerns about the viability of the building and condominium construction boom in the Greater Toronto Area, insolvency proceedings involving construction companies may be expected in the future.  There is little to distinguish the Comstock situation and argument from any such future situation, at least on its face.

The problems created by the wider stay

The wider stay granted in Comstock caused predictable problems.  It is trite to note that there is only so much time that a trade has under the CLA to exercise lien rights before they are gone.

The timing in the Comstock proceeding illustrated that well.  Comstock had been getting into trouble on its jobs towards the end of June, 2013.  It had obtained the initial order that arguably stayed liens on July 9.  It obtained the restated order that certainly did so on July 26.  By that time, however, many trades were beginning to wonder if they were already coming up against the 45 day time limit in the CLA to lien.  To make matters worse, there were many projects where it was not clear whether Comstock was still on the job site or not, due to aggressive actions by some general contractors to begin reallocating some or all of Comstock`s scope of work to new trades.  So it was not clear whether Comstock was still on site (and a trade therefore still running the clock) or whether Comstock may have been terminated or had abandoned in the past without the trade necessarily knowing.

A stay was therefore not anything more than a temporary situation until the Court supervising the Comstock CCAA was going to have to choose between (a) lifting the stay well before much (if any) of the planned restricting or asset sales process had taken place or (b) keeping the stay and likely causing trades to lose lien rights altogether.  Such a loss of lien rights would be all the more acute for trades when Comstock was obviously in perilous shape and many of its projects were underwater, because not having a lien would deprive a trade of access to the holdback fund.

Of even greater concern in Comstock was the request by the applicants to remove all liens that had been filed after the commencement of insolvency proceedings under the BIA on June 28, 2013 and under the CCAA on July 9.  The discharge of a registered lien can prejudice the ability of a claimant to later claim the same relief, and where such claims include holdback (as they usually do) then the ability to later claim a lien on holdback was in peril if what Comstock sought was granted.

Attempt at a solution

That problem led the stakeholders in the Comstock CCAA to try to think of creative ways in which those competing interests could be accommodated.

One idea that was ultimately rejected was to extend, or toll, the time limits under the CLA by order of the CCAA Court.  There were several difficulties with that, including that (i) it is doubtful that a Court can extend or vary the timelines under the CLA,[13] and (ii) even if a Court could, a CCAA proceeding does not necessarily involve, or more to the point provide notice to, all the parties who might later be involved in a lien proceeding, so the binding nature of such an order would be in question in any event.

The idea that was ultimately adopted in Comstock was to attempt to recreate many of the lien rights under the CLA within an order under the CCAA – called a Lien Regularization Order.[14]  The idea behind the order was that it could grant a charge to lien claimants equivalent to their rights under the CLA (or other similar provincial statutes) if the claimants exercised their rights through a process that did not involve registering liens, and therefore did not involve interrupting the payment process.  Notice of claims was instead provided to the Monitor for Comstock and owners or other payors of Comstock were expressly allowed to pay amounts owing under projects on an ongoing basis.  Holdback was administered by the Monitor as well.

The Lien Regularization Order adopted in Comstock may well end up being (re)used in later CCAA filings if the same or similar payment stream problem that was present in Comstock will justify it.  It may therefore merit some review beforehand, as it is more than a little complex, and it is also possible that it could be improved upon,[15] such as in respect of the following points:

• The Lien Regularization Order provided that all lien claims would be done through a claims process in the CCAA Court, perhaps with a claims officer appointed to determine matters like in a reference.  Query whether this process is better, including faster and/or cheaper, than a reference to the Master in Toronto?
• The Lien Regularization Order (and all of the other stay type orders) did not apply to any CLA rights that Comstock as the company under protection had.  On projects where Comstock’s time limit to make claims was passing, lien claimants had an interest in whether Comstock would try to enforce those rights or not, because doing so could increase the funds available for lien claimants (either under the lien or under the trust provisions of the CLA).  Query whether some tie-in with an ability to prompt the debtor to take such steps, or perhaps take such rights over as in s. 38 of the BIA, would be worthwhile?

Chapter 3 – Substantive changes in rights for trades (“the wicked witch of the East”)

The substantive change to rights of trades in Comstock came through the granting of “superpriority” charges under the CCAA ahead of the rights of all creditors, including lien claimants.  Loss of priority alone was thought to be bad for the trades, but the particular charges that were granted made it worse, being:

• an “Administration Charge” to pay for the legal fees of Comstock and its Monitor, along with the Monitor’s fees;
• a “Director Charge” to indemnify directors and officers after the date of the CCAA filing;  and
• a debtor in possession charge, or “DIP Charge”, to allow Comstock to borrow funds to stay in business and have those borrowings be paid before other creditors.

All of those types of charges were permitted under the CCAA.[16]  While these charges are also in the discretion of the Court, most CCAA proceedings contain them and the real debates centre around how much they should secure and what relative priority they should have over each other and as against other ranking creditors.

This granting of priority ahead of the rights of lien claimants caused a great deal of frustration for trades.  Given that Comstock did not have a brilliant reputation with its trades, and in particular the ones who had not been paid, having more debts added ahead of trades to ostensibly aid Comstock seemed to add insult to injury for trades.

Further frustration for trades came from a relatively recent change in the law.  Older case law in Royal Oak Mines[17] had both questioned the jurisdiction of a CCAA Court to grant priority for such charges ahead of lien rights, and also phrased why lien claimants might argue that they should not be subject to that remedy in the same way as other creditors:

“… the lien claimants are parties who (to the extent of their valid lien claims) have not voluntarily offered credit to Royal Oak on any extended time basis as opposed to other secured creditors who may be viewed as having offered credit to Royal Oak on an extended time basis with their security terms being negotiated between the parties.”

The result in Royal Oak Mines was that while DIP and other charges were granted some priority, they ranked behind the lien claimants who were only a portion of the overall creditor group.

By the time of Comstock, however, the CCAA had been amended to specifically resolve much (if not all) of the jurisdictional question noted in Royal Oak Mines.[18]  Further, like with the problem that liens being registered might frustrate the CCAA restructuring, the vast majority of Comstock’s creditors were trades, so treating trades differently than other creditors along the lines of the Royal Oak Mines approach would create an impasse.  If those charges were necessary, then having priority over the rights of lien claimants was a live issue.

When faced with the Administration Charge, the Directors Charge and the DIP Charge having been granted already in the initial order,[19] trades in the Comstock matter had to grapple with whether there was any basis to try to undo that.  The answer seemed to be that the Court had jurisdiction to make those orders with perhaps only one caveat, and that the best arguments remaining after that were about the fairness of doing so.

The caveat to the jurisdiction of the Court to make the various charges rank in priority to the rights of lien claims centered on holdback, because insofar as getting priority over the trust and lien remedies was at issue, there did not seem to be any basis for challenge on jurisdiction.  The sections of the CCAA allowing these sorts of charges all granted them over “all or part of the company’s property.”  A lien was on (among other things) the interest of Comstock on funds paid out of the project, so that was clearly caught.  While at first blush a trust claim under the CLA seemed not to fit the definition of “company’s property”, because the very notion of a trust is that it is not beneficially owned, that foundered on the ratio in Indalex where a similar trust under the Pension Benefits Act of Ontario was held to be attachable under these provisions because the CCAA provisions and the Ontario legislation in that case was thought to be incompatible, and the doctrine of paramountcy meant that the CCAA’s ability to charge trust funds had to prevail.

The issue with holdback, however, is that case law suggests that it is specifically not the property of the debtor such as Comstock until there are no lien claims.[20]  There was ultimately no adjudication of that issue in Comstock.[21]

Chapter 4 – Things a trade can do (“going to see the Wizard”)

The analogy in this title may not be apt.  In some respects, given the problems that can arise in a CCAA as noted above, and in particular the way in which the demands of the situation of a company engaged in the construction business could justify the broader remedies seen in Comstock, the best advice may be to take preventative steps.  This would more or less mean seeing the Wizard before going to Oz, whereas in that story Dorothy of course only saw the Wizard afterwards.

The obvious points for a trade to consider in such a preventative approach should include the following:

• Pay attention to the payables, and the overall health of the payor on a project (if known), and consider whether to lien earlier than otherwise.  Trades who liened before the Comstock CCAA filing were in many cases bonded off, and they may have an argument to preferential recovery against those bonds as compared to trades who were not bonded off for equivalent claims that happened to be made post-filing of the CCAA process.
• Pay attention to the overall size of the payor, and whether the payor will (or might) qualify for the $5 million debt threshold to invoke the CCAA.  Bear in mind that affiliated or subsidiary companies can be included in that calculation.  If the size and debt of the payor (if known) is not large, then the application of the CCAA may not be a real risk.

If a CCAA ends up happening and a trade has not had a chance to take preventative steps, then consider the following for post-filing issues:

• A stay of the right to register a lien is unusual and should be justified by the circumstances.
• A stay of the right to register a lien cannot be indefinite.  If a Lien Regularization Order is used to avoid the time pressures while also avoiding the problems of registrations, get advice on the precise terms and think about the facts of the particular projects to consider new terms for such an order.
• While a typical initial order will seem on its face to compel a trade to continue to supply materials or services after the CCAA has started, that does not prevent a trade from going COD.[22]  Although a debtor in CCAA protection can get an order to compel continued supply, this is only possible when the continued supply is “critical to the company’s continued operation.”  If so, that finding has an upside, in that the Court may then make an order granting a(nother) charge to secure payment of what is compelled to be supplied.[23]
• If a CCAA is the sort of construction industry filing to justify the more invasive type of remedies seen in Comstock, consider seeking the appointment of representative counsel for trades.  There are two possible advantages to this: (i) such an appointment is paid for out of the cash flow and assets of the debtor, and (ii) the interests of smaller trades might receive some protection when it is otherwise uneconomical to do so, and the interests of trades might be given more weight against the demands of other stakeholders when a unified position is taken.