Dutil, Gagné, Cotnam

Appeal from a judgment of the Superior Court granting in part an application for the recovery of funds and a motion for directives. Dismissed.

The appellant entered into a factoring agreement with the debtor, who undertook to sell the appellant its claims. The debtor filed a notice of intention. The trustee then informed the appellant that it owed the debtor over $100,000, which the appellant disputes. The appellant alleges that it is entitled to withhold several amounts, including $50,000 in liquidated damages pursuant to a penalty clause included in the contract and $30,000 as a provision for the settlement of a lawsuit. It argues that it is entitled to set off the amounts owed the debtor for the purchase of certain claims against those owed as liquidated damages.

With respect to the amount of $50,000, the judge concluded that the application of the penalty clause had been triggered by the bankruptcy, resulting in the reduction of the debtor’s estate by $50,000. Thus, he applied the anti-deprivation rule, developed in the common law, to cancel this clause and ordered the appellant to remit this amount to the trustee.

The appellant contests this judgment arguing in particular that the anti-deprivation rule does not apply in Quebec.

The anti-deprivation rule applies in Quebec. It is the result of the legislature’s implementation of the principle that the assets of a bankrupt debtor, which must be vested in the trustee, cannot be removed from the debtor’s patrimony pursuant to a contractual agreement providing for the payment of a fixed sum to a creditor due solely to the filing of a notice of intent or a bankruptcy. It is a reflection of the application of section 71 of the Bankruptcy and Insolvency Act (R.S.C. 1985, c. B-3). That statute includes this rule, even if it does not codify it. Moreover, one of the important aspects of the Bankruptcy and Insolvency Act is that it guarantees creditors equitable treatment. The anti-deprivation rule gives effect to an implicit prohibition under the statute that “prevents parties from agreeing to remove property from a bankrupt’s estate that would otherwise have vested in the trustee” (Chandos Construction Ltd. v. Deloitte Restructuring Inc. (S.C. Can., 2020-10-02), 2020 SCC 25, SOQUIJ AZ-51712024, 2020EXP-2239 at para. 12).

In this case, the two parts of the test in Chandos Construction Ltd. to determine whether the anti-deprivation rule was violated are met. First, the application of the invoked clause was triggered only by the fact that the debtor filed a notice of intention. No other valid ground was established to justify withholding $50,000 from the amount owed to the debtor for the purchase of the claims. Second, the appellant withheld $50,000 that it had to pay the debtor for the purchase of claims. The appellant absolutely did not own this amount, which was instead a debt it owed, and it should therefore have been vested in the trustee. Thus, by keeping it to set it off against the claim arising from the application of the penalty clause, the appellant reduced the value of the debtor’s estate.

Text of the decision: http://citoyens.soquij.qc.ca