LEGALMATTERS
Creditor proceedings and bond claims BY ROBERT KENNALEY
IN THE LAST COUPLE of years, several high-profile insolvencies (including Carillion, Bondfield and Sears) have resulted in proceedings commenced under the Creditors Companies Arrangement Act (CCAA). In this article, we will discuss the subcontractor’s ability, where the principal under the bond has obtained CCAA protection, to pursue the bond claim notwithstanding the usual Initial Order issued under section 11.02 of the CCAA, which stays any proceedings “against or in respective of” the principal, its business or its property. Some would argue, for example, that because a claimant will not be able to prove a claim against the bond without first establishing that the principal owes it monies under the subject contract or subcontract, any proceeding to enforce the bond must be a proceeding “in respect of” the principal. We would not agree. First, an action against the principal is not, based on the plain wording of the standard form bond itself, a condition precedent to a claim. In addition, numerous cases confirm that claimants can and do pursue labour and material payment bond claims in proceedings to which the underlying debtor/principal is not made a party. See, for example, Truro (Town) v. Toronto General Insurance Co., [1974] SCR 1129, 1973 CanLII 169 (SCC), Harris Steel Ltd. et al. v. Alta Surety Co., 1992 CanLII 4560 (NS SC), Campbell Comeau Engineering Ltd. v. Alta Surety Company, 1996 CanLII 5343 (NS SC), Williams v. Axa
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Pacific Insurance Co., 2003 CanLII 49306 (ON SC) and Harris Steel Ltd. v. Seaboard Surety Company of Canada, 2003 CanLII 49313 (ON SC).
In addition, a labour and material payment bond is a guarantee, made by the surety, that the bonded contractor or subcontractor will pay its subcontractors for their labour and materials supplied to the bonded project. This is significant given section 11.04 of the CCAA, which provides that an order for a stay under section 11.02 has no effect on proceedings against a person, other than the company in respect of which the order is made, who is obligated under a guarantee in relation to that company. The rationale for s.11.04 (as it applies to sureties) was addressed in Browne v. Southern Canada Power Co. [1941] CarswellQue 14 (C.A. Que.), an often cited case of the Quebec Court of Appeal in which the court rejected a surety’s argument that an action against it on a bond should be stayed. The Court stated: “It is a somewhat startling proposition that a surety can avail himself of the bankruptcy of his principal debtor to avoid or modify his own obligation. A contract of commercial suretyship, such as is under consideration in the present case, is generally for the very purpose of guaranteeing the solvency of the principal debtor. … . The very special remedies authorized by law for the exclusive benefit of a debtor company are not available to
third parties. The Companies’ Creditors Arrangement Act is a special statute, to be restrictively interpreted, and its benefits accrue to those alone envisaged by the statute. Its provisions only come into play after the debtor has become bankrupt, thus involving the sureties, and what happens after that event affects the company only. Any delay given for payment of the company’s debts as an insolvent … do not and were not intended to operate as a release of any of the obligations of the company’s guarantors. … It is always possible that a debtor, whether a person or a company, will become bankrupt. That is not something inherent in the debt, but it is in most cases the reason why a guarantee is demanded.”
Similarly, in Northern Transportation Co., the Alberta Court of Queen’s Bench adopted the approach in Brown to hold that a s.11.02 stay ought not extend to those who guarantee the debtor’s obligations: “The nature of a contract of guarantee is that the primary debtor will perform his contract and the guarantor has to answer for the consequence of the primary debtor’s default: Schell v. McCallum & Vannatter (1918), 57 S.C.R. 15 (SCC), [1918] 2 WWR 735, at paras 50, 51 Brodeur J. (dissenting). ... “In addressing the public policy objectives of the Act to keep the
