Supreme Court of Canada
Halpenny Estate v. Paddon, [1982] 1 S.C.R. 559
Date: 1982-04-05
Administrators of the Estate of George E. Halpenny (Plaintiffs) Appellants;
and
Warren B. Paddon, Trustee of the Estate of Context Systems Inc., a Bankrupt (Defendant) Respondent.
File No.: 15898.
1981: May 13, 14; 1982: April 5.
Present: Laskin C.J. and Beetz, Estey, McIntyre and Chouinard JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Securities—Debenture—Petition in bankruptcy filed before registration—Priorities—Effect of s. 75 of Bankruptcy Act—Whether or not late registration of debenture should be allowed—The Corporation Securities Registration Act, R.S.O. 1970, c. 88, s. 7—Bankruptcy Act, R.S.C 1970, c. B-3, s. 75.
The sole surviving executor of appellant estate improperly loaned estate money to his company without the knowledge or consent of the beneficiaries. A debenture was executed at that time—in unregistrable form—but no payments were made under it. Before any facts came to light, the administrator died and letters of administration were taken out. The administrators’ application for late registration of the debenture was dismissed before the court proceeded to grant a receiving order in a petition in bankruptcy against the debtor company. An appeal to the Court of Appeal was dismissed.
This appeal concerns the interrelationship of s. 7 of The Corporation Securities Registration Act (C.S.R.A.) and s. 75 of the Bankruptcy Act.
Held: The appeal should be dismissed.
The fraud, negligence or inadvertence of the executor was a “sufficient cause” for failure to register the debenture within the terms of s. 7(1) of the C.S.R.A. However, by the operation of s. 50(4) of the Bankruptcy Act, the corporation’s assets vested, in the trustee in bankruptcy on the date of the filing of the petition in bankruptcy, and accordingly the rights of the creditors therein were crystallized on that date. Section 75(1) of the Bankruptcy Act did not operate in these circum-
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stances to preserve a right or authority to register a debenture pursuant to s. 7 of the C.S.R.A. or otherwise so as to cause the debenture, when so registered, to be binding on the trustee in bankruptcy, and thereby elevate appellant’s unsecured claim to a secured claim in priority to existing creditors at the time of registration. The problem of rectifying the deficiencies in the form of the debenture, therefore, became academic.
In Re S. Abrahams & Sons, [1902] 1 Ch. 695; In Re Kris Cruisers, Limited, [1949] Ch. 138; Re Heather’s House of Fashion Inc. (1977), 23 C.B.R. (N.S.) 161; Re Pic-N-Save Limited (1973), 19 C.B.R. (N.S.) 42, referred to.
APPEAL from a judgment of the Ontario Court of Appeal (1979), 41 N.R. 463, dismissing an appeal from a judgment of Anderson J. Appeal dismissed.
Earl A. Cherniak, Q.C., for the appellants.
F. Bennett, for the respondent.
The judgment of the Court was delivered by
ESTEY J.—This appeal raises the interrelationship of The Corporation Securities Registration Act, R.S.O. 1970, c. 88, as amended, and the Bankruptcy Act, R.S.C. 1970, c. B-3, where bankruptcy proceedings arise before registration of a corporate debenture is completed. The facts are simple but their chronology is most important. A sole executor in the appellant estate improperly withdrew moneys from the estate and caused them to be advanced to a company of which the sole executor was the president and presumably the principal or sole stockholder. The loan was made without the knowledge or consent of the beneficiaries of the estate. A debenture was executed by the debtor company on or about the time the moneys were improperly advanced by the estate, but the debenture was never registered under The Corporation Securities Registration Act, supra, which for convenience is hereafter referred to as the C.S.R.A. Furthermore, the debenture was not in registrable form.
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No payments were ever made under the debenture and before any of the facts came to light the executor of the appellant estate disappeared and was found dead. Letters of administration were taken out and the administrators in due course applied to the court for an order under s. 7 of the C.S.R.A. for the late registration of the debenture. The following is a chronology of these events.
(a) November 26, 1975: date of debenture of corporate debtor.
(b) April 30, 1976: resolution of the board of the corporate debtor authorizing the debt.
(c) November 23, 1978: petition in bankruptcy against corporate debtor.
(d) January 10, 1979: motion by appellants for order for late registration of debenture under C.S.R.A.
(e) January 30, 1979: order for late registration refused; order dated 31 January 1979.
(f) January 30, 1979: after motion refused, petition in bankruptcy heard and granted (date of order not in the record).
It would appear that the motion for an order for the late registration of the debenture was adjourned in order to bring it on for hearing in Bankruptcy Court by Mr, Justice Anderson who was scheduled to hear the petition in bankruptcy against the debtor company on January 30, 1979. Hence the application and the petition were heard by Anderson J. in that order on January 30. It would appear that while the formal order dismissing the application for late filing is dated January 31, in fact oral reasons were given at the conclusion of the hearing and this order was dismissed prior to the receiving order which was apparently made orally on January 30.
Two principal issues are raised in this appeal:
1. Does s. 7 of the C.S.R.A. empower the Court
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(a) in the circumstances of this appeal to issue an order extending the time for registering the debenture;
(b) to make an order extending time for registration when the effect would be to give the appellant priority over creditors whose claims arose in the period between the expiry of the time for registration and the application for an order extending the period for registration; and,
(c) to rectify omissions in the form of the debenture so as to put the debenture in registrable form?
2. Does s. 75 of the Bankruptcy Act, supra, operate so as to enable the Court to make an effective order under s. 7 of the C.S.R.A. as above notwithstanding the fact that such order would be made after the effective date of a receiving order, that is to say the date of the petition in bankruptcy?
The learned trial judge refused the application on two grounds: Firstly,
If it [the order permitting late filing] affects the rights of the creditors and affects the rights of the holder as against the creditors it does so adversely, and it would be an improper exercise of discretion to grant relief to the applicant which had that result. If it does not affect those rights the order has no effect and the discretion ought not to be exercised to make a bootless order.
Secondly, the trial court interpreted s. 7(1) of the C.S.R.A. as limiting the circumstances in which such an order might be made by the application of the interpretative rule of ejusdem generis to the expression “…any omission or misstatement in any document filed under this Act was accidental or due to inadvertence or impossibility or other sufficient cause…” The court found no such circumstance here arising. The Court of Appeal, speaking through Dubin J.A., did not agree that s. 7, where the words “other sufficient cause” are employed, should be read ejusdem generis with the words “accidental, inadvertence or impossibility”. The Court of Appeal further disagree with the judge of first instance that an order for extension
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of time to register should not be granted where there were creditors in existence at the time of the application for such an order. The Court of Appeal, however, agreed in the result with the trial court for two reasons:
(a) As regards s. 7 of the provincial Act:
Where the evidence discloses that the instrument was not registered so that its existence would be concealed from the public, an application to extend the time for registration should be dismissed.
(b) Because a petition in bankruptcy had been filed prior to the application for the order of extension, the effect of the receiving order, relating back as it does to the date of the petition, was to remove from the debtor and to transfer from it to the trustee all the assets of the debtor.
The Court of Appeal therefore concluded:
If an order were made to extend the time for registration, the instrument would be registered at a time when there was no property in the bankrupt upon which it could give a valid security.
I turn now to the first submission with reference to the authority of the Court under s. 7(1) of the C.S.R.A. to make an order extending the time for registration of the debenture in question.
As stated, s. 2(1) and (3) of the C.S.R.A. require the registration of a debenture within thirty days of execution to be effective against subsequent creditors which include a bankruptcy trustee (s. 1(f)). Section 7(1) of the Act then makes provision for late registration:
7.—(1) Subject to the rights of other persons accrued by reason of any omission or misstatement referred to in this section, a judge of the Supreme Court, on being satisfied that the omission to file an instrument or affidavit within the time prescribed by this Act or any omission or misstatement in any document filed under this Act was accidental or due to inadvertence or impossibility or other sufficient cause, may, in his discretion, extend the time for registration, or order the omission or misstatement to be rectified on such terms and conditions, if any, as to security, notice by advertise-
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ment or otherwise, or as to any other matter or thing, as he thinks fit to direct.
Setting to one side for the moment the opening phrase of the subsection, it will be seen that the authority to extend the time for registration may be exercised “in his discretion” when the judge is “satisfied that the omission to file… was accidental or due to inadvertence or impossibility or other sufficient cause…” Plainly this is not a case of ‘accident’ or ‘inadvertence’ or ‘impossibility’. The words “other sufficient cause” must, however, be accorded a meaning and a purpose for inclusion in the sentence. The words preceding this expression do not constitute a class and as Dubin J.A. said, speaking for the Court of Appeal: “This is not a case for the application of the ejusdem generis rule”. In this connection see In Re S. Abrahams & Sons, [1902] 1 Ch. 695, at p. 699. But that, in my view, does not end the matter. The failure to register was assumed by the judges in both courts below to be the result of a positive decision ‘because of the adverse effect it would have on the credit of the company’. No doubt the decision also reflected the desire of the sole surviving executor to keep the knowledge of the advances from the estate assets to his company from the beneficiaries of the estate. The executor had at least three legal personalities at the time in question: he was the sole surviving executor, the estate solicitor, and the president of the debtor company. In the latter capacity he was in opposite interest to the beneficiaries of the estate. He was in breach of his duty in his office as executor. His failure to register or to cause his company to register was a positive action in all the circumstances, no doubt carefully deliberated. In my view, this cause was of a kind quite different from the other enumerated causes in the subsection and is included in the expression “other sufficient cause”.
However, it is said by the appellants and indeed by the Court of Appeal that the judicial discretion authorized in s. 7(1) should not be exercised where failure to register was due to a desire to conceal
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the existence of the security from the public. In support is cited In Re Kris Cruisers, Limited, [1949] Ch. 138, where Vaisey J. said at pp. 141-42 that such an order would be appropriate to relieve a mortgagee of the consequences of his own negligence:
…provided that the court is satisfied that the omission to register was not an omission with any fraudulent intention but was, in the words of the Act, “due to inadvertence or to some other sufficient cause”… That seems to me to be inadvertence, inattention, carelessness, but very far removed from the kind of case in which this relief should be refused—a typical case of which would be obviously where there was some fraudulent or improper motive in withholding the knowledge of the existence of the charge from the public, to whom the registration of it would have given the appropriate notice.
There the court was concerned with carelessness of the corporate officers and their legal advisers. The illustrations mentioned in the quotation above are ex gratia comments on the reach of a similar but not identical provision to that found in s. 7(1). Here we are concerned with an estate whose agent acted against the interests of the estate and in his own interests; a breach of his duty as an officer appointed by the court to administer the assets of the deceased. The beneficiaries are directly affected. While, as regards Mitches, the failure to register is unexplained, as regards the beneficiaries there is an explanation which appears in the record. That explanation is that the existence of the debenture was unknown to the beneficiaries until after Mitches’ death, at which time the present proceedings were begun. From the point of view of the appellants, the fraud, negligence or inadvertence of Mitches is a “sufficient cause” for a failure to register. This is completely different from a case where a party first deliberately conceals a debenture, and then later seeks relief from a court. No doubt that would be the sort of case Vaisey J. was contemplating in the extract set out above.
The estate represented by the late executor was, of course, defenceless to the depredations of the
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personal representative at the time of his wrongdoing. The beneficiaries had no part in the appointment process of the wrongdoing executor who by an accident of fate became the sole surviving executor. The deceased selected him (and another who died) and the court appointed him to office by grant of letters probate. The substantive interest in the estate is that held by the beneficiaries. They are powerless in the selection procedure and virtually powerless in the appointment procedure of the personal representative of the deceased, the executors of the estate. They are, however, at considerable risk in practice and with little authority in the administration of the affairs of the estate. It would be anomalous if a consideration of their plight were to be omitted from the determination of the exercise of discretion under s. 7.
The wrongdoer’s appointment was revoked and the Probate Court appointed the appellants in his place. They now seek the exercise of the Court’s discretion to permit late registration of this security. I can see nothing in s. 7(1) to bar a court from ordering the extension of time subject to such terms and conditions as may be appropriate and as the statute authorizes. Such an order is, of course, made in any event under the umbrella of the opening words of the subsection.
The learned judge of first instance declined to make the requested order for the further reason that such an order would either prejudice existing creditors of the company or be ineffective. His comments have been quoted above. The Court of Appeal took a different view. The existence of other creditors’ claims which would be prejudiced by the priority accorded the debenture (other than those whose rights accrued by reason of the omission to register) should not be a bar to the exercise of discretion to extend. This the Court of Appeal said is so because “such other creditors should not be in a better position than they would have been if the registration had been made on time”. With this I respectfully agree providing the Court is there referring to creditors’ claims arising after the
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late registration is effected. This is so because the opening of s. 7(1) makes the extension order “subject to the rights of other persons accrued by reason of any omission or misstatement referred to in this section”; i.e. the failure to register the debenture within the thirty day period. On this point the judge of first instance took the opposite view doubting that these words afforded any protection to creditors and fearing that the attachment of any conditions, as the section invites the court to do, would be “merely. the deferral of the question which is now before me”. With the greatest respect, I come to a different conclusion with reference to this aspect of s. 7(1).
The effect of all this, of course, is but to qualify the circumstances here encountered for the exercise of the statutory discretion. This, however, is all subject to the conclusion on the second issue, the operation in these proceedings of the Bankruptcy Act, supra.
If the second ground for judgment in the Court of Appeal is well founded, there is nothing that a court may properly or effectively do under s. 7 of the C.S.R.A.
The petition in bankruptcy preceded the application for extension of time under the C.S.R.A. by several months. By the operation of s. 50(4) of the Bankruptcy Act, supra:
50. …
(4) The bankruptcy shall be deemed to have relation back to and to commence at the time of the filing of the petition on which a receiving order is made or of the filing of an assignment with the official receiver.
The debtor from that date forward (November 23, 1978) was without assets, the assets being with effect that date vested in the trustee under the Bankruptcy Act. The rights of the creditors in these assets thus were crystallized on that date. Dubin J.A. put it this way in the Court of Appeal:
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A petition in bankruptcy was filed to the date of the application for an extension of time to register the instrument. Following the dismissal of the application to extend the time for registration, a receiving order was made, and the receiving order is not under appeal. If an order were made to extend the time for registration, the instrument would be registered at a time when there was no property in the bankrupt upon which it could give a valid security.
The Court of Appeal did not expressly refer to s. 75 of the Bankruptcy Act, supra, which the appellant says meets the situation otherwise arising as a result of s. 50(4) of that Act. The appellant goes on to conclude that s. 7(1) of the C.S.R.A. remains available to the Court for the authorization of late registration of the debenture. Section 75(1) of the Bankruptcy Act, supra, provides as follows:
75. (1) Subject to the foregoing provisions of this Act with respect to the effect of bankruptcy on an execution, attachment or other process against property, and with respect to the avoidance of certain settlements and preferences, nothing in this Act invalidates, in the case of bankruptcy
(a) any payment by the bankrupt to any of his creditors,
(b) any payment or delivery to the bankrupt,
(c) any conveyance or transfer by the bankrupt for adequate valuable consideration, or
(d) any contract, dealing, or transaction by or with the bankrupt for adequate valuable consideration,
if both the following conditions are complied with, namely:
(e) that the payment, delivery, conveyance, assignment, transfer, contract, dealing, or transaction, as the case may be, is in good faith and takes place before the date of the bankruptcy, and
(f) that the person, other than the debtor, to, by, or with whom the payment, delivery, conveyance, assignment, transfer, contract, dealing or transaction was made, executed or entered into, has not at the time of the payment, delivery, conveyance, assignment, transfer, contract, dealing or transaction, notice of any act of bankruptcy committed by the bankrupt.
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Omitting the surplusage, the subsection reads as regards the situation now before this Court as follows:
…nothing in this Act invalidates … any … transaction … by … the bankrupt for adequate valuable consideration, if … the … transaction … is in good faith and takes place before the date of bankruptcy, and … the person … with whom the … transaction was made… has not at the time of the transaction, notice of any act of bankruptcy.
Here the bankrupt received money from the appellant estate and issued in return therefor a debenture. Though that instrument was not registered, nor indeed was it in registrable form, it is not in law an invalid or unenforceable instrument as against the issuer by reason of nonregistration. In the limited record in this appeal it appears to be valid as against the debtor company. It is not, as we have seen above, binding on creditors of the issuing company. Section 75 does not affect this situation. It simply provides that the Bankruptcy Act shall not by any provision thereof invalidate the debenture as such if (as is the case here) it was issued in a transaction in good faith prior to the bankruptcy and without notice of any act of bankruptcy having been committed by the debenture issuer. All that refers to the transaction in which the debtor company borrowed money from the appellant and issued, as evidence of the debt, the debenture which included a floating charge against the assets of the company. None of that transaction is, by reason of s. 75, invalidated by the Bankruptcy Act.
However, the debenture was not registered and by applicable provincial law it was not effective as against creditors (s. 2(1) and (3) of the C.S.R.A.). The term “creditor”, by s. 1(f) of the same statute, includes a trustee under the Bankruptcy Act. There is, therefore, nothing “to invalidate” in the words of s. 75(1) by reason of the failure to register the debenture. Provincial law had already precluded any third party effect in the debenture. The Bankruptcy Act is left with nothing to engage under s. 75. The estate remains an unsecured creditor of the company under the pending bank-
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ruptcy, its status wholly unaffected by s. 75(1).
The failure to register the debenture created the unsecured status of the appellant and s. 75(1) has no affirmative effect which might improve or elevate that status to one of a secured creditor, or even to the stage where an order under s. 7 of the provincial Act might have that effect against existing creditors. The failure to register is not a “transaction” separate and distinct from the act of the issuance of the debenture. The registration to be effected under s. 7(1) is likewise not a new “transaction” and even if it were it does not meet three of the four tests or standards of s. 75(1). Firstly, there is no independent “valuable consideration” in support of the alleged “transaction”. Secondly, it did not take place before the bankruptcy. Thirdly, the appellant is not effecting this new “transaction” without notice of any act of bankruptcy on the part of the issuing company. Whatever s. 75 may be thought to contemplate, it does not include such an artificial concept of “transaction” and certainly not a transaction where the party to it, who now claims the protection of s. 75, had full knowledge of the bankruptcy of the issuer. To qualify under s. 75 the appellant must take the “transaction” to be that which occurred in 1975 when the debenture was issued so as to escape the fatality of notice of the bankruptcy of the debtor company under s. 75(1); but that transaction, the debenture, is not invalidated by the Bankruptcy Act. However, the preservation against invalidation must be directed to the act of late registration and not to the act of issuance of the debenture, which would occur entirely after the bankruptcy and the concurrent appointment of the trustee.
Section 75 cannot, in my view, be seen to arrest in some manner the dating back of the receiving order under s. 50(4) so as to make effective an order made under s. 7(3) of the provincial Act. Dubin J.A. must be taken to allude to this when he observed: “There is no authority to extend the time for registration nunc pro tunc”. The Ontario Court of Appeal dealt with some aspects of the Bank-
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ruptcy Act and s. 7 of the C.S.R.A. in Re Heather’s House of Fashion Inc. (1977), 23 C.B.R. (N.S.) 161. While that case is fundamentally different from the instant case in that the petition in bankruptcy was not filed until after the registration of the debenture, it does contain helpful observations about the interrelationship of the two statutes here under consideration, and explains in part the judgment of the Court of Appeal in this appeal. For example, Dubin J.A. for the Court in Heather’s, supra, stated, at p. 165:
This court held that in light of s. 2(3), where the petition in bankruptcy preceded the date of registration of the debenture, the debenture was void as against the unsecured creditors who became such prior to registration. In arriving at that conclusion, the court was content to merely state the words of s. 2(3) without any extended reasons. However, in the Re Pic-N-Save Ltd. case [19 C.B.R. (N.S.) 42], by reason of the receiving order relating back to the date of the filing of the petition as provided for in the Bankruptcy Act, R.S.C. 1970, c. B-3, the property of the debtor had vested in the trustee in bankruptcy before the debenture had been registered. Therefore, in the Re Pic‑N‑Save Ltd. case at the date of registration there was no property in the bankrupt upon which he could give a valid security.
In Re Pic-N-Save Limited (1973), 19 C.B.R. (N.S.) 42, the petition, as here, was filed before the registration of the debenture. The trial judge held that the debenture was valid as against the trustee in bankruptcy by reason of s. 75 and notwithstanding s. 50(4). With that the Court of Appeal (at p. 50) appears to have disagreed. Houlden J. (as he then was), sitting in Bankruptcy Court, applied s. 75 in the protection of the debenture as follows, at p. 49:
If s. 75(1) is interpreted in the manner that I have suggested, then the debenture received by the bank falls within its protection. The debenture was given for adequate valuable consideration. It was received by the bank prior to the date of the receiving order, and the bank had no notice of any act of bankruptcy committed by the bankrupt. In my opinion, s. 75(1) was designed to protect a bona fide transaction such as the present one.
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There, of course, the debenture was registered within the thirty day period and before the receiving order was issued. In our case the registration could be effected only after an extension order and, at the earliest, two months after the petition was filed. The judgment in the Court of Appeal in Pic-N-Save, supra, is very difficult to reconcile with that of the trial judge therein although the appeal was dismissed. In so far as it purports to relate to the factual sequence in this appeal, I am content to leave Pic-N-Save as explained by Dubin J.A. in Heather’s, supra, and in the judgment of the Court of Appeal herein.
I therefore would on this ground dismiss the application as s. 75(1) does not operate in these circumstances to preserve a right or authority to register a debenture pursuant to s. 7 of the provincial Act or otherwise so as to cause the debenture, when so registered, to be binding upon the trustee in bankruptcy and thereby elevate the unsecured claim of the appellant to a secured claim in priority to existing creditors at the time of registration.
This disposes of all the issues which have arisen in these proceedings except that relating to the rectification of the deficiencies in the form of the debenture itself. This matter was not dealt with in either of the courts below because, by reason of the order of dismissal, the problem was rendered academic. For the same reason I make no comment with reference to the position of the Court in such a circumstance.
In all the circumstances arising in this proceeding, I would take the lead of the courts below and make no order as to costs except that the respondent may recover his costs throughout from the estate of Context Systems Inc., the bankrupt.
Appeal dismissed.
Solicitors for the appellants: Lerner & Associates, London.
Solicitors for the respondent: Harries, Houser, Toronto.