Supreme Court Judgments

Supreme Court of Canada

Hudson v. Benallack, [1976] 2 S.C.R. 168

Date: 1975-10-07

Blaine L. Hudson, The Trustee of the Estate of G.S. & D. Construction Ltd., a Bankrupt Appellant;

and

John Alexander Benallack and Lillian M. Benallack Respondents.

1974: December 4; 1975: October 7.

Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.

ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION

Bankruptcy—Fraudulent preference—Whether concurrent intent on part of both insolvent debtor and creditor required—The Bankruptcy Act, R.S.C. 1970, c. B-3, s. 73.

A company assigned to the respondents its interest as purchaser, in an agreement for sale of certain lands. The consideration for the assignment was stated to be $15,250. At the time the assignor company was indebted to the assignees in the amount of $15,000 with interest and this indebtedness was used to offset the purchase price of the assignor’s interest in the agreement of sale. All of the issued shares of the company were owned by the son and daughter-in-law of the respondents. The company made an assignment in bankruptcy within the 12-month period mentioned in s. 74 of the Bankruptcy Act, R.S.C. 1970, c. B-3, and the appellant was named as trustee. Subsequently, an application to have the assignment declared void as against the trustee was granted. The Appellate Division of the Supreme Court of Alberta reversed, whereupon the trustee appealed to this Court. The question at issue was whether the words “with a view to giving such creditor a preference” contained in s. 73(1) of the Bankruptcy Act require only an intention on the part of the insolvent debtor to prefer or a concurrent intent on the part of both debtor and creditor.

Held: The appeal should be allowed.

A finding of concurrent intent is not necessary in order to set aside a payment as a fraudulent preference under s. 73 of the Bankruptcy Act. The cognizance of the creditor or its absence is not relevant. Although one can sympathize with the rationale of concurrent intent, which is the desire to protect an innocent creditor who accepts payment of a debt in good faith, this point of view cannot be reconciled with the language of the statute, with the history of bankruptcy legislation, or

[Page 169]

with the right of other innocent creditors to equal protection.

Benallack v. Bank of British North America (1905), 36 S.C.R. 120, distinguished.

APPEAL from a judgment of the Supreme Court of Alberta, Appellate Division[1], allowing an appeal from a judgment of Cullen J. Appeal allowed.

J.L. MacPherson, Q.C., for the appellant.

G.C. Hawco, for the respondents.

The judgment of the Court was delivered by

DICKSON J.—

I

This appeal raises a question of statutory construction which, one should think, would not cause difficulty, but which has indeed given rise to an abundance of conflicting legal opinion and a thoroughly obfuscated state of the law. The question is whether the words “with a view to giving such creditor a preference” contained in s. 73(1) of the Bankruptcy Act, R.S.C. 1970, c. B-3, require only an intention on the part of the insolvent debtor to prefer or a concurrent intent on the part of both debtor and creditor. Sections 73 and 74 of the Act read as follows:

73. (1) Every conveyance or transfer of property or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any insolvent person in favour of any creditor or of any person in trust for any creditor with a view to giving such creditor a preference over the other creditors shall, if the person making, incurring, taking, paying or suffering the same becomes bankrupt within three months after the date of making, incurring, taking, paying or suffering the same, be deemed fraudulent and void as against the trustee in the bankruptcy.

(2) Where any such conveyance, transfer, payment, obligation or judicial proceeding has the effect of giving any creditor a preference over other creditors, or over any one or more of them, it shall be presumed prima

[Page 170]

facie to have been made, incurred, taken, paid or suffered with a view to giving such creditor a preference over other creditors, whether or not it was made voluntarily or under pressure and evidence of pressure shall not be receivable or avail to support such transaction.

(3) For the purposes of this section, the expression “creditor” includes a surety or guarantor for the debt due to such creditor.

74. Where the conveyance, transfer, charge, payment, obligation or judicial proceeding mentioned in section 73 is in favour of a person related to the insolvent person, the period limited in subsection 73(1) shall be twelve months instead of three months.

Any conveyance or transfer of property or payment made by an insolvent person in favour of any creditor with a view to giving such creditor a preference over other creditors is deemed fraudulent and void as against the trustee in bankruptcy if the insolvent person becomes bankrupt within three months thereafter or within twelve months where the insolvent person and the preferred creditor are related persons.

II

In the present case the transaction impugned is the assignment on March 1, 1972, by G.S. & D. Construction Ltd. to the respondents, John Alexander Benallack and Lillian M. Benallack, of the assignor’s interest, as purchaser, in an agreement for sale of certain lands in the City of Calgary. The consideration for the assignment was stated to be $15,250. At the time the assignor company was indebted to the assignees in the amount of $15,000 with interest and this indebtedness was used to offset the purchase price of the assignor’s interest in the agreement of sale. All of the issued shares of G.S. & D. Construction Ltd. were owned by George Bayard Benallack and Shirley Edna May Benallack, the son and daughter-in-law respectively of the respondents. G.S. & D. Construction Ltd. made an assignment in bankruptcy on June 27, 1972, within the 12-month period mentioned in s. 74 of the Act, and the appellant Hudson was named as trustee. The learned Chambers Judge, Cullen J., made a number of findings, of which the following are of moment:

[Page 171]

1. On March 1, 1972, the date of the assignment, the bankrupt company was an insolvent person within the meaning of the Bankruptcy Act;

2. The bankrupt and the respondents were related persons within the meaning of the Act and s. 74 applied;

3. The respondents received a preference over other creditors as a result of the assignment;

4. The bankrupt intended to give the respondents a preference over its other creditors.

Cullen J. held against the need for concurrent intent and declared the assignment to be void as against the trustee in bankruptcy. The Appellate Division of the Supreme Court of Alberta reversed. Mr. Justice McDermid, with whom Mr. Justice Prowse concurred, considered the Supreme Court of Canada decision in Benallack v. The Bank of British North America[2] to be binding, although Mr. Justice McDermid was of the opinion that if he had been originally considering the proper interpretation of s. 73, he would not have read into the section the secondary meaning that the creditor as well as the debtor must have the view of giving the creditor a preference over other creditors. Mr. Justice Clement concurred in judgment of McDermid J.A., but he did not share the opinion of Mr. Justice McDermid as to the proper construction of s. 73.

III

On the question whether proof of concurrent intent on the part of the debtor and creditor must be shown before the transaction can be set aside, there is, as I have indicated, a wide divergence of opinion. There are many decisions in which it has been held that concurrent intent must be proved; others in which it has been held that the Court is concerned only with the intent of the debtor; and still others in which the point has been left unresolved.

In the jurisprudence of British Columbia one finds such cases as Re Blenkarn Planer Ltd.[3], in which Mr. Justice Ruttan held, obiter, that the view of the debtor alone is to be considered. In Re

[Page 172]

Totem Painting Co. Ltd.[4], Mr. Justice Wilson apparently was of the opinion that the intention of the creditor was of importance. In Re B.C. Boat Sales Ltd.[5], two of the judges held the evidence established a double intent and it was therefore unnecessary to decide whether s. 64 (now s. 73) of the Act called for consideration of the creditor’s intent. Norris J.A. strongly supported the position that the intent of the person receiving the benefit is irrelevant. Wilson C.J.S.C. reached the same conclusion in Re Pacific Belting Co. Ltd.[6], followed in Re Lock Enterprises Ltd.[7] The British Columbia Court of Appeal in the recent case of Flor-Lay Services Ltd. v. Stewart[8], reviewed many of the authorities and concluded that the principle enunciated in Benallack v. Bank of British North America was not applicable to s. 73 of the Bankruptcy Act and that the Court need have regard only to the intent or view of the debtor. Mclntyre J.A. (Robertson and Taggart JJ.A. concurring) made this observation in the course of his reasons for judgment (at p. 465):

It would then seem that the law on this subject is well settled. However, one cannot review the many cases decided on this point without sensing that the judges in Canada, including appellate judges, have grown restive under the need to apply the concurrence of intent principle from the Benallack case to the construction of s. 73 of the Bankruptcy Act.

When one examines the decisions in the Province of Alberta one also finds diversity of opinion: compare Beck J.A., in In re Cohen and Mahlin[9], and Riley J. in Re McIntosh-Marshall Equipment

[Page 173]

Ltd.[10]

In an early Manitoba Court of Appeal decision, In re Bell[11], frequently referred to, two members of the Court, Perdue C.J.M. and Dennistoun J.A., held that the 1905 Benallack case should be followed and, therefore, a common or concurrent intent must be found in order to constitute a preference under s. 31 (now s. 73) of the Bankruptcy Act. Cameron J.A. dissented in a carefully researched and persuasive judgment.

In Ontario one finds frequent reference to the case of In re Webb[12], in which Orde J. held that there must be a concurrence of intent on the one side to give and on the other side to accept a preference over other creditors. The year after the decision in In re Webb Sir William Mulock C.J. Ex., in Burns v. Royal Bank of Canada[13], reached the opposite conclusion, holding that to constitute a fraudulent preference there must be present two circumstances: a preference in fact and an intention on the part of the debtor to prefer. An appeal from the judgment of Mulock C.J. Ex. was dismissed without written reasons by the Appellate Division[14]. Oddly, the very next year the Appellate Division, differently constituted, relying on In re Bell, supra, and on the judgment of Orde J. in In re Webb, supra, made a finding of common intention in Briscoe v. Standard Bank of Canada[15]. Then in 1928 Orde J.A., delivering the judgment of the Appellate Division of the Supreme Court of Ontario in Canadian Credit Mens Association v. Jenkins[16], appears to have adopted the judgment of Mulock C.J. Ex. in the Burns case. After quoting the following words of Duff J., as he then was, in Salter & Arnold, Ltd. v. Dominion Bank[17], at p.625:

[Page 174]

“It is settled law that the intention to give a preference envisaged by sec. 3.1 is an intention in fact, and whatever else may be said about it, it must be an intention entertained by the debtor:”

Orde J.A. added (at p. 80):

See also to the same effect, Mulock C.J. in Burns v. Royal Bank of Canada (1922) 2 C.B.R. 241, at p. 253, 51 O.L.R. 564, at p. 572; Ex parte Taylor; In re Goldsmid (1886), 18 Q.B.D. 295, 56 L.J.Q.B. 195.

Two more recent Ontario cases might be mentioned in which it was held that the concurrent intent of both debtor and creditor are not necessary to show a fraudulent intent: Re Echlin Press Ltd.[18], and Re Suta[19].

Cases from the Province of Quebec reflect the different points of view: In re La Corporation des Obligations Municipales Ltée[20] (appeal dismissed[21]) and Gavsie v. Goldberg[22]. See also In re Piette et Frère[23].

The cases from the Province of Nova Scotia of In re Star Grocery Co.[24], and In re George E. Boak & Son Ltd.[25], apply a concurrent intent test. The only other judgment which I would add to those of this illustrative, but by no means exhaustive, list is In re Mills and Mills[26] in which Winter J. came to the conclusion that the doctrine of concurrent intent appeared “wrongly conceived and bad in law.”

IV

Although the Courts of the country appear divided, more or less evenly, on the need for a concurrent intent before invalidating a transaction, the textbook writers and commentators do not evidence such divergence of opinion. The editors of Duncan & Honsberger, Bankruptcy in Canada,

[Page 175]

3rd ed., p. 485, point out that s. 64 (now s. 73) makes no reference to the view of the creditor and that the cases in England and in the other Dominions on corresponding sections in Bankruptcy Acts contain no references to the view of the creditor, the view of the debtor alone being considered. The editors of Houlden & Morawetz, Bankruptcy Law of Canada, Cumulative Supplement, 1974, p. 83, say:

In view of the plain meaning of Sec. 73, the concurrent intent of both debtor and creditor is not necessary to show a fraudulent preference. The intention of the debtor alone is to be considered.

and in Bradford & Greenberg’s Canadian Bankruptcy Act, 3rd ed., p. 163, the authors cite “an intention on the part of the debtor to prefer” as one of the two circumstances constituting a fraudulent preference. See also 2 C.E.D. (Ont. 3d) 15-334: “The intention of the debtor alone is to be considered” and Comment in (1958-59), 37 C.B.R. 153, and Notes on Section 64 of the Bankruptcy Act by Professor Réginald Savoie in (1967), 9 C.B.R. (N.S.) 1.

V

If this Court is free to decide the issue of concurrent intent untrammelled by earlier decisions, there would seem to be at least three reasons why we should not engraft upon s. 73 of the Bankruptcy Act an additional concept, that of concurrent intent: first, the policy of the Bankruptcy Act; second, the history of the Act; third, the language of s. 73.

The object of the bankruptcy law is to ensure the division of the property of the debtor rateably among all his creditors in the event of his bankruptcy. Section 112 of the Act provides that, subject to the Act, all claims proved in the bankruptcy shall be paid pari passu. The Act is intended to put all creditors upon an equal footing. Generally, until a debtor is insolvent or has an act of bankruptcy in contemplation, he is quite free to deal with his property as he wills and he may prefer one creditor over another but, upon becoming insolvent, he can no longer do any act out of the

[Page 176]

ordinary course of business which has the effect of preferring a particular creditor over other creditors. If one creditor receives a preference over other creditors as a result of the debtor acting intentionally and in fraud of the law, this defeats the equality of the bankruptcy laws.

The cognizance of the creditor or its absence should be irrelevant. One can sympathize with the rationale of concurrent intent, which is the desire to protect an innocent creditor who accepts payment of a debt in good faith, but it is hard to reconcile this point of view with the language of the statute, with the history of bankruptcy legislation, and with the right of other innocent creditors to equal protection.

VI

Section 73(1) of the present Bankruptcy Act had its counterpart in s. 31 of the Bankruptcy Act, 1919 (Can.), c. 36, as amended by 1920 (Can.), c. 34, which was the first Canadian bankruptcy Act (although not the first Canadian Act related to insolvency). The section is derived from s. 44 of the English Bankruptcy Act, 1914 (U.K.), c. 59, which in turn derived from the earlier Acts of 1869 and 1883. Therefore the English jurisprudence arising from the interpretation of those statutes may help in understanding our own Act.

It is interesting to note that even before those enactments and as early as 1777 Lord Mansfield in Rust v. Cooper[27] held that where a transaction is carried out to defeat the equality of the bankruptcy laws, the fact the defendant was a meritorious creditor would not warrant the transaction. In Bills v. Smith[28], Cockburn C.J. referred to the intention of the party making the payment, to defeat the law, as the “cardinal point on which the whole question turned”. The Act of 1869 was under consideration in Ex parte Blackburn; In re Cheesebrough[29]. There Sir James Bacon C.J., referring to the phrase “in favour of any creditor with a view of giving such creditor a preference

[Page 177]

over other creditors” said, p. 364: “The act of the debtor is alone to be considered—the object and purpose for which the payment is made can alone be enquired into…”. This statement of the law was approved in Ex parte Topham; In re Walker[30]. Another case to which one might refer is Butcher v. Stead[31]. Section 92 of the 1869 Act, 32 & 33 Vict., c. 71, which governed that case, was in terms almost identical to s. 73(1) of our present Act but the English Act of that time contained a provision reading:

…but this section shall not affect the rights of a purchaser, payee, or incumbrancer in good faith and for valuable consideration.

Such a proviso introduced the question of the good faith of the payee or creditor and in Butcher v. Stead it saved the transaction. But a proviso in these words was not carried forward into the later English Bankruptcy Act of 1883 and such a proviso has never formed part of the Canadian Bankruptcy Act. According to Williams on Bankruptcy, 18th ed., p. 382: “…the introduction of the concluding words in the 1883 Act restored the common law rule, with the result that the bona fides of the preferred creditor is today immaterial.”

The English attitude is reflected in the following words of Lord Esher, quoted with approval by the Earl of Halsbury L.C. in Sharp v. Jackson[32], p. 421:

“The question whether there has been a fraudulent preference depends, not upon the mere fact that there had been a preference, but also on the state of mind of the person who made it. It must be shewn not only that he has preferred a creditor, but that he has fraudulently done so. It depends upon what was in his mind. Whether it is called “intention” or “view” or “object” does not appear to me to matter much. The question is whether in fact he had the intention to prefer certain creditors.”

[Page 178]

VII

I come now to consider the decision of this Court in Benallack v. Bank of British North America. The case has stood on the books for seventy years. Many judges have considered it controlling on the question of concurrent purpose as applied to s. 73(1) of the Bankruptcy Act. I approach the case, therefore, with the respect to which those considerations entitle it, but I must at once observe that the case was decided in 1905, some fourteen years before the enactment of the Canadian Bankruptcy Act in 1919. It concerned a Yukon Ordinance having to do with preferential assignments, c. 38 of the Consolidated Ordinances of the Yukon Territory 1902. To permit comparison with s. 73(1) of the Bankruptcy Act, I will give the Ordinance in its entirety:

An Ordinance respecting Preferential Assignments.

1. Every gift, conveyance, assignment or transfer, delivery over or payment of goods, chattels or effects or of bonds, bills, notes, securities or of shares, dividends, premiums or bonus in any bank, company or corporation made by any person at any time when he is in insolvent circumstances or is unable to pay his debts in full or knows that he is on the eve of insolvency with intent to defeat or delay or prejudice his creditors or to give to any one or more of them a preference over his other creditors or over any one or more of them or which has such effect shall as against them be utterly void.

2. Every such gift, conveyance, assignment, transfer, delivery over or payment whether made owing to pressure or partly owing to pressure or not, which has the effect of defeating, delaying or prejudicing creditors or giving one or more of them a preference shall as against the other creditors of such debtor be utterly void.

3. Nothing in this Ordinance shall apply to any deed of assignment made and executed by a debtor for the purpose of paying and satisfying rateably and proportionately and without preference or priority all the creditors of such debtor their just debts or any bona fide sale of goods or payment made in the ordinary course of trade or calling, to innocent purchasers or parties.

The wording of the Ordinance differs from that of s. 73(1) of the Bankruptcy Act; in particular s. 3

[Page 179]

introduces concepts of bona fides and “innocent purchasers or parties” not found in s. 73(1).

The action in the 1905 Benallack case was brought to set aside several instruments, consisting of a chattel mortgage, land transfer and book debt assignments, in favour of a bank, as being void against creditors under the Ordinance. The bank was ignorant of the true financial condition of the debtor. Idington J., who delivered the unanimous judgment of a five‑man Court, after referring to the cases of Stephens v. McArthur[33], and Gibbons v. McDonald[34], said:

And if a fraudulent preference to whom is the having such a purpose to be attributed?

Is it enough to shew that the assignor may have had such an intent?

Must not the assignee as well as the assignor be a party to the fraudulent intent?

Such would seem to be the result of a long line of decisions upon which the commercial world as had a right to act for a long time past. And though there may not have been any express decision on the point upon this legislation in this Court the late Chief Justice, Sir William Ritchie, in Gibbons v. McDonald, at page 589 indicates that in his view there must be

“a concurrence of intent on the one side to give and on the other to accept a preference over other creditors.”

Counsel for the appellants properly conceded that the evidence here did not show knowledge on the part of the bank such as would enable us to find this concurrence of purpose.

Until the legislature obliterates the element of intent in such legislation and clearly declares that, quite independently of intent, the preferential result or effect of the transaction impeached is to govern, it will be exceedingly difficult to arrive at any other conclusion in cases of this kind. The results that might flow from such legislation ought not to be brought about without such purpose being most clearly expressed by the legislature.

[Page 180]

The case is unsatisfactory, if I may, with respect, say so, in that none of the “long line of decisions” upon which Idington J. relies is identified and no reasons are given for concluding that the intent to which the Ordinance refers must be entertained by the creditor as well as the debtor. In the later case of Salter & Arnold, Ltd. v. Dominion Bank, supra, as I have already mentioned, Duff J. observed that whatever else may be said about the intention to give a preference envisaged by s. 31 (now s. 73) “it must be an intention entertained by the debtor”. These words have been interpreted by some judges to mean that the intention with which one is concerned is only that of the debtor. I think, however, that we must give effect to the words of Duff J. “whatever else may be said about it”. What Duff J. intended, in my opinion, was merely to leave the matter open, just as Cartwright J., as he then was, did in the penultimate paragraph of his judgment in Velensky v. Canadian Credit Men’s Trust Association Limited[35], (reported in 38 C.B.R. 162 as In re Bernard Motors Ltd.). The paragraph in question, for some reason, was not printed in the report of the case in the Supreme Court Reports but is contained in the 38 Canadian Bankruptcy Reports, p. 167 and reads:

Before parting with the matter, I wish to observe that Bridges J. suggests a doubt as to whether if he were untrammelled by authority he would hold that, on the true construction of s. 64, to render void a preference in fact it is necessary that there be an intention on the part of the creditor to be preferred as well as an intention on the part of the debtor to prefer. In In re Blenkarn Planer Ltd. (1958), 37 C.B.R 147, 26 W.W.R. 168, 14 D.L.R. (2d) 719, 1958 Can. Abr. 55, Ruttan J. examines a number of decisions and expresses the opinion that the view of the debtor alone has to be considered. I mention this for the purpose of making it clear that in the case before us this point does not require decision and I express no opinion upon it.

I have concluded that a finding of concurrent intent is not necessary in order to set aside a payment as a fraudulent preference under s. 73 of the Bankruptcy Act. I do not believe that the decision of this Court in Benallack v. Bank of British North America is authoritative in inter-

[Page 181]

preting s. 73 of the Bankruptcy Act. However similar may be the wording, I do not think that a phrase in a provincial or territorial Ordinance of three paragraphs dealing with preferential assignments and having a particular legislative history and jurisprudence should govern the language of a federal Act of some 213 sections dealing with bankruptcy and having an entirely different legislative history and jurisprudence.

One must recall that fraudulent preference statutes and fraudulent conveyance statutes outside of the bankruptcy laws have generally contained a section exempting from the application of the statute any assignment or payment or bona fide sale of goods made in the ordinary course of trade to innocent purchasers. Such saving provisions are contained in our provincial fraudulent preference statutes and in each of the cases relied on in the 1905 Benallack judgment a similar statute was under consideration. These statutes required consideration of the knowledge or bona fides of the creditor. Under the law relating to bankruptcy the rule has been different, as the English authorities cited earlier in these reasons will confirm.

I am further of the view that s. 3 of the Yukon Ordinance plays the same role in the interpretation of the Ordinance as the proviso to s. 92 of the English Act of 1869 played in Butcher v. Stead, requiring consideration of the knowledge and intent and privity of the creditor; but there is no counterpart of s. 3 of the Ordinance to be found in s. 73(1) of the Bankruptcy Act. Section 75(1) of the Act, which protects certain transactions, is the only section in which the bona fides of the creditor emerges. Section 75(1) is very limited in scope. It is expressly made “Subject to the foregoing provisions of this Act… with respect to the avoidance of certain settlements and preferences…” and only comes into operation when s. 73(1) does not apply. Section 75(1) in express terms calls for double intent whereas s. 73(1) does not.

[Page 182]

Our duty is to construe the language of s. 73 of the Bankruptcy Act within the ambit and policy of that Act; if we go to the words of the statute we find that what is to be considered as fraudulent and void is:

“Every conveyance… of property” (i.e., the assignment in favour of respondents) “… made by any insolvent person” (i.e., G.S. & D. Construction Ltd.) “in favour of any creditor” (i.e. the respondents) “…with a view to giving such creditor a preference…”

It seems to me plain from the quoted words that the view, the only view, with which s. 73(1) of the Act is concerned is that of the insolvent person making the conveyance and we should not be diverted to any other conclusion by reliance upon a case in which a different statute in different language was construed. Whether or not a conveyance or payment is a fraudulent preference depends entirely on the intention of the debtor. The trial judge has found against the respondents on this point.

I would allow the appeal, set aside the judgment of the Appeal Division and restore the judgment of Cullen J. with costs throughout.

Appeal allowed with costs.

Solicitors for the appellant: MacPherson, Kelly & O’Neil, Calgary.

Solicitors for the respondents: Nelson, Benders & Hawco, Calgary.