Structure of a Carrier’s Claim in the
Context of Debtor Restructuring
The Sural Case Law :
Prioritization Between the Bills of Lading Act and Insolvency Laws
Me Pierre-Olivier Ménard Dumas
Acknowledgements
Me Karine Dionne & Me Gilles-Étienne Lemieux Stein Monast LLP
Bills of Lading Act
Bills of Lading Act (« BLA »)
2. Every consignee of goods named in a bill of lading, and every endorsee of a bill of lading to whom the property in the goods therein mentioned passes on or by reason of the consignment or endorsement, has and is vested with all rights of action and is subject to all liabilities in respect of those goods as if the contract contained in the bill of lading had been made with himself.
Civil Code of Quebec (« CCQ »)
2045. Subject to the rights of the shipper, the receiver upon accepting the property or the contract acquires the rights and assumes the obligations arising out of the contract.
Consignees are subject to the same obligations arising out of the contract of carriage / bill of lading that the contracting parties.
In the absence of an agreement to exempt the consignee from his legal obligation to pay for the freight, he must pay the carrier.
2318-1654 Québec inc. c. Swiss Bank Corp. (Canada)
“Under s. 2 of the [BLA], there is a presumption that the consignee is responsible for the carrier's freight charges. To avoid liability, the consignee must rebut the presumption by proving the existence of another arrangement that the shipper alone would be responsible for the freight charges and that the carrier has not waived the protection of the Act. Nothing in the bills of lading used by the plaintiff incorporated by reference the terms of the contract between Canada and Company A.
The plaintiff did not waive the protection of the Act”
Cassidy’s Transfer & Storage Limited v. 144736 Ontario Inc.
In Molson, the carriers were delivering empty bottles from the company consumers (« Consumers ») to Molson. Molson was paying Consumers for the services, which included the price of the bottles and freight charges. Consumers was not paying entirely the carriers.
Consumers then seeked protection under the Companies' Creditors Arrangement Act. The carriers sued Molson for the freight charges, which Molson had already paid to Consumers. Molson was ordered by the Court to pay the carriers, as it was not proved that they waived the protection of the BLA.
Section 2 BLA does not substitute the debtor (consignee vs shipper), but it adds a new debtor (consignee) to the premier debtor (shipper) for the carrier’s unpaid freight charges.
Section 2 BLA is not of public order.
SGT 2000 inc. c. Molson Breweries of Canada Ltée
To avoid liability pertaining to freight charges, the consignee must prove:
The existence of another arrangement wherein the shipper would be responsible alone for freight charges; or
The carrier has waived its protection of section 2 BLA.
Carrier’s waiver of such protection can be express or implied, but can’t be presumed from the silence of the parties. Such waiver could be found through annotations on the BOL or specific clauses in the contract.
The term ‘Prepaid’ may amount to a waiver ONLY if it is found to be a representation to the consignee that the freight charges HAVE ACTUALLY BEEN PAID.
If the freight charges has to be paid AFTER the delivery, the term ‘Prepaid’ shouldn’t be considered as a waiver of carrier’s rights.
SGT 2000 inc. c. Molson Breweries of Canada Ltée
A consignee could argue that the transport service intermediary represented itself as the carrier and that payment to the intermediary discharged him of payment to another carrier in application of section 2035 CCQ. The identification of the carriers in such circumstances remains of question of fact.
Regulation respecting the requirements for bills of lading (CQLR, chapter T-12, r. 6)
7. The bill of lading shall be signed by an operator of heavy vehicles who is acting as a carrier or his mandatary and by the shipper or his mandatary.
Compagnies’
Creditors Arrangement Act
Bankruptcy and Insolvency Act (BIA)
An insolvent person may choose to file for bankruptcy or give notice of its intention to
file a proposal pursuant to the BIA
Compagnies’
Creditors Arrangement Act (CCAA)
An insolvent person having more than 5M$ in debt may choose to ask for an initial
order staying proceedings against it in order to file an arrangement plan pursuant to
the CCAA
Sections 97 (3) BIA and 21 CCAA both state that the law of compensation or offset
applies in insolvency cases.
However, in insolvency cases, it is also provided that unsecured creditors be treated
equally, without any undue preference (sections 95-101 BIA and 36.1 CCAA).
The Sural Case Law
Application for Directions and Certain Orders
500-11-056018-191
Superior Court (Commercial Division)
District of Montreal (Quebec)
• Sural operated 2 rod mills in the aluminum sector and it deals with a dozen of carriers to ship aluminum rods sold to various clients in the USA
• The unpaid freight charges by Sural to 11 carriers amounted to US$1,261,764
• Sural had a total of US$2,579,751 of receivables from its USA clients (consignees)
• In February 2019, an initial order pursuant to the CCAA was granted by the Superior Court preventing the carriers to receive payment from Sural
• A few carriers had sent formal notices and filed motions against consignees to claim unpaid freight charges
• In March 2019, a monitor filed an application for directions and certain orders seeking an order declaring that
(i) The carriers cannot claim payment from the consignees for pre-filing services rendered and (ii) Sections 2045 CCQ and 2 BLA create an undue preference in favour of the carriers
The
Monitor’s
Opinion :
•
If sections 2045 CCQ and 2 BLA were to apply, consignees would necessarily
withhold (compensation
–
offset) an amount equivalent to the freight charges
claimed by carriers to the detriment of the mass of creditors
•
Carriers claims against the consignees would therefore grant an illegal and undue
preference over
Sural’s
other unsecured creditors with respect to the collection of
Sural’s
receivables
•
Judicial intervention was required to allow Sural to collect the full amount of their
receivables
Carriers’
opinion
(supported also by the Attorney General of Quebec) :
•
Sections 2 BLA and 2045 CCQ add a new debtor and allow carriers to claim from
this other debtor
•
If consignees pay the carriers, they would be subrogated in the
carriers’
rights
against Sural
•
As of the date of the initial order, and since no mutual debt existed between
carriers and Sural or consignees and Sural, consignees could not withold from any
pre-filling amounts owed to Sural any sums it had to pay to the carriers
Carriers’
opinion was based on the Supreme Court of
Canada’s
judgment in
D.I.M.S.
Construction
In D.I.M.S., the facts were the following:
• As a contractor, D.I.M.S. did not pay the sums it should have paid for workers’ compensation and other protection measures (to the Quebec occupational health and safety board (« CSST ») and the Quebec Construction Board (« QCB »))
• The applicable acts stated that those who employed the contractor were also responsible to pay these amounts to the CSST and the QCB.
• The question was if the payment to the CSST and QCB by these « employers » create an undue preference and upset the BIA scheme of payment.
The Supreme Court analysed the following possibilities: If the employers paid the CSST and the QCB prior or after the bankruptcy
If the employers paid the CSST and the QCB priorto the bankruptcy, the Supreme Court found that :
43. From the moment when the employer pays the CSST, the employer’s claim becomes certain, liquid and exigible. As a result of subrogation, the CSST’s claim is transferred to the employer. (…) If the employer is also in debt to the contractor, and if that debt is liquid and exigible, legal compensation is effected by operation of law (…)
45. Since in this scenario the bankruptcy has not yet occurred when legal compensation is effected, the scheme of distribution is not affected, because the claim against the employer is not part of the property vested in the trustee.
If the employers paid the CSST and the QCB after the bankruptcy the Supreme Court found that:
51. (…) The CSST owed the contractor nothing and could not therefore set up compensation. Following this line of reasoning, the employer was not a creditor of the contractor before the bankruptcy. The employer did not become a creditor until the subrogatory payment was made, that is, after the bankruptcy. The dual status of creditor and debtor did not arise until after the bankruptcy. (…)
52. In the civil law of Quebec, a person who pays in the place of a debtor has no more rights than the subrogating creditor (…), compensation cannot be effected to the prejudice of third persons (…) There is no question that third persons would be affected by compensation should it come into play. The effect of substituting creditors subsequent to the bankruptcy is such that the trustee must now deal with a creditor who is also a debtor of the bankruptcy, whereas the original creditor was not and would not therefore have been able to set up compensation. The employer’s claim would, in a way, be secured by the amounts owed by the employer to the bankrupt, whereas the CSST’s claim was not.
If the employers paid the CSST and the QCB afterthe bankruptcy the Supreme Court found that:
58. The trustee’s argument that s. 316 AIAOD subverts the scheme of distribution under the BIA cannot therefore be accepted. First, the right to reimbursement is compatible with the BIA and, second, if the right to retain cannot be exercised by an employer, it is because of the inherent constraints of the civil law rules governing subrogation and compensation. The right to retain is not in conflict with the BIA, because the only circumstances in which the right can be exercised are those provided for in the BIA, which is more open to compensation than Quebec civil law.
The same reasoning applied in Sural’s case. As of the date of the initial order:
• The carrier did not owe anything to Sural, so no compensation was possible
• Since consignees had not paid previously to the initial order, Sural did not owe anything to the consignees By asking the consignees to pay the carriers, the insolvency schedule of distribution was not upset, as the consignees did not have the right to withhold payment because third party rights were affected.
The matter was eventually settled out of Court.
ORDERS that each of the Grayson Transaction Agreement, the G.B.N. Transaction Agreement and the J.C. Germain Transaction Agreement (collectively the "Transaction Agreements") be binding on any trustee in bankruptcy that may be appointed, and shall not be void or voidable nor deemed to be a fraudulent preference, assignment, fraudulent conveyance, transfer at undervalue or other reviewable transaction under the BIA or any other applicable federal or provincial legislation, nor shall it give rise to an oppression or any other remedy;
IN THE PRESENCE OF THE HONOURABLE MARTIN CASTONGUAY, S.C.J 500-11-056018-191
