Canada Deposit Insurance Corp. v. Canadian Commercial Bank

Canada Deposit Insurance Corp. v. Canadian Commercial Bank
Collection
Supreme Court Judgments
Date
1992-11-19
Report
[1992] 3 SCR 558
Case number
22084
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Stevenson, William; Iacobucci, Frank
On appeal from
Alberta
Subjects
Financial institutions
Notes
SCC Case Information: 22084
Decision Content
Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558
In the Matter of The Winding‑up Act, R.S.C. 1970, c. W‑10, as amended;
and
In the Matter of the Winding‑up of Canadian Commercial Bank
between
Price Waterhouse Limited, Liquidator
of Canadian Commercial Bank Appellant
v.
Her Majesty The Queen in right of Alberta,
Royal Bank of Canada, Bank of Montreal,
Toronto‑Dominion Bank, Bank of Nova Scotia,
Canadian Imperial Bank of Commerce and
National Bank of Canada Respondents
Indexed as: Canada Deposit Insurance Corp. v. Canadian Commercial Bank
File No.: 22084.
1992: April 2; 1992: November 19.
Present: La Forest, L'Heureux‑Dubé, Gonthier, Cory, McLachlin, Stevenson* and Iacobucci JJ.
on appeal from the court of appeal for alberta
Banks and banking operations ‑‑ Winding‑up ‑‑ Bank facing solvency crisis ‑‑ Support group providing emergency financial assistance ‑‑ Whether money advanced was in nature of a loan or of a capital investment ‑‑ Whether participants rank pari passu with other unsecured creditors on winding‑up.
Banks and banking operations ‑‑ Winding‑up ‑‑ Postponement of claims ‑‑ Doctrine of equitable subordination ‑‑ Bank facing solvency crisis ‑‑ Support group providing emergency financial assistance ‑‑ Money advanced being in nature of a loan ‑‑ Whether loan comes within postponement provision in Partnerships Act ‑‑ If not, whether claim should nonetheless be postponed under doctrine of equitable subordination ‑‑ Partnerships Act, R.S.O. 1990, c. P.5, ss. 3(3)(d), 4.
In early 1985 Canadian Commercial Bank ("CCB") faced a solvency crisis owing to a sharp deterioration in its loan portfolio. A support group consisting of the governments of Canada and of Alberta, the Canadian Deposit Insurance Corp. and six major Canadian banks (the "participants") entered into an arrangement to provide the emergency financial assistance requested. They essentially agreed to purchase from CCB an undivided interest by way of participation in a portion (the "syndicated portion") of a portfolio of assets it held, the participation interest of each being proportionate to its own financial contribution. The parties also agreed that the participants would receive from CCB on a proportionate basis the money recovered on the syndicated portion of the portfolio assets as well as 50 percent of CCB's pre‑tax income, or alternatively 100 percent of CCB's pre‑tax income plus interest at the prime rate, until such time as the money advanced had been repaid. CCB undertook to indemnify each participant against any loss experienced under the support program up to the amount paid by them to CCB. It was agreed that, in the event of the insolvency or winding‑up of CCB, any amount remaining unpaid "shall constitute indebtedness of CCB to the members of the Support Group". Finally, the parties agreed that each participant would receive from CCB, on a proportionate basis, warrants to purchase common shares of CCB, although the exercise of this option was contingent on shareholder, regulatory and legislative approval. The warrants were to expire 10 years after the date on which CCB had repaid the full amount advanced. Despite this financial assistance, CCB's financial status continued to deteriorate and the Court of Queen's Bench ordered that it be wound up. On an application by the liquidator for advice on the validity and ranking of the participants' claims, the chambers judge considered the injection of funds by the participants to have been a capital investment. He held that they were entitled to repayment of sums recovered on the syndicated portion of the portfolio assets but otherwise not entitled to recovery of their advances until after all ordinary creditors were paid in full. The Court of Appeal reversed the latter part of this judgment. It characterized the advance as a loan and concluded that the participants were entitled to rank pari passu with CCB's other unsecured creditors for all monies advanced and not repaid from the syndicated portion of the portfolio assets. This appeal is to determine (1) whether the Court of Appeal was correct in characterizing the advance by the participants to CCB as a loan; if so, (2) whether the loan comes within the postponement provision found in s. 4 of the Ontario Partnerships Act; and (3) if the Partnerships Act does not apply, whether the respondents' claim for the money loaned under the participation agreement should nonetheless be postponed to the claims of CCB's other unsecured creditors based on the doctrine of equitable subordination.
Held: The appeal should be dismissed.
Both the wording of the agreements and the surrounding circumstances clearly support the Court of Appeal's conclusion that the $255 million advance was in substance a loan and not a capital investment. Although the transaction did have an equity component (the warrants), this aspect alone does not in the circumstances of this case transform the essential nature of the advance from a loan to an investment. Nor does the fact that CCB's pre‑tax income was the main source for repayment affect this characterization as the amount to be repaid from this source was limited to the sum advanced to CCB. Thus, the respondents are creditors of CCB and, as such, are entitled to rank pari passu with the other unsecured creditors of CCB in the distribution of CCB's assets.
The Court of Appeal properly declined to postpone the respondents' claims for the moneys not repaid until the claims of the other ordinary creditors of CCB were satisfied. The postponement provision in s. 4 of the Ontario Partnerships Act applies only where "money has been advanced by way of loan upon such a contract as is mentioned in section 3". Section 3(3)(a) makes no reference to a "contract" and is thus beyond the scope of s. 4. Section 3(3)(d) applies where "the lender is to receive . . . a share of the profits arising from carrying on the business". Any fixed debt to be repaid out of profits does not in itself constitute a "share of the profits" within the meaning of this provision. A lender does not share in profits unless he or she is entitled to be paid amounts referable to profits other than in repayment of the principal amount of the loan. Here the participants had a fixed debt which would be repaid in part by the moneys received from the syndicated portion of the portfolio assets and in part by CCB's pre‑tax income. With the exception of the contingent interest at prime rate, under no circumstance were the payments from the pre‑tax income to be applied to anything but the repayment of the loan. Once the loan was fully repaid, all payments from CCB's pre‑tax income were to stop. Accordingly, the participants were not to receive a "share of the profits" of CCB within the meaning of s. 3(3)(d) by virtue of the repayment scheme for the advance. The contemplated granting of warrants under the highly contingent circumstances of this case does not alter this conclusion.
The principles of equitable subordination have no application to the facts of this case. Assuming that Canadian courts have the power in insolvency matters to subordinate otherwise valid claims to those of other creditors on equitable grounds relating to the conduct of these creditors inter se, the exercise of such a power is not justified in the present case. The reasons and limited evidence advanced before this Court disclose neither inequitable conduct on the part of the participants nor injury to the ordinary creditors of CCB as a result of the alleged misconduct.
Cases Cited
Considered: Sukloff v. A. H. Rushforth & Co., [1964] S.C.R. 459; referred to: Laronge Realty Ltd. v. Golconda Investments Ltd. (1986), 7 B.C.L.R. (2d) 90; In re Dickie Estate (1924), 5 C.B.R. 214; In re Meade, [1951] 1 Ch. 774; In re Beale (1876), 4 Ch.D. 246; British Eagle International Airlines Ltd. v. Compagnie Nationale Air France, [1975] 2 All E.R. 390; Grace v. Smith (1775), 2 Wm. Bl. 997, 96 E.R. 587; Waugh v. Carver (1793), 2 Hy. Bl. 235, 126 E.R. 525; Cox v. Hickman (1860), 8 H.L.C. 268, 11 E.R. 431; Ex parte Taylor; In re Grason (1879), 12 Ch.D. 366; In re Stone (1886), 33 Ch.D. 541; In re Hildesheim, [1893] 2 Q.B. 357; In re Mason; Ex parte Bing, [1899] 1 Q.B. 810; In re Fort; Ex parte Schofield, [1897] 2 Q.B. 495; In re Young; Ex parte Jones, [1896] 2 Q.B. 484; In re Mobile Steel Co., 563 F.2d 692 (1977); In re Multiponics Inc., 622 F.2d 709 (1980).
Statutes and Regulations Cited
Act to Amend the Law of Partnership (U.K.), 28 & 29 Vict., c. 86 [rep. 53 & 54 Vict., c. 39].
Bank Act, R.S.C., 1985, c. B‑1, ss. 132, 173, 174, 277.
Bankruptcy Act, R.S.C., 1985, c. B‑3, s. 139 .
Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39, ss. 2(3)(d), 3.
Partnerships Act, R.S.O. 1990, c. P.5, ss. 3(3)(a), (b), (d), 4.
Winding‑up Act, R.S.C. 1970, c. W‑10.
Winding‑up Act, R.S.C., 1985, c. W‑11, ss. 93 , 94 , 95 .
Authors Cited
Canada. Inquiry into the Collapse of the CCB and Northland Bank. Report of the Inquiry into the Collapse of the CCB and Northland Bank. By the Hon. Willard Z. Estey, Commissioner. Ottawa: The Inquiry, 1986.
Crozier, Lawrence J. "Equitable Subordination of Claims in Canadian Bankruptcy Law" (1992), 7 C.B.R. (3d) 40.
DeNatale, Andrew, and Prudence B. Abram. "The Doctrine of Equitable Subordination as Applied to Nonmanagement Creditors" (1985), 40 Bus. Law 417.
Halsbury's Laws of England, vol. 2, 3rd ed. London: Butterworths, 1953.
Halsbury's Laws of England, vol. 3(2), 4th ed. London: Butterworths, 1985.
Lindley, Nathaniel. Lindley on the Law of Partnership, 15th ed. By Ernest H. Scamell and R. C. l'Anson Banks. London: Sweet & Maxwell, 1984.
Ziegel, Jacob S. "Characterization of Loan Participation Agreements" (1988), 14 Can. Bus. L.J. 336.
APPEAL from a judgment of the Alberta Court of Appeal (1990), 107 A.R. 199, 74 Alta. L.R. (2d) 69, 69 D.L.R. (4th) 1, allowing the respondents' appeal from a judgment of the Court of Queen's Bench (1987), 83 A.R. 122, 56 Alta. L.R. (2d) 244, 46 D.L.R. (4th) 518, 67 C.B.R. (N.S.) 136. Appeal dismissed.
Charles P. Russell, for the Liquidator.
Earl A. Cherniak, Q.C., and Robert J. Morris, for the general body of creditors of the estate of Canadian Commercial Bank.
James Rout, Q.C., for the respondent Her Majesty the Queen in right of Alberta.
Colin L. Campbell, Q.C., for the respondents Royal Bank of Canada, Bank of Montreal, Toronto‑Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada.
//Iacobucci J.//
The judgment of the Court was delivered by
Iacobucci J. -- In September of 1985, the Canadian public witnessed what fortunately has been an infrequent occurrence in Canadian banking. Early that month, a chartered bank known as the Canadian Commercial Bank ("CCB") became insolvent and was ordered to be wound up pursuant to the provisions of the Winding-up Act, R.S.C., 1985, c. W-11 (formerly R.S.C. 1970, c. W-10). This appeal concerns the characterization of the unique and complex financial arrangement entered into by the Governments of Canada and of Alberta, six major Canadian financial institutions, the Canadian Deposit Insurance Corporation ("CDIC") and CCB in the spring of 1985 in an attempt to prevent its winding-up. The main issue is whether, in substance, the $255 million advanced to CCB under this arrangement was in the nature of a loan, in which case the "lenders" thereof would rank pari passu with the other unsecured creditors of CCB, or whether it was in the nature of a capital investment in the business of CCB, in which case such unsecured creditors would have priority over the "investors". If the former characterization is adopted, as I believe it should be, subsidiary issues concerning the postponement of claims under s. 4 of the Partnerships Act, R.S.O. 1990, c. P.5, and the doctrine of equitable subordination are also raised.
I. Facts
Although they are relatively uncomplicated, the facts of this case are rather extensive and warrant a full review. CCB was a chartered bank involved primarily in commercial lending. In early 1985, CCB faced a solvency crisis owing to a sharp deterioration in its loan portfolio. Many of its outstanding loans had become non-performing. On March 14, 1985, CCB's Chief Executive Officer reported this crisis to the Office of the Inspector General of Banks and announced the inability of CCB to continue in operation without outside assistance. At the request of the Governor of the Bank of Canada, a government and banking industry funded support initiative was undertaken to assist CCB and to avoid the loss of public confidence in Canada's banking system.
On March 24, 1985, a support group comprising Her Majesty in right of Canada ("Canada"), Her Majesty in right of Alberta ("Alberta"), CDIC and what I shall sometimes refer to as the "Bank Group", consisting of the Royal Bank of Canada, the Bank of Montreal, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, and the National Bank of Canada, entered into a Memorandum of Intent to provide the "emergency financial assistance" requested by CCB "on certain terms".
In essence, Canada, Alberta, CDIC and the Bank Group, collectively referred to as the "Participants", agreed to purchase from CCB, at a total price of $255 million, an undivided interest by way of participation in a portfolio of assets held by CCB consisting of loans and related security having a nominal value, on the books of CCB, of over $500 million ("Portfolio Assets"). The participation interest of each Participant was proportional to its own financial contribution and was to be evidenced by Participation Certificates issued by CCB. The parties also agreed in principle that the Participants would receive from CCB on a proportionate basis, and until such a time as the Participants received the amount they paid for their Participation Certificates, a portion of the money received on account of each Portfolio Asset as well as 50 percent of CCB's pre-tax income, or alternatively 100 percent of CCB's pre-tax income plus interest. In other words, it was agreed that the $255 million advanced by the Participants would be repaid by CCB. After repayment, the payments from the Portfolio Assets and from CCB's pre-tax income would cease.
Under the Memorandum of Intent, CCB undertook to indemnify each Participant against any loss experienced under the support program up to the amount paid by them to CCB. It was agreed that in the event of the insolvency or winding-up of CCB, any amount remaining unpaid "shall constitute indebtedness of CCB to the members of the Support Group". Finally, the parties agreed in principle that each Participant would receive from CCB, on a proportionate basis, transferable rights or warrants to purchase common shares of CCB at a price of $0.25 per share. The warrants were to expire 10 years after the day that CCB had repaid the full amount advanced for the Participation Certificates.
On March 25, 1985, the Department of Finance issued a press release announcing a joint agreement involving "an infusion of capital with repayment provisions . . . designed to provide the Canadian Commercial Bank with sufficient funds to ensure solvency following a recent and sharp deterioration in its U.S. loan portfolio". The agreement was described as resulting in the "purchase by the support group of a package of nonperforming loans", leaving CCB "in a strong position of solvency in order to support its deposit base". After setting out the general terms of the support program, the Minister of State (Finance) said she had "full confidence" that this program "involving Canada's largest chartered banks and the two Governments will permit the Canadian Commercial Bank to continue its active and important role in the growing economy of Western Canada". The Minister concluded that the support program represented "a strong collective vote of confidence in the health of the economy of Western Canada".
In order to carry out the letter and spirit of the Memorandum of Intent, the Participants and CCB were to execute, among other documents, a "Participation Agreement" (also referred to as "P.A."), an "Equity Agreement" (also referred to as "E.A.") and an "Amending and Subordination Agreement". These agreements, which incorporate and refine the general principles agreed to earlier in the Memorandum of Intent, were ultimately entered into as of April 29, 1985. The Participation Agreement and the Equity Agreement formed the core of the support program. There are no relevant inconsistencies between these documents and the Memorandum of Intent. I will, however, review in closer detail the former documents as their provisions are of crucial importance to the resolution of the issues raised by this appeal.
Section 2 of the Participation Agreement provided for the Participants to purchase from CCB, at a total price of $255 million, an undivided interest by way of participation in 255,000,000 units in the Portfolio Assets of CCB. Each Participant's interest was proportional to its financial contribution. For example, CDIC advanced $75 million and received a participation interest in 75,000,000 units. The total participation in the Portfolio Assets was divided into 529,798,627 units, with the portion of 255,000,000 units purchased by the Participants commonly referred to as the "Syndicated Portion". CCB retained beneficially an undivided participation interest in the remaining 274,798,627 units which comprised the aggregate of the "CCB Portion" of the Portfolio Assets.
Under s. 5 of the Participation Agreement, CCB warranted that the CCB Portion for each Portfolio Asset represented its "best estimate of the amount likely to be recovered from or with respect to that Portfolio Asset". Thus, as found by the learned chambers judge, the Participants purchased, in essence, a portfolio of bad loans or that portion of a loan not likely to be recovered.
CCB was appointed and authorized to act as agent to administer the Portfolio Assets (P.A. s. 6(a)). Pursuant to s. 9 of the Participation Agreement, all money received by CCB on account of each Portfolio Asset, whether principal, interest or otherwise, was first to be retained by CCB until the CCB Portion of that Portfolio Asset was completely recovered; then to be paid to the Participants (except CDIC) proportionately to reduce or retire their respective advances; then to be paid to CDIC to reduce or retire its proportionate share; and finally to be retained by CCB. Each Participant was entitled to receive these proceeds up until such time as it received an amount which, when taken together with all amounts received by that Participant from CCB's pre-tax income pursuant to s. 10, was equal to the price paid by that Participant for its Participation Certificate.
In addition to proceeds from CCB's Portfolio Assets, the Participants were entitled to receive proportionately from CCB, on a quarterly basis, an amount equal to 50 percent of CCB's pre-tax income (P.A. s. 10). CCB's "pre-tax income" was defined in s. 10 of the Participation Agreement as CCB's "net income . . . before making any allowance for the payments to be made pursuant to this section, accrued interest on any presently existing bank debenture of CCB or any provision for income taxes payable to Canada, the United States of America and any political division of either". Again, CCB's obligation to make such payments would terminate after each Participant received an amount pursuant to ss. 9 and 10 equal to the price paid by such Participant for its Participation Certificate (P.A. s. 10).
Under s. 11 of the Participation Agreement, if CCB failed by October 31, 1985, to obtain the shareholder and regulatory approval necessary for it to increase its authorized capital to the extent required for it to perform the Equity Agreement, as discussed below, then s. 10 of the Participation Agreement would be deemed to have been amended and would be construed as requiring CCB to pay to the Participants 100 percent of CCB's pre-tax income. This obligation would continue until such time as the total amount received by each Participant from the Portfolio Assets and CCB's pre-tax income satisfied the amount paid by that Participant for its Participation Certificate, together with interest at prime rate. It should be noted that this was the only circumstance under which CCB was to pay interest to the Participants.
Section 8 of the Participation Agreement provided that CCB indemnified each Participant against any loss suffered by it by reason of the amounts realized from the Portfolio Assets and from 50 percent of CCB's pre-tax income failing to equal the price paid by that Participant for its Participation Certificate. This indemnity was to be paid only by payments of the amount and source described in ss. 10 and 11, with one important exception: "if CCB becomes insolvent or is wound up, any amount remaining unpaid and required to be paid in order to indemnify that Participant completely in accordance with the foregoing indemnity, shall constitute indebtedness of CCB, to which the provisions of section 13 shall apply."
The relevant parts of s. 13 of the Participation Agreement read as follows:
13. Priorities on Insolvency
(a) Notwithstanding the provisions of section 277 of the Bank Act [which otherwise gives Canada and a province a first and second charge respectively on the assets of an insolvent bank] or any other rule of law, each of the Participants agrees that, in the case of the insolvency or winding-up of CCB:
(i) neither Canada, CDIC nor Alberta shall, in connection with any money owing to it under this agreement, claim any charge on the assets of CCB;
(ii) the right of each of the Participants other than CDIC to money owing to it under this agreement shall rank pari passu with the right of the depositors of CCB to payment in full of the deposit liabilities of CCB;
(iii) the right of CDIC to money owing to it by CCB, under this agreement but not by reason of the subrogation of CDIC to the claims of depositors of CCB (if any) shall be subordinate in right of payment to the prior payment in full of all money owing to the other Participants under this agreement and to the depositors of CCB, but shall rank in priority to any outstanding bank debentures of CCB.
Each of Canada, CDIC and Alberta acknowledges that it has waived, as set out above, any priority to which it would otherwise be entitled. Each Participant agrees that this section 13 is intended to benefit the depositors of CCB, and to enure to the benefit of the successors of CCB and any curator, liquidator or receiver that may be appointed to supervise or to wind up the business of CCB. [Emphasis added.]
Moreover, s. 13 provided that each Participant would rank pari passu with each other except CDIC and that each would, as necessary, redistribute payments received by it in order to achieve this ranking.
Pursuant to s. 12 of the Participation Agreement, CCB could not, without the consent of the Participants, declare or pay any dividend or reduce its issued capital until such time as CCB paid to each Participant its purchase price, and any additional amount (interest at prime rate) payable under s. 11. Moreover, the Participants required as a condition to their purchase, inter alia: (1) the execution of an Amending and Subordination Agreement; (2) the execution of the Equity Agreement; and (3) the opinion of the Inspector General of Banks that CCB would be solvent following the purchase (P.A. ss. 14 and 16). Finally, the parties expressly declared that the Participants were not partners or joint venturers with each other (P.A. s. 18(j)) and that the law governing the agreement would be the law applicable in the Province of Ontario (P.A. s. 18(d)).
The Equity Agreement gave the Participants warrants providing for the right to subscribe to a total of 24,062,517 common shares of CCB at a price of $0.25 per share, on a basis proportionate to each Participant's participation interest (E.A. ss. 2, 3, 5 and 6). At the date of the agreement, CCB had an authorized capital of 10,000,000 common shares with a par value of $10 each, of which 6,529,768 were issued and outstanding (E.A. s. 4). If all outstanding employee stock options to purchase common shares were exercised and all issued convertible preferred shares were converted into common shares, the issued capital of CCB would consist of a total of 8,020,839 common shares (E.A. s. 4). Thus, if the warrants were fully exercised, the Participants would own 75 percent of CCB's common shares.
Shareholder and regulatory approval were required to increase CCB's authorized capital from its current level of 10,000,000 common shares to the 32,100,000 required in order to give full effect to the Equity Agreement. Pursuant to s. 15 thereof, CCB had to first obtain shareholder approval no later than October 31, 1985, and next had to apply to the Minister of Finance pursuant to the Bank Act, R.S.C., 1985, c. B-1 (formerly S.C. 1980-81-82-83, c. 40) for the necessary change in its authorized capital. If such an application was not made by October 31, 1985, the provisions of s. 11 of the Participation Agreement (100 percent pre-tax income plus interest) were triggered. In s. 8 of the Memorandum of Intent, Canada had agreed that "an application for such alteration in capital when made shall be approved for purposes of the Bank Act ".
The limited authorized capital of CCB was not the only obstacle to the issuance of common shares to the Participants. Under present law, the chartered banks which were Participants could not legally exercise their right to subscribe to common shares of CCB. This was recognized by the parties in paragraph (d) of the preamble to the Equity Agreement as well as in s. 10 of the agreement. Under s. 8 of the Equity Agreement, the warrants were made fully assignable and it was the declared intention of the Participants, as recorded in the preamble, "that unless the present law is materially changed, they shall assign such rights".
The Participants' right to purchase these shares was to continue for a period of 10 years after the date on which each Participant had been repaid the full amount it had advanced under the terms of the Participation Agreement (E.A. ss. 1 and 12). Again, this agreement would be governed by and construed in accordance with the law applicable in the Province of Ontario (E.A. s. 19).
Finally, under the Amending and Subordination Agreement, the holders of all outstanding subordinated debentures issued by CCB pursuant to s. 132 of the Bank Act (i.e. Canada, British Columbia, Alberta and the Workers' Compensation Board of British Columbia) agreed to postpone the repayment of the amounts represented by their debentures until such time as CCB had paid to each Participant an amount equal to the price paid by that Participant for its Participation Certificate.
To summarize, the Participants were to receive in return for the $255 million advanced under the support program, proportionally to their own financial contribution and up to that amount: (1) payments from the Portfolio Assets; (2) (a) 50 percent of CCB's pre-tax income and warrants to buy up to 75 percent of CCB's common shares, or (b) 100 percent of CCB's pre-tax income, with interest on the amount contributed; and (3) an indemnity for any losses caused. Under these agreements, the Participants could receive a return which was greater than their contribution only in two ways, namely by exercising or assigning their warrants up to 10 years after full repayment (however, this option was contingent on shareholder, regulatory and legislative approval) or, if these warrants could not be granted, by receiving interest on the amount advanced at the prime rate.
CCB was advised by the Office of the Inspector General of Banks, by a letter dated April 24, 1985, as to the appropriate accounting treatment to be applied to these transactions. Following these guidelines, CCB wrote down its loan assets by $255 million, charged the write-down to tax-allowable appropriations for contingencies and credited the $255 million received from the Participants to tax-paid appropriations for contingencies. CCB was not specifically directed by the Inspector General of Banks to record its indemnity towards the Participants as a liability, nor did CCB do so. By effectively "selling" that portion of its loan portfolio not likely to be recovered and by not recording its indemnity obligation under the Participation Agreement to repay the $255 million as a liability, CCB was able to restore a position of solvency on its books, thereby allowing it to remain in business, which was, after all, the raison d'être of the support program.
Despite this financial assistance, CCB's financial status continued to deteriorate. For reasons beyond the scope of this appeal, the support program was unsuccessful in ensuring CCB's long-term solvency. By an Order made September 3, 1985, on a petition by CDIC, Wachowich J. of the Alberta Court of Queen's Bench ordered CCB to be wound up pursuant to the Winding-up Act, R.S.C. 1970, c. W-10. At that point, none of the Participants had exercised or assigned (or even been granted) any of their warrants under the Equity Agreement as the preliminary conditions of shareholder and regulatory approval for the authorization and issuance of additional common shares had not been fulfilled. Price Waterhouse Limited was appointed, and remains, the sole Liquidator of CCB ("Liquidator").
As of August 18, 1987, the Liquidator had recovered approximately $112 million on account from CCB's Portfolio Assets, of which $5 million was attributable to the portion thereof beneficially owned by the Participants (namely, the Syndicated Portion). The Liquidator brought an application before Wachowich J. for advice and direction as to the interpretation of the support agreements. In particular, the Liquidator sought to determine the validity and ranking of the claims of the Participants pursuant to the Participation Agreement.
In a judgment rendered on December 7, 1987, Wachowich J. held the Participants to be entitled to the repayment of sums recovered by the Liquidator on the Syndicated Portion of the Portfolio Assets (the $5 million), but otherwise not entitled to recover their advances until after all ordinary creditors, including unsecured creditors, were paid in full. Wachowich J. interpreted the injection of funds by the Participants to have been a capital investment. The Participants, apart from Canada and CDIC, the respondents in this appeal, successfully appealed the latter part of this judgment. The Alberta Court of Appeal disagreed with Wachowich J., preferring to characterize the advance of $255 million as a loan. The Court of Appeal concluded that the Participants were entitled to rank pari passu with CCB's unsecured creditors for all monies advanced to CCB pursuant to the Participation Agreement and not repaid by monies recovered from the Syndicated Portion of the Portfolio Assets.
On an application by the Liquidator, Wachowich J. directed the Liquidator to present an application to this Court for leave to appeal from the Court of Appeal's decision. Wachowich J. further ordered that Lerner & Associates be appointed as Legal Representative ("Legal Representative") of CCB's general body of creditors, other than the Participants, for purposes of the application for leave to appeal and further on the appeal. Leave to appeal to this Court was granted on March 14, 1991, [1991] 1 S.C.R. vi. The Liquidator, as an officer of the Court and as the representative of all the creditors of CCB, takes no position in this appeal. The Bank Group and Alberta, the respondents before this Court, made separate written and oral submissions.
II. Judgments in the Courts Below
A. Alberta Court of Queen's Bench (1987), 83 A.R. 122
On the initial application, the Participants took the position that they were entitled under the terms of the support agreements: (1) to receive their proportionate shares of the moneys received by the Liquidator or CCB on account of the Portfolio Assets; and (2) to rank pari passu with all the other unsecured creditors of CCB for any amounts not recovered from the Portfolio Assets and still owing to them pursuant to the Participation Agreement. Wachowich J. agreed with the first proposition but rejected the second.
According to Wachowich J., the Participants' first submission involved a consideration of the validity of the Participation Agreement. The learned chambers judge confessed it was a "difficult task" to determine the position of the Participants with respect to CCB's estate given the "extraordinary nature of the agreement" involved (at p. 126). He noted there were no precedents dealing with similar commercial agreements. In his view, the Participation Agreement in question was not prohibited by ss. 173 and 174 of the Bank Act . While the agreement did not relate to business in which a bank would normally or commonly engage, he noted that "given the unique circumstances and the stated purpose of the Participation Agreement as a whole, one can hardly regard this as an invalid transaction" (at p. 127). He found it was a valid contractual document binding on all parties and held that the Participants were entitled to receive their proportionate share from moneys recovered by the Liquidator from the Portfolio Assets, in the manner provided for in s. 9 of the Participation Agreement (i.e. to the extent such recoveries exceed the CCB Portion).
Next, Wachowich J. turned to a consideration of the ranking of the Participants with the general body of creditors of CCB for any amounts not recovered from the Syndicated Portion of the Portfolio Assets, and still owing pursuant to the Participation Agreement. He noted that the Participants would have "valid claims" under the terms of the Participation Agreement for such amounts (at p. 128). However, whether they could rank pari passu with other unsecured creditors depended on the interpretation of the agreement taken as a whole and a determination of the "real basis upon which the $255 million was paid to CCB" (at p. 128).
In Wachowich J.'s view, the essence of the Participation Agreement was not the creation of a mere purchase and sale of assets with an added indemnity as to the value of those assets. Rather, the transaction reflected an investment of capital into CCB (at p. 129):
The agreement, as evidenced by all the surrounding circumstances, was really to effect an infusion of capital into C.C.B. whereby the Participants would be risking their monies in hope that the C.C.B. would continue as a viable and profitable business. If this in fact had occurred, the Support Group Participants stood to gain a healthy return on their investments.
The learned chambers judge found support for his characterization in the following: (1) the portion of the Portfolio Assets purchased by the Participants was of little value; (2) s. 2 of the Participation Agreement masked the true nature of the transaction, that is, the investment of working capital into CCB; (3) the indemnity provision and repayment structure set up by the agreement were directly connected to the profits and income of CCB; (4) the repayment of the purchase price was to come not only from the Portfolio Assets, but mainly from CCB's pre-tax income; (5) if CCB's business was successful, the Participants would benefit not only in recovering their purchase price, but as well by purchasing common shares in CCB under the Equity Agreement; (6) "[w]hile the transaction may not be a typical investment situation, where for example there is an outright purchase of shares, it is difficult to ignore the investment features of the agreement" (p. 130); (7) while the accounting treatment had to be looked at with caution, the fact there was no liability to the Participants recorded on the balance sheet of CCB, as created by the indemnity provisions of the agreement, supported the conclusion that the transaction was an investment; (8) the cases of Laronge Realty Ltd. v. Golconda Investments Ltd. (1986), 7 B.C.L.R. (2d) 90 (C.A.) ("Laronge Realty"), In re Dickie Estate (1924), 5 C.B.R. 214 (N.S.S.C.), and In re Meade, [1951] 1 Ch. D. 774, "stand for the general proposition that advances of monies will be classed as capital investments where the monies were used in the business and the business was carried on for the joint benefit of the parties involved" (at p. 131); and (9) the Participants here did have a stake in the continued profitability of CCB in that (a) the repayment of the money advanced would come from the income of CCB and (b) their warrants allowed them to "continue to share in the profits of C.C.B." (at p. 131).
Thus, according to Wachowich J., the Participants could not rank pari passu with the ordinary creditors of CCB, including unsecured creditors, for the amounts not recovered from the Portfolio Assets. In so doing, he applied the principle that "if a person contributes capital to a business, even though that person is not a partner in the business and may have received no share of the profits, they cannot prove their claim in bankruptcy in competition with the creditors of the business" (at p. 131): Halsbury's Laws of England (3rd ed.), vol. 2, at p. 495; Laronge Realty, supra; and In re Beale (1876), 4 Ch.D. 246.
In concluding, Wachowich J. held the provisions of the Participation Agreement which attempt to rank the Participants pari passu and to create a debt on insolvency are ineffective to alter the "existing legal nature of their relationship" with CCB. These provisions would be void as they are an attempt to alter insolvency laws through a private agreement: British Eagle International Airlines Ltd. v. Compagnie Nationale Air France, [1975] 2 All E.R. 390 (H.L.).
B. Alberta Court of Appeal (1990), 107 A.R. 199
The respondents (the Participants apart from Canada and CDIC) appealed from Wachowich J.'s conclusion with respect to their ranking on insolvency, whereas the then Legal Representative cross-appealed from the conclusion that the Participants could receive funds from the Syndicated Portion of the Portfolio Assets. Harradence J.A. (writing for the Court of Appeal) began by stating that the learned chambers judge had erred in law in his interpretation of the decisions in Laronge Realty, supra, In re Dickie Estate, supra, and In re Meade, supra (at p. 207):
I have examined closely the cases relied upon as well as others to which I have been referred and the inescapable conclusion to be reached is that the proposition as stated [by Wachowich J.] can only be correct where one implies into the term "monies were used in the business" a necessary condition that the investor has not expressly stipulated a requirement for the repayment of monies advanced. A failure to imply this term into the proposition results in a misstatement of the appropriate test and, further, is inconsistent with the decision of the Supreme Court of Canada in Sukloff v. Rushforth (1964), 45 D.L.R. (2d) 510 (S.C.C.).
Harradence J.A. reviewed the cases cited by Wachowich J. and noted that, unlike the case at bar, none of them involved transactions where provisions for the repayment of the money advanced had been included by the parties. Turning specifically to Sukloff v. A. H. Rushforth & Co., [1964] S.C.R. 459 ("Sukloff v. Rushforth"), Harradence J.A. said that while it was "difficult to glean" from that case the exa