Near-Bankruptcy Payments Do Not Warrant a Remedial Constructive Trust

Case comment: Sirius Concrete Inc. (Bankruptcy), 2020 ONSC 7733 (Sirius Concrete)

Does the timing of an enticed payment to a soon-to-be bankrupt give rise to a remedial constructive trust that would allow the payor to claw back the funds from the bankrupt’s estate? Sirius Concrete provides clarification to this and in short, the answer is no.

Timing of payment and assignment in bankruptcy

Ayerswood had contracted Sirius for construction work. In early 2019, Ayerswood noted delays and deficiencies. Under the pretense of “getting back on track,” Sirius requested payment of an outstanding invoice for work already completed. Ayerswood complied and paid $381,578.40 to Sirius on March 1, 2019. On March 4, 2019, Sirius made an assignment in bankruptcy, subsequently causing Ayerswood attendant loss.

Affidavit evidence showed that Sirius made assurances  on March 1, 2019 that it was committed to rectifying the deficiencies and delays. Furthermore, Ayerswood’s evidence showed that payment was only released based on those assurances.

However, at the same time Sirius was making those assurances to Ayerswood, the company was also completing documents for assignment in bankruptcy. Ayerswood accused Sirius of inducing payment when it had no intention of actually completing the work, knowing it would be entering bankruptcy. Sirius’ bankruptcy would inevitably cause Ayerswood attendant loss.

Remedies under the Bankruptcy and Insolvency Act are paramount

Ayerswood’s position turned on the timing of the payment, arguing that their payment should be considered as held in a remedial constructive trust, which would place it outside of the bankrupt’s estate. The Court rejected this argument and declared that the payment would be considered part of the bankrupt’s estate. The Court agreed with the trustee in bankruptcy from a policy perspective. To find a trust in this situation would “lead to chaos” as every payment prior to an assignment in bankruptcy may be impressed with a trust. Ultimately, pre-bankruptcy payments induced by the bankrupt while near bankruptcy, do not constitute funds held in a remedial constructive trust. The nearness (or in this case, absolute certainty) of bankruptcy does not change the payment nor its treatment under the BIA.

Instead, Ayerswood can make use of the remedies under the BIA and file a proof of claim; in essence, there is no special treatment. The timing and circumstances of the payment did not amount to any priority position against Sirius’s other unsecured creditors.

BIA’s statutory scheme prevails

The BIA sets out remedies for distinct parties in similar timing circumstances; however, in this case, Ayerswood did not qualify for separate protection for its payment. As a result, Ayerswood’s position is the same as any other unsecured creditor: sharing in the distribution of the estate.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.

If you require assistance navigating bankruptcy proceedings, please contact a member of the MLT Aikins insolvency and restructuring team.