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Legal Notes: A cautionary tale about trusts, creditor protection and offshore bank accounts

John Bleasby
Legal Notes: A cautionary tale about trusts, creditor protection and offshore bank accounts

A recent decision by the Ontario Superior Court of Justice has revealed the vulnerability of trust funds designed to protect the interests of suppliers and subcontractors and how they can be undermined by complicated offshore banking arrangements.

The case in question involves the international general contractor Carillion. The Ontario operations of Carillion were run by its Canadian arm, Carillion Construction Inc., a general contractor for several large projects over the past two decades. The Canadian firm in turn was a subsidiary of the multinational British construction company of the same name that went into liquidation in 2018, forcing the Canadian arm into creditor protection as well.

At issue were the funds paid in trust by project owners to contractors pursuant to Sections 7 and 8 of the Construction Act. The benefit is designed for unpaid contractors or subcontractors that supply goods or services to a project. As such, these funds are normally subject to protection from outside creditors in the case of bankruptcy.

That isn’t automatically the case, however. Certain conditions must be met.

As Jeff Levine and Paola Ramirez of McMillan LLP explain, “Where such circumstances are satisfied, the money in question will no longer be considered property of a bankrupt contractor available for distribution to creditors, but will constitute funds that are reserved for beneficiaries of the trust.”

If these conditions are not satisfied, protection may not exist. That’s what happened with Carillion Construction.

Carillion had a complicated banking arrangement. The company had an ongoing, bank-approved process of “sweeping” funds away from Carillion’s Canadian accounts. They ultimately ended up in accounts owned by the main British corporate office.

When Carillion went into creditor protection in Canada, the CCA Monitor went to court in Ontario, arguing some $21 million of the funds held by Carillion Canada were in fact trust funds, and therefore were for the benefit of Carillion’s unpaid suppliers and subcontractors.

That’s when the matter of the required creditor protection conditions became the court’s focus.

To be exact, there must be three conditions met for funds to be so qualified, write Levine and Ramirez. These were affirmed by a previous Court of Appeal ruling in early 2019. These conditions are: certainty of intention, certainty of object and certainty of subject matter.

In this case, the court ruled that certainty of subject matter had been lost when the funds that had been paid by owners and intended as trusts had in fact been recently “swept” up, comingled into one bank account and then converted into nine other accounts which were in turn held by seven other entities in two different countries.

“These steps served to eliminate any certainty of subject matter, causing the funds to lose their character as trust funds,” write Levine and Ramirez.

Furthermore, some of the funds had been used for other purposes, such as paying the debts of Carillion Construction. By not being “separately accounted for,” they could not be traced and identified.

A move for leave to appeal was denied.

“The court was not satisfied that the proposed appeal was prima facie meritorious or that the case was of significance to the practice for two reasons,” writes John Polyzogopoulos of Blaney McMurtry. “First, the decision was fact specific: the nature and operation of the applicant’s unique banking structure were critical factors. Second, the decision does not create uncertainty because it is consistent with established jurisprudence.”

What is to be learned from this?

“Those expecting to be paid for services rendered or supplies provided during the course of a construction project ought to take note that the protection afforded by the trust provisions of the Construction Act only go so far where a general contractor is also being pursued by creditors,” write Levine and Ramirez. “The Superior Court ruling of Carillion Canada Inc. (Re), now final, suggests that these funds may lose their trust character merely by operation of common banking arrangements.”

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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