Supreme Court of Canada

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Supreme Court of Canada

    Employer’s Liability Assurance Corp. Ltd. v. Ideal Petroleum (1959) Ltd., [1978] 1

    S.C.R. 230

    Date: 1976-12-07

    The Employer’s Liability Assurance Corporation Limited (Plaintiff) Appellant;


    Ideal Petroleum (1959) Ltd. (Defendant) Respondent. 1976: March 2 and 3; 1976: December 7.

    Present: Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.


    BankruptcyPreferential paymentsFive-year prescriptionSuspension of the

    prescriptionDate of bankruptcyEffect of the composition proposalBankruptcy Act,

    R.S.C. 1952, c. 14, ss. 16, 34(6), 38(1), 41(4), 64Bankruptcy Act, R.S.C 1970, c. B-3, ss. 39(1), 41(10), 43(4), 44Civil Code, arts. 1040 and 2232.

    In 1957-58, Lewis Brothers Asphalt Paving Ltd., a company which subsequently went

    bankrupt, had made some payments to respondent, which was one of its creditors at the time.

    Appellant, also claiming to be a creditor of Lewis Brothers, brought an action in 1965 to

    request the annulment of these payments, because in its opinion they were preferential

    payments. In September 1957, Lewis Brothers undertook to perform certain work for C.N.

    under contract; under a contract of guarantee, appellant became jointly responsible with

    Lewis Brothers for the performance of the contract. On February 6, 1958, a petition in

    bankruptcy, which is still pending, was brought against Lewis Brothers, and on February 20,

    1958, Lewis Brothers submitted a composition proposal to its creditors that was accepted by

    them in March 1958. However, since Lewis Brothers was insolvent, C.N. would no longer deal

    with the company; as a result appellant had to pay a substantial sum to complete the contract.

    Finally, in October 1961, Lewis Brothers made an assignment of its property since it could no

    longer meet its obligations as stated in the composition proposal.

    The Superior Court and the Court of Appeal allowed the plea of prescription submitted

    by respondent, and the action was dismissed in these two courts without further comment on

    the other aspects of the case.

    Held: The appeal should be allowed in part.

    [Page 231]

    On the basis of the law at the time, the Court of Appeal, like the Superior Court, had to

    allow the plea of prescription and dismiss the action, making no distinction between the

    Paulian and bankruptcy aspects. However, Gingras v. General Motors Products of Canada Ltd., [1976] 1 S.C.R. 426, has since modified the position of the parties by holding that, under

    the Bankruptcy Act, the prescription is for five years in commercial matters. Moreover, for

purposes of this prescription, it must be considered that it was “absolutely impossible for” the

    creditor “to act”, as long as the circumstances have not created suspicion. Consequently, in

    the case at bar, the prescription was suspended: the five-year prescription did not come into

    effect until October 6, 1961which was less than five years before the proceedings were

    institutedsince until that date Lewis Brothers had complied with its obligations. Nevertheless,

    the payments challenged cannot be annulled, because they were not made within three

    months of the bankruptcy, which occurred on the same date as the assignment, namely

    October 6, 1961. The bankruptcy cannot be moved back to February 6, 1958, the date of the

    petition in bankruptcy, because the petition filed at that time was not followed by a receiving

    order. Nor can the bankruptcy be moved back to February 20, 1958, the date of the

    composition proposal, since under the Bankruptcy Act of 1952 such a proposal does not constitute an act of bankruptcy.

    However, since, under the composition proposal, respondent received dividends to

    which it was not entitled, it must pay appellant the amounts in question, which were paid to it

    either directly or indirectly through its assignee.

    Gingras v. General Motors Products of Canada Ltd., [1976] 1 S.C.R. 426, applied; In re

    Legault (1956), 36 C.B.R. 167, distinguished; Traders Finance Corp. Ltd. v. Lévesque, [1961]

    S.C.R. 83; Joy Oil Ltd. v. McColl Frontenac Oil Co. Ltd., [1943] S.C.R. 127; Gagnon v. Lesage, [1951] Que. K.B. 571; Lussier v. Marquis, [1960] Que. Q.B. 20, rev’d [1960] S.C.R. 449; Alain v. Fonds d’indemnisation des victimes d’accidents d’automobile, [1974] C.A.

    89; Amanda Designs Boutique Ltd. v. Charisma Fashions Ltd. (1972), 17 C.B.R. (N.S.) 16;

    Perras v. Boulet, [1959] S.C.R. 838, referred to.

    APPEAL from a decision of the Court of Appeal of Quebec dismissing an appeal against

    a judgment of Tellier J. of the Superior Court. Appeal allowed in part.

    [Page 232]

    David Wood, for the appellant.

    Carol Laramée and Raymond Hébert, for the respondent.

    The judgment of the Court was delivered by

    DE GRANDPRE J.Appellant, claiming to be a creditor of Lewis Brothers Asphalt Paving Ltd.

    (hereinafter referred to as Lewis Brothers), a bankrupt company, brought an action against

    respondent because the latter had received preferential payments in 1957 and 1958, thus

    giving rise to a Paulian action and an action under the Bankruptcy Act then in effect, R.S.C. 1952, c. 14. These proceedings could clearly have been instituted by the trustees, but they

    refused to do so, and on November 9, 1965 appellant obtained from the Court the necessary

    authorizations under the Bankruptcy Act, followed some days later by the transfer of the

trustees’ rights (s. 16). It should be noted that the action under s. 16 is personal to appellant

    1). and is conferred on it by the Act (Traders Finance Corporation Limited v. Lévesque

    The relevant facts are as follows:

    (a) on September 27, 1957, Lewis Brothers obtained a contract from C.N. covering certain work at the Côte de Liesse railway yard in Montreal;

    (b) on October 1, 1957, appellant issued a guarantee of performance in favour of C.N., under which it became jointly responsible with Lewis Brothers for the performance of the contract; (c) on February 6, 1958, a petition in bankruptcy was brought against Lewis Brothers; during the hearing, this petition was still outstanding;

    (d) on February 20, 1958, Lewis Brothers submitted a proposal to its creditors offering them a payment of thirty-five cents on the dollar over a period of four years, which was accepted by the creditors on March 28 and ratified by the Court on April 25, 1958;

    (e) in the intervening period, that is on March 6, 1958, C.N. refused to deal any longer with Lewis Brothers with respect to the contract of

    [Page 233]

    September 1957, since Lewis Brothers was insolvent, with the result that appellant had to pay the sum of $169,247.55 to complete the contract;

    (f) on October 6, 1961, Lewis Brothers, having paid three of the dividends promised in the proposal and having been unable to pay the fourth, made an assignment of its property, which was followed by various proceedings, in particular a judgment of March 20, 1962, recognizing the validity of the claim of $167,247.55 filed by appellant; however, no judgment was made annulling the proposal.

    The preferential payments allegedly received by respondent were:

    $ 5,000 on December 12, 1957

    $ 5,000 on December 19, 1957

     1 [1961] S.C.R. 83.

    $10,576.61 on December 9, 1958

    They resulted from the sale of petroleum products by respondent to Lewis Brothers in 1957. Appellant requested that these payments be declared void and that respondent be condemned to pay the sum of $17,070.26, that is, the difference between the preferential amounts mentioned above and the dividends to which respondent was entitled under the proposal and the assignment, with interest, of course.

    To this action, respondent pleaded that the amounts it had received were not preferential payments, and that, moreover, the petroleum products had not been sold to Lewis Brothers but to Pavage Richelieu Limitée. Respondent added that in any case the claim is prescribed, whether the action is considered as a Paulian action or as a case under ss. 64 et seq. of the

    Bankruptcy Act of 1952.

    The Superior Court and the Court of Appeal did not consider the facts except for determining whether the plea of prescription had any merit. Having found in the affirmative on this point, the Quebec courts went no further in their study of the record, and this Court does not have the benefit of their views on the other aspects of the case.

    [Page 234]

    A preliminary question arises: does appellant have the status of a creditor which would permit it to challenge the payments made in 1957 and 1958, when it had certainly not paid out anything before the two payments of 1957, and it had probably not spent a penny before the payment of December 1958? In my opinion, this status should be admitted. Once the guarantee of performance was signed, appellant became a debtor of C.N. It is true that this obligation was coupled with a suspensive condition and could only take complete effect on default by Lewis Brothers. When this default occurred in March 1958, the condition disappeared and appellant’s obligation became complete, retroactively to the date of the

    guarantee of performance. It remained only to determine the amount of appellant’s debt to C.N.

    I have already noted that the Quebec courts accepted the plea of prescription. They held unanimously that appellant was aware of the payments and their grave appearance of fraud

more than a year before the institution of proceedings in December 1965. The trial judge said

    as much:

    [TRANSLATION] …it is clear that this decision by plaintiff to bring an action followed

    facts of which it had been aware since at least 1963, through its accountant Whalen,

    who, according to the evidence, made a “final” report in May 1964.

    Bélanger J.A. affirmed this in the Court of Appeal:

    [TRANSLATION] More than a year before the action, through its counsel and

    investigating accountant, it was aware of the payments which it challenged, of the

    insolvency of L.B.A.P. at that time, and of other circumstances which, according to its

    allegations, rendered these payments fraudulent.

    Appellant did not succeed in establishing that these consistent findings were contrary to the

    evidence, and I have no hesitation in accepting them.

    With respect to the Paulian aspect of the action, the Superior Court and the Court of Appeal

    were correct in finding that in law, knowledge of the facts by appellant involved application of

    the one-year prescription against it. I cannot accept its contention that it did not have to act

    while its file

    [Page 235]

    was not in fact complete. Like the Quebec courts, I believe that the beginning of the

    prescription cannot be deferred until such time as almost all aspects of the evidence have

    been assembled.

    Having found in the record evidence that more than twelve months had elapsed between the

    appellant acquiring knowledge of the relevant facts and the institution of proceedings, the

    judgment rendered, like that of the Superior Court, in accordance with the law at the time, had

    to apply art. 1040 of the Code and dismiss the action, making no distinction between the

    Paulian and bankruptcy aspects. Since then, however, the decision of this Court in Gingras v.

    2General Motors Products of Canada Ltd., has held that prescription under the Bankruptcy

    Act is for five years in commercial matters, as in the case at bar.

     2 [1976] 1 S.C.R. 426.

The question presented is whether this five-year prescription ran from the date of the

    preferential payments of 1957 and 1958, or whether this is a case of suspension, it having

    been “absolutely impossible for them to act” (art. 2232, Civil Code) before the end of 1960,

    that is, five years before service of the proceedings. The exact scope of this article has given

    rise to differing conclusions. This may be seen in the following decisions, inter alia: Joy Oil

    345Limited v. McColl Frontenac Oil Co. Limited; Gagnon v. Lesage; Lussier v. Marquis, set

    6aside on another point; and Jean-Paul Alain v. Fonds d’indemnisation des victimes

    7d’accidents d’automobile. For the limited purposes of this case, I shall note the following:

    (1) the old law recognized that prescription must not run against someone who found it

    impossible to act;

    (2) the Code Napoléon (art. 2251) did not repeat this rule in its text;

    [Page 236]

    (3) French cases, notwithstanding the silence of the text, have held that factual obstacles,

    arising from circumstances external to the creditor which make it impossible to act, retain their

    suspensive value;

    (4) many French authors criticize this line of authority, but there is no unanimity of opinion;

    (5) in their third report (1865), the Commissioners wrote, with respect to the maxim contra non

    valentem (at p. 424):

    It is remarkable that it is not textually inserted in the French code, although it is the basis

    of all its particular provisions, and has an extensive application to many other cases

    which do not result from the natural or legal state of the parties concerned.

    This reason for suspension must be understood. In the case at bar, I do not believe that a

    creditor, presented with a petition in bankruptcy by another creditor or having received a

    proposal from the debtor, must immediately act as though the debtor had contravened the Act

    and made preferential payments. On the contrary, it seems to me that the presumption is the

    opposite, and that it must be considered that it was “absolutely impossible for” the creditor “to

     3 [1943] S.C.R. 127. 4 [1951] Que. K.B. 571. 5 [1960] Que. Q.B. 20. 6 [1960] S.C.R. 442. 7 [1974] C.A. 89.

act”, as long as the circumstances have not created suspicion. In the case at bar, as long as

    the proposal was complied with, that is until October 1961, the creditor was perfectly justified in not moving; it was only later that the questions arose. In other words, the evidence established to my satisfaction that the rule of suspension applies in the case at bar, since appellant had no opportunity to act before certain facts came to its attention, and this did not occur more than five years before proceedings were instituted. The plea of prescription could therefore not be maintained against the action, considered from the point of view of the Bankruptcy Act.

    The plea of prescription having been rejected, the real question is as follows: is it possible, although the assignment of property dates from October 1961, to go back in time to the autumn of 1957, since s. 64 limits the action to cases in which a person guilty of preference “becomes bankrupt

    [Page 237]

    within three months” after the date the preference is given? In seeking an answer, I of course

    assume that the payments were in fact preferential, a point which it will be necessary to study if I come to the conclusion that, in the circumstances of this case, the month of October 1961 immediately followed the autumn of 1957. It must be remembered that the difficulties of the bankrupt were divided into three periods:

    (1) a petition in bankruptcy in February 1958, which was never followed by a judgment; (2) a proposal in March 1958, which remained in effect until the autumn of 1961, after being accepted and ratified, and resulted in various dividend payments; this proposal was never annulled by judgment;

    (3) an assignment in October 1961, which was followed by all the usual proceedings. Appellant asks this Court to relate the assignment of October 1961 either to the petition in bankruptcy of February 1958 or to the proposal of March 1958, so that the first two preferential payments would have been made within the three months mentioned in s. 64. In

    8. The facts in that case should be order to do this, appellant relied on In re Legault


    March 8, 1955: hypothec giving a preference;

    April 5, 1955: receiving order;

    May 28, 1955: proposal approved by the Court, whose judgment annulled the receiving


    November 3, 1955: annulment of the proposal and receiving order.

    On subsequent application by the trustees challenging the hypothecary transaction of March

    8 and demanding that it be cancelled, Montpetit J. related the bankruptcy back to either the

    first receiving order (April 5) or the date the proposal was approved (May 28). On the first

    point, he stated (at p. 169):

    [TRANSLATION] What is the meaning of the expression “becoming bankrupt”? In my

    opinion, it is concerned

    [Page 238]

    with the case of the person against whom a receiving order is made. This was the

    situation for the bankrupt on April 5.

    After dismissing the objection that the proposal had annulled the first receiving order, the

    learned judge continued (at p. 169):

    [TRANSLATION] Moreover, this aspect is of secondary importance, since the proposal

    was approved on May 28. In fact, is it not legitimate and reasonable to say, using s. 38(1)

    which states that all provisions of the Bankruptcy Act, to the extent to which they are

    applicable, apply mutatis mutandis to proposals, that s. 64 may be relied on in a case in

    which the person who effected the challenged transfer has a proposal approved within a

    three-month period after the said transfer? It appears to me that this is to apply to

    proposals, mutatis mutandis, what the Act provides for bankruptcy.

    The facts of the case before this Court are different: it is sufficient to note that here, the

    petition in bankruptcy of February 1958 was not followed by a judicial decision, and that the

    proposal which followed it several days later was never annulled by a judgment. Moreover, In

     8 (1956), 36 C.B.R. 167.

    re Legault has not met with complete approval, as shown by the criticism found in L.W. Houlden’s article, “The first ten years of the 1949 Bankruptcy Act”, 1 C.B.R. (N.S.), at

    p. 97:

    It is submitted that this decision is not correct and is not justified on the wording of the

    Bankruptcy Act. It is therefore, quite properly, necessary to reread the Act.

    Is it possible in the case at bar, notwithstanding the proposal duly approved by the Court, to

    relate the bankruptcy back to the filing of the petition in February 1958 by relying on s. 41(4)?

    The text of s. 41(4) is as follows:

    The bankruptcy shall be deemed to have relation back to and to commence at the time

    of the filing of the petition on which a receiving order is made or of the filing of an

    assignment with the official receiver.

    It is clear that this section relates only to the petition on which a receiving order is made,

    which is not the case here, since the petition was never followed by an order. Failing an order,

    the date of filing of the assignment is conclusive. It would

    [Page 239]

    perhaps be otherwisebut the Court is not asked to decide thisif an order had been made

    annulling the proposal and stating what the Court could consider “proper in the

    circumstances” (s. 36(1)). I do not see how it could be possible to relate the bankruptcy back

    to the petition of February 1958.

    Can it be related back to the proposal of March 1958? The relevant Act being that of 1952, it

    is not possible for me to rely on the 1966 Act, where the beginning of a solution may perhaps

    be found in ss. 39(1), 41(10), 43(4) and 44. In my opinion, under the former Act, the question

    posed at the beginning of this paragraph must be answered in the negative. The proposal is a

    contract between the debtor and his creditors. When it is made in accordance with certain

    formalities prescribed in the Act this contract, which binds all the creditors, even the

    dissenting minority, is not an act of bankruptcy, and the situation which results from it is not a

    situation of bankruptcy. This is what Kelly J., speaking for the Court of Appeal of Ontario, held

    9. Although written in in Amanda Designs Boutique Limited v. Charisma Fashions Limited

    another context, the following sentence expresses the situation well (at p. 20):

    Accordingly, when filed the proposal has the potentiality of bankruptcy which does not

    crystallize until the proposal is refused and never crystallizes if the proposal be approved. However, we must go further: even in the case of a proposal by an already bankrupt person,

    approval of the proposal by the Courtand here this approval was given—“operates to annul

    the bankruptcy” (s. 34(6)). The provisions of the Act thus leave to the debtor the entire

    administration of his property if the proposal is the first stage in the solution of his difficulties,

    and returns it to him if the proposal was preceded by bankruptcy. Except in extraordinary

    circumstances which do not exist in this case, the trustee has only one function, that is the

    distribution of the amounts which the debtor has undertaken to pay to the creditors.

    This finding should not be ignored because s. 38(1) provides that all provisions of the Act


    [Page 240]

    mutatis mutandis to proposals. In view of the clear words of s. 41(4) and the provisions of the

    Act as a whole, it is not possible for me to state that in cases where a proposal is followed by

    an assignment, the date of the bankruptcy should be related back to the date of the proposal.

    Moreover, I do not see how it can be said that the proposal survived the assignment because

    it was not expressly annulled. When, as in the case at bar, the assignment was accepted by

    all the creditors who had accepted the proposal at the outset, the latter disappeared without

    any order to that effect being necessary. Although the point was not discussed in Perras v.

    10Boulet, it seems to me that acceptance of it was necessary to the unanimous finding of the Court.

    One conclusion necessarily results from all this: the date of the assignment, that is October

    1961, is the only relevant date. It follows that the payments received by respondent, assuming

    that they were preferential, cannot be ignored, since they dated from 1957 and 1958.

     9 (1972), 17 C.B.R. (N.S.) 16. 10 [1959] S.C.R. 838.

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