Both the Mechanics’ Lien Act in New Brunswick and the Builders’ Lien Act in Nova Scotia contain provisions which deem certain money received by owners, builders and contractors to be held in trust for those below them on the construction ladder. The money is to be held in trust for the protection of those to whom money is owed as a result of services or materials supplied to the construction project.
The legislation provides that if the company holding the trust funds uses those funds for a purpose not authorized by the trust, it commits a breach of the trust. The legislation goes on to provide that the officers and directors of the company can be personally liable for the breach of trust.
Recent decisions in Ontario and Alberta address the question of what priorities exist when the company holding the trust funds goes bankrupt. The question the Courts had to answer was whether the trust funds should go to the creditors of the bankrupt company, or alternatively, to the beneficiaries of the trust fund.
In both cases the Court ruled in favour of the creditors of the bankrupt. The Courts found that federal law trumps provincial law.
While the Bankruptcy and Insolvency Act contains a provision which provides that any property held in trust by the bankrupt is not to be included as part of the bankrupt’s assets for purposes of determining what is available to creditors, the Courts held that the trusts created by the provincial lien legislation generally did not meet the requirements of a traditional or common-law trust, and therefore did not qualify as trusts under the federal Bankruptcy and Insolvency Act.
The decision of the Alberta Court has been appealed but the appeal hearing has not
yet taken place.
It is important to remember that the potential personal liability of officers and directors for a breach of trust remains in place despite the bankruptcy of the corporate trustee. The beneficiaries of the trust may not be able to pursue amounts owing from the bankrupt company, but they may still have personal remedies against the officers and directors.
For those owed money from a company which appears to be on shaky financial footing, these decisions emphasize the importance of protecting any available lien rights and/or investigating what other sources of payment may be available such as a bond or letter of credit.
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