Supreme Court Judgments

Supreme Court of Canada

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

Date: 1974-11-27

Paul Gingras Appellant;

and

General Motors Products of Canada Ltd. Respondent.

1974: March 22; 1974: November 27.

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

ON APPEAL FROM THE COURT OF QUEEN’S BENCH, APPEAL SIDE, PROVINCE OF QUEBEC

Bankruptcy—Preferential payments—Petition by trustee to set aside—Time limit under Civil Code for Paulian actions not applicable—Repeal of federal act, consequence—Long line of cases—Interpretation Act—Civil Code, art. 1040—Bankruptcy Act, R.S.C. 1952, c. 14, s. 64—Interpretation Act, R.S.C. 1970, c. I-23, s. 37.4.

Appellant, the trustee in bankruptcy of Boulevard G.M.C. (1964) Inc., filed a petition alleging that respondent had received from the debtor preferential payments contrary to s. 64 of the Bankruptcy Act, R.S.C. 1952, c. 14, and also taken back goods, which constituted a fraudulent payment. This petition was served more than one year after the appointment of the trustee and was dismissed by the lower courts on the ground that the prescription or time limit of one year specified in Art. 1040 C.C. for Paulian actions was applicable to the remedy of a trustee under s. 64. Hence the appeal to this Court.

Held (de Grandpré J. dissenting): The appeal should be allowed.

Per Martland, Pigeon and Dickson JJ.: Article 1040, as it stands, does not apply to the remedy created by the Bankruptcy Act for the purpose of having preferential payments declared void. It cannot be supposed that in enacting art. 1040, the Legislature intended that this prescription period or time limit of one year should apply not only to the remedy based on anything contained in that section of the code, but to the wider provisions contained in the Insolvent Act of 1864 as well. The Legislature did not intend in any way to affect what had been enacted some years earlier in that act which was a statute applicable to Upper Canada also. Whatever may have been the effect of the repeal by Parliament in 1880 of all legislation on insolvency, its result certainly could not have been that when a new Bankruptcy Act was introduced in 1919, art. 1040 became applicable to the provisions of that Act concerning preferential payments, when it had never been so

[Page 427]

applicable to analogous provisions in prior bankruptcy statutes. The special remedy provided, in the case of bankruptcy, for having preferential payments declared void, has always been legislatively distinct from the Paulian action since the first insolvency statute was adopted in 1864. There is thus no reason not to give a literal interpretation to art. 1040.

These are not here circumstances comparable to those which sometimes led this Court to regard provincial precedents as decisive. This case deals with the application of provincial law to proceedings instituted under a federal statute. Section 37(4) of the Interpretation Act prevents its reenactment being regarded as an adoption of such judicial construction.

Per Beetz J.: At the outset, Art. 1037 C.C. may have had the effect to incorporate for certain purposes within Section VI of the Civil Code the “further provisions concerning the presumption of fraud and the nullity of acts done in contemplation of insolvency … contained in the Insolvent Act of 1864”. Such incorporation, if any, ceased to exist with the repeal of legislation on insolvency in 1880 and the repeal of Art. 1037 C.C. and the final words of Art. 1039 C.C. in 1886, and, in view of the wording of Art. 1040 C.C., it could not subsequently revive in the absence of some clear provision which only Parliament was empowered to enact; the Act respecting Bankruptcy of 1919 and amendments contain no such provision. Accordingly, it is the limitation periods of general application, of thirty or five years, as the case may be, which must be applied to the remedy provided by s. 64 of the Bankruptcy Act.

Per de Grandpré J., dissenting: Constitutional theory requires that in a field such as that of bankruptcy, the federal legislator has priority only in the portion occupied by him. Consequently, federal and provincial legislation may exist side by side in the field of preferential payments, since the Bankruptcy Act overrides the Paulian action only to the limited extent that it deals with acts in defraud of the debtor; all aspects of fraudulent action falling outside the provisions of the Bankruptcy Act may be considered in the light of the principles of the Civil Code. In view of the silence of the Bankruptcy Act on prescription of the trustee’s remedies, therefore, these remedies can be made subject to prescription under the Civil Code, whether for thirty years, five years or one year. Since the remedy in the Bankruptcy Act and that in the Paulian remedy are the same in substance, the best prescription to apply is that of Art. 1040 of the Civil Code. The pre-Confederation legislator intended at that time prescription of the trustee’s remedies in cases of preferential payments to be subject to the rule of Art. 1040. Nothing since then has

[Page 428]

altered this position, and the remedy in s. 64 of the Bankruptcy Act remains subject to annual prescription.

[Cie de Construction de Charlesbourg v. Demers, [1948] Que. Q.B. 745; Grobstein v. Bank Canadian National, [1963] Que. Q.B. 215; Bissonnette v. Bank of Nova Scotia, [1964] Que. Q.B. 918; Mercure v. Vary, [1970] C.A. 480; Traders Finance Corporation Ltd. v. Lévesque, [1961] S.C.R. 83, referred to. Ace Holdings Corporation v. The Montreal Catholic School Commission, [1972] S.C.R. 268; Village de la Malbaie v. Boulianne, [1932] S.C.R. 374, distinguished]

APPEAL from the Court of Queen’s Bench, Appeal Side, Province of Quebec, affirming a bankruptcy judgment of the Superior Court. Appeal allowed, de Grandpré J. dissenting.

M. Hickson, for the appellant.

J. Turgeon, for the respondent.

The judgment of Martland, Pigeon and Dickson JJ. was delivered by

PIGEON J.—This appeal is against a decision of the Court of Appeal of Quebec, affirming a judgment of the Superior Court, bankruptcy side, dismissing the petition of appellant, the trustee in bankruptcy of Boulevard G.M.C. (1964) Inc. That petition alleged that respondent has received from the debtor within the three months preceding its bankruptcy preferential payments amounting to $27,000, contrary to s. 64 of the Bankruptcy Act. It also alleged that, within the few months prior to the bankruptcy, respondent took back goods valued at $98,862.74, which constituted a fraudulent preferential payment.

The only ground raised in respondent’s exception to dismiss was that appellant was appointed trustee on May 25, 1967, and his petition was served on respondent on February 18, 1970. This exception was allowed for the reason that the prescription or time limit of one year specified in Art. 1040 of the Civil Code of Quebec was held to be applicable to the remedy of a trustee under s. 64 of the Bankruptcy Act (R.S.C. 1952, c. 14, now R.S.C. 1970, c. B-3, s. 73). This decision is in accordance with earlier judgments of the Court of

[Page 429]

Appeal of Quebec: Cie de Construction de Charlesbourg v. Demers[1]; Grobstein v. Bank Canadian National[2], Bissonnette v. Bank of Nova Scotia[3]; Mercure v. Vary[4].

However, a contrary view was expressed in this Court by Locke J. in Traders Finance Corporation Ltd. v. Lévesque[5]. In that case, as in the others, the trustee did not act within a year from his appointment; however, the action was instituted not by him but by a creditor authorized to do so under s. 16 of the Bankruptcy Act (now s. 20), under which “the trustee shall assign and transfer to the creditor all his rights”. This creditor had only learned of the fraudulent payment less than a year before his action was instituted, and for this reason the Quebec courts held[6] that the prescription or time limit affecting the remedy of the trustee was not applicable to him. However, Choquette J.A. took the view that Art. 1040 C.C. was wholly inapplicable (at pp. 274-275):

[TRANSLATION] 1. The payment impugned by respondent is in fact one considered by s. 64 of the Bankruptcy Act to be “fraudulent and void as against the trustee in the bankruptcy”. The court relied on that section in declaring this payment void:

Whereas respondent (the appellant) has not rebutted the presumption created by s. 64 of the Bankruptcy Act.

Now, Art. 1040 C.C. applies exclusively to the Paulian action of the Civil Code, Arts. 1032 to 1039 C.C., which are grouped under the title: “Of the avoidance of contracts and payments made in fraud of creditors”.

Indeed, the text of Art. 1040 C.C. could not possibly be more explicit.

I do not see how we could apply a provision of such a limited nature to a remedy which it does not cover, particularly to the remedies based on ss. 60-67 of the Bankruptcy Act, which exist independently of Arts. 1032-1040 of the Civil Code. The position is not altered in any way by the new s. 41(6), which leaves unchanged provisions concerning property and civil rights not in conflict with federal law. That section only confers on

[Page 430]

the trustee all civil remedies which are “supplementary to and in addition to the rights and remedies provided by this Act”; it does not incorporate in ss. 60-67 a time limit applicable exclusively to a remedy peculiar to the Civil Code.

That is why I would only apply Cie de Construction Charlesbourg Inc.: Lefaivre et al v. Demers [1948] Que. Q.B. 745 to contracts and payments made more than three months before the bankruptcy, and not covered by ss. 60-67 of the Bankruptcy Act; as such contracts and payments were not contemplated by the aforementioned sections, the law governing them must be applied to them. We were referred to Lefebvre v. Cartierville Lumber Co. and Perras [1955] Que. Q.B. 474 and Trahan v. Lamarre and Roy and Custeau [1956] Que. Q.B. 1, but in those cases the payment or contract impugned was made more than three months prior to the bankruptcy.

I conclude that Art. 1040 C.C. does not bar respondent’s petition.

The majority decision in this Court did not deal with the point, Fauteux J. saying (at p. 87 as translated in 26 D.L.R. (2d) 390):

Consequently it is unnecessary to decide whether the loss of rights, specifically established in art. 1040 of the Civil Code for remedies which, while related to those authorized by s. 16, differ from them, may be applied in the case in question. But assuming, without deciding it, that such were the case, I would say, in agreement with Justices Pratte and Choquette, that the starting point of the loss of rights provided for by this article varies according to whether the action is instituted by the creditor or the Trustee. It would follow, then, that the respondent having sued within the year in which knowledge of the fraudulent payment was acquired, his action could not be considered late within the terms of this section.

However, Locke J. said (at pp. 90-91):

The limitation in art. 1040 is that no payment can be avoided “by reason of anything contained in this section” and it is not by reason of anything contained in section 6, being art. 1032 to 1036 and 1038 to 1040 both inclusive, that the respondent sought to recover and did recover. The article, therefore, in my opinion does not affect the matter.

It may be said that provisions similar to those contained in the articles of the Civil Code to which I have referred are to be found in statutes of most of the provinces of Canada.

[Page 431]

…

The remedies thus given are quite distinct from those given to the trustee in bankruptcy under c. 64 of the Bankruptcy Act. The right to enforce such claims by creditors does not depend upon the fact that the person making the transfer has been declared bankrupt and these rights may be enforced under the provincial statutes unless bankruptcy has intervened. This has been held in a number of cases in various provinces, which are to be found collected in the 3rd ed. of Bradford and Greenberg on the Bankruptcy Act, at p. 158 et seq. In Quebec the limitation provided by art. 1040 only refers to proceedings under the articles mentioned.

If it were otherwise and art. 1040 on its face applied to the cause of action referred to in s. 64 of the Bankruptcy Act, when asserted either by the trustee or under s. 16 by a creditor claiming by virtue of an assignment, it would be necessary to consider whether the article was intra vires the Legislature of Quebec. The right of action is one given by a Dominion statute and the right of the trustee and his assignee to resort to the courts is a substantive right. Article 1040, if it applied, would deprive those entitled to assert that right after a defined period. It would be necessary to consider then the effect of the decision of this Court in Attorney General of Alberta and Winstanley v. Atlas Lumber Co. Ltd. [1941] S.C.R. 87, 1 D.L.R. 625.

At the hearing counsel for the respondent put considerable emphasis on the argument that, as the Quebec Civil Code predates Confederation, the provisions it then contained, such as Art. 1040, cannot be unconstitutional. But, this does not prevent such provisions from becoming inoperative if the federal Parliament occupies the field. The fact that, to be strictly correct, the issue should have been stated in those terms, in no way detracts from the value of the opinion of Locke J., which like that of Choquette J.A. was based on the unequivocal wording of Art. 1040 C.C.

The question is not whether the prescription periods fixed by provincial law apply to bankruptcy cases in the absence of any contrary provision. What has to be decided here is whether Art. 1040 C.C., as it stands, applies to the remedy created by the Bankruptcy Act for the purpose of having preferential payments declared void. This article is

[Page 432]

not under the heading of prescription. It is not a general provision fixing the time required for prescription to have effect, as are Arts. 2240-2270. It is the final article in Section VI of the chapter Of Contracts. When the Code was adopted by the Legislature, that section read as follows:

Of the Avoidance of Contracts and Payments made in Fraud of Creditors

1032. Creditors may in their own name impeach the acts of their debtors in fraud of their rights, according to the rules provided in this section.

1033. A contract cannot be avoided unless it is made by the debtor with intent to defraud, and will have the effect of injuring the creditor.

1034. A gratuitous contract is deemed to be made with intent to defraud, if the debtor be insolvent at the time of making it.

1035. An onerous contract made by an insolvent debtor with a person who knows him to be insolvent is deemed to be made with intent to defraud.

1036. Every payment made by an insolvent debtor to a creditor knowing his insolvency, is deemed to be made with intent to defraud, and the creditor may be compelled to restore the amount or thing received or the value thereof, for the benefit of the creditors according to their respective rights.

1037. Further provisions concerning the presumption of fraud and the nullity of acts done in contemplation of insolvency are contained in The Insolvent Act of 1864.

1038. An onerous contract made with intent to defraud on the part of the debtor, but in good faith on the part of the person with whom he contracts is not voidable; saving the special provisions applicable in case of insolvency of traders.

1039. No contract or payment can be avoided, by reason of anything contained in this section, at the suit of a subsequent creditor, unless he is subrogated in the rights of an anterior creditor; saving however the exception contained in The Insolvent Act of 1864.

1040. [No contract or payment can be avoided by reason of anything contained in this section, at the suit of any individual creditor, unless such suit is brought within one year from the time of his obtaining a knowledge thereof.

[Page 433]

If the suit be by assignees or other representatives of the creditors collectively, it must be brought within a year from the time of their appointment]

Can it be supposed, even for a moment, that in thus enacting Art. 1040—a provision embodying new law as indicated by the square brackets,—the Legislature intended that this prescription period or time limit of one year should apply not only to the remedy based on anything contained in this section, but to the further provisions … contained in The Insolvent Act of 1864 as well? That Insolvent Act, it must be noted, contained at the outset the following provision:

1. This Act shall apply in Lower Canada to traders only, and in Upper Canada to all persons whether traders or non-traders.

Under the heading “Of fraud and fraudulent preferences” there was a lengthy section, of which I shall quote the first subsection only:

8. All gratuitous contracts or conveyances, or contracts or conveyances without consideration, or with a merely nominal consideration, made by a debtor afterwards becoming an involvent, with or to any person whomsoever, within three months next preceding the date of the assignment or of the issue of the writ of attachment in compulsory liquidation; and all contracts by which creditors are injured, obstructed or delayed, made by a debtor unable to meet his engagements, and afterwards becoming an insolvent, with a person knowing such inability or having probable cause for believing such inability to exist, or after such inability is public and notorious, are presumed to be made with intent to defraud his creditors.

In my view it is clear that, in enacting as it did Section VI of the chapter Of Contracts, the Legislature did not intend in any way to affect what had been enacted some years earlier in the Act respecting Insolvency, which was a statute applicable to Upper Canada also. This intent was indicated, not only by Art. 1037, but also by the following words added to Arts. 1038 and 1039 respectively:

… saving the special provisions applicable in case of insolvency of traders.

… saving however the exception contained in the Insolvent Act of 1864.

[Page 434]

It is no doubt proper to note that, in the draft submitted with the First Report of the codifiers, on October 12, 1861, Section VI consisted of ten articles. The first five, Arts. 51 to 55, became Arts. 1032 to 1036 practically without change. Arts. 57 and 58 became 1038 and 1039, with the above-noted additions, and Art. 60 became Art. 1040. As to Arts. 56 and 59, which were provisions embodying new law suggested in amendment, the Legislature replaced them by Art. 1037. These two articles read as follows:

(Additional article suggested in amendment.)

56. (61) If any contract or payment designated in the three last preceding articles be made by a merchant or trader within ten days previous to his bankruptcy, his insolvency and intent to defraud, and the knowledge thereof by the creditor or the party with whom he contracted, are presumed.

(Additional article suggested in amendment.)

59. (64) Contracts and payments made by a merchant or trader within ten days previous to his bankruptcy may be avoided for the causes assigned in this section, at the suit of any creditor, although posterior thereto.

Clearly, if the Legislature had enacted the Code with these provisions in the section, Art. 1040 would have applied thereto, but due to the adoption of an insolvency act in the meantime, it deleted them. It thus clearly indicated that it intended to leave the insolvency act intact, whereas it would have introduced an important change by enacting a short period of prescription or time limit applicable thereto which did not exist previously. In this regard I should point out that, Art. 1040 aside, the prescription period of thirty years provided in Art. 2242 is not necessarily the only period applicable. Under Art. 2260(4) the five-year prescription period applies to any claim of a commercial nature.

It now remains to be seen how Art. 1037, and the final clause added to Art. 1039, disappeared. For this, it must first be noted that, after enacting two new statutes on insolvency in 1869 (32-33 Vict., c. 16) and in 1875 (38 Vict., c. 16) to replace the act of 1864, the federal Parliament

[Page 435]

completely repealed all legislation on insolvency in 1880 (43 Vict., c. 1). When the revision of 1886 was undertaken, there was therefore no longer an insolvency statute in existence. It was in view of this situation that, in Schedule A of the Revised Statutes of 1886, reference was made, inter alia, to Art. 1037 of the Civil Code and the last clause of Art. 1039, as being among the “Acts and parts of Acts repealed, from the date of the coming into force of the Revised Statutes of Canada, so far as the said Acts and parts of Acts relate to matters within the legislative authority of the Parliament of Canada”. Subsequently, in the Revised Statutes of Quebec, 1888, under the heading “Federal amendments to Civil Code”, the following sections were inserted:

6233. Article 1037 is repealed by the Federal act respecting the Revised Statutes of Canada. 49 V., C, c. 4, s. 5, schedule A.

6234. Article 1039 should read as follows:

“1039. No contract or payment can be avoided, by reason of anything contained in this section, at the suit of a subsequent creditor, unless he is subrogated in the rights of an anterior creditor”. C.C., 1039; 43 V., C., c. 1; 49 V., C., c. 4, s. 5, schedule A.

In all previous cases on the construction of Art. 1040, I have found only a single opinion which refers to Art. 1037. It is that of Taschereau J.A. in Mercure v. Vary[7]. He said (at p. 482):

[TRANSLATION] Regarding the contention of the trustee that Art. 1040 C.C. is unconstitutional, it should be borne in mind that it was enacted not by the Quebec legislature, but before Confederation by an Act of the Parliament of United Canada (1865, 29 Vict., c. 41), when only one jurisdiction existed. Laws enacted during this period have full force and effect unless repealed, abolished or altered by the Parliament of Canada, as provided by s. 129 of the British North America Act, which is worded as follows:

Except as otherwise provided by this Act, all Laws in force in Canada, Nova Scotia, or New Brunswick at the Union, and all Courts of Civil and Criminal Jurisdiction, and all legal Commissions, Powers, and Authorities, and all Officers, Judicial, Administrative, and Ministerial, existing therein at the Union, shall

[Page 436]

continue in Ontario, Quebec, Nova Scotia and New Brunswick respectively, as if the Union had not been made; subject nevertheless (except with respect to such as are enacted by or exist under Acts of the Parliament of Great Britain or of the Parliament of the United Kingdom of Great Britain and Ireland,) to be repealed, abolished, or altered by the Parliament of Canada, or by the Legislature of the respective Province, according to the authority of the Parliament or of that Legislature under this Act.

Accordingly, the federal Parliament relied on this Act in repealing Art. 1237 C.C. in 1888, when the statutes were revised (Art. 6833), while leaving intact Art. 1040 C.C., dealing with the avoidance of contracts and payments made in fraud of creditors. That article is therefore constitutional, and must be implemented.

With respect, I have to point out that in that case the point was not fully considered. The Parliament of Canada definitely had no power to amend Art. 1040 C.C. The scope of that provision is limited to the remedies provided in the section which it includes. However, Parliament unquestionably had the right to repeal its own bankruptcy statute. That repeal undoubtedly made entirely useless and redundant any provisions referring to an Act which had been replaced by the Bankruptcy Act. Whatever may have been the effect of the repeal, its result certainly could not be that when a new Bankruptcy Act was introduced in 1919 (9-10 Geo. V., c. 36), Art. 1040 C.C. became applicable to the provisions of that Act concerning preferential payments, when it had never been so applicable to analogous provisions in prior bankruptcy statutes. If it could be shown that, in the case of bankruptcy, these provisions on preferential payments replace those in the Civil Code regarding the Paulian action, it might be logical, though not in keeping with the text, to apply the prescription period for the Paulian action thereto. However, that is not so. The special remedy provided, in the case of bankruptcy, for having preferential payments declared void, has always been legislatively distinct from the Paulian action since the first insolvency statute was adopted in 1864. There is thus no reason not to give a literal interpretation to Art. 1040 C.C.

[Page 437]

There do not appear to be here circumstances comparable to those which led this Court to regard provincial precedents as decisive in Ace Holdings Corporation v. Montreal Catholic School Commission[8] and Village de la Malbaie v. Boulianne[9]. Those decisions concerned provisions retained without significant change when a new Code was drafted. They dealt with a strictly provincial matter, not with the application of a provision of provincial law to proceedings instituted under a federal statute. Although this statute was re-enacted by Parliament after the 1948 decision, s. 37(4) of the Interpretation Act (1967-68, c. 7, now R.S.C. c. I-23) prevents its being regarded as an adoption of this judicial construction. It may be noted that the Quebec Interpretation Act (R.S.Q. 1964, c. 1) contains no similar provision. In addition, it may be that the dissenting opinion of Locke J., coupled with that of Choquette J.A., expressed in a case in which it did not conflict with the majority view is enough to make it impossible to say that the case law has adopted a uniform approach.

I would therefore allow the appeal and dismiss the exception to dismiss submitted by respondent. This does not mean that the latter will not be entitled to rely on Art. 1040 in answer to a claim based on the goods taken back, if the trustee should contend that his petition allows him to go beyond the three months preceding the bankruptcy, and base a claim not only on the Bankruptcy Act but also on Arts. 1032 to 1040 C.C.

I conclude that the appeal should be allowed, the judgments of the Court of Appeal and of the Superior Court reversed, and the exception to dismiss made by respondent dismissed with costs in all courts.

Having read the opinion of Beetz J., I must say that I would agree with him as to the consequences of the repeal of Art. 1037, if that provision was to be regarded as incorporating into Section VI, for

[Page 438]

certain purposes, some provisions of the 1864 Act respecting Insolvency.

BEETZ J.—I have had the considerable advantage of reading the opinion of Mr. Justice Pigeon and that of Mr. Justice de Grandpré.

At the outset Art. 1037 C.C. may not have been simply a cross-referencing provision. It may have had the effect to incorporate for certain purposes, within Section VI the “further provisions concerning the presumption of fraud and the nullity of acts done in contemplation of insolvency .. contained in the Insolvent Act of 1864.” Art. 1037, which referred to the further provisions in the 1864 Act, was unquestionably a provision “contained in this section”, in the words of Art. 1040. As the Act respecting Insolvency of 1864 specified no time limit within which the remedy of a Paulian nature it provided, should be exercised, it is not inconceivable that the Legislature, which then had jurisdiction over insolvency as well as over property and civil rights, and was reviewing these two areas of law at the same period, intended to make the limitation period of Art. 1040 applicable to the remedy provided by the Act respecting Insolvency, 1864, in preference to the limitation periods of general application. Support is lent to this hypothesis by the fact that, in their Supplementary Report, the Codifiers suggested adding to the end of the article which was to become Art. 1040 the words “saving the special provisions, relating to the insolvency of traders”, but their suggestion was not taken up by the Legislature.

At all events, by repealing all legislation on insolvency in 1880, and then, in 1886, by repealing Art. 1037 C.C. and the final words of Art. 1039 C.C., the federal Parliament terminated such an incorporation, if ever it had existed; in view of the wording of Art. 1040, such incorporation could not subsequently revive in the absence of some clear provision, which only the Parliament of Canada was authorized to enact. Neither the Act respecting Bankruptcy of 1919, 9-10 Geo. V., c. 36, nor its subsequent amendments, contain any provision to this effect.

[Page 439]

Accordingly, I conclude that it is the limitation periods of general application, of thirty or five years as the case may be, which must be applied to the remedy provided by s. 64 of the Bankruptcy Act, and I would dispose of the appeal in the manner proposed by Mr. Justice Pigeon.

DE GRANDPRE J. (dissenting)—Appellant asks this Court to quash a decision of the Court of Appeal affirming a judgment of the Superior Court, bankruptcy side.

In general, the matter before the Court is the inter-relation of the articles of the Civil Code dealing with the Paulian action (1032 to 1040 C.C.) and the sections of the Bankruptcy Act, R.S.C. 1952, c. 14 (now R.S.C. 1970, c. B-3), dealing with preferential payments made in the three months preceding the bankruptcy. In particular, appellant submits that the prescription or avoidance of Art. 1040 C.C. does not apply to the remedy conferred on the trustee by s. 64 (now s. 73 as amended) of the Bankruptcy Act.

The argument derives from a “motion to cancel preferential payments” made in February 1970 by appellant, in his capacity as trustee in bankruptcy of Boulevard G.M.C. (1964) Inc. The latter company was one of respondent’s distributors, and at the relevant times respondent held a claim against the debtor for a considerable sum. The motion alleges:

—an assignment of property on April 24, 1967;

—payments by cheque of a total of $27,000 in the three months preceding the bankruptcy;

—payments in the form of automobile parts of the sum of $93,862.74 in the months preceding the bankruptcy;

—respondent’s awareness of the debtor’s state of insolvency;

and, contending that this was a “preferential payment made to defraud other creditors of their rights”, it prays the courts to declare these payments “void and unlawful as against the creditors”, and order respondent to make repayment.

[Page 440]

In reply to this motion respondent moved to dismiss on the basis of Art. 1040 C.C.; as more than a year elapsed between the time appellant was appointed and the start of his action, it was alleged that the latter should be dismissed. The Superior Court allowed this motion to dismiss and its judgment was unanimously affirmed. I quote from the short opinion of Lajoie J. the paragraph which sums up the views of the courts of Quebec:

[TRANSLATION] There is abundant authority in this Court for the proposition that the prescription period enacted by the second paragraph of Art. 1040 C.C. applies to the remedy of a trustee under s. 64 of the Bankruptcy Act.

There is no question that the Court of Appeal of Quebec has always held to this effect:

Cie de Construction Charlesbourg Inc.: Lefaivre et al. v. Demers[10];

Garage Causapscal Limitée: Traders Finance Corporation Ltd. v. Lévesque et al.[11];

Grobstein v. Bank Canadian National et al.[12]

Bissonnette v. Bank of Nova Scotia et al.[13]

Rainville v. Plouffe et al[14].

In re Monette: Mercure v. Vary et al.[15]

Donat Delisle et Fils Limitée v. de Coster et al.[16]

Biais v. Shaw et al.[17].

The only disagreement was by Choquette J. in the aforementioned case of Traders Finance Corporation Ltd. v. Lévesque; the context of that decision suggests that his remarks were made obiter.

The Superior court has shown the same near-unanimity. As examples I refer to the following decisions:

In re Modern Hat Manufacturing Ltd[18]. (Boyer J.);

In re Roger Fortier[19] (Boyer J.);

[Page 441]

In re Chabot, Rouleau et Frères Inc.[20] (Marier J.);

In re Gervais[21] (M. Archambault J.).

The consistency of these judicial authorities may not be an answer to appellant’s arguments, but it requires us to use particular caution. Such unanimity compels respect, if not agreement.

This is the first time this Court has been called on to decide the point. In Traders Finance Corporation Ltd. v. Emilien Lévesque[22], four of the five judges expressly refused to do so; only Locke J. expressed the opinion that Art. 1040 C.C. cannot be pleaded against a motion by a trustee under s. 64 of the Bankruptcy Act. It may be noted in passing that the problem apparently does not arise in the other provinces, as the periods of prescription in the laws of those provinces are not as short as those in the Civil Code.

I

The first question that arises is: Does the fact of bankruptcy limit the recourse of creditors prejudiced by a preferential payment to proceedings under the Bankruptcy Act, and defeat their right to reply on the provisions of the Civil Code regarding the Paulian action? In other words, does a partial occupation of the field of preferential payments by the Bankruptcy Act (partial because limited in general to payments made in the three months preceding the bankruptcy) suspend the right of the Civil Code to occupy the part of the field not occupied by the Bankruptcy Act? If the foregoing must be answered in the affirmative, it necessarily follows that Art. 1040 C.C. cannot be pleaded against appellant.

The only reference to the point by this Court is a paragraph from the reasons of Duff C.J., speaking for himself and two of his colleagues, in In re Bozanich—The A.H. Boulton Company Limited v. The Trusts and Guarantee Company Limited[23], at p. 136:

[Page 442]

I may add that, in my opinion, the provisions of R.S.O. 1927, Chap. 162, in relation to preferences are superseded by section 64 of the Bankruptcy Act, and that the authority of the Ontario Legislature to enact such legislation is, in consequence of the enactment of section 64, suspended in virtue of the concluding paragraph of section 91.

The two other judges, Rinfret and Crocket JJ., did not address themselves to the point. This paragraph has been regarded by some as holding that the entire field of preferential payments is outside provincial jurisdiction, as it is partially occupied by the Bankruptcy Act. I see nothing in the statement to support such a broad conclusion. Even if that were the case, suffice it to say the statement is not a binding authority on this Court, since it was made obiter. The only question indeed to be decided was whether a settlement was at issue, within the meaning of s. 60 (now s. 69) of the Bankruptcy Act. Reference to s. 64 of that Act was only necessary to determine the meaning of the preceding sections. Furthermore, as may be seen from the factums of the parties recourse to the Ontario statute was only had in this Court; as the provisions of the Ontario statute could only apply, because certain time limits had expired, on evidence of “intent to defeat… or prejudice” creditors, and as there was no finding “as to good faith and valuable consideration”, this new argument by the respondent could not be accepted; it could be dismissed merely by reference to the foregoing.

If in fact Duff C.J. intended to give a broad scope to his proposition, I am unable to agree. Constitutional theory requires that in a field such as that in question, where both legislators are entitled to be present, the federal legislator has priority only in the portion occupied by him. Attorney General of Ontario v. Attorney General of Canada[24], at p. 200:

In their Lordships’ opinion these considerations must be borne in mind when interpreting the words “bankruptcy” and “insolvency” in the British North America Act. It appears to their Lordships that such provisions as are found in the enactment in question, relating as they do

[Page 443]

to assignments purely voluntary, do not infringe on the exclusive legislative power conferred upon the Dominion Parliament. They would observe that a system of bankruptcy legislation may frequently require various ancillary provisions for the purpose of preventing the scheme of the Act from being defeated. It may be necessary for this purpose to deal with the effect of executions and other matters which would otherwise be within the legislative competence of the provincial legislature. Their Lordships do not doubt that it would be open to the Dominion Parliament to deal with such matters as part of a bankruptcy law, and the provincial legislature would doubtless be then precluded from interfering with this legislation inasmuch as such interference would affect the bankruptcy law of the Dominion Parliament. But it does not follow that such subjects, as might properly be treated as ancillary to such a law and therefore within the powers of the Dominion Parliament, are excluded from the legislative authority of the provincial legislature when there is no bankruptcy or insolvency legislation of the Dominion Parliament in existence.

In my view, the Bankruptcy Act overrides the Paulian action only to the limited extent that it deals with acts in defraud of the debtor; all aspects of fraudulent action falling outside the provisions of the Bankruptcy Act may be considered in the light of the principles of the Civil Code.

In my view this is also the way we should read the judgment of Mignault J. in Canadian Credit Mens Trust Association Ltd. v. Hoffar Limited[25], when, sitting in chambers, he denied the leave to appeal requested. Before citing that judgment reference may be made to the finding and the principal passages of the judgment of the Court of Appeal of British Columbia which this Court was asked to consider. The extracts which follow are taken from [1929] 1 W.W.R. 557. First, the finding:

Sec. 3 (quoted infra) of the Fraudulent Preferences Act, R.S.B.C., 1924, ch. 97, is repugnant to sec. 64 of the Bankruptcy Act, R.S.C., 1927, ch. 11, and is rendered inoperative thereby.

While the Bankruptcy Act does not abrogate a provincial Act merely because the latter deals with preferential

[Page 444]

transactions, yet with respect to such transactions a provincial statute cannot be enforced if it provides that a certain result shall follow from circumstances which under the Dominion statute are followed by a different result.

Then, Macdonald C.J., at p. 558:

The only question involved in this appeal is one of conflict between a provincial and a Dominion statute.

The facts are not in dispute. The neat question is as to whether or not sec. 64 of the Bankruptcy Act, R.S.C. 1927, ch. 11, is repugnant to sec. 3 of the Fraudulent Preferences Act, R.S.B.C., 1924, ch. 97. The learned Judge held that it was not.

No question of the validity of either statute was raised in argument.

For many years there was no Bankruptcy Act in Canada, and during that period of time this and other provinces enacted legislation pari materia with 13 Eliz., and 27 Eliz., with some amendments. After the enactment of the Bankruptcy Act the provincial Fraudulent Preferences Act was retained on the statute book. It professes to deal with preferences given by a debtor to one creditor to the prejudice of others. Shortly, sec. 3 renders void an assignment such as the one attacked in this action, if attacked within a specified time, which this one was.

Sec. 64 of the Bankruptcy Act makes preferential assignments and transfers made with a view to prefer one creditor over another void under conditions admitted to exist here, but subsec. (2) of sec. 64 declares that such assignments which “have the effect” of giving such preference “shall be presumed prima facie” to have been made with a view to giving such preference. The distinction between the two sections is found in this, that the presumption of the invalidity under sec. 3 is irrebuttable, while under sec. 64, subsec. (2), it may be rebutted. In this case the Judge has found as a fact that that presumption had been rebutted and the finding is accepted by both parties.

Assuming then that the provincial Act is intra vires, sec. 3 has, in my opinion, been rendered inoperative by the overriding enactment of sec. 64. It would, I think, be difficult to find a clearer case of repugnancy. I would allow the appeal.

Reference may now be made to Mignault J., at p. 184:

[Page 445]

The difference between the two statutory enactments, both of which deal with fraudulent preferences, is that subsection 2 of section 64 of the Bankruptcy Act, when the transfer, made within three months of the assignment in bankruptcy, has the effect of giving any creditor a preference over other creditors, creates merely a prima facie presumption that the transfer was made with a view to give the creditor such a preference; whereas section 3 of the provincial statute renders the transfer, having the effect to give a creditor preference over other creditors, utterly void as against the assignee or any creditor authorized to take proceedings when it was made within sixty days before an assignment by the debtor for the benefit of his creditors. Under the former statute the presumption of a fraudulent intent can be rebutted, under the latter it cannot.

The learned trial judge, upon consideration of section 64 of the Bankruptcy Act, found that the presumption of a fraudulent intent had been successfully rebutted, but he annulled the transfer under section 3 of the provincial statute, which he held established an irrebuttable presumption of fraudulent intent from the mere fact that the transfer, made less than sixty days before the assignment in bankruptcy, had the effect of giving the creditor a preference over the other creditors.

The Court of Appeal, [1929] 1 W.W.R. 557, set aside this judgment for the reason that there was here a clear conflict between Dominion and Provincial legislation, and that the Dominion enactment should prevail. Inasmuch, therefore, as the fraudulent intent had been rebutted, the court held that the transfer could not be attacked.

The petitioner now seeks leave to appeal from this judgment. In my opinion, the decision of the Court of Appeal is clearly right.

In my opinion, federal and provincial legislation may exist side by side in the field of preferential payments, the latter yielding to the former only within the narrow limits I have indicated.

II

The second question is: In view of the silence of the Bankruptcy Act on prescription of the trustee’s remedies, can such remedies be made subject to prescription under the Civil Code, whether for thirty years, five years or one year? In this Court appellant put forward the proposition that the

[Page 446]

Civil Code has a role to play, and he suggested applying the thirty-year prescription, but at the same time he referred the Court to the following extract from the reasons of Locke J. in Lévesque, cited above, at p. 90:

If it were otherwise and art. 1040 on its face applied to the cause of action referred to in s. 64 of the Bankruptcy Act, when asserted either by the trustee or under s. 16 by a creditor claiming by virtue of an assignment, it would be necessary to consider whether the article was intra vires the Legislature of Quebec. The right of action is one given by a Dominion statute and the right of the trustee and his assignee to resort to the courts is a substantive right. Article 1040, if it applied, would deprive those entitled to assert that right after a defined period. It would be necessary to consider then the effect of the decision of this Court in Attorney General of Alberta and Winstanley v. Atlas Lumber Co. Ltd. [1941] S.C.R. 87. There, a statute of the Province of Alberta which deprived the holder of a promissory note of his right of access to the court without permission of the Debt Adjustment Board, constituted under the Debt Adjustment Act, 1937, of Alberta, was held to be ultra vires. This aspect of the matter was not raised before the courts of Quebec nor argued before us and I accordingly do no more than draw attention to the fact that, in my opinion, that question would arise if art. 1040 applied to the facts of this case.

Whatever the length of the prescription, its effect is to void the remedy after a given period. This, then, is the question before the Court.

With respect, I cannot share the first reaction of Locke J. that no provincial statute concerning prescription can be pleaded against a claimant on whom a right of action is conferred by a federal statute, when the latter contains no provision regulating this subject-matter. Accordingly, the right of action conferred by the Bills of Exchange Act (then R.S.C. 1906, c. 119, now R.S.C. 1970, c. B-5) was held subject to the five-year prescription of the Civil Code in Dame O. Catellier v. Dame A. Bélanger[26]. That decision indicates the path to be taken where, as here, the provincial legislation dates from before Confederation.

[Page 447]

III

A Civil Code prescription period may thus be pleaded against the trustee; the question is which period, that of 1040 C.C. or that of the title “Of prescription”? It is this which we must now consider. To aid us in resolving it appellant submits, first, that there is a very clear distinction between the remedy provided by the Bankruptcy Act and the Paulian action. He summarizes his argument in the following paragraph from his factum:

[TRANSLATION] The articles of the Civil Code list certain rules designed to protect and safeguard the debtor’s inheritance, which serves as a common surety for creditors; however, the specific purpose of the Bankruptcy Act is to ensure that the property of an insolvent debtor is distributed between creditors, which in certain cases requires securing cancellation of preferential payments in order to reconstitute the mass for distribution.

I readily concede that such differences exist; however, those differences do not affect the very nature of the remedy: on the contrary. This was the view of the Court of Appeal of British Columbia in Hoffar (supra) concerning the situation in that province; the reasons of M.A. Macdonald J., at p. 561 of [1929] 1 W.W.R., are especially relevant. Comparison of the Bankruptcy Act and the Civil Code leads to the same conclusion. Furthermore, it is precisely because in substance the two remedies are identical that pro tanto the provincial legislation is suspended by the federal. We must refer at this point to the observations of Duff C.J. in Bozanich (supra), at p. 135:

I pass now to section 64 which deals with transactions between an insolvent person and his creditor. The history of the law relating to such transactions is familiar. At common law there is nothing to prevent a debtor preferring one creditor to another. The Statute, 13 Elizabeth, Chap. 5, did not prohibit such transactions. This common law privilege is obviously opposed to the fundamental principle of bankruptcy law—the equitable distribution of assets among all entitled to share; and the law of fraudulent preference was originally developed by the courts on the basis of the principles of the Bankruptcy Acts. The principle of section 64 was first formulated

[Page 448]

by statute in section 92 of the Bankruptcy Act of 1869. In Canada in most of the provinces there were, prior to the Bankruptcy Act, statutory enactments making voidable transfers of property by an insolvent made with the intention of giving a particular creditor an “unjust preference”.

Though this extract does not refer to the Civil Code, and in form is limited to English law, I feel its substance applies to the case at bar.

Even in the observations of Locke J. in Lévesque (supra) I find a confirmation of this identity, though his decision appears to negate it. Speaking of s. 64 he says, at p. 89:

The right of action conferred by the section is to obtain a declaration that the conveyance is null and void and to recover the property conveyed, and that right is given. alone to the trustee.

Moreover, discussing the provincial statutes, in particular the Civil Code, he states at p. 90:

All of these statutes deal with the rights of creditors to set aside conveyances made by persons in insolvent circumstances, which have the effect of giving a creditor a preference over the others and all of them provide that, in the event of action being brought within a certain period of the date of the conveyance, it is to be held null and void.

It is true that Locke J. goes on to state that the remedies are different, but in my view this distinction between the remedies does not necessarily imply a difference in the substance of the action.

It must be borne in mind that, according to the decision of this Court in Siméon Lamothe v. Adolphe Daveluy[27] the Paulian action is not simply for the benefit of the creditor who starts proceedings, it is for the benefit of all concerned. Sir Charles Fitzpatrick C.J., speaking for the Court, says at p. 81:

[Page 449]

It is quite true that the plaintiff in such an action brought under the Quebec Code represents not only himself, but all the other creditors of the fraudulent debtor prejudicially affected by the sale (art. 1036 C.C.).

And subsequently, at p. 83, the learned Chief Justice reiterates:

The Quebec Code differs from the French Code in this respect; by art. 1036 the defendant creditor is compelled to restore the thing received or the value thereof for the benefit of the creditors of the insolvent debtor according to their respective rights, and not exclusively as in France, for the benefit of the plaintiff in the action.

It is a fact that sixteen years earlier, in John Ira Fiait et al. v. F.F. Ferland et al.[28], the Court, without giving reasons, appears to have arrived at a different conclusion. It is also true that in Alfred Fortier v. Wilfrid Poulin and Ovila Poulin[29], this Court declined to admit jurisdiction on the ground that the amount at issue in the action instituted by the Paulian plaintiff was not sufficient in itself. On that occasion Rand J., speaking for the Court, said at p. 182:

It is a settled rule that in these circumstances the benefit of a judgment recovered in an action paulienne enures solely to the creditor who is a party to it: Dalloz J.G. (1925) R.P. prem. partie, p. 223, notes 1, 2 and 3. On the other hand, treating the two conveyances as constituting a transfer from the husband to the wife and therefore void, the interest of the appellant is obviously limited to the judgment which he seeks to realize.

With respect, I feel the latter solution is not correct; I feel we must return to the rule laid down in Lamothe v. Daveluy. The Fortier decision rests on the authority of French jurists, in an area governed by rules which are peculiarly our own. In my opinion, the correct rule is to be found in the 19G8 Lamothe decision.

This substantive identity emerges clearly if we look again at the relevant parts of s. 64, and then of Art. 1036 C.C.:

[Page 450]

64. (1) … every payment made … by any insolvent person in favour of any creditor … with a view to giving such creditor a preference over the other creditors shall … be deemed fraudulent and void as against the trustee in the bankruptcy.

I omit the parts which, while describing the remedy, do not change its nature.

Art. 1036. Every payment by an insolvent debtor to a creditor knowing his insolvency, is deemed to be made with intent to defraud, and the creditor may be compelled to restore the amount or thing received or the value thereof, for the benefit of the creditors according to their respective rights.

Even the form of the February 1970 motion confirms this identity. Apart from the statement that it is made on the basis of the Bankruptcy Act, and that the payments were made within three months of the bankruptcy, it could be used without changing a single word to apply for the remedy provided by Section VI of Chapter I of the title “Of Obligations” of the Civil Code.

I am therefore unable to accept the argument of appellant regarding the substantive difference between the Civil Code remedy and that of the Bankruptcy Act. Appellant also maintains, however, that the actual wording of Art. 1040 C.C. is a bar to its application here, since it is limited to the avoidance of contracts “by reason of anything contained in this section”. This was what Locke J. noted in Lévesque, at p. 90:

The limitation in art. 1040 is that no payment can be avoided “by reason of anything contained in this section” and it is not by reason of anything contained in section 6, being art. 1032 to 1036 and 1038 to 1040 both inclusive, that the respondent sought to recover and did recover. The article, therefore, in my opinion does not affect the matter.

Is this in fact a limitation? If the two remedies are the same in substance, and if also a Civil Code prescription or avoidance must be applied to the remedy provided by the Bankruptcy Act (two points which I think may be assumed), what better prescription to apply to the case at bar than that of 1040 C.C.? In this closely defined area of the preferential payment made by an insolvent debtor, the Civil Code makes only one reference to the

[Page 451]

length of time available to the creditor for instituting proceedings in avoidance, and this is the appropriate place to look for the relevant provision as to time.

It may be assumed that this was the course taken by the Parliament of the province of Canada at the time of passage of the Act respecting the Civil Code of Lower Canada in 1865 (29 Vict., c. 41). It accepted the recommendation of the codifying commissioners to create new law by adding to the end of the chapter on the Paulian action what is now Art. 1040 of the Civil Code, which may be cited at this point.

Art. 1040. No contract or payment can be avoided by reason of anything contained in this section, at the suit of any individual creditor, unless such suit is brought within one year from the time of his obtaining a knowledge thereof.

If the suit be by assignees or other representatives of the creditors collectively, it must be brought within a year from the time of their appointment.

It may be noted at once that

—when the commissioners made their recommendation in 1.861, it is reasonable to assume that they were aware of 7 Vict., c. 10, which, in reference to bankruptcy, had enacted for a period of just over two years provisions concerning preferential payments, giving certain rights to the syndic (in English the “assignee”); it is not necessary here to consider the effect of 24 Vict., c. 5, s. 2, which provided for “continuing” for certain purposes 7 Vict., c. 10 and some others referred to by the section;

—when the Parliament of the province of Canada passed the Civil Code in 1865, it had before it its own law on bankruptcy, passed in 1864 (27-28 Vict., c. 17), which contained provisions relating to the syndic (in English the “assignee”) and to preferential payments, but no provision concerning the prescription of remedies.

This is the background against which we must re-read Art. 1040 and the preceding articles, noting that

[Page 452]

(1) Art. 1037, which disappeared in 1888, stated that broader provisions on the presumption of fraud and avoidance of acts done with a view to bankruptcy were to be found elsewhere;

(2) Art. 1038, in reference to onerous contracts made in good faith by third parties, lays down one rule for the case of faillite (in English, “insolvency of traders”) and another for ordinary cases;

(3) Art. 1040 refers to two classes of plaintiffs, the creditors individually and their representatives, and for the latter class it uses the word syndic (in English “assignee”), which is especially characteristic of bankruptcy.

It seems to me the conclusion is obvious. The pre-Confederation legislator, having complete control over all matters now under consideration, intended at that time prescription of the trustee’s remedies in cases of preferential payments to be subject to the rule of Art. 1040 C.C. Nothing since then has altered this position, and the remedy in s. 64 of the Bankruptcy Act remains subject to annual prescription.

On the whole, I would affirm the judgment a quo with costs in all courts.

Appeal allowed with costs, DE GRANDPRE J. dissenting.

Solicitors for the appellant: Rivard, Rivard, Hickson & Sirois, Quebec.

Solicitor For the respondent: Buchanan, McAllister, Blakely & Turgeon, Montreal,