Pre-Bankruptcy Payment To Secured Creditor Escapes Statutory Deemed Trust

Secured creditors should take note of Callidus,¹ wherein the Federal Court (the "Court") held that the bankruptcy of a tax debtor rendered a statutory deemed trust under section 222 of the Excise Tax Act (the "ETA") ineffective as against a secured creditor who, prior to the bankruptcy, received proceeds from the tax debtor's assets.

Background

In 2004, Cheese Factory Road Holdings Inc. (the "Tax Debtor") obtained a credit facility in the amount of $1,950,000 (the "Credit Facility") from Bank of Montreal (the "Bank") and granted the Bank certain security in respect thereof (the "Security").

By 2011, the Tax Debtor was in default under the Credit Facility. Pursuant to an assignment of debt and security agreement with Callidus Capital Corp. (the "Secured Creditor"), the Bank assigned all the Security and the indebtedness owing under the Credit Facility to the Secured Creditor. The Tax Debtor and the Secured Creditor then entered into a forbearance