Equitable Subordination - Will It Find A Home In Canada?

When a debtor is insolvent, recovery by a creditor will generally depend on the creditor's ranking. Secured creditors will have priority over preferred creditors who in turn have priority over unsecured creditors. If a claim can be characterized as an equity claim, it could be further subordinated. Notwithstanding these general rules, the Supreme Court of Canada could soon give courts wider discretion to adjust priorities even further in certain situations.

Earlier this year, our country's highest court granted leave to certain creditors to appeal the decision of the Ontario Court of Appeal in Re U.S. Steel Canada Inc. in which that court refused to apply the United States remedy of equitable subordination in proceedings under the Companies' Creditors Arrangement Act (CCAA).