Recent legislative amendments in Ontario are intended to protect construction subcontractors from the claims of other creditors in the event of insolvency. They impose a new requirement to maintain written records for trust funds that will be in effect as of July 1, 2018.
Section 8 of the Construction Lien Act, R.S.O. 1990, c. C.30 provides that amounts owing to, or received by, a contractor on account of a contract or subcontract constitute a trust fund for the benefit of the subcontractors. These claims have often proved unrecoverable when a general contractor becomes bankrupt because trust claims created under provincial statutes like the Construction Lien Act do not survive bankruptcy unless the trust also meets the common law test for a trust.
A common law trust requires three “certainties”: (1) certainty of intention, meaning the testator clearly intended to create a trust; (2) certainty of subject-matter, meaning it is clear what property is part of the trust; and (3) certainty of object, meaning it is clear who are the beneficiaries of the trust.
Recent amendments to the Construction Lien Act will improve the prospects for subcontractors. The addition of section 8.1 will require that the trust funds be deposited into an account in the trustee’s name, who must maintain a trust ledger recording all deposits and withdrawals.
In a 2017 decision of the Ontario Superior Court (Commercial List), a subcontractor sought to recover a debt against an insolvent contractor by asserting a common law (non-statutory) trust claim, which ranks above most secured debt claims. The case turned on the second part of the test and whether there was sufficient “certainty” as to what money formed part of the trust. The common law trust claim was dismissed because neither the general contractor nor its court-appointed receiver held the funds in a separate trust account, and instead mixed all funds from all sources in a general account. The subcontractor claimed that it was possible to trace and identify all of the monies owed, however the Court found this insufficient. The funds were not held in a segregated trust account from the outset, and therefore lacked certainty of subject-matter.
In a 2018 decision of the Ontario Superior Court (Commercial List), the court-appointed receiver of an insolvent paving company was ordered to create two bank accounts. The first held receipts from the relevant paving projects, and the second was a general post-receivership account. The question arose whether funds in the former account were held in a common law trust, largely on the grounds that the receiver allegedly kept “meticulous” notes which allowed the funds to be correlated with the paving projects. However, there was no evidence as to the source, status or treatment of those funds prior to payment to the receiver. Once again, the Court denied the common law trust claim because it lacked certainty of subject-matter. The Court nevertheless noted that common law trust claims arising out of the Construction Lien Act could, in the right case, establish the three “certainties” and be recognized as a common law trust under the Bankruptcy Insolvency Act.
When these two cases were decided, there was no obligation on the contractor or the court-appointed receiver to maintain the detailed records that will be required as of July 1, 2018. The new requirements imposed by section 8.1 should ensure certainty of subject matter. If these requirements are observed, contractors and subcontractors should be entitled to recover as common law trusts claimants before other creditors in future insolvency cases.