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. 

In Tri-State Signature Homes Ltd, Re, 2017 ABQB 587, the Alberta Court of Queen’s Bench ruled that the statutory stay of proceedings under the Bankruptcy and Insolvency Act (BIA) does not prevent a creditor of the insolvent person from demanding payment under a letter of credit.

The insolvent debtors, which together used the name “Tri-State”, had previously authorized Westpoint Capital Corporation (“Westpoint”) to issue irrevocable stand-by letters of credit to one of Tri-State’s creditors, Star Prebuilt Homes Ltd. (“Star”). After Tri-State became insolvent and had sought to restructure its affairs by filing a notice of intention to make a proposal, a stay of proceedings was automatically imposed under s. 69.1 of the BIA, which provides the following: