Creditors Beware – The Time is Ripe for Equitable Subordination

The addition of a statutory good faith requirement in Canadian insolvency proceedings has opened more doors than it has closed. In late 2019, section 18.6 of the Companies’ Creditors Arrangements Act[1] (“CCAA”) and section 4.2 of the Bankruptcy and Insolvency Act[2] (“BIA”) were introduced, requiring all interested parties to a proceeding to act in good faith (“2019 Amendments”). The 2019 Amendments do not define “good faith” or provide specific remedies for a breach of it. Rather, the amendments provide the court with unfettered discretion to make any order it considers appropriate when a stakeholder breaches its good faith obligation.[3]

The breadth of these powers could breathe new life into the often-rejected but frequently entertained doctrine of equitable subordination. The 2019 Amendments may provide fertile grounds for a court to subordinate the priority of a creditor for misconduct, as it provides the court with jurisdiction to fashion remedies as a matter of equity to enforce good faith. Accordingly, this paper suggests that door is now opened for equitable subordination to be adopted in Canada.