HARMONIZATION OF FEDERAL LEGISLATION WITH QUEBEC CIVIL LAW: SOME EXAMPLES FROM THE BANKRUPTCY AND INSOLVENCY ACT


By Alain Vauclair[1]
Senior Counsel,
Civil Code Section,
Department of Justice Canada

By Martin-François Parent
Legal Counsel,
Civil Code Section,
Department of Justice Canada

Introduction

The purpose of this paper is to take stock of the work done by Justice Canada to harmonize the Bankruptcy and Insolvency Act[2] [hereinafter B.I.A.] with Quebec civil law. This paper deals with some of the most important and fascinating examples arising out of the harmonization process. Our work is still at a preliminary stage. In a way, then, this paper is an interim report, a series of findings and observations. It should therefore be noted that no legislative amendments are recommended in this paper, nor should any be deduced from the following remarks. We would therefore be delighted to receive any comments you might have.

Generally, harmonization consists, firstly, in reviewing all federal legislation and regulations whose application requires the use of provincial private law and, secondly, in harmonizing the content of this legislation and these regulations to ensure that it includes the concepts and terminology of Quebec civil law. Specifically, harmonizing federal legislation with Quebec civil law focuses on the interaction between federal law and provincial private law.

Private law in Canada comes from two separate legal systems: civil law and common law. The civil law tradition in Canada has its origin in French law, introduced during the French régime, eliminated with the transfer of New France to England, and reinstated by the British Parliament under the Quebec Act. The common law tradition is a legacy of the British colonies that, one after another, joined the Canadian federation. Under Canada's Constitution, the powers of the various legislatures in the new federation were defined, and legislative powers in private law matters were distributed between the provincial legislatures, which have general jurisdiction over property and civil law, and the federal Parliament, which has exceptional jurisdiction over certain matters including bankruptcy and insolvency. The exceptional nature of federal jurisdiction in private law matters explains, at least in part, the interdependence between federal and provincial legislation. Federal legislation, with its sources in two separate legal traditions, is bijural.

Many examples of dual legal systems are found worldwide. Most often this situation is the result of juxtaposition of two legal systems. One remarkable characteristic of the Canadian system is the interaction of the two legal traditions within a single legislative corpus. Federal legislation on private law matters can thus be described as "joint law" or, more accurately, "joint private law". An even more remarkable characteristic of the Canadian system is that this interaction or "jointness" evolves in a bilingual context. In this context, it can be affirmed that Canada's experience in harmonization is unique.

Canadian bijuralism represents a considerable challenge. Parliament must not only consider the civil law's and the common law's respective terminology and concepts, but also reconcile the numerous changes which flowed from the civil law reform in 1994. In fact, the Quebec legislature replaced old legal concepts with new ones. With respect to terminology, some words became obsolete while some expressions were born. Hence, Parliament's decision to undertake the harmonization of the federal legislation with the Quebec civil law.

It is nonetheless possible to find legal standards derived from neither legal tradition; these standards are said to be "dissociated" from provincial private law and to constitute a form of "autonomous law". In these cases, harmonization will not be needed since the standards are not derived from either legal tradition.

This paper will provide a number of examples illustrating the complementarity between the B.I.A. and provincial private law, and consider some of the challenges of harmonizing the B.I.A. with the Quebec civil law.

1. Complementarity between the B.I.A. and provincial private law

1.1. History of the B.I.A.

If we are to understand the issues at stake in harmonizing the B.I.A. with Quebec civil law, a glance at this statute's history is of interest. This history shows the complementarity that has developed over the years between an English-based statute and a shared, civil law-based legal system. We will consider the passage of the first bankruptcy enactments in Canada; the repeal of bankruptcy enactments; the background to the passage of modern bankruptcy legislation; and the present statute.

Passage of the first bankruptcy enactments in Canada (1774-1880)

In Quebec, the 1774 reinstatement[3] of French customary law led to a lengthy period of legal confusion in commercial matters.[4] Insistence by English-speaking subjects on importing the rules of common law vied with resistance by French-speaking subjects attached to the Coutume de Paris and French royal edicts.[5] After the rebellion by the Patriotes was put down, the Special Council of Lower Canada placed at the head of the colony's legislative power passed, between 1838 and 1841, numerous English-based commercial statutes, including Canada's first bankruptcy enactment.[6] Starting in 1843, this enactment was applied throughout the united Province of Canada.[7] The overhaul in 1864 of this enactment[8] occurred very shortly before the passage of numerous provisions of the Civil Code of Lower Canada[9] [hereinafter C.C.L.C.] (including Paulian action) governing bankruptcy and insolvency.[10] After Confederation, these provisions formed a basis for the federal Parliament's exclusive jurisdiction over bankruptcy and insolvency.[11] In 1875, the federal Parliament finally repealed the then existing Prince Edward Island and British Columbia bankruptcy enactments, making its own bankruptcy enactments the only ones applicable to bankruptcy and insolvency in Canada.[12]

Repeal of bankruptcy enactments (1880-1919)

Following an economic crisis in the 1870s, the federal Parliament decided to repeal its bankruptcy enactment.[13] During heated debate in the House over the passage of the related bill, the opinion was expressed that creditors whose debtors were experiencing serious financial difficulties might resort to provincial private law.[14] In light of this singular situation, the English Privy Council allowed the provincial legislatures to encroach on this area of exclusive federal jurisdiction.[15] As a result, fraudulent preferences and assignments acts[16] and, in Quebec, amendments to the Code of Civil Procedure [hereinafter C.C.P.] introducing the voluntary deposit were passed.[17]

Passage of modern bankruptcy legislation (1919-1949)

After a period of silence lasting nearly 40 years, the federal Parliament once again exercised its exclusive jurisdiction over bankruptcy and insolvency.[18] It should be noted that the then Minister of Justice emphasized, while speaking in the House, how important it was for the federal Parliament to respect provincial private law, particularly Quebec civil law.[19] Unfortunately, the Department's nobles intentions did not find expression in the actual bill,[20] which was derived directly from the English bankruptcy legislation.[21] So it happened that many procedures foreign to Quebec civil law (including settlement of property, petitioning in bankruptcy, and receiving orders) were imported into Canadian law.

The present statute (1949-2000)

Since 1949, the B.I.A. has been subject to a few revisions. These revisions were used to introduce new provisions including those on consumer proposals, environmental matters, recourse by secured creditors, international bankruptcy, and bankruptcy by securities firms. Traces of this common law-based structure, however, are still very much apparent today.[22] In the meantime, the Quebec legislature has reformed the Civil Code of Quebec[23] [hereinafter C.C.Q.], in particular the rules governing security.

It can be noted from the foregoing remarks that the issues surrounding harmonization of the B.I.A. with Quebec civil law have marked Canada's legislative history. Although the importance of the civil law tradition has been recognized on occasion, and although the complementarity that binds federal bankruptcy legislation to provincial private law has been acknowledged, it is still true that harmonization of the B.I.A. presents a basic problem in the very spirit of this legislation, derived directly from the English tradition.

1.2. Recognition in case law of complementarity

Case law has recognized the complementarity that binds federal bankruptcy legislation to Quebec private law. This recognition has found expression in two passages that are highly interesting and, incidentally, emanate from Canada's highest court. These passages are the remarks by Beetz J. in the Robinson v. Countrywide Factors Ltd. decision, and those by Pigeon J. in the Rainville decision.

Robinson v. Countrywide Factors Ltd.[24]

Robinson dealt with the validity of a remedy sought by the trustee in bankruptcy who had relied upon provisions of the Fraudulent Preferences Act[25] to have an allegedly fraudulent payment set aside. This case was argued all the way to the Supreme Court of Canada who considered the constitutionality of the provincial act in light of the division of powers. Justice Beetz, considering this question, underlined the interaction between provincial private law and bankruptcy enactement as follows:

Insolvency lies at the core of those parts of the common law and of the civil law which relate to such matters as mortgage, pledge, pawning, suretyship and the securing of debts generally which are implicitly or explicitly predicated on the risk of insolvency and which produce their full effect when the risk has been converted into reality […].[26]

Beetz J. went on to state that "the primary jurisdiction of Parliament cannot easily be exercised together with its incidental powers without some degree of overlap in which case federal law prevails."[27]

Relying on the wording of subsection 72(1) of the B.I.A., Beetz J. concluded that, in enacting this provision "Parliament, far from intending to depart from the rule of operational conflict, did in fact aim at the highest possible degree of legal integration of federal and provincial laws […]."[28]

Rainville[29]

One of Pigeon J.'s best-known remarks is found in the Supreme Court of Canada decision in Rainville.[30] At issue in this case was whether, for the purposes of federal bankruptcy legislation, a privilege granted to the Crown under a provincial statute should be recognized. After briefly summarizing the facts and the parties' allegations, Pigeon J. went on to make an observation that is surprisingly relevant to the present federal harmonization program. He stated:

We are confronted here by major problem in the interpretation of federal legislation, and, at this juncture, it is proper to stop to consider the difficulty of the task facing our legislative draftsmen. They must not only formulate all legislative provisions in two languages, but also more often than not they must do so in terms of two different legal systems; the civil law of Quebec and the common law of the other provinces. In bankruptcy legislation, which everywhere impinges upon every area of public and private provincial law, the task is particularly difficult. It is therefore not surprising that major problems should be encountered. Moreover, it is a fact which cannot be ignored that the Bankruptcy Act of 1949, like the Bankruptcy Act of 1919, was not only derived almost entirely from English sources but was also poorly served by the authors of the French version.[31]

This statement was recently quoted by the justices of the Quebec Court of Appeal in the decision in Château d'Amos.[32]

1.3. Creation of a working group to harmonize the B.I.A. at Justice Canada

Justice Canada, too, recognizing the complementarity between the B.I.A. and Quebec civil law and faced with the complexity of the issues raised by harmonization, undertook the revision of the B.I.A. as a harmonized legislation pilot project. To this end, professors were consulted and a working group set up.

Studies by professors

Starting in 1995, Justice Canada approached an impressive range of experts in various fields of legal study—professors Jacques Deslauriers, Albert Bohémier, Jacques Auger and Roderick A. Macdonald—in order to obtain an initial diagnosis of the harmonization work to be accomplished in the field of bankruptcy and insolvency. These experts unanimously affirmed the need to harmonize the B.I.A. with Quebec civil law. Professor Bohémier concluded an article on this subject by stating: "I am convinced that the enactment of appropriate solutions with regard to the matters discussed will greatly improve the current situation" [emphasis added][33]

In the first pages of an article on the treatment of creditors in the B.I.A., Professors Jacques Auger, Albert Bohémier and Roderick A. Macdonald were somewhat more explicit in stating that: "[c]learly, the B.I.A. and the Civil Code are mutually interdependent, and it is accordingly important that they be in complete harmony" [emphasis added].[34]

For different reasons, however, Justice Canada's first initiatives to harmonize the B.I.A. with Quebec's civil law, which included changes to the definition of "secured creditor", have not found expression in legislation.[35] However, as Professor Jacques Deslauriers noted: [translation] "harmonization of the Bankruptcy and Insolvency Act with the Civil Code of Quebec is urgent" [emphasis added].[36]

These experts' opinions confirm our conviction that the task of harmonizing the B.I.A. with Quebec civil law is both unavoidable and pressing.

Creation of the bankruptcy working group

In July 1999, the Civil Code Section created a working group of legal experts. The working group was given the mandate of revising the B.I.A. in its entirety, as well as the Bankruptcy and Insolvency General Rules[37] [hereinafter B.I.G.R.], in order to harmonize them with Quebec civil law. A partnership was also established with Industry Canada who administers this act. Following this preliminary work, the working group noted issues raised in the B.I.A. as well as other, equally serious, but more general issues. To these issues we now turn.