One of the primary goals of insolvency law is to ensure fair distribution among creditors. In order to fulfill the goal, the law restricts certain contractual provisions that trigger upon insolvency (known as ipso facto clauses). One of these restrictions is the anti-deprivation rule, which holds that ipso facto clauses that deprive the debtor's creditors of assets they are entitled to in insolvency are void.
This week, the Supreme Court of Canada heard the appeal of Chandos to determine whether the anti-deprivation rule is still applicable in Canadian common-law and, if it is applicable, how the courts ought to apply it.1 In this article, we will review the decision and discuss its commercial implications.
Background
Chandos was the general contractor for a condominium project and subcontracted Capital Steel to provide $1.3 million worth of steel work. In the subcontract, Capital Steel agreed that if it entered into insolvency, Chandos was entitled to all costs arising from the suspension of the contract and it would forfeit 10% of the total subcontract price as a fee for the inconvenience.2
Capital Steel performed most of its obligations, however it filed for an assignment into bankruptcy before full performance of the contract. As a result, Chandos was forced to complete the remaining work at an estimated...
