Lien Regularization Orders: A Major Risk to Subcontractors
Imagine this: You’re a subcontractor whose crew completed significant work on a project. You supplied labour and materials, submitted proper invoices, and waited for payment. Months go by. Then you learn the contractor you’re working for has filed for protection under the Companies’ Creditors Arrangement Act (CCAA).
You quickly register a construction lien to secure your right to payment. The insolvent contractor cannot post a bond, letter of credit, or enough cash to vacate it. The project owner may stop payments, freezing the contractor’s cash flow. Other subcontractors rush to register liens. With no cash, the contractor cannot pay for the CCAA restructuring. If the contractor cannot fund its restructuring, the process fails, the contractor liquidates, and lien claimants may recover only a fraction of what they are owed.
To manage the pressure that lien claims place on an insolvent contractor, courts are increasingly resorting to a tool known as a Lien Regularization Order. These orders, however, significantly interfere with the statutory protections afforded to lien holders under the Construction Act.
The LRO: What is Supposed to Happen
The CCAA gives large insolvent companies time to restructure and make plans of compromise to avoid bankruptcy, such as a sale or refinancing. Courts stay proceedings against insolvent companies to prevent creditors from taking legal action against them.
Where contractors are involved, the stays prevent breach of trust claims under the Construction Act against the insolvent companies’ directors and officers. Further, the stays now routinely extend to construction liens. As a compromise, courts will issue an LRO to “preserve” would-be lienholders’ rights under the Construction Act.
LROs replace normal lien registration with a “Lien Charge” granted by a court-appointed Monitor, who oversees the CCAA proceedings. In theory, the Lien Charge is meant to mirror the security rights of a lien. In practice, the Lien Charge is far from a typical construction lien.
In extreme circumstances, the court may reduce the Lien Charge to a nominal amount to be shared between all subcontractors. The practical effect is subcontractors can receive a negligible sum for their work once an LRO is issued.
The LRO: What Actually Happens
Under the Construction Act, lienholders are secured creditors. They hold a charge against land as collateral. While this means they have the ability to force the sale of land to get paid what they are owed, more commonly this means someone will pay the full amount to discharge the lien from the land.
Under the CCAA, Lien Charge holders are unsecured creditors. They have no collateral, against land or otherwise. In theory, they should be paid what they would otherwise be paid under the Construction Act. In practice, their payment is subject to higher-priority creditors and further constraints, as explained below.
The Priority Problem: Risks to Your Lien Charge
During CCAA restructurings, courts grant “super-priority” charges to parties they consider essential to the proceedings. These parties typically include:
- Insolvency lawyers
- Financial advisors
- Directors and key employees
- Interim lenders providing debtor-in-possession financing
Under the doctrine of federal paramountcy, federal legislation overrides provincial legislation where the two cannot operate together. This means that the CCAA may, to a degree, displace rights otherwise enshrined under the Construction Act. As explained above, this directly affects subcontractors’ rights to make claims against statutory trust funds, liens, and even holdback.
In the case of holdback, LROs direct these funds to the Monitor instead of subcontractors. The Lien Charge attaches to these funds, but funds from the charge are only realized after super-priority creditors are paid. Moreover, such payments are potentially subject to further restrictions arising from subsequent CCAA orders.
The practical reality is clear: regardless of what Monitors and courts say, LROs can significantly reduce or effectively eliminate subcontractors’ rights under the Construction Act.
Despite the LRO’s constraints, subcontractors have potential avenues for significant recovery. The specifics depend on the particulars of the project, LRO, and other CCAA orders. When faced with an LRO, it is critical to obtain timely legal advice.
The Bottom Line
If your general contractor files for CCAA protection and obtains an LRO:
- You cannot simply register a lien in the normal course. Doing so can violate the LRO.
- You must act quickly. Preserving and acting on your available rights is essential. While LROs will stay proceedings, they do not affect the limitation periods on those proceedings.
- Expert advice is crucial. Navigating a CCAA restructuring and LRO process is complex. Finding experienced counsel maximizes your odds of recovery.
HOW WE CAN HELP
RAR Litigation’s team has a proven track record representing clients in complex construction and infrastructure disputes, and handles all forms of insolvency proceedings.
Contact us for strategic advice, risk assessment, and litigation representation.