T-3600-78
The Queen (Plaintiff)
v.
Gallagher Leblanc Ltée (Defendant)
and
Suzanne Gallagher (Objector)
Trial Division, Marceau J.—Quebec City, June
25; Ottawa, July 2, 1980.
Income tax — A certificate in accordance with s. 223(2) of
the Income Tax Act was filed, establishing a debt owed by the
defendant to plaintiff' — Seizure of defendant's property for
court sale to satisfy judgment — The wife of the president of
the debtor company objected to the seizure because seized
property was pledged by defendant to objector to secure repay
ment of a debt owed to her by company for rental of equipment
— Plaintiff challenged the objection on the ground that the
contract of commercial pledge was entered into in order to
defraud creditors Whether the conditions of the "Paulian"
action of art. 1032 et seq. of the Quebec Civil Code exist so as
to nullify the pledge — Plaintiff's challenge allowed — Com
mercial pledge declared null and void and objector's objection
dismissed — Quebec Civil Code, art. 1032, 1034 and 1035 —
Code of Civil Procedure, art. 597.
In re Mocajo Construction Inc.: Freed v. Rodrigue [1973]
C.A. 509, distinguished. R. v. Restaurant & Bar La
Seigneurie de Sept-Iles Inc. [1977] 2 F.C. 207, followed.
APPLICATION.
COUNSEL:
J. Ouellet, Q.C. for plaintiff.
No one appearing for defendant.
R. Carrier for objector.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
No one appearing for defendant.
R. Carrier, Quebec City, for objector.
The following is the English version of the
reasons for order rendered by
MARCEAU J.: A certificate in accordance with
section 223(2) of the Income Tax Act, S.C. 1970-
71-72, c. 63 was filed in the Registry of the Court
on August 14, 1978, establishing that defendant
owed Her Majesty a sum of over $17,000. The
certificate immediately acquired the force and
effect of a judgment. Execution proceedings were
undertaken and defendant's property was seized
for court sale to satisfy the judgment. The objector
challenged this seizure on the ground that [TRANS-
LATION] "the seized property had been pledged by
defendant to the objector by notarial deed made on
October 16, 1978 before Mr. Paul Dionne, notary,
at Amqui, as No. 457 of his minutes". The Attor
ney General, on behalf of Her Majesty, disputed
the validity of the objection and asked that it be
dismissed. His chief argument was that the con
tract of commercial pledge on which the objector
sought to rely was entered into in order to defraud
the seizing creditor of her rights, and should
accordingly be declared null and void. Alternative
ly, he argued that even if the contract of pledge
were not held void, it could not in itself permit an
appeal to article 597 of the Code of Civil Proce
dure of the Province of Quebec so as to block the
execution proceedings undertaken.
It will be seen that the primary basis for the
remedy exercised by the seizing creditor is the
so-called "Paulian" action provided to a creditor
by articles 1032 et seq. of the Civil Code of the
Province of Quebec, so as to nullify with respect to
him any deed concluded by his debtor to avoid the
general right of pledge guaranteeing his debt. The
Queen's action in this regard was properly under
taken, as it seems hard to imagine a situation more
clearly within the ambit of the Paulian action.
The objector is the wife of the debtor company's
president; the latter formed the company in 1971
to undertake highway construction. In 1978 the
affairs of the company, which was wholly con
trolled by her husband, were already in a most
deplorable state; legal actions had been multiply
ing for several years (more than twenty are
referred to in list C-3); prosecutions by the Attor
ney General under the Income Tax Act had fol
lowed each other without interruption as the result
of an entire series of unpaid notices of assessment
(C-2), and even a criminal conviction handed
down on November 18, 1977 remained unpaid
(C-5); attempts at third party execution pursuant
to the said Income Tax Act had been as frequent
as they were futile (C-6). It is against this back
ground and in the midst of these difficulties that,
on October 16, 1978, the deed of pledge relied on
by the objector here was concluded. This notarial
deed purported to give effect to a resolution of the
company's shareholders and directors (apparently
the husband, his sister and his wife), according to
which a pledge on all the company's movable
property had to be given to the objector to secure
repayment of a debt of $166,067.47 owed to her by
the company for rental of equipment. The objector
explained in her testimony that this debt which
was owed to her resulted from the fact that three
tractors used by the company since its inception
had been purchased by her husband, but in her
name and with her money. The first purchase was
made in 1967 and required $3,000 which she then
had on hand; the other two occurred in 1971, for
amounts of about $11,000 and $8,000, which she
had borrowed for the most part from her father-in-
law, her husband's father. However, there was no
trace of these agreements between the objector
and her husband, between her and the company, or
between her and her father-in-law, and there was
no reference to them in any written document; the
only evidence available was this decision by the
company to recognize the debt and to secure it by
a pledge giving evidence of it. Those are the facts.
There would appear to be a serious question as
to the reality of the transactions relied on, and as
to the legal existence of the debt which the deed of
pledge purported to cover, but there is no need to
raise such a question as the Court is not required
here to rule on whether a subterfuge exists. The
question before the Court is as to whether the
conditions of the Paulian action of articles 1032 et
seq. of the Civil Code exist in the circumstances of
the case at bar, and as I mentioned there can be no
doubt that the answer must be in the affirmative.
To begin with, the company was clearly insolvent,
that is, unable to meet its commitments, and its
claims of possible debts against third parties do
not establish the contrary, regardless of whether
such claims were entered on the annual balance
sheet prepared by its accountant. Secondly, this
insolvent condition was well known to the objector,
a shareholder of the company and its president's
wife, and she indeed spontaneously admitted as
much in her testimony. These are the only condi
tions required by article 1034 or 1035 of the Civil
Code as a basis for the Paulian action. As the
challenge to the objection was made within one
year from the conclusion of this deed removing the
company's property from the reach of its creditors
in general, it must unquestionably be upheld.
In view of this conclusion, it is not necessary for
the Court to rule definitively on the merits of the
second alternative argument put forward in sup
port of the challenge. However, I should like to say
that in my opinion this second argument is also
correct. In my view, a commercial pledge does not
give a creditor the right to object to the seizure
and sale of the pledged properties, as this right is
reserved by article 597 of the Code of Civil Proce
dure to the party entitled to claim as owner.
Counsel for the objector maintained that the con
trary was held in In re Mocajo Construction Inc.:
Freed v. Rodrigue [1973] C.A. 509, but that case,
which involved a bankruptcy, is based on princi
ples applicable only to its own circumstances. The
decision of my brother Walsh J., in The Queen v.
Restaurant & Bar La Seigneurie de Sept-Iles Inc.
[1977] 2 F.C. 207, would seem to be more in point
and in my view this is what must be followed.
ORDER
The Court allows the challenge. It declares the
commercial pledge made by defendant in favour of
the objector on October 16, 1978 null and void
with respect to the seizing creditor; accordingly,
the Court dismisses the objector's objection and
orders that the seized property be sold and the
debt of Her Majesty be paid from the proceeds of
the sale in accordance with the provisions applica
ble in the circumstances.
The whole with costs against the objector.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.