February 2012

Is your deposit a preferential payment?

By Louis Morency Lawyer

Can a deposit paid as part of a service contract by a business that later goes bankrupt be considered a preferential payment under the Bankruptcy and Insolvency Act?

In the case of Limtech Carbonate inc. (Syndic de), 2011 QCCS 1477 (CanLII), the Court ruled that it could.

In April 2003, Limtech Carbonate inc. paid out $13 150 as a deposit to Gaz Métro, with whom it entered into a service agreement. In June 2009, Limtech made an assignment in bankruptcy. The following month, Gaz Métro sent an invoice for $13 150 and set off the sum held as a deposit.

In court, the trustee demanded that Gaz Métro reimburse the amount, claiming it was a preferential payment. Gaz Métro argued that set-off law applied and that it should not have to pay back the deposit.

After assessing the evidence and service contract, the court concluded that, because the invoice was dated after the bankruptcy, Gaz Métro's claim did not exist when Limtech filed for bankruptcy and that the set-off conditions had not been met. The court ruled that the amount constituted a preferential payment and ordered Gaz Métro to pay back the deposit it had received six years earlier.

Though an appeal has been filed, it is important that businesses that require deposits set out clear contract terms stipulating that all amounts owing will be immediately considered liquidated and all deposits will be cashed and set-off should the co-contracting party declare bankruptcy or become insolvent.