Nobody from the sponsor sat on the board of the acquired contractor. The trust claim named three of them anyway, and the statute told the court it was free to ignore the structure.
At a glance
A mid-market sponsor was building a mechanical-services platform. The third add-on was an Ontario commercial mechanical contractor: $31 million of revenue, 140 field staff, and a project mix of institutional retrofits with long payment cycles.
The sponsor ran integration the way it ran every add-on. On day one the target’s bank accounts were brought into the group cash-management arrangement: daily balances swept up to a concentration account, funding drawn back down against a group revolver. Two of the sponsor’s operating partners chaired a weekly cash call. Its treasury manager had signing authority on the target’s accounts. None of the three was appointed to the target’s board, deliberately, on the sponsor’s standing advice that board seats attract director liability.
The money being swept was not the target’s money in the sense the sponsor assumed. A contractor’s receipts on account of a contract price are trust funds for its unpaid subtrades, and there is a separate provision requiring them to be held in a particular way.
Fourteen months in, four projects were in dispute, $2.21 million was owed to subtrades on them, and the target could not pay. The subtrades sued for breach of trust — and did not stop at the corporation.
Over fourteen months $3.4 million was swept out of the target’s accounts into the group concentration account.
Of that, $1.86 million was traceable to progress payments received on the four disputed projects — contract receipts, and therefore trust funds for the subtrades who had supplied services and materials to those improvements. The remaining $1.54 million came from service work, equipment sales and a tax refund, and carried no trust.
The sponsor’s defence was the loan-discharge shelter. Of the $1.86 million, $940,000 could be matched to revolver draws that had actually funded labour and materials on those same four projects. That much was sheltered. The remaining $920,000 had been applied to group overhead, to a term-debt amortisation payment on a different platform company, and to the sponsor’s monitoring fee.
The claim settled at $1.05 million including costs. The three individuals contributed personally, and the apportionment between them and the corporation was argued under the contribution provision rather than left to the settlement.
The trust is created by Construction Act s.8(1): all amounts owing to or received by a contractor or subcontractor on account of the contract or subcontract price of an improvement, including holdback, “constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement”. Section 8(2) makes the contractor the trustee and bars appropriation to its own use until those persons are paid.
Since 1 July 2018 there has also been a segregation duty. Section 8.1(1) paragraph 1 is short and was fatal to the sweep on its own terms: “The trust funds shall be deposited into a bank account in the trustee’s name.” A concentration account in the parent’s name is not that account.
What made the claim personal is s.13. Subsection (1) opens “In addition to the persons who are otherwise liable in an action for breach of trust under this Part” and then lists two categories: at (a) every director or officer of a corporation, and at (b) “any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities”. Either category is liable where the person “assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust”.
Paragraph (b) is the one that does the work, and s.13(2) tells the court how to apply it: “The question of whether a person has effective control of a corporation or its relevant activities is one of fact and in determining this the court may disregard the form of any transaction and the separate corporate existence of any participant.” That sentence is an instruction to look at who actually decided where the money went, and an express licence to ignore the boxes on the organisation chart.
The unit this governs is a person and an activity, not an office. “Its relevant activities” means control of the corporation is not required — control of the cash-management function is enough, and that is precisely what the sponsor had built. Section 13(3) then provides that “Where more than one person is found liable or has admitted liability for a particular breach of trust under this Part, those persons are jointly and severally liable”, so each of the three was exposed to the whole amount, with s.13(4) giving a right “to recover contribution from any other person also liable for the breach in such amount as will result in equal contribution by all parties liable for the breach” unless the court thinks that unfair.
The one thing that did work was s.11(2): where a trustee has paid for the improvement out of borrowed money, “trust funds may be applied to discharge the loan to the extent that the lender’s money was so used by the trustee”, and doing so is not a breach. That is what sheltered $940,000 — and it is a tracing exercise, project by project, not a netting exercise across a group.
The sweep was rebuilt. Project receipts now land in a project-receipts account in the target’s own name and are excluded from the sweep; only the balance after subtrade obligations for the period is available to the group. Revolver draws that fund a specific improvement are coded to that improvement so that the s.11(2) shelter can be evidenced rather than argued.
The sponsor also reversed its standing advice for construction platforms. Staying off the board had been the entire liability strategy, and s.13(1)(b) makes board membership irrelevant — while a board seat at least brings information rights and the ability to insist on segregation. See sale proceeds that became trust money on closing for the same statute’s other trust, which arises from the act of selling rather than from receiving contract money.
The corporate claim alone was $2.21 million against a company whose ability to pay depended on the same sponsor that had removed its cash. Without s.13 the subtrades would have recovered a dividend in an insolvency.
With s.13, the exposure moved to three individuals with houses and RRSPs, jointly and severally, and to a sponsor whose reputation with subtrades on the other two platform companies was suddenly a live commercial issue. The settlement number was smaller than the claim; the change to the cash-management architecture across three companies was the real cost, and it was paid regardless of the settlement.
The tell was in the integration checklist: “bank accounts: migrate to group cash management, week 1”. That line is correct for a distribution business, a services business and a manufacturer. For a construction business it is an instruction to commit a breach of trust on the first Monday, because the receipts it is moving are already impressed with a trust and there is a provision requiring them to sit in the trustee’s own account.
The generalisable question for any acquisition in a sector with a statutory trust: does this business receive money that the statute says belongs to somebody else, and does our integration plan move it?
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