Direct Payment Clauses and the Fraud Upon the Bankruptcy Law Principle: Re Horizon Earthworks Ltd. (Bankrupt)

The “fraud against the bankruptcy law principle” provides that it is not lawful for parties to use contractual provisions to circumvent bankruptcy law. In England this principle has split into two distinct subrules – the pari passu rule which invalidates contractual provisions that alter the bankruptcy scheme of distribution, and anti-deprivation rule that invalidates provisions that withdraw an asset that would otherwise be available to satisfy the claims of creditors in insolvency proceedings. Canadian courts have not adopted a similar approach, and the decision of the Alberta Court of Appeal in Re Horizon Earthworks Ltd. (Bankrupt), which applied the principle in relation to a direct payment clause in a construction contract, provides an opportunity to examine how the common law and statutory rules governing this issue interact in Canada.