Saturday, December 30, 2006

Air Canada v. M & L Travel Ltd.

My legal obligations to you if you transfer $10,000 to me may vary depending on whether the transfer is a gift, a loan, or a trust. If a gift, I may keep it. If a loan, I have an obligation to repay you the amount loaned. But if it is a trust, I have additional responsibilities to you as a trustee. The law distinguishes between debtor-creditor relationships (such as loans), and trustee-beneficiary relationships. In some cases, this can have very important practical implications on the rights of the people involved.

In Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, the Supreme Court of Canada considered whether the defendant travel agency held funds from the sale Air Canada tickets as a trustee for Air Canada, or was merely indebted to Air Canada. This was an important issue because the travel agency did not have the funds to pay Air Canada what it owed to the airline. If the relationship was one of debtor-creditor, Air Canada was out of luck. But, if the travel agency was a trustee, and if the travel agency’s directors knowingly assisted in a breach of trust by the travel agency, Air Canada could seek to recover from the directors personally.

The travel agency, M & L Travel Ltd., sold Air Canada tickets. The agreement with Air Canada provided that, “All monies, less applicable commissions to which the Agent is entitled hereunder, collected by the Agent for air passenger transportation…shall be the property of the Airline, and shall be held in trust by the Agent until satisfactorily accounted for to the airline.”

The agreement did not expressly require the travel agency to keep the funds received from the sale of Air Canada tickets in a separate trust account.

The travel agency had a line of credit with its bank, and deposited the receipts from the sale of tickets with its other funds in its bank account. The line of credit was personally guaranteed by the travel agents directors. The two directors of the travel agent had a falling out, and they issued stop payment orders to the bank. The bank withdrew the funds in the travel agent’s account to pay M & L Travel Ltd’s debt to the bank.

The Supreme Court of Canada held that the travel agent held the funds as a trustee for Air Canada, despite the fact the agreement did not expressly require that the travel agency hold the funds in a separate trust account. The three certainties required to create an express trust were present:

1. the certainty of intent to create a trust (set out in the agreement);
2. the certainty of the subject matter of the trust (the funds from the sale of air tickets less commissions); and
3. the certainty of the object of the trust (Air Canada was the beneficiary).

The court’s finding that M & L Travel Ltd. was a trustee was not sufficient by itself to make the directors liable for the travel agency’s failure to remit the funds. Air Canada also had to prove that the directors’ conduct was wrongful, and that the wrongful conduct was such that the law imposes personal liability on the directors. Keep in mind that the law treats companies as independent persons from the companies’ shareholders and directors.

In this case, the Supreme Court of Canada held that the directors were liable to Air Canada for knowingly assisting M & L Travel Ltd. in breaching its trust obligations. In imposing liability on the directors, the court considered the following:

1. The directors knew of the terms of the agreement with Air Canada, and that the funds were trust funds;

2. They knew that the bank could take funds from the travel agency’s account after demand to pay the debt to the bank;

3. By intermingling the trust funds with their other funds in the general account, the directors took a risk they had not right to take with the funds to the prejudice of Air Canada;

4. Because they guaranteed the travel agency’s debt to the bank, the directors personally benefited by putting the funds into the general account, thereby reducing their personal liability to the bank.


Jonah said...

This was helpful for understanding my trusts class. Thank you!

Anonymous said...

Me too!