Courts everywhere have always used their powers to sanction improper conduct by creditors and to restore parties to the positions they would have had if the improper conduct had not taken place. In most common-law jurisdictions, the principles of equity evolved to allow courts to remedy an unfair or "inequitable" result. One aspect of the ability of the courts to grant equitable relief to redress improper activity in situations of insolvency is the equitable subordination remedy that courts can use to adjust priorities between creditors. U.S. experience with equitable subordination has made it one of the most refined remedies of its kind in the world.

Canadian corporate legislation has for many years featured the "oppression remedy" power, which is essentially an extraordinarily broad jurisdiction given to the courts to remedy the effects of corporate conduct that is "unfairly prejudicial." In Canada, there have been isolated examples of courts applying remedies in insolvency situations that have the "look and feel" of equitable subordination, but recently an Ontario court took the bold step of explicitly applying the doctrine of equitable subordination to subordinate the claims of a secured creditor to the claims of an unsecured and unpaid supplier.

The case, C.C. Petroleum v. Allen, (2002) (Ont. S.C.) 35 CBR (4th) 22, involved a closely held company that had given security interests to its insider shareholders. The company was never in good financial condition, but it staggered along, aided by, as the court described it, kiting checks among its various bank accounts. The kiting scheme allowed the company to carry on its business longer than it should have, but when the scheme ultimately collapsed, the shareholders applied for the appointment of a receiver under their security and for the sale of the company's assets to repay their loans.

The court concluded that the actions of the shareholders/insiders amounted to fraud and that even the appointment of the receiver was a part of the fraud. Because the fraud had prevented the supplier from being paid (or, for that matter, even knowing that there was a financial problem with the business), the court held that it would be inequitable and unjust to permit the shareholders to retain the benefit of their secured position. Consequently, the court used the doctrine of equitable subordination to subordinate the secured claims of the shareholders to the unsecured claim of the unpaid supplier. For good measure, the court also awarded punitive damages against the shareholders.

A similar result was reached in another more recent Ontario case, Sittuk Investments Limited v. Farber & Partners Inc., (2002) 61 O.R. 3rd (546) (Ont. S.C.). Creditors of a bankrupt company had relied on representations made to them by the principal of a sister company. The sister company was also a creditor of the bankrupt company and was controlled by the same officers and directors. The representations made to the creditors (concerning the priority of their claim in a potential bankruptcy) proved to be untrue and, in the court's view, the creditors had lost badly as a result. The court ruled that the conduct of the sister company and its officers and directors was unconscionable and that the appropriate remedy was to subordinate its claims against the bankrupt company to the claims of the creditors that it had led astray. The legal analysis that the court followed to achieve this result did not specifically refer to the concept of equitable subordination but, to use a tried and true legal analogy, anything that looks like a duck, walks like a duck, swims like a duck and quacks is quite likely a duck! Whether the remedy is called the "oppression remedy" or "equitable subordination" is less important than the fact that courts in Canada are finding ways in insolvency situations to redress improper creditor behavior.