Supreme Court of Canada Holds Pre-filing Claims can be Set Off in Proceedings Under the Companies’ Creditors Arrangement Act
In Montreal (City) v. Deloitte Restructuring Inc., a majority of the Supreme Court of Canada ruled that the Companies’ Creditors Arrangement Act (the “CCAA”) authorizes a court, though only in rare circumstances, to allow a creditor
to set off a debt that the CCAA debtor owed it before filing for protection under the CCAA against a debt it incurs to the debtor after the filing (“pre-post set-off”).1
The Supreme Court emphasized the importance of the stay of proceedings generally granted at the outset of a CCAA proceeding, and of the supervising judge’s exercise of discretion with respect to it. The stay would normally prevent a creditor from
relying on set-off to withhold payments to the debtor for work done or goods supplied after the initiation of CCAA proceedings. The Supreme Court held that a supervising judge may exercise discretion to refuse to stay a creditor’s right
to exercise pre-post set-off, but cautioned that this would be appropriate only in exceptional circumstances, given the highly disruptive effect of allowing pre-post set-off in a restructuring. In doing so, the Supreme Court rejected the view expressed
by the Quebec Court of Appeal in Quebec (Agence du Revenue) v. Kitco Metals Inc. (“Kitco”) that there is an absolute prohibition against a creditor exercising pre-post set-off in CCAA proceedings.
Background
The central issue in Montreal v. Deloitte Restructuring was whether the City of Montreal (the “City”) could withhold payment for work performed by SM Group (the “Debtor”), a consulting engineering firm that became subject to proceedings
under the CCAA. The City sought to set off debts owed by the Debtor to the City that arose before the CCAA filing against amounts owed by the City to the Debtor for work performed by the Debtor after the CCAA filing.
The City’s pre-filing claim arose out of Quebec legislation creating a “voluntary reimbursement program” for the recovery of amounts improperly paid under public contracts (the “VRP Claim”). The Debtor performed work
for the City after the CCAA proceedings commenced, but the City refused to pay the Debtor, claiming a right to set off the pre-filing VRP Claim against the amounts it owed the Debtor for the work. Deloitte Restructuring Inc., in its capacity
as monitor (the “Monitor”), sought a declaratory judgment that the City could not apply set-off to the amounts it owed the Debtor for work performed post-filing. The City countered that, despite the absolute prohibition against pre-post
set-off established in Kitco, it could apply any amounts owing to it in respect of the VRP Claim to reduce its payments to the Debtor because the claim related to the reimbursement of monies the Debtor had obtained by fraud.
Lower Court Decisions
The Superior Court of Quebec granted the Monitor’s application for declaratory judgment, which the Quebec Court of Appeal upheld, applying Kitco. The City appealed to the Supreme Court of Canada.
Supreme Court of Canada
Stay of Proceedings
In dismissing the appeal, the Supreme Court recognized that the broad discretion granted pursuant to sections 11 and 11.02 of the CCAA authorizes a court to stay the exercise of a creditor’s rights against a debtor. The Supreme Court held that this
discretion is broad enough to authorize a stay of the right of a creditor to pre-post set-off, and that a prohibition against pre-post set-off generally flows from the initial stay order in a CCAA proceeding. However, the Supreme Court expressly
rejected the proposition that there is an absolute prohibition against pre-post set-off. Instead, the Supreme Court held that a supervising judge has the discretion to refuse to stay the right to pre-post set-off in exceptional circumstances. The
Supreme Court emphasized that courts should be cautious in exercising this discretion, and should do so only rarely.
The Supreme Court decided that section 21 of the CCAA, which protects a creditor’s right to set-off, only applies if both debts are incurred pre-filing. In the Supreme Court’s view, Parliament could not have intended for section 21 to apply
to pre-post set-off, as this could derail the restructuring process. However, section 21 does not have the effect of prohibiting pre-post set-off. It remains within the discretion of a supervising judge to stay or allow a claim of pre-post set-off.
The Supreme Court provided guidance regarding the exercise of this discretion, holding that a supervising judge must consider: (1) the appropriateness of the order being sought, assessed against the remedial purposes of the CCAA; (2) whether the applicant
proceeded with due diligence; and (3) the good faith of the applicant.
Applying these principles to the facts at hand, the Supreme Court refused to allow the City to effect pre-post set-off. Among other things, the City had not demonstrated that the Debtor had committed fraud, and the City had not diligently raised its pre-post
set-off claim, but rather had waited until long after becoming aware of the Debtor’s CCAA restructuring.
Looking Forward
For further information concerning Montreal v. Deloitte Restructuring, please contact any member of our Restructuring and Insolvency or Dispute Resolution Groups.
1 - Montreal (City) v. Deloitte Restructuring Inc. concerned compensation under the civil law but the Supreme Court’s analysis also applies to the common law concept of set-off.
Authors
Insights
-
Employment, Pensions and Executive Compensation
Bill C-228: The Pension Protection Act – It’s Time to Prepare
Bill C-228, An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985, or the Pension Protection Act (PPA) in short… -
Banking and Financial Services
The Lending and Secured Finance Review 8th Edition - Canada Chapter
Jean Anderson, David Wiseman, David Nadler, Caroline Descours, Michael Royal, Kyle Gerow and Cathy Costa-Faria co-authored the Canada Chapter of The Law Reviews' Lending and Secured Finance Review 8th… -
Restructuring
ICLG - Restructuring & Insolvency Laws & Regulations - Canada Chapter
Joseph Pasquariello, Andrew Harmes and Brennan Caldwell co-authored the Canada Chapter of ICLG - Restructuring & Insolvency Laws & Regulations - 16th Edition.The… -
Restructuring
Supreme Court of Canada Holds Pre-filing Claims can be Set Off in Proceedings Under the Companies’ Creditors Arrangement Act
In Montreal (City) v. Deloitte Restructuring Inc., a majority of the Supreme Court of Canada ruled that the Companies’ Creditors Arrangement Act (the “CCAA”) authorizes a court, though only in rare… -
Banking and Financial Services
The Lending and Secured Finance Review 7th Edition - Canada Chapter
Jean Anderson, David Wiseman, David Nadler, Carrie Smit, Caroline Descours, Kyle Gerow and Cathy Costa-Faria co-authored the Canada Chapter of The Law Reviews' Lending and Secured Finance Review 7th… -
Banking and Financial Services
The Acquisition and Leveraged Finance Review 7th Edition - Canada Chapter
Jean Anderson, David Nadler, Carrie Smit, David Wiseman, and Caroline Descours co-authored the Canada Chapter of The Law Reviews' Acquisition and Leveraged Finance Review 7th Edition. The publication…
Featured Work
-
Restructuring
Instant Brands’ Restructuring Proceedings
Goodmans LLP is counsel for Ernst & Young Inc. (“EY”) in its capacity as court-appointed information officer (the “Information Officer”) in the recognition proceedings of Instant Brands Inc… -
Restructuring
Stoneway Capital Corporation’s CBCA Proceedings
Goodmans LLP acted as co-counsel to the Term Loan Lenders to Stoneway Capital Corporation in its proceedings before the Ontario Superior Court of Justice (Commercial List) to implement a pre-arranged… -
Restructuring
MJardin’s Restructuring Proceedings
Goodmans LLP acts for KSV Restructuring Inc. (“KSV”) in respect of MJardin Group, Inc. (“MJardin” or the “Company”), a publicly traded licensed Canadian cannabis producer, in its ongoing restructuring… -
Restructuring
Sherritt International Corporation Completes $90 Million Notes Purchase Transaction
Goodmans LLP represented Sherritt International Corporation in its $90 Million Notes Purchase Transaction Pursuant to Oversubscribed Offers… -
Restructuring
Harte Gold CCAA Proceedings
Goodmans LLP (“Goodmans”) is counsel to FTI Consulting Canada Inc. (“FTI”), the court-appointed monitor of Harte Gold Corp. (“Harte Gold” or the “Company”) in its ongoing proceedings under the… -
Real Estate
Credit facility to Blackstone
Goodmans LLP represented Royal Bank of Canada, Citibank, Deutsche Bank Canada and Deutsche Bank New York, in connection with a $1.5 billion senior credit facility to finance the purchase by Blackstone…
News & Events
-
Banking and Financial Services
Who's Who Legal Continues to Recognize Goodmans in the Canada 2023 Guide
We are pleased to share Goodmans lawyers have been recognized across Who's Who Legal's National Guide: Canada 2023. WWL National Guides identify national or regional leaders in a sector, industry… -
Banking and Financial Services
Goodmans named one of Canada's Best Law Firms for 2024
We’re pleased to announce Goodmans was once again named to The Globe and Mail’s Canada’s Best Law Firms list, recognizing us as one of the country’s best law firms for 2024.Goodmans was… -
Mergers and Acquisitions
Chambers and Partners Continues to Honour Goodmans with Top-Tier Recognition
We are delighted to announce Goodmans LLP has once again received top-tier recognition from Chambers and Partners in the Chambers Canada 2024 Guide released today. Recognition from…