Supreme Court of Canada: "Pre-post set-off rights can and should be stayed by an initial order"

8 GERMAN minute read
16 Dezember 2021

In 2017, the Quebec Court of Appeal had issued a decision in the matter of Arrangement relatif à Métaux Kitco inc., 2017 QCCA 268 ("Kitco") to the effect that the Companies' Creditors Arrangement Act (the "CCAA") prohibited the exercise of all rights of set-off between pre-filing and post-filing claims. Following this decision, there was significant uncertainty on whether the Kitco decision would apply outside the Province of Quebec, or whether it went against prior decisions on the topic of set-off, including Air Canada (Re), 2003 CanLII 64234 (ON SC) and North American Tungsten Corp., Re, 2015 BCCA 390.

On Dec. 10, 2021, the Supreme Court of Canada (the "Supreme Court" or "SCC") released an important decision for the restructuring industry in the case of Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53 ("Montreal v. Deloitte.") In a decision split 8-1, Canada's highest Court confirmed that Courts having jurisdiction over CCAA proceedings have the power to stay the exercise of the right of set-off between pre-filing and post-filing claims. Further, the SCC interpreted s. 21 of the CCAA to only allow set-off between pre-filing claims.

Facts

In August 2018, the Superior Court of Quebec made an initial order (the "Initial Order") by which SM Group, a consulting engineering firm, became subject to CCAA proceedings. The order included a stay of proceedings and appointed Deloitte Restructuring Inc. as monitor (the "Monitor.") Following the Initial Order, SM Group continued to perform work for Ville de Montréal ("VDM.") However, VDM refused to pay for that work and invoked its right to set-off between what it owed SM Group and two claims it allegedly had against SM Group that arose before the Initial Order was granted. The first claim arose from a settlement agreement and the second claim was based on a proceeding brought by VDM against SM Group, in which it claimed money from SM Group for allegedly having participated in collusion in relation to a call for tenders for a water meter contract.

Both the Superior Court of Quebec and the Quebec Court of Appeal agreed with the Monitor that the Initial Order stayed the exercise by VDM of its right to set-off pre-filing claims owed by SM Group to VDM against post-filing claims owed by VDM to SM Group. VDM appealed to the SCC.

Decision

After an analysis of the nature of the claims advanced by VDM, the SCC concluded that a right to set-off pre-filing claims against post-filing claims invoked by a creditor under the civil law, or the common law, can be stayed by a court under ss. 11 and 11.02 of the CCAA. Under s. 11.02 of the CCAA, a court may stay any action, suit or other proceeding that might be brought against the debtor company and has the power to stay rights held by creditors if the exercise of those rights could jeopardize the restructuring process, including set-off rights. The SCC described the discretion the CCAA grants to CCAA courts as the true "engine" of the CCAA.

Notably, the Supreme Court indicated that "[i]n the vast majority of cases, an initial order will, and should, stay a creditor's right to set up pre‑post compensation against the debtor", providing clear guidance to restructuring practitioners and courts supervising CCAA proceedings across Canada. The Court indicated that the supervising judge in a CCAA proceeding retains their discretion to not stay, or lift the stay of proceedings, in order to allow the exercise by a creditor of pre-post set-off rights. The SCC indicated that it expected the exercise of this discretion to be rare, however. The SCC, referring to its decision in 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, noted that a judge's discretion under the CCAA is not boundless and must be exercised keeping the rehabilitation goals of the CCAA in mind. The SCC warned that "a court must be cautious before allowing such a form of compensation, given its high disruptive potential".

The SCC then turned to its analysis of s. 21 of the CCAA, which provides that the law of set-off continues to apply during CCAA proceedings. The SCC found s. 21 is not intended as an exemption to the broad discretion of a court to stay proceedings in CCAA, but rather that it is only intended to preserve the right of a creditor to set-off a pre-filing claim against another pre-filing claim. The SCC noted that s. 21 was found in Part III of the CCAA entitled "Claims" instead of Part II of the CCAA dealing with stays and exceptions thereof. According to the SCC, if Parliament had intended to create an exception to the exercise of set-off rights, it would have included it in Part II or expressly stated that it was an exception.

Conclusion

Following the Quebec Court of Appeal decision in Kitco, professionals were divided on whether pre-post set-off was permitted in jurisdictions outside Quebec. The decision in Montreal v. Deloitte, leaves no doubt on the answer to that question. The decision brings much needed certainty on the topic of pre-post set-off and, in addition to ensuring stability of a restructuring business following the issuance of an initial order, will assist debtors and monitors in determining claims against the debtor for the purposes of voting on, and receiving distributions under, a CCAA plan.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.