Key Developments in Canadian Insolvency Case Law in 2022

In 2022, several significant judicial decisions were rendered across Canada that are particularly relevant to commercial lenders, businesses and restructuring professionals. This comprehensive report summarizes the key facts and core issues of importance in each case and provides status updates on the cases reported on in our May 2022 bulletin, Key Developments in Canadian Insolvency Case Law in 2021.

The following cases and topics are covered in this bulletin:

Tolling of Limitation Periods

Carillion Canada Holdings Inc. et al. (Re), 2022 ONSC 66
 Date of Decision: January 10, 2022
 
The Ontario Superior Court of Justice (ONSC) considered the impact of a tolling order granted in the context of a Companies’ Creditors Arrangement Act (CCAA) proceeding on the claims of third parties against the debtor company.

Carillion Canada Inc. (Carillion) commenced proceedings under the CCAA in January 2018. At that time, the commencement of proceedings against Carillion without the consent of the monitor and Carillion or leave of the ONSC were stayed. On January 13, 2020, Carillion obtained a tolling order from the ONSC that extended certain limitation periods from the date of the tolling order to the expiry of the stay of proceedings. At the time this tolling order was granted, Carillion had already conducted a court-approved claims process and the claims bar date had long passed.

On May 29, 2020, prior to the limitation period’s expiry in respect of its claim, Weinrich Holdings Inc. (Weinrich) issued a statement of claim against Carillion in respect of alleged damage to premises it leased to Carillion. Weinrich did not seek Carillion’s or the court-appointed monitor’s consent or leave of the court prior to issuing the statement of claim.

On October 27, 2020, after the expiry of the limitation period in respect of Weinrich’s claim, Weinrich sought the monitor’s consent to lift the stay. The monitor declined. Weinrich brought a motion within the CCAA proceeding seeking an order (i) declaring that any limitation period applicable to Weinrich’s action against Carillion was tolled by the tolling order, and (ii) lifting the stay of proceedings to authorize Weinrich to bring its claim.  

Weinrich relied on the provisions of the tolling order declaring that limitation periods were tolled in respect of claims relating to “current and future assets, undertakings and properties” and “the business” of Carillion. Weinrich took the position that the tolling order captured its claim against Carillion because its claim related to both Carillion’s “assets, undertakings and properties” and its “business.” Weinrich did not file a proof of claim in the claims process.

The ONSC held that the interpretation of a court order is much like the interpretation of a statute. Courts must consider the plain language of the tolling order as well as its context and purpose. The ONSC reviewed the tolling order, including its preamble. It determined that the context and purpose of the tolling order clearly related to Carillion’s and the other CCAA applicants’ claims against third parties, rather than claims against Carillion and the other CCAA applicants. If the provisions were intended to extend all limitations applicable to all possible claims against Carillion in general, the language used would have been explicit. Additionally, the tolling order was effective only with respect to a prescription, time or limitation period which “may hereafter expire during the pendency of these CCAA proceedings.” Carillion’s business was sold by July 2018. Thus, in January 2020 when the tolling order was issued, the Weinrich claim did not relate to any “current or future” property or to the then-existing “business” of Carillion.

Weinrich also failed to articulate any principled basis, context or purpose for why a general suspension of all limitation periods of all third-party claims against Carillion would have been in the interests of the CCAA applicants or other stakeholders in general. Given the claims process and claims bar dates, there was no discernible benefit to the applicants, the monitor, or the stakeholders of the applicants generally tolling claims of third parties against the applicants.

Status:
This decision was not appealed and is final.
 
Takeaway:
A tolling order (including scope thereof) will be interpreted in the same manner as a statute. Any language tolling a limitation period must be explicit and clear to be effective. Consent to commence a claim or toll a limitation period should be sought from a debtor company and/or court officer in advance of a limitation period’s expiry. If consent is not obtained, leave should be sought from the court.

Seeking to Appoint a Receiver Without Statutory 10-Day Notice

Pandion Mine Finance Fund LP v. Otso Gold Corp., 2022 BCSC 136
Date of Decision: January 28, 2022
 
The Supreme Court of British Columbia (BCSC) heard an application for the appointment of a receiver under section 243 of the Bankruptcy and Insolvency Act (BIA) over a company that was subject to proceedings under the CCAA. The statutorily required 10-day notice of intention to enforce security under section 244 of the BIA had not been provided to the debtor company.

Otso Gold Corp. (Otso) is a Canadian company that owns a gold mine in Finland. The mine was Otso’s only substantial asset. Otso produced gold at the mine between November 2018 and March 2019 and again briefly in November and December 2021. It ceased operations due to insufficient working capital.

Pandion Mine Finance Fund LP and certain other parties (collectively, the Petitioners) constituted Otso’s only secured creditors. There was no dispute that Otso defaulted on the loan and was not able to pay the Petitioners.

In early December 2021, Otso sought and was granted relief under the CCAA. In January 2022, the Petitioners filed an application in the CCAA proceedings seeking to terminate the stay of proceedings against Otso and to appoint the court-appointed monitor as receiver of Otso.

In response, Otso took the position that recourse to section 243 was not available to the Petitioners because the Petitioners had not given notice to Otso in the manner contemplated by section 244 of the BIA.

The Petitioners submitted that appointment of a receiver was appropriate in this case and that courts are not bound by the 10-day notice period. Section 243(1.1)(b) of the BIA provides for the appointment of a receiver prior to the expiry of the notice period, where it is appropriate to do so.

The BCSC considered the purpose of the 10-day notice requirement under the BIA which is to provide a debtor company with the opportunity to negotiate and reorganize affairs before a receiver is appointed. Section 243(1.1)(b) provides for an abridgement of the 10-day notice requirement to acknowledge and provide for circumstances in which immediate relief from the court may be appropriate. The relevant considerations bearing on the exercise of discretion under Section 243(1.1)(b) are:

1. The extent to which the purpose of the 10-day notice requirement is engaged.

2. The possibility of prejudice to the Petitioners resulting from the requirement.

3. The possibility of prejudice to Otso if it is waived.

The BCSC concluded that Otso was not in a position to repay the Petitioners, and this would not change if Otso had been given 10-days notice before the application was heard. The statutory 10-day notice period would just be a formality. The BCSC did not find that Otso and its stakeholders would be prejudiced by the appointment of the receiver absent the notice. As a result, it was appropriate to abridge notice and appoint the receiver in the circumstances.

Status:
This decision was not appealed and is final.
 
Takeaway:
Section 243(1.1)(b) entitles the court to exercise discretion and forgo the statutory 10-day notice period if the court considers it appropriate to appoint a receiver before the expiry of the notice period. In exercising its discretion, the court will consider the extent to which the purpose of the 10-day notice requirement is engaged and the possibility of prejudice to both the appointing creditors and respondents. Where provision of notice would not produce any benefit to the insolvent corporation or its stakeholders and is merely a formality, such notice may be abridged or waived by the court.

Disputed Events of Default

Ward Western Holdings Corp. v. Brosseuk, 2022 BCCA 32
 Date of Decision: January 31, 2022
 
Ward Western Holdings Corp. (Ward Western) and Westrike Resources Ltd. (Westrike) (together, the Appellants) appealed the BCSC’s appointment of a receiver over their assets on the basis that the Appellants actively disputed the alleged existence of events of default.
 
In September 2020, as a result of various defaults by Ward Western, the respondents on appeal made demand for Ward Western to pay in full the outstanding indebtedness and sought appointment of a receiver over Ward Western’s assets, including its shares in Westrike. The Appellants resisted the appointment of the receiver and disputed the existence of certain events of default. The BCSC dismissed the Appellants’ objections and accepted the respondents’ submissions in support of the appointment of a receiver. The Appellants subsequently obtained leave to appeal from the decision appointing the receiver.

On appeal, the Appellants asserted, among other things, that the BCSC erred in appointing a receiver in circumstances where the alleged events of default are actively disputed based on irreconcilable conflicting evidence. The Appellants proposed that in such circumstances, the matter should be remitted to a trial of the factual issues, unless the court is able to resolve the dispute on the basis of credible evidence.
 
The Court of Appeal for British Columbia (BCCA) found that, even when an underlying debt is in dispute, a receiver may be appointed if there is evidence of serious potential prejudice or jeopardy to a creditor’s rights to recover under its claim and security interests. The BCCA considered several factors in making its decision, including but not limited to (i) the preservation and protection of the property pending judicial resolution, (ii) the consideration of whether a court appointment is necessary to enable the receiver to carry out its duties more efficiently, and (iii) the likelihood of maximizing return to the parties.
 
The BCCA held that there were numerous uncontested events of default before the BCSC:

• The amounts that the Appellants disputed were, in fact, debts that they properly owed and failed to pay.

• The fact that the Appellants had failed to pay the legal and advisory fees they owed many months after those obligations were incurred was a clear source of concern.

• There was also evidence that established a basis for concern about the assets that the parties had secured through various agreements.

The BCCA found that the Appellants’ behaviour suggested that they did not intend to operate Westrike in an open and transparent manner or adhere to their various obligations. It was open to the application judge to conclude, as he did, that the appointment of a receiver would advance the interests of justice and convenience. The BCCA dismissed the Appellants’ appeal.

Status:
This decision was not appealed and is final.
 
Takeaway:
A receiver may be appointed in circumstances where the underlying debt is in dispute, where there are uncontested events of default and where there is evidence of serious potential prejudice to a creditor’s right to recover under its claim. With respect to appellate review, an order appointing a receiver is a discretionary decision entitled to deference. In this case, the appellants failed to identify any error in principle in the presiding judge’s exercise of discretion.

Reverse Vesting Orders

Harte Gold Corp. (Re), 2022 ONSC 653
 Date of Decision: February 4, 2022
 
The ONSC considered and provided specific guidance on the factors relevant to granting a reverse vesting order (RVO).

On December 7, 2021, Harte Gold Corp. (Harte Gold), a public company that operates a gold-mining operation in northern Ontario, filed for creditor protection under the CCAA.

Following a court-approved sales process, Harte Gold entered into a subscription agreement with its primary secured creditor. The purchase price for Harte Gold’s shares under the subscription agreement was intended to be satisfied primarily by way of credit bid. The subscription agreement contemplated an RVO structure, under which the purchaser would obtain all of the outstanding equity of Harte Gold while stranding certain assets, contracts, and liabilities that would be assigned to a newly formed company. The parties chose an RVO structure to allow the purchaser to retain Harte Gold's numerous permits, licenses, and mineral claims.

Harte Gold sought approval of the RVO transaction from the ONSC. The ONSC set out a number of considerations when approval of an RVO is sought:

1. Why is the RVO necessary in this case?

2. Does the RVO structure produce an economic result at least as favourable as any other viable alternative?

3. Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative?

4. Does the consideration for the debtor’s business reflect the importance and value of the licences and permits (or other intangible assets) that are being preserved under the RVO structure?

Ultimately, the ONSC concluded that the RVO transaction was necessary and appropriate in the circumstances. Among other things, the ONSC cites that (i) the process leading to the transaction was reasonable, (ii) the transaction was superior to a bankruptcy and resulted in a higher recovery for stakeholders, (iii) all major creditors were consulted, (iv) the transaction would be beneficial for creditors and other interested parties, (v) the transaction involved sufficient consideration (including in respect of the permits and licences), and (vi) the RVO structure presented limited closing risk. Absent such a structure, there would be potential delays in transferring Harte Gold’s permits and licences, which could result in material costs.
 
Status:
This decision was not appealed and is final.
 
Takeaway:
This decision provides much needed clarity on the considerations relevant to the granting of an RVO. The decision in Harte Gold highlights the utility of RVOs as a tool to facilitate restructurings in the right circumstances and affirms the jurisdiction of CCAA courts to approve RVO transactions. Despite its usefulness, however, the RVO remains an exceptional remedy. Courts have cautioned that the RVO should not be used merely for convenience. Parties seeking to implement a restructuring pursuant to an RVO should keep in mind the considerations identified by the ONSC, and the circumstances must support the appropriateness of such an order.
 
For more information and a more detailed analysis of this decision, please see our August 2022 Blakes Bulletin: Below the Surface: A Deeper Look at Harte Gold and the Future of Reverse Vesting Orders

Interpretation of the Pari Passu and Anti-Deprivation Rules

Urbancorp Toronto Management Inc. (Re), 2022 ONCA 181
Date of Decision: March 3, 2022
 
The Ontario Court of Appeal (ONCA) considered the circumstances in which the pari passu and anti-deprivation rules apply. The pari passu rule prohibits contractual provisions that allow creditors to obtain more than their fair share on the insolvency of a counterparty. The anti-deprivation rule protects creditors by rendering void contractual provisions that remove value that otherwise would be available to them upon the debtor’s insolvency.
 
In 2016, the Urbancorp group of companies (Urbancorp Group) commenced proceedings under the CCAA. King Towns North Inc. (KTNI) leased lands to certain Urbancorp Group entities. KTNI and the Urbancorp Group entities are related parties. Rental payments under the lease were a nominal amount and significantly less than market value. This made the lease a valuable asset. The lease included a provision that on a transfer of the lease, KTNI was entitled to any “value” that was reasonably attributable to the desirability of the leased property’s location or to leasehold improvements that KTNI owned (the Transfer Provision). The Transfer Provision allowed the landlord to capture the value of the below-market lease on any transfer.

Over the objection of KTNI, the supervising CCAA judge approved the sale of certain assets related to the leased premises. The interest of the Urbancorp Group in the lease was one of the assets sold. The order provided that the assignment was free of any payment obligation to KTNI that might arise under the Transfer Provision. The monitor brought a motion before the CCAA judge for directions regarding the distribution of procceeds of sale of certain assets and recommended that the amount allocated to the lease be distributed to the Urbancorp Group rather than KTNI.

The key issue before the CCAA judge was whether the Transfer Provision offended the pari passu or the anti-deprivation rule. The CCAA judge found that the pari passu rule was not triggered because the Transfer Provision reserved the transfer value to KTNI and did not prefer KTNI over other creditors or alter the scheme of distribution among creditors. The anti-deprivation rule did not apply because the Transfer Provision was not triggered by an insolvency or bankruptcy. The CCAA judge ordered the monitor to distribute the funds allocated to the lease and to make them available for distribution to KTNI. The foreign representative of Urbancorp Inc. sought leave to appeal.

The ONCA upheld the decision of the CCAA judge and dismissed the motion for leave to appeal. It followed the Supreme Court of Canada (SCC) precedent in Chandos Construction Ltd. v. Deloitte Restructuring Inc. It found that the anti-deprivation rule does not apply where the contractual provision is triggered by an event other than insolvency or bankruptcy. The ONCA noted that the doctrine is engaged where assets are withdrawn from the estate upon bankruptcy or insolvency. The transfer of the lease triggered the Transfer Provision, not the insolvency of Urbancorp Group. Therefore, it was enforceable.

Status:
This decision was not appealed further and is final.
 
Takeaway:
The anti-deprivation rule does not apply to provisions that are triggered by events other than an insolvency or bankruptcy.

The Corporate Attribution Doctrine

Both the Aquino and the Golden Oaks decisions below consider the corporate attribution doctrine in the insolvency context. In Aquino, application of the doctrine served to protect creditors and was permitted by the ONCA. In Golden Oaks, the ONCA found that the application of the doctrine would deprive the bankrupt estate of funds and elected not to apply the doctrine. Leave to appeal both cases to the SCC has been granted and such appeals will be heard together on December 5, 2023.
 
Ernst & Young Inc. v. Aquino, 2022 ONCA 202 (Aquino)
 Date of Decision: March 10, 2022
 
The ONCA considered the circumstances in which the fraudulent intent of a corporation’s principal will be attributed to the corporation as a whole.

John Aquino was the directing mind of Bondfield Construction Company Limited (Bondfield) and its affiliate Forma-Con Construction (Forma-Con, and together with Bondfield, the Companies). He and his associates (Principals) carried out a false invoicing scheme between April 2014 and April 2019. The scheme involved suppliers falsely invoicing the Companies where no work was actually performed. Pursuant to this scheme, tens of millions of dollars were siphoned away from the Companies and to the Principals in the five years prior to the Companies’ insolvency.

Bondfield’s court-appointed monitor and the trustee in Forma-Con’s bankruptcy challenged the false invoicing scheme and sought to recover funds pursuant to section 96 of the BIA and section 36.1 of the CCAA that address transfers at undervalue. These are transfers for conspicuously less than fair market value a debtor company made within certain periods prior to the initial bankruptcy event. Given the timing of the false invoicing scheme, the transfers in this case could only be impugned where (i) the transferee was not dealing at arm’s length with the debtor and (ii) the debtor had the intent to defraud, defeat or delay a creditor.

The Principals conceded that no value was provided to the Companies in exchange for the transfers made in connection with the invoicing scheme. They asserted, however, that the Companies were financially strong and healthy enough to sustain the frauds, and that accordingly, the requisite intent to defeat creditors was not present.

The ONSC rejected the argument made by the Principals, imputed the fraudulent intent of the Principals to the Companies and found that the Companies’ transfers to the Principals were transfers at undervalue

The Principals appealed the ONSC’s decision. The ONCA rejected the Principals’ arguments and found that the application judge did not err in finding that the “intention of the debtor” under section 96 can include “the intention of individuals in control of the corporation, regardless of whether individuals had any intent to defraud the corporation itself.” The ONCA dismissed the appeals with costs.

The ONCA relied on the test set out by the SCC in Canadian Dredge and Dock Co. v. The Queen, 1985 1 SCR 662 (Dredge) and Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (Livent):

1. The wrongdoer must be the directing mind of the corporation.
2. The wrongful actions of the directing mind must have been done within the scope of his or her authority.

The ONCA noted, however, that the Livent test had not previously been applied in the insolvency context. The ONCA reframed the Livent test for the insolvency context: “The underlying question here is who should bear responsibility for the fraudulent acts of a company’s directing mind that are done within the scope of his or her authority — the fraudsters or the creditors?”

Permitting the fraudsters to receive a benefit at the expense of creditors would be perverse. The way to avoid the perverse outcome is to attach the fraudulent intentions of the Principals to the Companies to achieve the social purpose of providing proper redress to creditors, which is the goal of section 96 of the BIA.

Status:
On January 19, 2023, the SCC granted leave to appeal this decision. The appeal will be heard on December 5, 2023.
 
Takeaway:
The Livent test remains the governing standard for the corporate attribution doctrine’s application in the insolvency context. The intention of the debtor under section 96 of the BIA may be established by the intention of individuals in control of the corporation, acting within their authority. In the context of insolvency proceedings, however, the Livent test is to be considered in light of the underlying public policy considerations and whether creditors should bear the responsibility for fraudulent acts committed by a company’s directing mind if the doctrine is not applied.  
 
Golden Oaks Enterprises Inc. v. Scott, 2022 ONCA 509 (Golden Oaks)
 Date of Decision: July 4, 2022 (additional reasons on July 28, 2022)
 
The ONCA considered the application of the corporate attribution doctrine to a trustee in bankruptcy’s attempt to recover funds lost in a Ponzi scheme. The bankrupt company’s principal carried out the Ponzi scheme where the principal was the sole member of the corporation.

Joseph Gilles Jean Claude Lacasse (Lacasse) founded Golden Oaks Enterprises Inc. (Golden Oaks). Lacasse was also Golden Oaks’ principal and directing mind. Between 2009 and 2013, Golden Oaks convinced several investors to loan it funds for short periods of time in exchange for high-interest promissory notes. Money from later investors funded the interest and commissions paid to early investors and insiders. Golden Oaks’ financial situation worsened, and it began issuing promissory notes at an interest rate in excess of 60%, the criminal rate of interest. The scheme collapsed in 2013. Golden Oaks and Lacasse went into receivership and both made assignments into bankruptcy shortly thereafter.

In 2016, the trustee commenced a summary trial of 17 actions against individuals and companies who received payments from Golden Oaks in 2012 and 2013, including but not limited to commission payments and interest on promissory notes. One of the trustee’s claims was that the defendants must repay the usurious interest and commission payments on the basis that they were unjustly enriched. The trustee argued that there was no juristic reason for the payments that flowed to the defendants and enriched them at Golden Oaks’ expense.

Generally, in Ontario, the Limitations Act, 2002 provides that, subject to certain exceptions, a claimant has two years to commence a legal proceeding from the day they discovered the claim. Accordingly, the defendants argued that the unjust enrichment claims were time-barred because the payments by Golden Oaks were made more than two years before the trustee brought its action. To prove that Golden Oaks had knowledge of the claims, the defendants needed to show that Golden Oaks should be imputed with Lacasse’s knowledge, pursuant to the corporate attribution doctrine. The trustee, as a successor in interest to Golden Oaks, is imputed with the same knowledge as Golden Oaks, and therefore is subject to the same limitations period as Golden Oaks.  

The trustee contended that the corporate attribution doctrine should not be applied in the context of a Ponzi scheme.

At trial, the ONSC applied the criteria from the SCC decision in Dredge and held that the corporate attribution doctrine applies “where it is established that the acts taken by the directing mind of a corporation was not totally in fraud of the corporation and was by design or result partly for the benefit of the company…A company will accordingly be imputed with the knowledge of a person directing actions within the scope of his or her authority unless that person was acting solely for their personal benefit and against the company’s interests.”

Applying these principles, the ONSC found that the corporate attribution doctrine applied because Lacasse did not act solely for his own benefit. Many of the funds acquired through the Ponzi scheme were used to pay other investors and for the company’s operating expenses, the purchase, renovation and repair of properties and advertising and other administrative expenses.

On appeal, the ONCA relied on Dredge, as modified by Livent. The ONCA noted that, in Livent, the SCC recognized that courts retain discretion to refrain from applying the corporate attribution doctrine where, under the circumstances, it would not be in the public interest to do so. The ONCA found the trial judge erred by failing to consider the discretion recognized in Livent. The ONCA also found that there were strong public policy reasons not to apply the doctrine in this case, where such application would be at the expense of creditors of the estate. In this case, application of the doctrine would undermine the fundamental tenet of insolvency law: ensuring equitable distribution of assets between creditors. Application of the corporate attribution doctrine would lead to the appellants avoiding the consequences of having collected criminally high interest rates and deprive the trustee of a civil remedy that would inure solely for the collective benefit of legitimate creditors. The corporate attribution rules, therefore, did not apply and the trustee’s actions were not time-barred.

Status:
On March 30, 2023, the SCC granted leave to appeal this decision. The appeal will be heard on December 5, 2023.
 
Takeaway:
Where application of the corporate attribution doctrine would not be in the public interest and would deprive the bankrupt estate of funds that would benefit creditors, courts retain the discretion not to apply the doctrine.

Substantive Consolidation

White Oak Commercial Finance, LLC v. Nygard Holdings, 2022 MBQB 48
Date of Decision: March 10, 2022
 
The Court of Queen’s Bench of Manitoba (MBQB), as it was then, considered the appropriate circumstances to order substantive consolidation of the assets and liabilities of a related group of entities. The MBQB found that, based on the applicable legal principles, the balancing of interests favoured an order for substantive consolidation.
 
A receiver was appointed over the assets, undertakings and properties of nine related Canadian and United States entities (the Nygard Group). The receiver sought an order substantively consolidating the Nygard Group’s assets and liabilities. This would have the effect of treating the entity’s assets and liabilities as common assets and liabilities, such that creditors’ claims against the Nygard Group’s individual members would become claims against the Nygard Group as a whole. Two members of the Nygard Group, Nygard Enterprises Ltd. (NEL) and Nygard Properties Ltd. (NPL), contested the receiver’s request on the basis that certain of their assets were solely owned and should not be subject to claims by creditors of the Nygard Group’s other members. NPL also submitted that it was solvent, asset-rich and a secured creditor of the Nygard Group’s other members.
 
The MBQB highlighted that orders of substantive consolidation are an extraordinary remedy because secured creditors may be prejudiced in favour of other creditors, including unsecured creditors. Relying on Redstone Investment Corporation (Re) (Redstone) and Basic v. Millennium Educational & Research Charitable Foundation, the MBQB found that the test for substantive consolidation requires a balancing of the affected parties’ interests. The MBQB, among other things, applied the seven elements of consolidation outlined in Redstone:

1. Difficulty in segregating assets.

2. Presence of consolidated financial statement.

3. Profitability of consolidation at a single location.

4. Commingling of assets and business functions.

5. Unity of interests in ownership.

6. Existence of intercorporate loan guarantees.

7. Transfer of assets without observance of corporate formalities.

After weighing each factor, the court concluded that the Nygard Group, including NPL and NEL, carried on a common enterprise and benefitted from the centralized way the business was operated. The prejudice to NPL and NEL was outweighed by the benefit to employees, landlords, suppliers, vendors and taxing authorities who were creditors of the Nygard Group. Therefore, it was fair and reasonable to order substantive consolidation.
 
Status:
This decision was not appealed and is final.
 
Takeaway:
Substantive consolidation continues to be an extraordinary remedy that will only be ordered where the evidence establishes that debtor entities carried on a common enterprise. Prejudice to third party creditors arising from any substantive consolidation order remains an important consideration in determining whether any such order is appropriate.

Priority Dispute: Abandonment and Reclamation Obligation Versus Other Claims

Courts continue to grapple with the interpretation and scope of the SCC decision in Orphan Well Association v. Grant Thornton Ltd. (Redwater) regarding the treatment and priority of environmental claims in insolvency proceedings. The Manitok and the Trident decisions below both address the scope of the priority for environmental obligations in the context of oil and gas producers.

Manitok Energy Inc. (Re), 2022 ABCA 117 (Manitok)
Date of Decision: March 30, 2022
 
Manitok Energy Inc. (Manitok) was an oil and gas company that became insolvent and became subject to receivership proceedings. At the time of its insolvency, Manitok had certain assets of value and others with no value due to inherent abandonment and reclamation obligations (AROs). Prior to its insolvency, two builders’ liens were filed against certain of its valuable oil and gas well sites.

The Court of Appeal of Alberta (ABCA) considered the interpretation and application of the SCC’s Redwater decision. The ABCA considered whether proceeds of sale of assets with value must be used to satisfy AROs in relation to assets with no value that were disclaimed by the receiver, in priority to two builders’ liens filed against the sold assets.

At the lower court, the Court of Queen’s Bench of Alberta (ABQB), as it was then, considered the language in the Redwater decision, suggesting that assets unrelated to the environmental condition or damage may not be subject to the so-called Redwater priority. The court determined that the assets sold to a third party were unrelated to the assets the receiver disclaimed and were subject to abandonment orders from the Alberta Energy Regulator (AER). The ABQB also emphasized the fact that sale proceeds were held in trust by the receiver, subject to the approval and vesting order (AVO) in that case, thereby preserving the lien holders’ rights as against the proceeds. Thus, the ABQB ruled in favour of the lien holders.

The ABCA reversed the decision of the ABQB and found that the lower court’s interpretation of “assets unrelated” would render Redwater meaningless. If proceeds of valuable asset sales cannot be applied to obligations of “unrelated assets,” there would never be proceeds available to satisfy AROs. The ABCA also held that conversion of assets to cash before the AER issues an enforcement order doesn’t change the analysis.

The ABCA noted that the receiver holding the proceeds of sale in trust did not create any greater rights on behalf of any creditor in accordance with their priorities. The sole purpose of the receiver’s trust is to preserve assets for the benefit of creditors and not to reorder creditor priorities. Accordingly, the AROs had to be satisfied by the receiver prior to the builders’ lien claims.

Status:
This decision was not appealed further and is final.
 
Takeaway:
This decision clarifies the law as stated in the Redwater decision concerning AROs. The requirement to discharge an ARO is an inherent obligation on the estate and applies irrespective of the existence and/or timing of any enforcement action by the regulator. The placement of funds into a trust account does not alter existing priorities or create new priorities.
 
Orphan Well Association v. Trident Exploration Corp., 2022 ABKB 839 (Trident)
Date of Decision: December 13, 2022
 
The Court of King’s Bench of Alberta (ABKB) has confirmed that an ARO ranks in priority to claims of municipalities for unpaid property taxes in insolvency proceedings.

Trident Exploration Corp. et al. (Trident) were a group of privately owned oil and gas exploration and production companies and partnerships. In 2019, Trident ceased all operations and terminated all employees and contractors. At the time, Trident’s primary obligations consisted of AROs estimated at C$407-million. The Orphan Well Association (OWA) brought an application to appoint a receiver. The primary objective of the receivership was to reduce the AROs by selling Trident’s assets. The reclamation obligations would otherwise ultimately rest with the OWA. The sales process sought to recover the most value for Trident’s assets, not only through cash proceeds from the sales, but also by transferring much of Trident’s reclamation obligations to the parties who purchased Trident’s assets. The receiver was able to transfer most, but not all, of Trident’s reclamation obligations to other oil and gas companies. As a result of the sales process, 66% of Trident’s AROs were transferred and the receiver obtained C$900,000 in sale proceeds.

The receiver brought an application for advice and directions regarding the distribution of the sale proceeds. The AER and the OWA claimed priority over the remaining funds. However, several municipalities argued that the funds should be shared to partially satisfy municipal tax obligations accruing after the receivership commenced, in respect of assets that the receiver had not sold.

The ABKB rejected the municipalities’ argument that they should share in the sale proceeds on the basis of a parallel priority arising out of the Municipal Government Act (MGA). The court held that OWA's entitlement to the proceeds of sale was not a claim on the estate subject to the determination of priorities, but an entitlement addressed outside the insolvency regime because it is a non-monetary obligation that cannot be reduced to a provable claim. ARO costs are not levied to generate revenue for the OWA but are a public duty, whereas municipal taxes very much are for the purpose of generating revenue for the municipality. Even if this was a matter of competing priorities, the MGA is clear that municipal taxes take second to the Crown, which includes the AER.

Status:
This decision was not appealed and is final.

Takeaway:
Municipal taxes are not akin to AROs in respect of oil and gas assets, nor do they share a parallel priority. Section 348(c) of the MGA specifically contemplates that municipal tax claims are subordinate to claims of the Crown, which include the AER.

Deference to the Receiver in a Sales Process

Ontario Securities Commission v. Bridging Finance Inc., 2022 ONSC 1857
Date of Decision: March 30, 2022
 
In 2021, on application by the Ontario Securities Commission, a receiver was appointed in respect of Bridging Finance Inc. and other respondents (Bridging Funds) pursuant to section 129 of the Securities Act (Ontario).

The receiver of the Bridging Funds sought an order approving its rejection of various bids and terminating an ongoing sale and investment solicitation process (SISP). This relief was opposed by one unitholder (Opposing Unitholder) who sought an adjournment to facilitate further engagement with unitholders.

The ONSC considered two issues: (i) whether the SISP should be terminated without further unitholder consultation or a unitholder vote, and (ii) regardless of whether the SISP is terminated, whether the receiver should solicit bids for managing the orderly liquidation of the Bridging Funds’ loan portfolio.

On the first issue, the receiver submitted that it exercised its business judgment and determined that the best path forward for stakeholders was to reject the remaining bids, terminate the SISP and continue with the status quo. The receiver was of the view that the time and expense of engaging in further stakeholder consultation was not justified given that extensive stakeholder consultation had already taken place. The receiver also submitted that the SISP, by its terms, gave the receiver authority to terminate the SISP at any time.

The Opposing Unitholder challenged the relief sought, seeking instead: (i) a more comprehensive discussion of the bids, (ii) a unitholder vote on the bids, and (iii) a further process to solicit bids for an orderly liquidation of the Bridging Funds, or, in the alternative to an SISP termination, further consultation with the unitholders.

The ONSC confirmed that, in reviewing a sales process, the court is to defer to the business judgment of the receiver and is not to “second-guess” the receiver’s recommendations. Courts will presume that the receiver is acting properly, unless compelling evidence is presented to the contrary.

The key flaw in the Opposing Unitholder’s position was that no evidence was filed to support its concerns or to suggest that the process carried out by the receiver was improvident or unfair. The receiver, in contrast, filed substantial evidence concerning the economics of the available bids and extensive unitholder engagement. The ONSC noted that the SISP gave the receiver the authority to terminate the SISP at any time and that the receiver had determined, in its business judgment, that the best path forward for stakeholders was to terminate the SISP and continue with the status quo. In the circumstances, the ONSC ruled in favour of the receiver and agreed with the receiver’s evidence which supported the proposed course of action as being in the best interests of the stakeholders.

Status:
This decision was not appealed and is final.
 
Takeaway:
Courts will afford deference to decisions made by court-appointed receivers in respect of sales processes. Courts will only interfere with such decisions in exceptional circumstances. When challenging a receiver’s recommendation on a sales process, compelling evidence must be presented to suggest that the receiver’s actions are not in the best interest of stakeholders. Absent compelling evidence, the receiver’s business judgment will be presumed to be correct.

Vesting Out Municipal Property Taxes

Grant Thornton Limited et al. v. 1902408 Ontario Ltd., 2022 ONSC 2011
Date of Decision: April 1, 2022

The ONSC considered the impact of an AVO, which purported to vest out municipal taxes, on the ability of the municipality to subsequently collect such taxes from the purchaser of an insolvent debtor’s assets.

In 2017, 1902408 Ontario Ltd. (190) requested a reconsideration of its tax assessment. Representatives of the municipal property assessment corporation (MPAC) met with representatives of 190 and entered into minutes of settlement (Settlement) to settle the classification and value of the subject property for the 2017 to 2019 tax years. The Township of Augusta (Township), is a municipal corporation governed by the Municipal Act. In 2018, the Township confirmed that a reduction in 190’s tax assessment had occurred from the Settlement. The reduced tax was later reflected in an amended notice of assessment for the applicable taxes.

In January 2019, a receiver was appointed with respect to 190 in connection with 27 acres of land (Property), the same Property which formed the subject of the Settlement.

The receiver marketed the Property and in July 2019, an AVO was granted to approve the sale of the Property to 1217858 B.C. Ltd. (121). The Township did not oppose the AVO. The sale to 121 closed in September 2019.

After the sale of the Property to 121, the Township issued a supplemental tax notice to 121 where it purported to impose an additional C$159,000 of taxes on the Property retroactive to January 2017. 121 disputed the supplemental tax, relying on the terms of the AVO which vested the Property in 121 as purchaser “free and clear of all levies and charges.”

The Township argued that at the time the AVO was granted, there were certain omitted assessments for the applicable tax years in question that MPAC had not issued. As such, the Township asserted it had the ability to issue the supplemental notice. In addition, the Township argued that the ONSC lacks jurisdiction to deal with the omitted assessment as this specific issue falls within the jurisdiction of the assessment review board (ARB) pursuant to the provincial Assessment Act.

The ONSC held that the Township was precluded from recovering taxes from 121 because of the terms of the AVO. It was undisputed that the Township was served with the motion for the AVO and did not respond to that motion. 

The ONSC reasoned that while the AVO does not expressly use the term “taxes,” it was not necessary to do so as it was clear from the wording of the AVO that claims by creditors are vested out. The ONSC also noted additional facts to support this position. First, taxes were adjusted on closing such that there were no taxes owing once the sale transaction took place. In addition, the word “levies” is commonly used by MPAC and the Township to describe different types of taxes (i.e., “municipal” and “education” levies). The ONSC also emphasized that purchasers, in the context of receiverships, must be able to rely on vesting orders to provide certainty.

Status:
This decision was not appealed and is final.
 
Takeaway:
When purchasing an insolvent debtor’s assets, purchasers are entitled to rely on the clear terms of AVOs which vest out municipal tax obligations on notice to the relevant tax authorities. The certainty provided to purchasers by AVOs in vesting out the debtor company’s obligations is key to the modern insolvency regime and will typically be protected by insolvency courts.

Mediation Within a CCAA Proceeding

1057863 B.C. Ltd. (Re), 2022 BCSC 759
Date of Decision: May 9, 2022
                                                                                                   
The BCSC considered whether it was appropriate to grant an order which provided for a mandatory mediation process (Mediation Order) pursuant to section 11 of the CCAA where a key participant in the mediation opposed the Mediation Order.

1057863 B.C. Ltd. and its affiliates (Petitioners) were the owners of a pulp mill located in Nova Scotia. As part of their operations, the Petitioners leased and operated an effluent treatment facility (ETF) that was owned by the province of Nova Scotia (Province). In 2015, the Province passed legislation that effectively required the Petitioners to cease using the ETF by 2020 — 10 years prior to the original lease term between the Petitioners and the Province. The Petitioners were unsuccessful in arranging for a replacement ETF by 2020.

The pulp mill ceased operations in 2020 and the Petitioners commenced proceedings under the CCAA. Prior to the commencement of the CCAA proceedings, the Petitioners asserted compensation claims against the Province arising from the closure of the pulp mill (Compensation Claims) that were potentially of significant value.

Throughout the CCAA proceedings, the Petitioners sought to engage the Province in discussions to address the Compensation Claims, including by way of mediation. The Province refused to engage with the Petitioners. In November 2021, the Petitioners notified the Province of their intention to seek the Mediation Order.

In their motion, the Petitioners referred to various authorities where the court ordered a mediation under section 11 of the CCAA. In response, the Province noted that these authorities could be distinguished since the mediations were ordered in respect of claims creditors asserted against the debtor, rather than claims the debtor company asserted against a third party.

The BCSC granted the Mediation Order over the Province’s objections. In its ruling, the BCSC held that it had the jurisdiction to grant the Mediation Order under the broad statutory jurisdiction provided in section 11 of the CCAA. The BCSC recognized that negotiation and compromise can greatly assist a debtor in taking advantage of the benefits of the CCAA process.

The BCSC concluded that success for the Petitioners in the Compensation Claims would materially enhance the Petitioners’ chances of a successful restructuring. Accordingly, the BCSC found that the Province’s reluctance to participate in mediation should not dictate the result of the motion and was not a sufficient basis for it to refuse to grant the Mediation Order.

Status:
The Province sought leave to appeal the Mediation Order to the BCCA on April 21, 2022. No date has been set for the hearing at this time. The Province and the Petitioners have voluntarily entered into a pause of litigation, including the pending appeal, to focus on the mediation.
 
Takeaway:
In the context of insolvency proceedings, court-mandated mediation is not limited to claims brought against the debtor company. It may also be ordered in respect of claims the debtor company brings, particularly where resolution of such claims has a real prospect to enhance a debtor company’s chances of a successful restructuring.

Treatment of Class Action Claims in CCAA

Just Energy Group Inc. (Re), 2022 ONCA 498
Date of Decision: June 28, 2022

The ONCA considered whether class creditors’ contingent claims should be allowed to be determined for voting purposes prior to a vote by creditors on a plan of arrangement.

Just Energy Group Inc., et al. (Just Energy) sought protection under the CCAA in March 2021. Just Energy provides energy to approximately 950,000 customers in Canada and the U.S. and employs over 1,000 people.

On October 3, 2017, two parties in the U.S. filed a proposed class action lawsuit against Just Energy for breach of contractual obligations. In February 2022, the U.S. class claimants brought a motion seeking: (i) an order declaring that Just Energy’s CCAA proceedings would not affect the U.S. class claimants or, in the alternative (ii) an order directing that an expedited process be undertaken to adjudicate the U.S. class claimants’ claims.

Just Energy, supported by its court-appointed monitor and senior secured creditors, successfully opposed this motion (see the written reasons of Justice McEwen dated February 23, 2022). On the first issue, the ONSC found that granting an order leaving the U.S. class claimants unaffected would elevate the class claims above other unliquidated, unsecured, contingent claims and allow the U.S. class claimants to potentially dictate the form of a plan. The ONSC similarly rejected the U.S. class claimants’ second request for an expedited process to establish their claim in light of the existing claims process that Just Energy commenced. The ONSC found that the U.S. class claimants had not yet engaged in the adjudication process provided for under the claims procedure order. It also found that the alternative process proposed by the U.S. class claimants would be a tremendous distraction from the restructuring at a critical time.

The U.S. class claimants sought leave to appeal the ONSC’s findings in respect to the second issue on the basis that contingent claims, such as those held by the U.S. class claimants, should be determined for voting purposes in an expedited process prior to a meeting of creditors.

The ONCA dismissed the motion for leave to appeal on the basis that the proposed appeal was not prima facie meritorious and the issues raised were not significant to the insolvency practice. The ONCA found that the supervising judge in the CCAA proceeding was extensively familiar with the complex CCAA proceeding and well informed to exercise discretion in this matter, and therefore, entitled to a high level of deference. Appellate intervention is only justified in such circumstances where the supervising judge erred in principle or exercised their discretion unreasonably.

Status:
This decision was not appealed further and is final.
 
Takeaway:
Whether and how contingent claims must be determined prior to a creditor vote is a fact-specific analysis. It depends on factors such as: (i) whether the existing claims procedure is sufficient to address the determination of claims and (ii) the impact an alternative process would have on the restructuring. When such determination is made by a supervising CCAA judge, it is entitled to a high level of deference and will not be interfered with unless the supervising judge erred in principle or exercised their discretion unreasonably.

Centre of Main Interest

In the Matter of Voyager Digital Ltd., 2022 ONSC 4553
Date of Decision: August 4, 2022
 
The ONSC considered the factors relevant to determining the publicly listed foreign corporation’s centre of main interest where recognition of such foreign corporation’s insolvency proceeding as a “foreign main proceeding” was sought in Canada.

Voyager Digital Ltd. (VDL) is a B.C.-incorporated company. Its shares are listed for sale on the Toronto Stock Exchange (TSX). VDL has no independent operations. Its U.S. subsidiaries operate a cryptocurrency brokerage and custodial lending service in the U.S. On July 5, 2022, VDL and two of its U.S.-based subsidiaries (together, the Voyager Debtors), filed under Chapter 11 of the U.S. Bankruptcy Code (Chapter 11 Proceeding). VDL was appointed as the foreign representative of itself and the other Voyager Debtors in the Chapter 11 Proceeding.  

VDL sought recognition of its Chapter 11 Proceeding in Canada pursuant to Part IV of the CCAA as a “foreign main proceeding.” VDL sought various other relief, including a stay of proceedings in Canada and recognition of certain orders granted in the Chapter 11 Proceeding. Part IV of the CCAA provides a process for the administration and recognition of cross-border insolvencies with a view to promoting cooperation and coordination among foreign courts. Under Part IV, a foreign proceeding may be recognized as either a “foreign main proceeding” or “foreign non-main proceeding.” The primary difference between the two concepts is that where a foreign proceeding is a “foreign main proceeding,” certain relief is granted on a mandatory, rather than discretionary basis, including a stay of proceedings in Canada. Whether a proceeding is a “foreign main proceeding” or “foreign non-main proceeding” turns on the location of the foreign debtor’s centre of main interest (COMI) and whether such COMI is in the jurisdiction where the plenary insolvency proceeding was commenced.

VDL’s position was that the Chapter 11 Proceeding was a foreign main proceeding and that VDL’s COMI was in the U.S. VDL’s position was opposed by counsel appearing for certain potential investors and counsel for a proposed representative plaintiff (Opposing Parties) in a recently commenced class action in Ontario against VDL. They asserted that VDL’s jurisdiction of incorporation (B.C.) and its listing on the TSX both indicated that its COMI was Canada.

The ONSC applied three factors to determine VDL’s COMI:

1. The location in which the foreign proceeding has been filed is readily ascertainable by creditors.

2. The location in which the foreign proceeding has been filed is one in which the debtor’s principal assets or operations are found.

3. The location in which the foreign proceeding has been filed is where the debtor’s management takes place.

The ONSC found that VDL’s COMI was in the U.S. on the basis that, in a case involving a public company, reliance should be placed on the objectively ascertainable expectations of shareholders and other stakeholders as to the location of the company’s principal assets and operations in publicly filed documents. VDL’s publicly filed documents clearly disclosed that its principal place of business was the U.S. The documents clearly indicated that the location of VDL’s principal assets, operations and management was the U.S. The ONSC therefore recognized VDL’s foreign proceeding as a “foreign main proceeding.”

Status:
This decision was not appealed and is final.
 
Takeaway:
When determining the COMI of a public company, courts will look to the (i) location ascertainable by creditors, (ii) location of the debtor’s principal assets and operations, and (iii) location of the debtor’s management. The objective expectations of shareholders and other stakeholders as set out in a company’s publicly filed disclosure provides key guidance in this analysis.

Arbitration Clauses in Insolvency Proceedings

The Mundo Media decision and the Petrowest decisions below are two examples where Canadian courts have navigated the tension between arbitration and insolvency. Arbitration is a consensual method of dispute resolution where parties can customize their process and select their own decision-maker. In insolvency proceedings, disputes involving the debtor are often involuntarily consolidated in a single insolvency proceeding. In both cases, courts favour efficiency and judicial economy over party autonomy in deciding how a dispute is to be disposed of in the context of receivership proceedings.
 
Mundo Media Ltd. (Re), 2022 ONCA 607 (Mundo Media)
Date of Decision: August 22, 2022

The ONCA denied leave to appeal a decision of the ONSC considering whether a receiver’s  motion demanding payment of amounts owing to the receivership estate should be stayed on the basis of an international arbitration agreement.

Mundo Media Ltd. (Mundo) is an advertising technology company that provided online marketing services to clients. In 2017, Mundo entered into several service agreements with SPay Inc. (SPay), a sports management technology company. On April 9, 2019, Mundo was placed into receivership. The receiver claimed that SPay was indebted to Mundo for US$4.1 million and proposed to assert a claim on behalf of Mundo against SPay, for the benefit of Mundo’s creditors.

SPay sought to stay the receiver’s motion based on Article 8 of Schedule II to the International Commercial Arbitration Act, 2017 (ICAA). The ICAA requires the court to stay proceedings falling within the scope of an arbitration agreement, unless the court finds the arbitration agreement is null and void, inoperative or incapable of being performed.

The ONSC dismissed SPay’s motion for a stay on the basis of the single proceeding model applicable in bankruptcy and insolvency matters. The single proceeding model favours dealing with litigation concerning an insolvent company in a single forum, rather than fragmented across separate proceedings. The ONSC stated that the single control model in the context of insolvency proceedings is meant both to centralize claims by creditors against the debtor and claims by the debtor against other third parties in a single proceeding model.

On appeal, the ONCA noted that the single control model has typically been a “shield” to protect debtors from having to defend claims in multiple proceedings or jurisdictions. The ONCA did not, however, find anything in the jurisprudence to preclude the single control model being used as a “sword” to enable receivers to pursue claims against third parties.

Status:
This decision was not appealed further and is final.
 
Takeaway:
The application of the single proceeding model in insolvency is not limited to the protection of debtors. It may also be applied to override contractual provisions, such as mandatory arbitration clauses, and to enable parties to pursue claims against third parties in a single proceeding model within the context of the insolvency proceeding.
 
Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (Petrowest)
Date of Decision: November 10, 2022
 
In Petrowest, the SCC provided clarity on the circumstances in which an insolvency court will favour the single proceeding insolvency model over a mandatory arbitration provision in an arbitration agreement and find such arbitration agreement “inoperative.”
 
Petrowest Corp. and Peace River Hydro Partners and related entities (Peace River) were parties to various agreements in respect of a hydroelectric dam construction in northeastern B.C. Most of these agreements contained mandatory arbitration provisions requiring that claims by Petrowest Corp. against Peace River in respect of such agreements be pursued through arbitration. 

During Petrowest Corp.’s receivership proceedings, the receiver commenced a civil claim against Peace River seeking recovery of amounts allegedly owing for the performance of Petrowest Corp.’s subcontracted work. Peace River responded seeking to stay the civil claim in favour of arbitration as contemplated by the agreement among the parties. The receiver took the position that it was not a party to the agreements containing the arbitration clauses, and therefore, was not bound by the arbitration provisions. The receiver argued that as a court appointed officer, it has the powers and obligations conferred under the BIA permitting it to request the court to exercise its inherent jurisdiction to displace private contractual rights to achieve the objectives of the BIA.

At the lower level, the BCSC refused to stay the proceedings. It found that although the arbitration agreements were valid, the court had the “inherent jurisdiction” to override the arbitration agreements. The BCCA also refused to stay the proceedings on the basis that the receiver had disclaimed the arbitration agreements by bringing a civil action.

The decision was appealed to the SCC where the court considered under what circumstances an otherwise valid arbitration agreement will be inoperative under section 15(2) of B.C.’s Arbitration Act (Arbitration Act) in the context of insolvency proceedings. Section 15(2) states that a court must order a stay of proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed. The SCC considered the interplay between the BIA and the Arbitration Act. The BIA provides for a single forum for the orderly resolution of stakeholders’ rights. The Arbitration Act favours party autonomy. The SCC determined that the Arbitration Act gives courts the jurisdiction to find arbitration agreements inoperative. It proposed a non-exhaustive list of factors to determine whether an arbitration agreement is inoperative, including:

1. The effect of arbitration on the integrity of the insolvency proceedings.

2. The relative prejudice to the parties from the referral of the dispute to arbitration.

3. The urgency of resolving the dispute.

4. The applicability of a stay of proceedings under bankruptcy or insolvency law.

5. Any other factor the court considers in the circumstances.

In applying this framework, the SCC concluded that enforcing the arbitration agreement in the circumstances would compromise the orderly and efficient resolution of the receivership proceedings. The SCC declared the arbitration agreement inoperative and agreed that the stay of proceedings should be refused.
 
Status:
This decision is final.
 
Takeaway:
Arbitration agreements are to be enforced in the insolvency context unless enforcing them would prevent the orderly and efficient resolution of a dispute. Pursuant to section 15(2) of the Arbitration Act, courts may find an arbitration agreement to be inoperative where arbitration would compromise the orderly and efficient resolution of a receivership.
 
For more information, please see our November 2022 Blakes Bulletin: Supreme Court of Canada Clarifies Application of Arbitration Clauses in Insolvency

Set-Off

The Ontario and Quebec courts considered set-off and the exercise of rights of set-off within the context of insolvency. In both Carillion and Bloom Lake below, the courts considered the SCC decision in Montréal (City) v. Deloitte Restructuring Inc. (Groupe S.M.). In Carillion, the court determined that it was appropriate to allow the exercise of set-off rights. Under different circumstances, the court in Bloom Lake denied the exercise of set-off rights.

Carillion Canada Inc., 2022 ONSC 4617 (Carillion)
Date of Decision: September 2, 2022
 
The ONSC considered whether stay provisions in an initial order stayed an exercise of contractual set-off rights by HSBC Bank Canada (Bank) and, if so, whether the exercise of such set-off rights was preserved by section 21 of the CCAA.

The Bank and Carillion Canada Inc. (Carillion Canada) were party to an agreement that authorized the Bank to exercise set-off against the obligations of Carillion Canada in the event that the Bank had to make payments under any of the letters of credit it had issued at Carillion Canada's request. Carillion Canada’s primary operating account was with the Bank. In 2018, after Carillion Canada applied for protection under the CCAA, the letters of credit were called upon and the Bank paid out C$6.8-million. The Bank notified Carillion Canada that it would take C$6.8-million from the operating account, in an exercise of its contractual and legal set-off rights under various indemnity agreements. The Bank did not seek leave of the court to do so.

The ONSC first considered whether the Bank’s exercise of set-off rights was stayed by the initial order. The Bank submitted that, while the court has jurisdiction to temporarily stay set-off rights in a CCAA proceeding, the set-off rights exercised by the Bank were not prohibited because they arose prior to the making of the initial order. The ONSC found that the set-off by the Bank was in breach of the initial order. While the contractual right to set-off arose prior to the CCAA proceeding, the actual exercise was carried out after the initial order was granted. Accordingly, the Bank was required to seek leave of the court, and instead, knowingly breached the stay provision contained in the initial order.

The Bank’s exercise of set-off rights was, however, preserved by section 21 of the CCAA. The ONSC noted that in Groupe S.M., the SCC concluded that section 21 of the CCAA allows pre-pre set-off for the purpose of quantifying creditors’ claims on the date of commencement of proceedings. The Bank’s obligation to pay out under the letters of credit, on the one hand, and Carillion Canada’s indemnity obligations under the indemnity agreements on the other hand, both existed prior to the filing date and arose prior to the filing date. The pre-filing obligations were merely quantified after the filing date.

The fact that the Bank was stayed from exercising its set-off rights unilaterally at the time of such exercise did not alter the legal conclusion that the Bank was entitled to a set-off claim. While the Bank breached the initial order in exercising set-off at the time it did, the ONSC found that no prejudice resulted to unsecured creditors of Carillion Canada from the exercise, as the recovery of unsecured creditors would always have been dependent on HSBC’s exercise of set-off rights. 

Status:
This decision was not appealed and is final.

Takeaway:
The ONSC confirmed that set-off rights can be exercised in an insolvency where a creditor holds contractual “pre-pre” set-off rights preserved under section 21 of the CCAA. The fact that the set-off right was exercised at a time when such right was subject to a stay of proceedings will not preclude a court from subsequently finding that the exercise was, nevertheless, valid and enforceable where no prejudice resulted to creditors as a result of the timing of the exercise.
 
Arrangement relatif à Bloom Lake, 2022 QCCA 1740 (Bloom Lake)
Date of Decision: December 22, 2022

In our May 2022 Blakes Bulletin: Key Developments in Canadian Insolvency Law, we discussed the Superior Court of Quebec's (QCS) decision on the issue of pre-post set-off. In its CCAA proceedings, Cliffs Quebec Iron Mining ULC (CQIM) disclaimed certain contracts pursuant to section 32 of the CCAA. Counterparties to these contracts had damage claims arising from the disclaimer. Pursuant to the applicable statutes, distributions made in respect of these damage claims by CQIM were deemed to include a payment on account of sales taxes. As a result, CQIM was entitled to claim certain federal and provincial sales tax refunds (Damage Payment ITCs). The QCS determined that Damage Payment ITCs in respect of pre-filing contracts disclaimed in the course of CCAA proceedings are post-filing in nature and may not be subject to set-off against pre-filing claims of taxing authorities.

Since then, an appeal was heard by the Quebec Court of Appeal (QCA). In a unanimous decision, the QCA affirmed the decision of the QCS, confirming that Damage Payment ITCs are post-filing claims. It also affirmed that the taxing authorities are restricted from setting-off the Damage Payment ITCs against their pre-filing tax claims against the CCAA debtor.

At the QCA, Revenu Quebec (RQ) argued that the Damage Payment ITCs constituted a pre-filing claim that could be set-off against pre-filing sales tax claims against the CCAA debtor. In the alternative, RQ argued that the CCAA supervising judge failed to properly exercise his discretion under section 11 to allow for set-off of a pre-filing obligation against a post-filing obligation.

RQ attempted to characterize the Damage Payment ITCs as pre-filing claims on the basis that the Damage Payment ITCs were related to restructuring claims pursuant to section 32(7) of the CCAA, which provides for a provable claim to contractual counterparties if a loss results from a disclaimer or resiliation. Pursuant to section 19(1)(b) of the CCAA, a provable claim is a pre-filing claim.

The QCA rejected this argument on the basis of a plain reading of the relevant provisions of the Excise Tax Act (Canada) and Retail Sales Tax Act (Quebec) that give rise to the Damage Payment ITCs at issue. Both provisions stipulate that when an amount is paid because of termination of an agreement for the making of a taxable supply, the person is deemed to have paid for the supply and the registrant is deemed to have collected the tax on the day that the damages were paid. Therefore, it was only when the interim distribution was made under the CCAA plan to creditors with damage claims arising from disclaimers that payment for the supply of taxable service was deemed to have been made. It is at this time that the entitlement of the CCAA debtor to the Damage Payment ITCs arose.

The QCA relied on the recent SCC decision in Groupe S.M. (rendered after the trial judgment), to dismiss RQ's argument that the CCAA supervising judge should have exercised his discretion under section 11 of the CCAA to allow the pre-post filing set-off. Although the SCC left the door open to pre-post filing set-off in certain exceptional circumstances, it concluded after the baseline considerations articulated by the SCC in Groupe S.M. were not satisfied. In particular, the QCA focused on the failure of RQ to establish that the criterion of appropriateness was met.

Status:
On February 16, 2023, RQ filed an application for leave to appeal this decision to the SCC that focused on the exercise of discretion by the CCAA supervising judge in failing to allow pre-post set-off. No decision on the leave application has yet been rendered.

Takeaway:
Damage Payment ITCs that result from the disclaimer of contracts are post-filing obligations. Based on a plain reading of the tax statutes from which Damage Payment ITCs arise, the Damage Payment ITCs only arise when a distribution is made post-filing on account of the damages. Discretion to allow pre-post filing set-off will only be exercised in exceptional circumstances.

For more information, please contact:

Pamela L.J. Huff            +1-416-863-2958
Kelly Bourassa              +1-403-260-9697
Linc Rogers                   +1-416-863-4168
Aryo Shalviri                  +1-416-863-2962
Caitlin McIntyre            +1-416-863-4174
Alexia Parente              +1-416-863-2417

or any member of our Restructuring & Insolvency group.