Montréal (City) v. Deloitte Restructuring Inc.

Montréal (City) v. Deloitte Restructuring Inc.
Collection
Supreme Court Judgments
Date
2021-12-10
Neutral citation
2021 SCC 53
Report
[2021] 3 SCR 736
Case number
39186
Judges
Wagner, Richard; Moldaver, Michael J.; Karakatsanis, Andromache; Côté, Suzanne; Brown, Russell; Rowe, Malcolm; Martin, Sheilah
On appeal from
Quebec
Subjects
Bankruptcy and insolvency
Notes
Case in Brief SCC Case Information
Decision Content
SUPREME COURT OF CANADA
Citation: Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53, [2021] 3 S.C.R. 736
Appeal Heard: May 20, 2021 Judgment Rendered: December 10, 2021 Docket: 39186
Between:
Ville de Montréal Appellant
and
Deloitte Restructuring Inc. Respondent
- and -
Alaris Royalty Corp., Integrated Private Debt Fund V LP, Thornhill Investments Inc., Ville de Laval and Union des municipalités du Québec Interveners
Official English Translation
Coram: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe and Martin JJ.
Joint Reasons for Judgment: (paras. 1 to 100)
Wagner C.J. and Côté J. (Moldaver, Karakatsanis, Rowe and Martin JJ. concurring)
Dissenting Reasons: (paras. 101 to 143)
Brown J.
Ville de Montréal Appellant
v.
Deloitte Restructuring Inc. Respondent
and
Alaris Royalty Corp.,
Integrated Private Debt Fund V LP,
Thornhill Investments Inc.,
Ville de Laval and
Union des municipalités du Québec Interveners
Indexed as: Montréal (City) v. Deloitte Restructuring Inc.
2021 SCC 53
File No.: 39186.
2021: May 20; 2021: December 10.
Present: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe and Martin JJ.
on appeal from the court of appeal for quebec
Bankruptcy and insolvency — Stay of creditors’ rights and remedies — Claims that may be dealt with by compromise or arrangement — Compensation between debt arising before and debt arising after initial order — Quebec Voluntary Reimbursement Program — Whether claim arising from agreement entered into under Quebec Voluntary Reimbursement Program is necessarily claim that relates to debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation pursuant to s. 19(2)(d) of Companies’ Creditors Arrangement Act — Whether supervising judge’s discretion in restructuring context allows judge to stay right invoked by creditor to effect compensation between debt arising before and debt arising after initial order — Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36, ss. 11, 11.02, 19(2)(d), 21 — Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c. R‑2.2.0.0.3 — Voluntary Reimbursement Program, CQLR, c. R‑2.2.0.0.3, r. 1.
In August 2018, the Superior Court made an initial order by which SM Group, a consulting engineering firm, became subject to proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The order stayed the rights and remedies of creditors, among other things, and appointed a monitor. Following that order, SM Group continued to perform work for Ville de Montréal (“City”). However, the City refused to pay for that work and invoked its right to effect compensation between what it owed SM Group and two claims it allegedly had against SM Group that arose before the initial order. Those claims are related to the application of the Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts (“Bill 26”) and, according to the City, result from fraud on SM Group’s part. The first claim arises from a settlement agreement entered into under the Voluntary Reimbursement Program (“VRP”) that resulted from Bill 26 (“VRP claim”). The second claim is based on a proceeding brought by the City 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.
In response to the City’s refusal to pay for the work done by SM Group after the initial order, the monitor applied for a declaratory judgment stating that compensation could not be effected with respect to the amounts owed by the City to SM Group. The supervising judge granted the application. The Court of Appeal reached the same conclusion as the supervising judge: that the compensation invoked by the City could not be effected. It found that a claim relating to fraud falling within s. 19(2)(d) of the CCAA is not an exception to the rule stated in Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268, whereby compensation between debts arising before and after an initial order (“pre‑post compensation”) is prohibited. It was also of the view that the City had not proved that s. 19(2)(d) applied to its claims. Finally, with regard to the water meter contract claim, the Court of Appeal agreed with the supervising judge that the conditions for judicial compensation were not met, since the certainty, liquidity and exigibility of that claim had to be determined later in a proceeding other than that of the restructuring case.
Held (Brown J. dissenting): The appeal should be dismissed.
Per Wagner C.J. and Moldaver, Karakatsanis, Côté, Rowe and Martin JJ.: First, a claim arising from an agreement entered into under the VRP is not necessarily a claim that relates to a debt resulting from fraud pursuant to s. 19(2)(d) of the CCAA. In this case, the City has not shown that the VRP claim relates to a debt resulting from fraud within the meaning of that provision. Second, with regard to pre‑post compensation, a supervising judge has the discretion to stay the exercise of a right to pre‑post compensation, or set‑off, invoked by a creditor under the civil law or the common law. However, the supervising judge may refuse to stay this right, or may lift such a stay, only in exceptional circumstances, given the high disruptive potential of this form of compensation. In the case at bar, the initial order stayed the City’s right to pre‑post compensation, and it would not be appropriate to lift the stay in relation to the claims in issue.
To answer the question with respect to compensation in the context of this appeal, the Court must first determine whether a claim arising from an agreement entered into under the VRP is necessarily a “claim that relates to” a “debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation” pursuant to s. 19(2)(d) of the CCAA.
The first step in characterizing the VRP claim is to distinguish, for the purposes of the CCAA, claims that are subject to a compromise or arrangement from those that are not. Section 19(2) provides, by way of exception, that certain claims may not be dealt with by a compromise or arrangement, including those that result from fraud. To prove that its claim relates to a debt resulting from obtaining property or services by false pretences or fraudulent misrepresentation pursuant to s. 19(2)(d), a creditor has the burden of establishing, on a balance of probabilities, the following four elements: (i) the debtor made a representation to the creditor; (ii) the representation was false; (iii) the debtor knew that the representation was false; (iv) the false representation was made to obtain property or a service.
In this case, the City did not try to prove or even allege any of these elements. The content of the VRP agreement, Bill 26 and the regulation made under it (“VRP Regulation”) must therefore be interpreted to determine whether the VRP claim may be dealt with by a compromise or arrangement. This interpretation exercise confirms that s. 19(2)(d) of the CCAA does not apply to the VRP claim.
First, it is clearly stipulated in the VRP agreement entered into by the parties that the amount fixed in the agreement can in no way be considered to constitute an admission of liability. As a result, it cannot be presumed that the VRP claim is a claim that falls within s. 19(2)(d) of the CCAA.
Second, Bill 26 and the VRP Regulation do not create a statutory presumption or a presumption of fact that a debtor made fraudulent representations to a public body. The use of the words “may have been” in s. 3 of Bill 26 and in s. 1 of the VRP Regulation to describe the purpose of the VRP indicates that fraud is a possibility rather than a certainty. Section 7 of the VRP Regulation supports this point, since it states that the fact that a natural person or an enterprise participates in the VRP does not constitute an admission of liability or of a fault committed by the natural person or enterprise. The fault in question in s. 7 is a matter of civil liability and is limited to the public contract to which a VRP agreement pertains. Where the legislature intends to refer to penal or criminal proceedings, or to civil proceedings outside the scope of a VRP agreement, it does so expressly. This interpretation is confirmed when s. 7 of the VRP Regulation is read in conjunction with s. 8.
The City is wrong to say that reading ss. 1, 3 and 10 of Bill 26 together leads to the conclusion that a natural person or enterprise that participated in the VRP necessarily defrauded a public body. Although s. 1 of Bill 26 does not refer to fraud as being hypothetical, s. 3 of Bill 26 and s. 1 of the VRP Regulation are clear: the substantive provisions of Bill 26 and the VRP Regulation contemplate fraud only hypothetically. Finally, the two schemes created by Bill 26 must not be confused. Section 10 states that fraud was committed, but this section is part of the scheme introduced by Chapter III (ss. 10 to 17), which applies to judicial proceedings brought against a natural person or enterprise that allegedly participated in fraud in relation to a public contract, and not part of the VRP scheme introduced by Chapter II (ss. 3 to 9). It is up to the courts to conclude that fraud has been committed, and the existence of fraud will be recognized by a court only under the Chapter III scheme, which did not take effect until the VRP scheme introduced by Chapter II ended. The reference to s. 10 in s. 3 merely serves to specify the natural persons to whom the VRP applies. Accordingly, the City has not shown that the VRP claim falls within s. 19(2)(d) of the CCAA. Neither the content of the VRP agreement nor its legal framework supports a presumption that SM Group admitted to having committed a fraudulent act.
Furthermore, a right to pre‑post compensation, or set‑off, 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. While at first glance the language of this provision limits the power to order a stay to judicial proceedings, the courts have taken a large and liberal approach in interpreting the scope of the rights and remedies that can be included in a stay order. A court has the power to stay rights held by creditors if the exercise of those rights could jeopardize the restructuring process. This includes a creditor’s right to effect pre‑post compensation. Such an interpretation advances the CCAA’s remedial objectives and is consistent with its scheme.
In 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. However, a court may in its discretion refuse to impose such a prohibition or, if pre‑post compensation was stayed by the order, lift the stay at a later date to allow an interested creditor to assert its rights. The absolute prohibition against pre‑post compensation imposed by the Quebec Court of Appeal in Kitco must therefore be tempered. However, a court must be cautious before allowing such a form of compensation, given its high disruptive potential.
Moreover, s. 21 of the CCAA does not grant creditors a right to pre‑post compensation that would be shielded from a supervising judge’s power to order a stay under ss. 11 and 11.02 of the CCAA. Read in light of its context, its purpose and the scheme of the CCAA, s. 21 is limited to authorizing compensation between debts that arise before an initial order is made (“pre‑pre compensation”) for the purpose of quantifying creditors’ claims on the date of commencement of proceedings. This provision does not have the effect of authorizing pre‑post compensation. That being said, s. 21 of the CCAA does not prohibit this form of compensation either. It follows that a supervising judge retains the discretion to stay or to authorize the exercise of a right to pre‑post compensation, or set‑off, invoked by a creditor under the civil law or the common law.
In exercising its discretion under the CCAA, a court must keep three baseline considerations in mind: (1) the appropriateness of the order being sought, (2) due diligence and (3) good faith on the applicant’s part. The first consideration relates both to the order itself and to the means that are employed. It is assessed in light of the CCAA’s remedial objectives, which include protecting the public interest. In very specific circumstances, a court could conclude that protection of the public interest and the CCAA’s other remedial objectives justify authorizing pre‑post compensation in favour of a creditor that has proved that it was a victim of fraud within the meaning of s. 19(2)(d) of the CCAA. However, the court should take care not to reduce the public interest to the interests of a particular creditor or group of creditors. The second consideration is also important because it discourages parties from sitting on their rights and ensures that creditors do not strategically manoeuver or position themselves to gain an advantage.
In the case at bar, the words of the stay order made by the Superior Court are broad enough to stay pre‑post compensation, and it would not be appropriate to lift the stay in relation to the VRP claim. Because the City has not proved the alleged fraud and has not relied, in support of its position, on any of the CCAA’s remedial objectives other than protecting the public interest, it has not discharged its burden of proving that the order being sought is appropriate. In addition, the City did not act with the diligence expected in CCAA proceedings.
With regard to the water meter contract claim, the Superior Court agreed to lift the stay of proceedings to allow the City to establish the existence and amount of its claim in that case. That order did not authorize the City to withhold the amounts owed to SM Group for the work subsequent to the initial order with a view to effecting compensation if the City was successful in the case relating to the water meter contract. In the circumstances, an order allowing the City to withhold the amounts owed to SM Group pending the outcome of that case would not be appropriate for the same reasons as those relating to the VRP claim.
Per Brown J. (dissenting): The appeal should be allowed solely for the purpose of remanding the case to the Superior Court so it can decide whether the City may effect pre‑post compensation for the VRP claim and whether compensation is available in respect of the water meter claim. There is agreement with the majority that a supervising judge has a discretion under s. 11 of the CCAA as to whether to allow a creditor to effect pre‑post compensation, or set‑off. However, this discretion is not limited solely to the exceptional circumstances the majority describes. The scope of s. 21 of the CCAA is not limited to pre‑pre compensation; pre‑post compensation is permitted, but must be subject to the exercise of a supervising judge’s discretion. Moreover, nothing in s. 21 of the CCAA prohibits judicial compensation.
The approach taken by the Quebec Court of Appeal in Kitco, according to which pre‑post compensation will never be authorized under the CCAA, involves several errors and must be rejected. To begin with, the Court of Appeal erred in relying on a judgment rendered by the Court in the context of a bankruptcy under the Bankruptcy and Insolvency Act (“BIA”). Although the scheme established by the CCAA and the one established by the BIA must be viewed as an integrated body of insolvency law, there remain many differences between them, including two that are fundamental. First, when an insolvent company has recourse to the CCAA, it continues its business activities and is not divested of its property in favour of a third party, unlike with the measures put in place under the BIA that vest the bankrupt’s property in a trustee. There is thus no loss of mutuality under the CCAA. This mutuality, which survives the initial order, is what makes compensation possible under the CCAA, unlike under the BIA. Secondly, the scheme established by the CCAA is flexible and allows creative solutions to be put forward to achieve the objective of restructuring a financially distressed company, in contrast to the BIA, which provides a set of pre‑established rules. The CCAA’s provisions must be interpreted expansively to enable its remedial objectives to be achieved. Because of these objectives, a broad discretion is also conferred on supervising judges by s. 11 of the CCAA. This discretion has no equivalent in the BIA.
Next, the state of the law elsewhere in Canada is clear: pre‑post set‑off is possible under the CCAA, subject to a supervising judge’s discretion to stay such set‑off having regard to its effects on the status quo period, the underlying objectives of this period, the advancement of efforts to reach an arrangement, and the remedial objectives of the CCAA. The approach proposed in Kitco has created an asymmetry between the interpretation given to s. 21 of the CCAA by the Quebec courts and the interpretation given to it by the courts of other Canadian provinces, which is contrary to the principle of homogenous interpretation of federal statutes.
Lastly, staying the remedies of an insolvent company’s creditors under the CCAA to allow the company to develop a plan of arrangement is of critical importance. However, where a plan of arrangement cannot be contemplated and the insolvent company will be liquidated or sold in any event, to conclude that pre‑post compensation is never allowed could be unfair to the company’s creditors with claims that are certain, liquid and exigible. In such cases, the creditors’ remedies will be stayed indefinitely and they will never be able to effect pre‑post compensation, since the insolvent company will become an “empty shell” after the sale. Moreover, allowing pre‑post compensation will not have the effect of derailing the company’s restructuring process, as there is no such process in this situation.
In the instant case, there is no need to decide whether the VRP claim must be characterized as a claim based on “false pretences or fraudulent misrepresentation” within the meaning of s. 19(2)(d) of the CCAA. Section 21 of the CCAA must be interpreted as allowing pre‑post compensation regardless of whether a claim results from fraud for the purposes of s. 19(2)(d). It is true that proof that the debt underlying a claim is fraudulent is a relevant factor in the exercise of a supervising judge’s discretion to permit pre‑post compensation; however, whether the City’s VRP claim results from fraud is a question to be decided by the supervising judge, not by the Court.
Given that the supervising judge did not exercise her discretion under s. 11 of the CCAA, believing herself to be bound by the conclusions of the Quebec Court of Appeal in Kitco, it is not for the Court to exercise that discretion in order to determine whether to permit pre‑post compensation. Supervising judges are in the best position to decide whether to exercise their discretion in a particular case. In cases involving an exercise of discretion by a court of first instance, it is not in the interests of justice for the Court to step into that court’s shoes and decide these matters.
Cases Cited
By Wagner C.J. and Côté J.
Overruled: Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268; considered: North American Tungsten Corp., Re, 2015 BCCA 390, 377 B.C.A.C. 6, aff’d 2015 BCCA 426, 378 B.C.A.C. 116; North American Tungsten Corp., Re, 2015 BCSC 1382, 28 C.B.R. (6th) 147; Air Canada, Re (2003), 45 C.B.R. (4th) 13; referred to: R. v. Fedele, 2018 QCCA 1901; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; 9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10; Léger v. Ouellet, 2011 QCCA 1858; Dupuis v. Cernato Holdings Inc., 2019 QCCA 376; Berger, Re, 2010 ONSC 4376, 70 C.B.R. (5th) 225; Lambert v. Macara, [2004] R.J.Q. 2637; Canada Mortgage and Housing Corp. v. Gray, 2014 ONCA 236, 119 O.R. (3d) 710; Terrain DEV Immobilier inc. v. Charron, 2021 QCCA 417; Pelletier v. CAE Rive‑Nord, 2019 QCCA 2164; Tavan v. Rostami, 2014 QCCA 304; Guilbert v. Economical Mutual Insurance Co., 2020 MBQB 179, [2021] I.L.R. ¶I‑6280; Sharma v. Sandhu, 2019 MBQB 160; Royal Bank of Canada v. Hejna, 2013 ONSC 1719; Re Horwitz (1984), 52 C.B.R. (N.S.) 102, aff’d (1985), 53 C.B.R. (N.S.) 275; Agriculture Financial Services Corp. v. Zaborski, 2009 ABQB 183, 58 C.B.R. (5th) 301; Szeto, Re, 2014 BCSC 1563, 15 C.B.R. (6th) 255; The Toronto‑Dominion Bank v. Merenick, 2007 BCSC 1261; Johnson v. Erdman, 2007 SKQB 223, 34 C.B.R. (5th) 108; Coyle (Bankrupt), Re, 2011 NSSC 238, 304 N.S.R. (2d) 369; Meridian Developments Inc. v. Toronto Dominion Bank (1984), 32 Alta. L.R. (2d) 150; Stelco Inc. (Re) (2005), 253 D.L.R. (4th) 109; Quinsam Coal Corp., Re, 2000 BCCA 386, 20 C.B.R. (4th) 145; Muscletech Research & Development Inc., Re (2006), 19 C.B.R. (5th) 54; Parc industriel Laprade inc. v. Conporec inc., 2008 QCCA 2222, [2008] R.J.Q. 2590; Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 92 O.R. (3d) 513; Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 51 B.C.L.R. (2d) 105; Smoky River Coal Ltd., Re, 1999 ABCA 179, 71 Alta. L.R. (3d) 1; Associated Investors of Canada Ltd. (Manager of) v. Principal Savings & Trust Co. (Liquidator of) (1993), 13 Alta. L.R. (3d) 115; Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; Stein v. Blake, [1996] 1 A.C. 243; Woodward’s Ltd., Re (1993), 79 B.C.L.R. (2d) 257; Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24; Hawkair Aviation Services Ltd., Re, 2006 BCSC 669, 22 C.B.R. (5th) 11; Ernst & Young Inc. v. Essar Global Fund Ltd., 2017 ONCA 1014, 139 O.R. (3d) 1; Canadian Red Cross Society/Société canadienne de la Croix-Rouge, Re (1998), 5 C.B.R. (4th) 299.
By Brown J. (dissenting)
Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268; D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), 2005 SCC 52, [2005] 2 S.C.R. 564; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; 9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10; Stelco Inc. (Re) (2005), 253 D.L.R. (4th) 109; Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 51 B.C.L.R. (2d) 105; Cam‑Net Communications v. Vancouver Telephone Co., 1999 BCCA 751, 71 B.C.L.R. (3d) 226; North American Tungsten Corp., Re, 2015 BCCA 390, 377 B.C.A.C. 6, aff’d 2015 BCCA 426, 378 B.C.A.C. 116; Re Just Energy Corp., 2021 ONSC 1793; Crystallex International Corp., Re, 2012 ONSC 6812, 100 C.B.R. (5th) 132; Air Canada, Re (2003), 45 C.B.R. (4th) 13; North American Tungsten Corp., Re, 2015 BCSC 1382, 28 C.B.R. (6th) 147; Canadian Broadcasting Corp. v. Manitoba, 2021 SCC 33, [2021] 3 S.C.R. 704.
Statutes and Regulations Cited
Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Income Tax Act, S.C. 1997, c. 12.
Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c. R‑2.2.0.0.3, ss. 1, Chapter II, 3 to 9, Chapter III, 10 to 17.
Act to give effect to the Charbonneau Commission recommendations on political financing, S.Q. 2016, c. 18.
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, ss. 71, 97(3), 121(1), 178(1)(e).
Civil Code of Québec, art. 2849.
Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36, ss. 6(1), Part II, 11, 11.01, 11.02, 11.08, 11.1, Part III, 19, 20, 21, 32.
Integrity in Public Contracts Act, S.Q. 2012, c. 25.
Voluntary Reimbursement Program, CQLR, c. R‑2.2.0.0.3, r. 1, ss. 1, 4, 7, 8.
Winding‑up and Restructuring Act, R.S.C. 1985, c. W‑11, s. 73(1).
Authors Cited
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Anderson, A. Robert, Thomas Gelbman and Benjamin Pullen. “Recent Developments in the Law of Set‑off”, in Janis P. Sarra, ed., Annual Review of Insolvency Law 2009. Toronto: Carswell, 2010, 1.
Boucher, Bernard. “Procédures en vertu de la Loi sur les arrangements avec les créanciers des compagnies”, dans JurisClasseur Québec — Collection Droit des affaires — Faillite, insolvabilité et restructuration, par Stéphane Rousseau, dir. Montréal: LexisNexis, 2010, fascicule 14 (feuilles mobiles mises à jour avril 2021, envoi no 20).
British Columbia. Supreme Court. Model CCAA Initial Order, August 1, 2015 (online: https://www.bccourts.ca/supreme_court/practice_and_procedure/practice_directions/civil/CCAA_Model_Initial_Order.docx; archived version: https://www.scc-csc.ca/cso-dce/2021SCC-CSC53_2_eng.pdf).
Brochu, Denis. Précis de la faillite et de l’insolvabilité, 5e éd. Montréal: LexisNexis, 2016.
Code civil du Québec: Annotations — Commentaires 2020‑2021, 5e éd. par Benoît Moore, dir., et autres. Montréal: Yvon Blais, 2020.
Edwards, Stanley E. “Reorganizations Under the Companies’ Creditors Arrangement Act” (1947), 25 Can. Bar Rev. 587.
Houlden, L. W., G. B. Morawetz and Janis Sarra. Bankruptcy and Insolvency Law of Canada, vol. 3, 4th ed. rev. Toronto: Thomson Reuters, 2019 (loose‑leaf updated 2021, release 3).
Keay, Andrew. “Insolvency Law: A Matter of Public Interest?” (2000), 51 N. Ir. Legal Q. 509.
McElcheran, Kevin P. Commercial Insolvency in Canada, 4th ed. Toronto: LexisNexis, 2019.
Morin, Luc, and Guillaume‑Pierre Michaud. “Set‑Off and Compensation in Insolvency Restructuring under the BIA/CCAA: After the Kitco and Beyond the Rack Decisions”, in Janis P. Sarra and Barbara Romaine, eds., Annual Review of Insolvency Law 2016. Toronto: Thomson Reuters, 2017, 311.
Ontario. Superior Court of Justice. Commercial List. Initial Order, January 21, 2014 (online: https://www.ontariocourts.ca/scj/files/forms/com/intitial-order-CCAA-EN.doc; archived version: https://www.scc-csc.ca/cso-dce/2021SCC-CSC53_3_eng.pdf).
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APPEAL from a judgment of the Quebec Court of Appeal (Rochette, Healy and Ruel JJ.A.), 2020 QCCA 438, [2020] J.Q. no 1852 (QL), 2020 CarswellQue 1987 (WL Can.), affirming a decision of Corriveau J., 2019 QCCS 2316, [2019] J.Q. no 4840 (QL), 2019 CarswellQue 5032 (WL Can.). Appeal dismissed, Brown J. dissenting.
Raphaël Lescop and Eleni Yiannakis, for the appellant.
Guy P. Martel and Danny Duy Vu, for the respondent.
Alain Tardif, for the interveners the Alaris Royalty Corp. and the Integrated Private Debt Fund V LP.
Luc Béliveau, for the intervener Thornhill Investments Inc.
Elizabeth Ferland, for the intervener Ville de Laval.
Marc Duchesne, for the intervener Union des municipalités du Québec.
English version of the judgment of Wagner C.J. and Moldaver, Karakatsanis, Côté, Rowe and Martin JJ. delivered by
The Chief Justice and Côté J. —
TABLE OF CONTENTS
Paragraph
I. Introduction
1
II. Facts
6
III. Judicial History
14
A. Quebec Superior Court, 2019 QCCS 2316 (Corriveau J.)
14
B. Quebec Court of Appeal, 2020 QCCA 438 (Rochette and Healy JJ.A., Ruel J.A. Dissenting in Part)
15
IV. Issues
17
V. Analysis
19
A. Voluntary Reimbursement Program Claim
21
(1) Characterization of the Voluntary Reimbursement Program Claim
21
(2) Compensation Between Debts Arising Before and After an Initial Order (Pre‑post Compensation)
44
(a) Power to Grant and Lift a Stay of the Right to Pre‑post Compensation
54
(b) Scope of Section 21 of the CCAA
63
(c) Application
83
B. Water Meter Contract Claim
96
VI. Conclusion
100
I. Introduction
[1] This appeal raises an issue relating to compensation, or set‑off in a common law setting, between two debts in the context of proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36 (“CCAA”). The question is whether compensation is permitted for debts between the same parties: on the one hand, a debt resulting from the Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c. R‑2.2.0.0.3 (“Bill 26”), that predates an initial order made under the CCAA and, on the other hand, a debt between the same parties that postdates that order. In these reasons, we will use the expression “pre‑post compensation” to refer generally to compensation between debts arising before and after an initial order.
[2] This question thus affords the Court an occasion to interpret, for the first time, certain provisions of Bill 26 as well as the regulation made under it, the Voluntary Reimbursement Program, CQLR, c. R‑2.2.0.0.3, r. 1 (“VRP Regulation”). In doing so, we will clarify for public bodies the burden of proof that rests on them in seeking to establish that a claim arising from an agreement entered into under the Voluntary Reimbursement Program (“VRP”) is fraudulent.
[3] Bill 26 was passed by the Quebec National Assembly in March 2015 in response to a commission of inquiry that had brought to light the existence of schemes involving collusion and corruption in the awarding and management of public contracts in the construction industry (“Charbonneau Commission”), and the VRP Regulation was made a few months later. The program resulting from this legislation, which was in effect for two years, allowed enterprises to “reimburse certain amounts improperly paid in the course of the tendering, awarding or management of a public contract in relation to which there may have been fraud or fraudulent tactics” (s. 3 of Bill 26).
[4] To answer the question with respect to compensation in the context of this appeal, the Court must first determine whether a claim arising from an agreement entered into under the VRP is necessarily a “claim that relates to” a “debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation” pursuant to s. 19(2)(d) of the CCAA. We would answer this question in the negative. It cannot be presumed that a claim arising from the VRP falls within that provision where no evidence to this effect has been tendered. We also conclude that a court should generally exercise its discretion to stay pre‑post compensation, although it may, in rare cases, refuse such a stay. As well, the court may later lift the stay of the right to pre‑post compensation in appropriate cases. In the case at bar, however, we conclude that the initial order stayed the right of the appellant, Ville de Montréal (“City”), to pre‑post compensation and that it would not be appropriate to lift the stay in relation to the claims in issue.
[5] The appeal should therefore be dismissed.
II. Facts
[6] SM Group, which at the relevant time was a consulting engineering firm, performed a variety of contracts for the City over a period of several years. The Charbonneau Commission’s work uncovered a link between SM Group and certain central players in the collusion schemes. Two of its former officers were in fact charged with criminal offences. SM Group subsequently became insolvent.
[7] On August 24, 2018, the Quebec Superior Court made an initial order by which SM Group became subject to proceedings under the CCAA and the rights and remedies of creditors were stayed. The respondent, Deloitte Restructuring Inc. (“Deloitte”), was appointed as monitor. Following that order, SM Group continued to perform work for the City, including the construction of the Samuel De Champlain Bridge and the rebuilding of the Turcot Interchange.
[8] The City refused to pay for that work. On November 7, 2018, it invoked its right to effect compensation between its debt to SM Group for the work done after the initial order and two claims against SM Group that, according to the City, arose before the order and resulted from fraud on SM Group’s part.
[9] On November 12, 2018, the Superior Court approved the sale of some of SM Group’s assets to Thornhill Investments Inc. (“Thornhill”). One week later, SM Group’s contracts were assigned to Thornhill.
[10] The two claims raised by the City are related to the application of Bill 26. The purpose of that statute, read in conjunction with the Integrity in Public Contracts Act, S.Q. 2012, c. 25, enacted in 2012, and the Act to give effect to the Charbonneau Commission recommendations on political financing, S.Q. 2016, c. 18, enacted in 2016, is to strengthen public confidence in government institutions by addressing the revelations made by the Charbonneau Commission. Bill 26 has been described as [translation] “a statutory benchmark for establishing a lack of ethics and lax (if not criminal) morals in a number of enterprises in relation to the awarding of public contracts in Quebec” (R. v. Fedele, 2018 QCCA 1901, at para. 44 (CanLII)).
[11] The first claim the City alleges it has against SM Group arises from a settlement agreement entered into in November 2017 by SM Group and the Minister of Justice, acting on the City’s behalf, under the VRP (“VRP claim”). The second is based on a proceeding brought by the City against SM Group in September 2018, in which it claimed more than $14 million from SM Group for allegedly having participated in collusion in relation to a call for tenders for a water meter contract (“water meter contract claim”).
[12] Because SM Group had failed to repay the VRP claim and because the sale of certain assets to Thornhill was imminent, the City advised SM Group that it intended to effect compensation between what it owed SM Group and the above‑mentioned claims, noting that those claims could not be discharged or dealt with by a compromise or arrangement in the planned restructuring process given that they resulted from fraud and from a misappropriation of public funds.
[13] In response, Deloitte applied for a declaratory judgment stating that compensation could not be effected with respect to the amounts owed by the City to SM Group for work performed for the City.
III. Judicial History
A. Quebec Superior Court, 2019 QCCS 2316 (Corriveau J.)
[14] The supervising judge granted Deloitte’s application for a declaratory judgment and held that pre‑post compensation could not be effected in favour of the City. Even though, in her view, the VRP claim was linked to an allegation of fraud that had not been refuted by SM Group, she concluded that, according to the principles laid down in Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268, pre‑post compensation was not possible. She also concluded that the water meter contract claim was neither liquid nor exigible, which precluded compensation.
B. Quebec Court of Appeal, 2020 QCCA 438 (Rochette and Healy JJ.A., Ruel J.A. Dissenting in Part)
[15] Rochette J.A., writing for the majority, rejected the City’s argument regarding the VRP claim. Relying on Kitco, he reached the same conclusion as the supervising judge: that pre‑post compensation could not be effected in this case. He also rejected the City’s argument that a claim relating to fraud falling within s. 19(2)(d) of the CCAA is an exception to the rule stated in that case. In any event, he expressed the view that the City had not proved that s. 19(2)(d) applied to its claims. Finally, with regard to the water meter contract claim, Rochette J.A. added that the conditions for judicial compensation were not met, since the certainty, liquidity and exigibility of that claim had to be determined later in a proceeding other than that of the restructuring case.
[16] Ruel J.A., dissenting in part, agreed with his colleagues on the nature of the water meter contract claim. However, he was of the view that the VRP claim had to be presumed to fall within s. 19(2)(d) of the CCAA and that Kitco had to be distinguished on the basis that it had been rendered in a different context. In the final analysis, Ruel J.A. found that s. 19(2)(d) of the CCAA represents an exception to the principle established in that case and that it therefore allowed pre‑post compensation between the two parties’ respective debts.
IV. Issues
[17] This appeal raises the following three questions:
1. Is the VRP claim a claim that relates to a debt resulting from fraud pursuant to s. 19(2)(d) of the CCAA?
2. Does the CCAA permit compensation between a debt that arises before an initial order and one that arises after that order?
3. If compensation is permitted, should the City be authorized to withhold the payments owed to SM Group until judgment is rendered in the case relating to the water meter contract?
[18] We will deal with these questions by considering each of the City’s claims separately.
V. Analysis
[19] In essence, the City argues that the VRP claim cannot be dealt with by a compromise or arrangement because it relates to a debt resulting from fraud pursuant to s. 19(2)(d) of the CCAA. According to the City, such a claim falls outside the absolute prohibition against pre‑post compensation imposed by Kitco. The City also argues that the absolute nature of the Kitco rule is inconsistent with the broad discretion conferred on supervising judges by the CCAA. It submits that supervising judges can, in exercising their discretion, authorize pre‑post compensation in appropriate circumstances. The exercise of this discretion is particularly appropriate where fraud is involved.
[20] For the reasons that follow, we are of the view that the VRP claim in this case is not a claim that relates to a debt resulting from fraud pursuant to s. 19(2)(d) of the CCAA. We also conclude that a right to pre‑post compensation, or set‑off, invoked under the civil law or the common law can be stayed under ss. 11 and 11.02 of the CCAA. In our opinion, however, a supervising judge has the discretion to authorize pre‑post compensation only in exceptional circumstances, giv