Areas of
Chief Justice Richard Wagner

Supreme Court looks at set-off, ‘pre-post compensation’ under Companies’ Creditors Arrangement Act

Friday, December 10, 2021 @ 5:32 PM | By Cristin Schmitz

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The Supreme Court of Canada has for the first time established the test for “fraud” under s. 19(2)(d) of the federal Companies’ Creditors Arrangement Act (CCAA) in a decision which holds that the City of Montreal cannot offset the amount it was owed by a contractor under Quebec’s voluntary reimbursement program against the amount the city owes for work the contractor performed on Montreal’s Samuel De Champlain Bridge and other provincial infrastructure.

The top court’s 6-1 judgment Dec. 10, co-written by Chief Justice Richard Wagner and Suzanne Côté, interprets, also for the first time, provisions of Bill 26 (an Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts) that was enacted by the Quebec Assembly in 2015 and the voluntary reimbursement program Regulation made pursuant to the bill: Montréal (City) v. Deloitte Restructuring Inc. 2021 SCC 53.

Notably, the Supreme Court clarifies for public bodies the nature of the burden of proof that rests on them when seeking to establish fraud with respect to a claim arising from an agreement entered into under the two-year voluntary reimbursement program (VRP) that was set up in response to the report of the Charbonneau Commission of Inquiry into collusion and corruption in public construction contracts in Quebec.

The City of Montreal unsuccessfully appealed from decisions in the Quebec courts below, which rejected the appellant’s bid to offset what the appellant said it was owed under the VRP, and under a claim the city had arising out of a water meter contract, against what the city owed to SM Group for work done by the consulting engineering company. One question before the Supreme Court was whether the CCAA permits compensation between a debt that arises before an initial CCAA order and a debt that arises after that order.

The case was sparked when SM Group received protection in August 2018 under the Companies’ Creditors Arrangement Act. The initial CCAA court order stayed the rights of SM Group’s creditors, and appointed Deloitte Restructuring Inc. as the monitor overseeing the restructuring of the engineering company. Following that initial court order, SM Group continued working on constructing the bridge and rebuilding the Turcot Interchange in Montreal.

The city refused to pay for the work, however, pointing to SM Group’s 2017 settlement agreement with the provincial minister of justice pursuant to the VRP.  

The two-year program 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.”

The Charbonneau Commission had uncovered a link between SM Group and some central players in collusion schemes, and two of the company’s officers were charged with criminal offences. SM Group subsequently became insolvent.

Because SM Group had not repaid the VRP claim, and because the sale of some of the company’s assets to another company was imminent, the city told SM Group it intended to offset what it owed SM Group against what SM Group owed the city, contending that its claims could not be discharged or dealt with by a compromise or arrangement in the planned restructuring process because they emanated from fraud and from a misappropriation of public funds.

In response to the city’s refusal to pay, Deloitte successfully applied to the Superior Court 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 — a result affirmed by the Quebec Court of Appeal and the Supreme Court of Canada.

Chief Justice Richard Wagner

Chief Justice Richard Wagner

“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 CCAA,” Chief Justice Wagner and Justice Côté said in a judgment endorsed by Justices Michael Moldaver, Andromache Karakatsanis, Malcolm Rowe and Sheilah Martin. “The question is whether compensation is permitted for debts between the same parties: on the one hand, a debt resulting from [Bill 26] … to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, that predates an initial order made under the CCAA and, on the other hand, a debt between the same parties that postdates that order.”

The majority explained it was using the term “pre‑post compensation” to refer generally to compensation between debts arising before and after an initial order.

“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,” Chief Justice Wagner and Justice Côté said.

“We would answer this question in the negative,” they ruled.

(Section 19(2) (d) of the CCAA stipulates that a compromise or arrangement in respect of a debtor company may not deal with any claim that relates to “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability of the company that arises from an equity claim,” unless the compromise or arrangement explicitly provides for the claim’s compromise, and the creditor in relation to that debt has voted for the acceptance of the compromise or arrangement.)

The majority held that the city had not shown that the VRP claim relates to a debt resulting from “fraud” within the meaning of the CCAA.

“It cannot be presumed that a claim arising from the VRP falls within that provision where no evidence to this effect has been tendered,” the majority held.

The majority ruled that “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 four following elements: (i) the debtor made a representation to the creditor; (ii) the representation was false; (iii) the debtor knew the representation was false; (iv) the false representation was made to obtain a property or service.”

In this case, the city “did not even try to prove or even allege any of these elements,” the majority said. “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 providing that the order being sought is appropriate.”

The majority concluded that s. 19(2)(d) of the CCAA does not apply to the VRP claim.

The six judges went on to hold 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.”

However, in this case, the initial CCAA  order stayed the right of the appellant city to pre‑post compensation, the majority held. “It would not be appropriate to lift the stay in relation to the claims in issue.”

In his lone dissent, Justice Russell Brown would have allowed the appeal solely in order to remand the case to the Superior Court to decide whether the city may effect pre-post compensation for the VRP claim and whether compensation is available for the city’s water meter claim.

Justice Brown said he agreed with the majority “that a supervising judge has 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,” he said in an opinion which elaborates on the scope of s. 21 of the CCAA.

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