Where relations between businesses result in a situation where each is a creditor and each a debtor at various points during the relationship (or simultaneous obligations exist), each will commonly assess the business risk of the relationship on the basis, not of the individual obligations owing in each direction, but rather, of the net obligation owing.
This is due, in large part, to the doctrine of set-off which provides, in general terms, that the mutual obligations of the parties may be met, not by each exchanging the individual sums owing, but rather by netting out the obligations, and providing for the party owing the larger obligation to deduct the smaller obligation and pay over the difference.
Types of setoff
Following the decision of the Supreme Court of Canada in Holt v TelfordFootnote1, it has been generally accepted that in Canadian law, there are three recognized forms of set-off.
The first is the concept of contractual set-off, which arises where the parties to a contract have specifically provided for the set-off of obligations owing as between them. The only limit (outside the insolvency context) is that the indices of a contract must be present, to bind the parties to their arrangement.
By entering a contract, the terms govern, and the usual rules applying to other forms of set-off do not apply.
The second is the concept of legal set-off, which arises where the obligations owed by the parties to each other are all liquidated sums, and the parties to each debt are the same, and claim in the same right, or capacity. Accordingly, where a party claiming debt claims or owes one of the debts as trustee, and not personally, or where the debt exists for a “special purpose” (such that it would be misappropriation to use it for another purpose), and the obligation claimed by the other party is not of the same type, there is no mutuality and no legal set-off arisesFootnote2.
The third is equitable set-off which arises absent the first two forms of setoff, but where a court determines that the claims made by the parties are closely connected, and where it would be unjust to enforce payment by one party without considering the other claim owed to that party. It is not required that the claims be liquidated, nor must the claims arise out of the same contract.
Equitable setoff, and the determination of what claims meet these tests is the subject of substantial jurisprudence, which lies beyond the scope of this paper.
Effect of insolvency
Similar provisions exist in each of the restructuring statutes. For this paper, we will focus on the provision in s. 21 of the Companies’ Creditors Arrangement Act, which reads:
The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may beFootnote3.
Against the backdrop of the foregoing, of note as respects each of the types of set-off:
- Even prior to the enactment of these provisions, it was held in 1924 that a contractual right of set-off survived bankruptcyFootnote4
- Legal set-off has been held to survive a CCAA initial order, in a decision based on the predecessor provision in that statute. The decision went so far as to permit post-filing debt owed by the creditor to be set off against pre filing debt owing by the debtorFootnote5
- While making out equitable set-off in insolvency appears to be a more difficult matter, it has been allowed by the courts where the test is met. An example is the Manitoba decision in Matrix SCL Inc.Footnote6, where a manufacturer was exposed to claims from both its shipping broker which claimed pursuant to unpaid invoices (most of which related to amounts not yet paid to shippers) and from the unpaid shippers (to whom Matrix was directly liable at law.) The doctrine was invoked to prevent Matrix from having to pay twice for shipping.
In view of this, one might be forgiven for holding the belief that a creditor owed monies would be free to set-off accounts following a CCAA initial order.
Effect of stay of proceedings
On June 9, 2015, North American Tungsten Corporation Ltd. obtained an initial order under the CCAA. The order (as amended and restated) provided that:
16. During the Stay Period, all rights and remedies of any individual, firm, corporation, governmental body or agency or any other entities (all of the foregoing, collectively being ‘Persons” and each being a “Person”) against or in respect of the Petitioner or the Monitor or affecting the Business of the Property are hereby stayed and suspended except with the written consent of the Petitioner and the Monitor or leave of this Court.
The wording looks familiar because it is virtually identical to the first half of paragraph 15 of the Saskatchewan Template CCAA order.
Prior to the granting of the initial order to NATC, a customer of NATC, Global Tungsten and Powders Corp. ordered product from NATC. NATC immediately assigned the receivables owing by GTP to a factoring company, and GTP paid on a 30-day basis. After the initial order, NATC was required to find a new financing arrangement. In the meantime, GTP continued to order and receive product for 45 days following the initial order.
GTP then announced that it would not be making payment (of an amount then equal to $1.7 million) in the ordinary course, but instead, asserted a right to set off that payable against a $4.4 million loan it had advanced to NATC prior to the initial order.
NATC brought application against GTP, seeking a declaration that GTP was in violation of the stay provisions in the initial order, that there was no right of set-off, and alternatively that any rights to set-off possessed by GTP should continue to be stayed during the CCAA proceedings.
The British Columbia court heard the applicationFootnote7. In adjudicating on the matter, it looked to s. 21 of the CCAA, referenced above, as well as ss. 11 and 11.02 of the CCAA, which provide
11. Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances.
11.02(1) A court may, on an initial application in respect of a debtor company, make an order on any terms that it may impose, effective for the period that the court considers necessary, which period may not be more than 30 days,
- Staying, until otherwise ordered by the court, all proceedings taken or that might be taken in respect of the company under the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act
- Restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company
- Prohibiting, until otherwise ordered by the court, the commencement of any action, suit or proceeding against the company
The court did not hold against GTP on the matter of its right to set-off. While the court expressed skepticism about the Ontario decision in Air Canada, it determined that it would not depart from the result of that earlier ruling.
However, this did not avail GTP. The court held that s. 21, while preserving a right to set-off, were subject to the broader provisions in ss. 11 and 11.02, stating that:
Sections 11 and 11.02 of the Act give the Court a very broad discretion which must be exercised in furtherance of CCAA purposes. Quite simply, it would be illogical if the Court had the discretion to broadly stay claims and proceedings and make relevant ancillary orders necessary to further the purpose of the Act and the purpose of the initial order, but could not do so with regard to set-off claimsFootnote8.
The decision was the subject of an application for leave to appeal. Leave was denied, again in large part due to the broad powers provided in ss. 11 and 11.02:
That s. 21 does not restrict the jurisdiction of the court is made clear when it is contrasted with other provisions of the CCAA which specifically prevent the court from staying certain rights and proceedings (see ss. 11.04, 11.06, 11.08, and 11.1). Set-off is clearly a remedy which is specifically stayed by the [Amended and Restated Initial Order], but also generally stayed in insolvency proceedings: see e.g. Re Quintette Coal (1990), 51 B.C.LR. (2d) 105 at 111-14, 2 C.B.R. (3d) 303. Clearly, if an attempt at compromise or arrangement is to have any prospect of success there must be a means of holding creditors at bayFootnote9.
This refusal was reviewed by a full panel of the Court of Appeal, which upheld the refusalFootnote10. The panel’s decision reads more forcefully than does the original leave determination.
For the present there appears to be no further judicial consideration.
Moving forward
Obviously, if acting for the restructuring company or other creditors, the NATC decision is very useful.
If not, there would appear to be two bases to challenge the result in British Columbia.
The first would be to invite the Saskatchewan courts to arrive at a different conclusion than their counterparts in B.C. An opening might be found in the reliance of the B.C. courts on the earlier case of Quintette CoalFootnote11, which the B.C. courts cited as authority for the proposition that set-off rights may be stayed. However, an examination of the timeframes discloses that s. 21 (and its predecessors) did not exist when Quintette was decided. There will be substantial argument required to meet the B.C. determination that the general provisions of s. 11 and 11.02 outweigh s. 21.
The second would appear to be to simply argue that imposing a stay of proceedings, on the particular facts before the court, is inequitable, unfair and prejudicial, in other words, to seek to distinguish NATC on its facts. This possibility was admitted by the panel having the final say in the matter, which considered the impact of the 1999 decision of the same court in Cam-Net Communications v Vancouver Telephone CompanyFootnote12. There, the B.C. Court of Appeal had permitted a creditor to proceed with a claim of equitable set off against a corporation in CCAA reorganization. While the panel in NATC held that Cam-Net did not stand for the proposition that set-off could not be stayed, it allowed that in appropriate circumstances, a CCAA court might refuse to stay set-off.
Conclusion
The decision in NATC means that any creditor with concerns about the solvency of the debtor corporation cannot be complacent and rely upon set-off to protect it where there is a possibility of CCAA proceedings. Vigilance is the key.
Where events have overtaken the creditor entitled to raise set-off, it is incumbent on that creditor to appear at the first instance. There, the creditor must challenge the stay provisions and seek to have its claim of set-off vindicated, either by a determination that the stay does not apply to claims of set-off, or, given the result in B.C., to convince the court that the creditor’s particular claim to set-off merits an exemption from the stay of proceedings.
Further reading
Two excellent articles have informed the foregoing, brief analysis. If faced with a set-off situation in insolvency proceedings, a good place to start would be:
Recent Developments in the Law of Set-off, by A. Robert Anderson, Thomas Gelbman and Benjamin Pullen in the Annual Review of Insolvency Law, 2009.
Staying Set-Off Rights in CCAA by John R. Sandrelli, Cindy Cheuk, Jordan Schultz and Tevia R.M. Jeffries in National Insolvency Review, Vol. 32 No. 6.
M. Kim Anderson, Q.C., is a lawyer with Robertson Stromberg LLP in Saskatoon