Clerk’s Stamp COURT FILE NUMBER: 2001-06194

JUDICIAL CENTRE: CALGARY

APPLICANTS: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, RSC 1985, c C- 36, as amended

AND IN THE MATTER OF THE COMPROMISE OR ARRANGEMENT OF REDROCK CAMPS INC., SOCKEYE ENTERPRISES INC., SWEETWATER HOSPITALITY INC. and BALDR CONSTRUCTION MANAGEMENT INC.

DOCUMENT: BRIEF

ADDRESS FOR SERVICE AND MLT AIKINS LLP CONTACT INFORMATION OF Barristers & Solicitors PARTY FILING THIS DOCUMENT: 2100 Livingston Place – 222 3rd Avenue SW Calgary, AB T2P 0B4 Attention: Ryan Zahara/Catrina Webster Phone: 403.693.5420/403.693.4347 Facsimile: 403.508.4349 File: 0128056.00002

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TABLE OF CONTENTS

PART I – INTRODUCTION ...... 3 PART II – STATEMENT OF FACTS ...... 3 PART III - ISSUE ...... 5 PART IV – LAW AND ARGUMENT ...... 6 A. Preferences under the CCAA ...... 6 B. The Set-Off Agreement was Executed to Prefer Blue Collar ...... 7 PART V – RELIEF SOUGHT ...... 8 LIST OF AUTHORITIES ...... 9

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PART I – INTRODUCTION

1. This brief is submitted on behalf of BDO Canada Limited, in its capacity as the court- appointed Monitor (“BDO” or the “Monitor”) of Redrock Camps Inc. (“Redrock”), Sockeye

Enterprises Inc. (“Sockeye”), Sweetwater Hospitality Inc. (“Sweetwater”), and Baldr

Construction Management Inc. (“Baldr”, and together with Redrock, Sockeye and Sweetwater, the “Companies”), in support of an Application filed by the Monitor on February 18, 2021 (the

“Application”) seeking, among other things, advice and direction regarding a set-off claim

advanced by one of Sockeye’s customers, Blue Collar Silviculture Ltd. (“Blue Collar”). Blue

Collar claimed a right to set off a debt claim that was assigned from Troy Ferguson (“Mr.

Ferguson”), Sockeye’s president, to Sockeye the day before the Companies brought their

application for relief under the Companies’ Creditors Arrangement Act (the “CCAA”).1

2. Capitalized terms used herein and not otherwise defined shall have the meanings

ascribed to such terms in the Seventh Report of the Monitor, dated February 12, 2021 (the

“Seventh Report”).2

PART II – STATEMENT OF FACTS

3. On May 13, 2020, this Honourable Court granted the Initial Order, among other things,

granting a stay of proceedings up to and including May 25, 2020 (the "Stay Period"), and

appointing BDO as the Monitor of the Companies in these proceedings.3

4. On May 25, 2020, this Honourable Court granted an Amended and Restated CCAA

Initial Order (the “ARIO”), among other things, extending the Stay Period. Since then, the Court

has extended the Stay Period through to March 31, 2021.4

1 Companies’ Creditors Arrangement Act, 1985 RSC, c C-36 (the “CCAA”), at TAB 1. 2 Seventh Report of the Monitor, dated February 12, 2021 (the “Seventh Report”). 3 Seventh Report, at paras. 2-3. 4 Seventh Report, at para. 5.

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5. Throughout the Stay Period, the Companies experienced difficulties collecting accounts

receivables. As a result, the ARIO included provisions to provide the Monitor with enhanced powers to receive and collect all monies and accounts owing to the Companies.5

6. As part of its collection efforts, on November 24, 2020, the Monitor, through its legal counsel, issued a letter to Blue Collar regarding amounts owing from Blue Collar to Sockeye in the amount of $722,334.08 (the “Outstanding Amount”), and regarding Blue Collar’s assertation that it had a right to set off $250,000.00 of the Outstanding Amount.6

7. Based on a number of documents provided to the Monitor, the Monitor became aware of

the following:

a. on April 1, 2020, Mr. Ferguson, in his role as the president of Sockeye, borrowed

$250,000.00 from David Newton (“Mr. Newton”), the director of Blue Collar;7

b. on April 1, 2020, Mr. Ferguson assigned his $250,000.00 debt to Sockeye

pursuant to a promissory note (the “Ferguson Promissory Note”);8

c. on May 12, 2020, after receiving notice of the Companies’ intention to file for

CCAA relief, Mr. Ferguson assigned his rights in the Ferguson Promissory Note

to Mr. Newton (the “Ferguson Assignment”);9

d. on May 12, 2020, Mr. Newton assigned his rights in the Ferguson Promissory

Note to Blue Collar (the “Newton Assignment”, and together with the Ferguson

Assignment, the “Assignments”);10 and

e. on May 12, 2020, Blue Collar and Sockeye executed a set-off agreement (the

“Set-Off Agreement”).

5 Seventh Report, at para. 30. 6 Seventh Report, at para. 31 and Appendix “D”. 7 Seventh Report, at para. 31(a) and Appendix “E”. 8 Seventh Report, at para. 31(b) and Appendix “F”. 9 Seventh Report, at para. 31(c). 10 Seventh Report, at para. 31(d).

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8. Under the Set-Off Agreement, Blue Collar and Sockeye agreed that Sockeye was indebted to Blue Collar in the amount of $252,868.85, pursuant to the Ferguson Promissory

Note, and that Blue Collar was indebted to Sockeye in an unspecified amount in excess of

$252,868.85, pursuant to a subcontractor agreement and a master services agreement between

Blue Collar and Sockeye.11 The Monitor has since confirmed that Blue Collar is indebted to

Sockeye in the amount of the Outstanding Indebtedness.12

9. Pursuant to the Set-Off Agreement, Blue Collar and Sockeye agreed to set off the debts owing to one another, such that the Ferguson Promissory Note was deemed to be paid in full, and the Outstanding Indebtedness owing from Blue Collar to Sockeye was also deemed to be paid in full.13

10. Mr. Ferguson advised the Monitor that the Assignments and Set-Off Agreement were entered into to reflect that the original $250,000.00 loan from Mr. Newton to Mr. Ferguson was injected by Mr. Ferguson into Sockeye to fund Sockeye’s payroll.14

11. Based on the date of the Assignments and Set-Off Agreement, it appeared to the

Monitor that the Set-Off Agreement constituted a preference that is contrary to section 36.1 of

the CCAA.15

PART III - ISSUE

12. The issue for this Honourable Court to determine on the within Application is whether the

Set-Off Agreement should be treated as a preference.

11 Seventh Report, at para. 31(e) and Appendix “I”. 12 Seventh Report, at para. 31. 13 Seventh Report, at para. 33 and Appendix “I”. 14 Seventh Report, at para. 34. 15 Seventh Report, at para. 37.

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PART IV – LAW AND ARGUMENT

A. Preferences under the CCAA

13. Pursuant to section 36.1(1) of the CCAA, sections 95 to 101 of the Bankruptcy and

Insolvency Act (the “BIA”)16 apply to a compromise or arrangement under the CCAA.17 Section

95(1)(a) of the BIA provides that an obligation incurred by an insolvent person in favour of an

arm’s length creditor, with a view to giving that creditor a preference over another creditor, is

void if it is incurred within three months before the date of the bankruptcy filing (or the CCAA

filing, in these circumstances).18

14. Further, pursuant to s. 95(2) of the BIA, if the obligation incurred under s. 95(1)(a) has the effect of giving the creditor a preference, it is presumed, in the absence of evidence to the contrary, to be incurred with a view of giving the creditor a preference.19

15. In Accel Canada Holdings Limited, Re, the Alberta Court of Queen’s Bench confirmed that where a transaction has the effect of preferring a creditor, and the debtor could not demonstrate with contradicting evidence that the debtor did not intend to prefer the creditor, then such a transaction was a preference and voidable under s. 95(1) of the BIA.20

16. Finally, section 97(3) of the BIA provides that the law of set off applies to all claims

against the estate, “except in so far as any claim for set-off or compensation is affected by the

provisions of this Act respecting frauds or fraudulent preferences.”21 In Canada (Attorney

General) v Reliance Insurance Co., the Court held that s. 97(3) of the BIA applies to the contractual right of set off, so long as the set off is not a preference under s. 95 of the BIA.22

16 Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”), at TAB 2. 17 CCAA, at s. 36.1(1), at TAB 1. 18 BIA, at s. 95(1)(a), at TAB 2. 19 BIA, at s. 95(2), at TAB 2. 20 Accel Canada Holdings Limited, Re, 2020 ABQB 204, at para. 69, at TAB 3. 21 BIA, at s. 97(3), at TAB 2. 22 Canada (Attorney General) v Reliance Insurance Co. (2008), 40 CBR (5th) 292 (Ont SCJ [Commercial List]), at para. 26, at TAB 4.

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17. Thus, contractual set off is permitted under the CCAA, but only to the extent the obligation to be set off is not incurred by the insolvent person with the dominant intention of giving the creditor a preference, or has the effect of preferring that creditor.

B. The Set-Off Agreement was Executed to Prefer Blue Collar

18. Based on the information available to the Monitor, and in light of the statutory framework

above, the Monitor has proceeded on the basis that the Set-Off Agreement is a preference

under s. 95(1)(a) of the BIA.

19. In Brunswick Chrysler Plymouth Ltd., Re (“Brunswick”),23 the Court held that contractual

set-off in a bankruptcy was permitted in the circumstances because the parties were operating

under a contractual right to set off their obligations for years prior to the bankruptcy, and the

obligations in question arose in the ordinary course of business. The Court confirmed that,

“Parliament has explicitly recognized the right of set-off in Section 97(3) of the BIA unless it is

fraudulent or a fraudulent preference.”24

20. In its decision, the Court noted that if a creditor incurred off-setting obligations with a debtor with full knowledge of the debtor’s insolvency, then:

"… those transactions would be obvious incidents of fraudulent preferences and ought to be disallowed. Such creditors would not be acting in good faith and would not be acting in the normal course of business. That type of transaction is the mischief the legislation specifically is legislating against by referencing frauds or fraudulent preferences in the provisions of Section 97(3) of the BIA."25

21. The Court distinguished the circumstances in Brunswick, noting that:

“However, in the case of Brunswick and DaimlerChrysler, they were operating in the ordinary course of business in accordance with the terms of a Sales and Service Agreement which had been in place for several years prior to the filing of Brunswick of its Notice of Intention To Make a Proposal.”26

22. The Court added that, “contractual set-off was not put in place on the eve of insolvency

23 Brunswick Chrysler Plymouth Ltd., Re, 2005 NBQB 83 (“Brunswick”), at TAB 5. 24 Brunswick, at para. 32, at TAB 5. 25 Brunswick, at para. 27, at TAB 5. 26 Brunswick, at para. 28, at TAB 5.

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which might raise preference issues.”27

23. Contrary to the circumstances in Brunswick, Blue Collar and Sockeye executed the

Assignments and Set-Off Agreement on the day before the Companies obtained a stay of proceedings under the CCAA. At the time the Assignments and the Set-Off Agreement were

entered into, Sockeye had been served with unfiled materials seeking relief under the CCAA on

behalf of the Companies that clearly indicated the Companies were insolvent at the time.28 On

the best information available to the Monitor, the Assignments and Set-Off Agreements do not

appear to be in the ordinary course of business and do not appear on their face to effect any

usual business purpose other than to prefer Blue Collar over other creditors.

24. If the Monitor permits Blue Collar to set off the Outstanding Indebtedness under the Set-

Off Agreement, this will have the effect of preferring Blue Collar over Sockeye’s other creditors, and will elevate Mr. Ferguson’s debt claim from an unsecured claim to a priority claim ahead of the secured creditors of Sockeye. The Monitor has yet to see evidence that the Set-Off

Agreement was entered for a substantive reason other than the intention to prefer Blue Collar, and maintains that the Set-Off Agreement ought to be set aside as a preference so as to permit the Monitor to collect the full amount of the Outstanding Indebtedness from Blue Collar.

PART V – RELIEF SOUGHT

25. For the reasons set out above, the Monitor respectfully requests that this Honourable

Court permit the Monitor to treat the Set-Off Agreement as a preference.

ALL OF WHICH IS RESPECTFULLY SUBMITTED this 18th day of February, 2021.

MLT AIKINS LLP

Ryan Zahara, Counsel for the Applicant, BDO Canada Limited

27 Brunswick, at para. 40, at TAB 5. 28 Affidavit of Service of Drew Hubka, filed on May 12, 2021

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LIST OF AUTHORITIES

Companies’ Creditors Arrangement Act, 1985 RSC c C-36 ...... TAB 1

Bankruptcy and Insolvency Act, 1985 RSC c B-3 ...... TAB 2

Accel Canada Holdings Limited, Re, 2020 ABQB 204 ...... TAB 3

Canada (Attorney General) v Reliance Insurance Co. (2008), 40 CBR (5th) 292 (Ont SCJ [Commercial List]) ...... TAB 4

Brunswick Chrysler Plymouth Ltd., Re, 2005 NBQB 83 ...... TAB 5

24101598

TAB 1

0001 CANADA

CONSOLIDATION CODIFICATION

Companies’ Creditors Loi sur les arrangements avec Arrangement Act les créanciers des compagnies

R.S.C., 1985, c. C-36 L.R.C. (1985), ch. C-36

Current to January 28, 2021 À jour au 28 janvier 2021

Last amended on November 1, 2019 Dernière modification le 1 novembre 2019

Published by the Minister of Justice at the following address: Publié par le ministre de la Justice à l’adresse suivante : http://laws-lois.justice.gc.ca http://lois-laws.justice.gc.ca

0002 Companies’ Creditors Arrangement Arrangements avec les créanciers des compagnies PART III General PARTIE III Dispositions générales Preferences and Transfers at Undervalue Traitements préférentiels et opérations sous-évaluées Sections 36.1-37 Articles 36.1-37

Preferences and Transfers at Traitements préférentiels et Undervalue opérations sous-évaluées

Application of sections 38 and 95 to 101 of the Application des articles 38 et 95 à 101 de la Loi sur la Bankruptcy and Insolvency Act faillite et l’insolvabilité 36.1 (1) Sections 38 and 95 to 101 of the Bankruptcy 36.1 (1) Les articles 38 et 95 à 101 de la Loi sur la and Insolvency Act apply, with any modifications that faillite et l’insolvabilité s’appliquent, avec les adaptations the circumstances require, in respect of a compromise or nécessaires, à la transaction ou à l’arrangement sauf dis- arrangement unless the compromise or arrangement position contraire de ceux-ci. provides otherwise.

Interpretation Interprétation (2) For the purposes of subsection (1), a reference in sec- (2) Pour l’application du paragraphe (1), la mention, aux tions 38 and 95 to 101 of the Bankruptcy and Insolvency articles 38 et 95 à 101 de la Loi sur la faillite et l’insolva- Act bilité, de la date de la faillite vaut mention de la date à la- quelle une procédure a été intentée sous le régime de la (a) to “date of the bankruptcy” is to be read as a refer- présente loi, celle du syndic vaut mention du contrôleur ence to “day on which proceedings commence under et celle du failli, de la personne insolvable ou du débiteur this Act”; vaut mention de la compagnie débitrice. 2005, ch. 47, art. 131; 2007, ch. 36, art. 78. (b) to “trustee” is to be read as a reference to “moni- tor”; and

(c) to “bankrupt”, “insolvent person” or “debtor” is to be read as a reference to “debtor company”. 2005, c. 47, s. 131; 2007, c. 36, s. 78. Her Majesty Sa Majesté

Deemed trusts Fiducies présumées 37 (1) Subject to subsection (2), despite any provision in 37 (1) Sous réserve du paragraphe (2) et par dérogation federal or provincial legislation that has the effect of à toute disposition législative fédérale ou provinciale deeming property to be held in trust for Her Majesty, ayant pour effet d’assimiler certains biens à des biens dé- property of a debtor company shall not be regarded as tenus en fiducie pour Sa Majesté, aucun des biens de la being held in trust for Her Majesty unless it would be so compagnie débitrice ne peut être considéré comme tel regarded in the absence of that statutory provision. par le seul effet d’une telle disposition.

Exceptions Exceptions (2) Subsection (1) does not apply in respect of amounts (2) Le paragraphe (1) ne s’applique pas à l’égard des deemed to be held in trust under subsection 227(4) or sommes réputées détenues en fiducie aux termes des pa- (4.1) of the Income Tax Act, subsection 23(3) or (4) of the ragraphes 227(4) ou (4.1) de la Loi de l’impôt sur le reve- Canada Pension Plan or subsection 86(2) or (2.1) of the nu, des paragraphes 23(3) ou (4) du Régime de pensions Employment Insurance Act (each of which is in this sub- du Canada ou des paragraphes 86(2) ou (2.1) de la Loi section referred to as a “federal provision”), nor does it sur l’assurance-emploi (chacun étant appelé « disposi- apply in respect of amounts deemed to be held in trust tion fédérale » au présent paragraphe) ou à l’égard des under any law of a province that creates a deemed trust sommes réputées détenues en fiducie aux termes de the sole purpose of which is to ensure remittance to Her toute loi d’une province créant une fiducie présumée Majesty in right of the province of amounts deducted or dans le seul but d’assurer à Sa Majesté du chef de cette withheld under a law of the province if province la remise de sommes déduites ou retenues aux termes d’une loi de cette province, si, dans ce dernier cas, (a) that law of the province imposes a tax similar in se réalise l’une des conditions suivantes : nature to the tax imposed under the Income Tax Act and the amounts deducted or withheld under that law

Current to January 28, 2021 48 À jour au 28 janvier 2021 Last amended on November 1, 2019 Dernière modification le0003 1 novembre 2019

TAB 2

0004 CANADA

CONSOLIDATION CODIFICATION

Bankruptcy and Insolvency Act Loi sur la faillite et l’insolvabilité

R.S.C., 1985, c. B-3 L.R.C. (1985), ch. B-3

Current to January 28, 2021 À jour au 28 janvier 2021

Last amended on November 1, 2019 Dernière modification le 1 novembre 2019

Published by the Minister of Justice at the following address: Publié par le ministre de la Justice à l’adresse suivante : http://laws-lois.justice.gc.ca http://lois-laws.justice.gc.ca

0005 Bankruptcy and Insolvency Faillite et insolvabilité PART IV Property of the Bankrupt PARTIE IV Biens du failli Crown Interests Droits de la Couronne Sections 87-95 Articles 87-95

(a) is subordinate to securities in respect of which all opposable aux autres créanciers ont toutes été prises steps necessary to make them effective against other avant l’enregistrement; creditors were taken before that registration; and b) ne sont valides que pour les sommes dues à Sa Ma- (b) is valid only in respect of amounts owing to Her jesté ou à l’organisme mentionné au paragraphe 86(1) Majesty or a workers’ compensation body at the time lors de l’enregistrement et les intérêts échus depuis of that registration, plus any interest subsequently ac- sur celles-ci. cruing on those amounts. L.R. (1985), ch. B-3, art. 87; 1992, ch. 27, art. 39; 1997, ch. 12, art. 74; 2004, ch. 25, art. 53; 2005, ch. 47, art. 70. R.S., 1985, c. B-3, s. 87; 1992, c. 27, s. 39; 1997, c. 12, s. 74; 2004, c. 25, s. 53; 2005, c. 47, s. 70. Priority of Financial Collateral Rang des garanties financières

Priority Rang 88 In relation to a bankruptcy or proposal, no order may 88 Il ne peut être rendu au titre de la présente loi, dans be made under this Act if the order would have the effect le cadre de toute faillite ou proposition, aucune ordon- of subordinating financial collateral. nance dont l’effet serait d’assigner un rang inférieur à R.S., 1985, c. B-3, s. 88; 1992, c. 27, s. 39; 1994, c. 26, s. 6; 2007, c. 29, s. 99, c. 36, s. 112; toute garantie financière. 2009, c. 31, s. 65. L.R. (1985), ch. B-3, art. 88; 1992, ch. 27, art. 39; 1994, ch. 26, art. 6; 2007, ch. 29, art. 99, ch. 36, art. 112; 2009, ch. 31, art. 65.

89 and 90 [Repealed, 1992, c. 27, s. 39] 89 et 90 [Abrogés, 1992, ch. 27, art. 39] Preferences and Transfers at Traitements préférentiels et Undervalue opérations sous-évaluées

91 [Repealed, 2005, c. 47, s. 71] 91 [Abrogé, 2005, ch. 47, art. 71]

92 and 93 [Repealed, 2000, c. 12, s. 12] 92 et 93 [Abrogés, 2000, ch. 12, art. 12]

94 [Repealed, 2005, c. 47, s. 72] 94 [Abrogé, 2005, ch. 47, art. 72]

Preferences Traitements préférentiels 95 (1) A transfer of property made, a provision of ser- 95 (1) Sont inopposables au syndic tout transfert de vices made, a charge on property made, a payment made, biens, toute affectation de ceux-ci à une charge et tout an obligation incurred or a judicial proceeding taken or paiement faits par une personne insolvable de même que suffered by an insolvent person toute obligation contractée ou tout service rendu par une telle personne et toute instance judiciaire intentée par ou (a) in favour of a creditor who is dealing at arm’s contre elle : length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a a) en faveur d’un créancier avec qui elle n’a aucun lien preference over another creditor is void as against — de dépendance ou en faveur d’une personne en fiducie or, in Quebec, may not be set up against — the trustee pour ce créancier, en vue de procurer à celui-ci une if it is made, incurred, taken or suffered, as the case préférence sur un autre créancier, s’ils surviennent au may be, during the period beginning on the day that is cours de la période commençant à la date précédant three months before the date of the initial bankruptcy de trois mois la date de l’ouverture de la faillite et se event and ending on the date of the bankruptcy; and terminant à la date de la faillite;

(b) in favour of a creditor who is not dealing at arm’s b) en faveur d’un créancier avec qui elle a un lien de length with the insolvent person, or a person in trust dépendance ou d’une personne en fiducie pour ce for that creditor, that has the effect of giving that cred- créancier, et ayant eu pour effet de procurer à celui-ci itor a preference over another creditor is void as une préférence sur un autre créancier, s’ils sur- against — or, in Quebec, may not be set up against — viennent au cours de la période commençant à la date the trustee if it is made, incurred, taken or suffered, as précédant de douze mois la date de l’ouverture de la the case may be, during the period beginning on the faillite et se terminant à la date de la faillite.

Current to January 28, 2021 153 À jour au 28 janvier 2021 Last amended on November 1, 2019 Dernière modification le0006 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART IV Property of the Bankrupt PARTIE IV Biens du failli Preferences and Transfers at Undervalue Traitements préférentiels et opérations sous-évaluées Section 95 Article 95

day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.

Preference presumed Préférence — présomption (2) If the transfer, charge, payment, obligation or judicial (2) Lorsque le transfert, l’affectation, le paiement, l’obli- proceeding referred to in paragraph (1)(a) has the effect gation ou l’instance judiciaire visé à l’alinéa (1)a) a pour of giving the creditor a preference, it is, in the absence of effet de procurer une préférence, il est réputé, sauf evidence to the contrary, presumed to have been made, preuve contraire, avoir été fait, contracté ou intenté, se- incurred, taken or suffered with a view to giving the cred- lon le cas, en vue d’en procurer une, et ce même s’il l’a été itor the preference — even if it was made, incurred, taken sous la contrainte, la preuve de celle-ci n’étant pas ad- or suffered, as the case may be, under pressure — and ev- missible en l’occurrence. idence of pressure is not admissible to support the trans- action.

Exception Exception (2.1) Subsection (2) does not apply, and the parties are (2.1) Le paragraphe (2) ne s’applique pas aux opérations deemed to be dealing with each other at arm’s length, in ci-après et les parties à celles-ci sont réputées n’avoir au- respect of the following: cun lien de dépendance :

(a) a margin deposit made by a clearing member with a) un dépôt de couverture effectué auprès d’une a clearing house; or chambre de compensation par un membre d’une telle chambre; (b) a transfer, charge or payment made in connection with financial collateral and in accordance with the b) un transfert, un paiement ou une charge qui se rap- provisions of an eligible financial contract. porte à une garantie financière et s’inscrit dans le cadre d’un contrat financier admissible.

Definitions Définitions (3) In this section, (3) Les définitions qui suivent s’appliquent au présent article. clearing house means a body that acts as an intermedi- ary for its clearing members in effecting securities trans- chambre de compensation Organisme qui agit comme actions; (chambre de compensation) intermédiaire pour ses membres dans les opérations por- tant sur des titres. (clearing house) clearing member means a person engaged in the busi- ness of effecting securities transactions who uses a clear- créancier S’entend notamment de la personne qui se ing house as intermediary; (membre) porte caution ou répond d’une dette envers un tel créan- cier. (creditor) creditor includes a surety or guarantor for the debt due to the creditor; (créancier) dépôt de couverture Tout paiement, dépôt ou transfert effectué par l’intermédiaire d’une chambre de compensa- margin deposit means a payment, deposit or transfer to tion, en application des règles de celle-ci, en vue de ga- a clearing house under the rules of the clearing house to rantir l’exécution par un membre de ses obligations tou- assure the performance of the obligations of a clearing chant des opérations portant sur des titres; sont member in connection with security transactions, includ- notamment visées les opérations portant sur les contrats ing, without limiting the generality of the foregoing, à terme, options ou autres dérivés et celles garantissant transactions respecting futures, options or other deriva- ces obligations. (margin deposit) tives or to fulfil any of those obligations. (dépôt de cou- verture) membre Personne se livrant aux opérations portant sur R.S., 1985, c. B-3, s. 95; 1997, c. 12, s. 78; 2004, c. 25, s. 56; 2007, c. 29, s. 100, c. 36, ss. des titres et qui se sert d’une chambre de compensation 42, 112. comme intermédiaire. (clearing member) L.R. (1985), ch. B-3, art. 95; 1997, ch. 12, art. 78; 2004, ch. 25, art. 56; 2007, ch. 29, art. 100, ch. 36, art. 42 et 112.

Current to January 28, 2021 154 À jour au 28 janvier 2021 Last amended on November 1, 2019 Dernière modification le0007 1 novembre 2019 Bankruptcy and Insolvency Faillite et insolvabilité PART IV Property of the Bankrupt PARTIE IV Biens du failli Preferences and Transfers at Undervalue Traitements préférentiels et opérations sous-évaluées Sections 96-97 Articles 96-97

Meaning of person who is privy Définition de personne intéressée (3) In this section, a person who is privy means a per- (3) Au présent article, personne intéressée s’entend de son who is not dealing at arm’s length with a party to a toute personne qui est liée à une partie à l’opération et transfer and, by reason of the transfer, directly or indi- qui, de façon directe ou indirecte, soit en bénéficie elle- rectly, receives a benefit or causes a benefit to be received même, soit en fait bénéficier autrui. by another person. L.R. (1985), ch. B-3, art. 96; 1997, ch. 12, art. 79; 2004, ch. 25, art. 57; 2005, ch. 47, art. 73; 2007, ch. 36, art. 43. R.S., 1985, c. B-3, s. 96; 1997, c. 12, s. 79; 2004, c. 25, s. 57; 2005, c. 47, s. 73; 2007, c. 36, s. 43.

Protected transactions Transactions protégées 97 (1) No payment, contract, dealing or transaction to, 97 (1) Les paiements, remises, transports ou transferts, by or with a bankrupt made between the date of the ini- contrats, marchés et transactions auxquels le failli est tial bankruptcy event and the date of the bankruptcy is partie et qui sont effectués entre l’ouverture de la faillite valid, except the following, which are valid if made in et la date de la faillite ne sont pas valides; sous réserve, good faith, subject to the provisions of this Act with re- d’une part, des autres dispositions de la présente loi spect to the effect of bankruptcy on an execution, attach- quant à l’effet d’une faillite sur une procédure d’exécu- ment or other process against property, and subject to tion, une saisie ou autre procédure contre des biens et, the provisions of this Act respecting preferences and d’autre part, des dispositions de la présente loi relatives transfers at undervalue: aux préférences et aux opérations sous-évaluées, les opé- rations ci-après sont toutefois valides si elles sont effec- (a) a payment by the bankrupt to any of the tuées de bonne foi : bankrupt’s creditors; a) les paiements du failli à l’un de ses créanciers; (b) a payment or delivery to the bankrupt; b) les paiements ou remises au failli; (c) a transfer by the bankrupt for adequate valuable consideration; and c) les transferts par le failli pour contrepartie valable et suffisante; (d) a contract, dealing or transaction, including any giving of security, by or with the bankrupt for ade- d) les contrats, marchés ou transactions — garanties quate valuable consideration. comprises — du failli, ou avec le failli, pour contrepar- tie valable et suffisante.

Definition of adequate valuable consideration Définition de contrepartie valable et suffisante (2) The expression adequate valuable consideration in (2) L’expression contrepartie valable et suffisante à paragraph (1)(c) means a consideration of fair and rea- l’alinéa (1)c) signifie une contre-prestation ayant une va- sonable money value with relation to that of the property leur en argent juste et raisonnable par rapport à celle des assigned or transferred, and in paragraph (1)(d) means a biens transmis ou cédés, et, à l’alinéa (1)d), signifie une consideration of fair and reasonable money value with contre-prestation ayant une valeur en argent juste et rai- relation to the known or reasonably to be anticipated sonnable par rapport aux bénéfices connus ou raisonna- benefits of the contract, dealing or transaction. blement présumés du contrat, du marché ou de la tran- saction.

Law of set-off or compensation Compensation (3) The law of set-off or compensation applies to all (3) Les règles de la compensation s’appliquent à toutes claims made against the estate of the bankrupt and also les réclamations produites contre l’actif du failli, et aussi to all actions instituted by the trustee for the recovery of à toutes les actions intentées par le syndic pour le recou- debts due to the bankrupt in the same manner and to the vrement des créances dues au failli, de la même manière same extent as if the bankrupt were plaintiff or defen- et dans la même mesure que si le failli était demandeur dant, as the case may be, except in so far as any claim for ou défendeur, selon le cas, sauf en tant que toute récla- set-off or compensation is affected by the provisions of mation pour compensation est atteinte par les disposi- this Act respecting frauds or fraudulent preferences. tions de la présente loi concernant les fraudes ou préfé- R.S., 1985, c. B-3, s. 97; 1992, c. 27, s. 41; 1997, c. 12, s. 80; 2004, c. 25, s. 58; 2005, c. rences frauduleuses. 47, s. 74. L.R. (1985), ch. B-3, art. 97; 1992, ch. 27, art. 41; 1997, ch. 12, art. 80; 2004, ch. 25, art. 58; 2005, ch. 47, art. 74.

Current to January 28, 2021 156 À jour au 28 janvier 2021 Last amended on November 1, 2019 Dernière modification le0008 1 novembre 2019

TAB 3

0009 Accel Canada Holdings Limited, Re, 2020 ABQB 204, 2020 CarswellAlta 558 2020 ABQB 204, 2020 CarswellAlta 558, [2020] A.W.L.D. 1913, 318 A.C.W.S. (3d) 538...

2020 ABQB 204 Alberta Court of Queen's Bench

Accel Canada Holdings Limited, Re

2020 CarswellAlta 558, 2020 ABQB 204, [2020] A.W.L.D. 1913, 318 A.C.W.S. (3d) 538, 79 C.B.R. (6th) 66

In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

In the Matter of Accel Canada Holdings Limited and Accel Energy Canada Limited

K.M. Horner J.

Heard: March 5-6, 13, 2020 Judgment: March 13, 2020 Written reasons: March 26, 2020 Docket: Calgary 1901-16581

Counsel: William Roberts, Jonathan Selnes, for Accel Canada Holdings Limited and Accel Energy Canada Limited Michael Bokhaut, for Accel Canada Holdings Limited and Accel Energy Canada Limited Chris Simard, Alexis Teasdale, Keely Cameron, for Third Eye Capital Corporation Paul G. Chiswell, for TransAlta Energy Marketing Corp. Courtney Kachur, for BP Canada Energy Group ULC Robyn Gurofsky, Jack Maslen, for PricewaterhouseCoopers Inc. Sam Gabor, for ICC Credit Holdings Limited John Sandrelli, for ICC Credit Holdings Limited Gordon Cameron, Guy Martel, for Stream Asset Financial Winterfresh LP and Stream Asset Financial Sega LP Gordon Mason, Danny Vue, for Stream Asset Financial Winterfresh LP and Stream Asset Financial Sega LP Jeffrey Oliver, for B.E.S.T. Active 365 Funds LP, B.E.S.T. Total Return Fund Inc. and Tier One Capital Limited Partnership David Legeyt, for ARC Resources Ltd.

Subject: Insolvency Headnote Bankruptcy and insolvency --- Avoidance of transactions prior to bankruptcy — Fraudulent preferences — What constituting preference — Miscellaneous Primary secured lender (creditor) entered into agreement to provide one of related companies with $800,000 at interest rate of 12 percent per annum in order to satisfy emergency payroll obligations of companies — Companies became insolvent and entered proceedings under Bankruptcy and Insolvency Act (BIA), then Companies' Creditors Arrangement Act — Creditor brought application for declaration it had enforceable claim against Energy for $12,205,838.90 which ranked above all other creditors — Application dismissed — Transaction was preference transaction under s. 95 of BIA, and was rendered void and set aside — Relevant company was insolvent at date of transaction and creditor was dealing with related companies at arm's length — Trust regarding funds at issue was not shown to exist for lack of certainty of intention to create trust — Transaction gave creditor security interest in preference to other creditors, as explicitly stated in term sheet, which stated that creditor was to receive perfected first priority security interest in all assets of borrower including all tangible and intangible assets now owned or hereafter acquired — Transaction was presumed to have been done with view to creating preference, under s. 95(2) of BIA — Dominant intent of agreement was to provide immediate funding to its employees, likely to protect its assets in short term, and not for purpose of continuing on business.

APPLICATION by creditor for declaration regarding claim against debtor.

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K.M. Horner J. (orally):

I. Background

1 On March 13, 2020 I delivered an Oral Decision on this Application and noted that written Reasons would follow. These are those Reasons.

2 In these proceedings, Accel Canada Holdings Limited and Accel Energy Canada Limited (collectively "Accel" and separately "Holdings" and "Energy") applied on November 22, 2019 to this Court for an Order in proceedings they had commenced under Part III of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA] to continue under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 [CCAA], which was granted. On November 27, 2019, that Order was amended and restated with the Stay granted therein extended to January 31, 2020, and then on January 21, 2020 further extended to March 13, 2020. On March 13, 2020, that Stay was further extended to April 24, 2020.

3 The application before the Court was brought forward by Third Eye Capital Corporation ("TEC") and is opposed by four other parties in these proceedings: Accel; Stream Asset Financial Winterfresh LP and Stream Asset Financial Sega LP (collectively "Stream"); ICC Credit Holdings Limited ("ICC"); and the Monitor.

4 TEC is seeking an Order providing that:

1) TEC has a valid and enforceable claim against Energy for $12,205,838.90 (as of January 27, 2020), plus all applicable interest and costs, pursuant to the September 13, 2019 agreement (the "Term Sheet") executed by TEC, Energy and Regent Equipment Leasing Ltd ("Regent");

2) TEC has a valid and enforceable security interest in all of Energy's assets pursuant to the September 20, 2019 Fixed and Floating Charge Debenture (the "Debenture"), which secures Energy's obligations under the Term Sheet;

3) TEC's security interest ranks in priority to those of all other creditors in the assets of Energy;

4) The Term Sheet be rectified to replace "Regent Holdings LLC" with "Regent Equipment Leasing Ltd"; and

5) The Debenture be rectified to reflect the intent of the parties to provide a fixed and floating charge debenture to secure the obligations under the Term Sheet.

II. Facts

5 TEC is the primary secured lender of Holdings. On September 13, 2019, TEC entered into the Term Sheet with Energy and Regent. Under the Term Sheet, TEC provided Energy with $800,000 at an interest rate of 12% per annum in order to satisfy Accel's emergency payroll obligations. According to Accel, Energy performed payroll functions for both itself and Holdings, such that the $800,000 advance provided payment to employees of both Accel entities.

6 In exchange for the $800,000 payroll advance, the Term Sheet requires Energy to undertake additional obligations as well as provide mandatory payments on or before September 20, 2019 or September 25, 2019, as specified within the Term Sheet. The additional obligations that Energy undertook pursuant to the Term Sheet include:

a) Payment of $4,400,702.65 plus all accrued and unpaid interest, fees or penalties thereon, pursuant to a Reservation of Rights letter dated June 3, 2019 and executed by TEC, several individuals, and several Accel entities including Holdings but not including Energy (the "Standstill Agreement");

b) Payment of $7,350,000 plus all accrued and unpaid interest, fees or penalties thereon, owed by various Accel entities to TEC and other related entities; and

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c) An unspecified amount in relation to all other fees, interest, penalties and obligations owing and outstanding under certain agreements as between TEC, Holdings, ACCEL Energy Limited and ACCEL Canada Resources Limited (the "Accel Credit Agreements").

7 The Monitor notes that in these proceedings TEC appears to only be claiming the $4,400,702.65 and $7,350,000 plus the initial $800,000 as secured against Energy and not the amount relating to the Accel Credit Agreements. The Monitor indicates that those other obligations set forth in the Term Sheet appear to refer to an additional $300 million of debt obligations, presumably being the debt addressed by the Standstill Agreement, as discussed below.

8 The Term Sheet also provides for "Regent LLC" to subordinate its security against Energy to that of TEC, regardless of any registration or other priority ranking. "Regent LLC" is also listed as a Guarantor under the Agreement. However, Regent is the party that executed the Term Sheet, there does not appear to be any security held by "Regent LLC" against Energy, and "Regent LLC" is not listed in the Alberta Corporate Registry.

9 TEC and Energy subsequently entered into the Debenture dated September 20, 2019. TEC relies on the Debenture as providing security to TEC against Energy for the obligations arising under the Term Sheet. The Monitor notes that the Debenture fails to define the "Credit Agreement" that it intended to secure, such that the actual effect of the Debenture is arguably unclear. On September 20, 2019, TEC registered a security agreement and land charge against Energy's property.

10 The Standstill Agreement, which is referenced in the Term Sheet, indicates that TEC will defer from exercising its rights and remedies arising from the "ACHL Debt Documents" during the Standstill Period, which ends on September 30, 2019 or upon other specified occurrences. The Standstill Agreement states that the outstanding amount of Holdings' debt owed to TEC under the ACHL Debt Documents is $321,669,513.15.

11 As the Monitor points out, the Standstill Agreement, although signed by several Accel entities, was not signed by Energy, and Energy had no obligations to TEC under the Standstill Agreement until the Term Sheet was executed.

12 The Standstill Agreement also provides that Holdings will "irrevocably authorize and direct its customers, marketers and production settlement payors" to provide TEC with at least $4 million per month from June — September of 2019. Those payments would go toward the debt owing to TEC from Holdings, all of which would become due if those monthly payments were not made to TEC's satisfaction.

13 In accordance with this provision in the Standstill Agreement, Holdings issued certain orders in the form of an irrevocable direction to pay ("IDP") to BP Canada Energy Group ULC ("BP Canada"). While several IDPs were issued by Holdings to BP Canada, of particular relevance in this proceeding is the IDP dated August 2, 2019 (the "August IDP"), in which Holdings stated that:

You are hereby irrevocably authorized and directed to pay out any net funds owing now, or that may be owing in the future from the ACHL July 2019 production settlement, up to the sums listed below, to ACHL from BP Canada, netting any agreed set-offs and/or other rights and remedies available to BP Canada under any agreement between BP Canada and ACHL or under law, as follows:

1. All net funds to Third Eye on or before August 29, 2019.

with a balance of zero dollars to be paid to ACHL, and for so doing this shall be your full and irrevocable authority.

14 The funds contemplated by the August IDP were paid to Holdings instead of TEC.

15 After the August IDP payment was provided to Holdings, approximately $8.3 million was diverted from an inter-company Accel bank account to Regent in relation to certain agreements involving Energy, Regent, and Stream (the "Regent/Stream Agreement").

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16 The Regent/Stream Agreement functioned to assign Stream's status as Energy's primary secured creditor to Regent. Of relevance to this application is that Stream also received a Gross Overriding Royalty through a series of subsequent transactions, which Stream could cause Regent to purchase back for 90 million dollars by exercising Streams' "Put Option" right. Energy also agreed to guarantee Regent's obligation to the pay the $90 million payment that would be owing from Regent to Stream if the Put Option were exercised.

17 Stream assigned Energy's debt to it to Regent on August 29, 2019, and subsequently exercised its Put Option for $90 million on September 13, 2019.

III. Analysis

18 First, I will address whether TEC has a valid and enforceable claim against Energy that gives rise to a security interest in Energy's assets by virtue of the Term Sheet and Debentures (collectively, the "Agreements").

19 The parties generally advance two arguments in this regard. First, whether the Agreements giving rise to TEC's claim are enforceable in light of alleged ambiguity, the circumstances of the transaction, and certain drafting deficiencies. TEC's requests for rectification of the Agreements also relate to certain of the drafting issues in the Agreements. Second, whether the Agreements are voidable as a reviewable transaction under the BIA, RSC 1985, c B-3.

20 The disputes concerning the enforceability of the Agreements as well as rectification would be rendered moot if the transaction is voided under the BIA. Therefore, and given the time sensitive nature of these proceedings, I will first address whether the Agreements constitute a reviewable transaction, assuming that they are enforceable as against Energy and Regent and that the Debenture was intended to secure the Term Sheet.

21 The Monitor urges this court to set aside the Agreements, whether as a reviewable transaction under the BIA or through an exercise of this Court's discretion to determine the amount of a secured claim under section 20(1)(b) of the CCAA. The Monitor further urges this court to consider the CCAA's underlying objectives. The Monitor also notes the recent imposition of a duty of good faith under section 18.6 of the CCAA, which came into force on November 1, 2019, although that provision has yet to be judicially interpreted. Section 18.6 provides that:

Good faith

18.6 (1) Any interested person in any proceedings under this Act shall act in good faith with respect to those proceedings.

Good faith - powers of court

(2) If the court is satisfied that an interested person fails to act in good faith, on application by an interested person, the court may make any order that it considers appropriate in the circumstances.

22 The Supreme Court of Canada discussed the nature of a Court's discretion under the CCAA in Ted Leroy Trucking Ltd., Re, 2010 SCC 60 (S.C.C.) [hereinafter Century Services]. The Supreme Court discussed potential limits to a court's authority in CCAA proceedings, especially considering the contrast between CCAA sections that provide for specific orders and section 11 of the CCAA, which states that:

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.

23 The Supreme Court stated that the general language within the CCAA should not be restricted by the availability of more specific orders, although a court must bear in mind the requirements of appropriateness, good faith, and due diligence when exercising its authority under the CCAA: Century Services at para 70. CCAA decisions are often exercised through the

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24 Although the Monitor suggests that it is not necessary to rely directly on the BIA reviewable transaction provisions in order to exercise my discretion, the Supreme Court in Century Services at para 65 notes that it is most appropriate for a court to first consider the specific statutory provisions and powers of the CCAA before turning to any equitable or inherent jurisdiction of the court.

25 Accordingly, I will consider whether the Agreements are reviewable under either section 95 or 96 of the BIA before deciding whether to exercise my discretion under the CCAA.

26 Each of the Monitor, Stream, ICC, and Accel agree that the Agreements should be declared void as an improper preference under section 95 of the BIA or as a transfer at undervalue under section 96 of the BIA. TEC disputes that the evidence before the Courts meets of the requirements of either section.

27 Section 36.1(1) of the CCAA incorporates sections 95 and 96 of the BIA into compromises or arrangements under the CCAA.

28 Section 36.1(2) further clarifies that:

(2) For the purposes of subsection (1), a reference in sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act

(a) to "date of the bankruptcy" is to be read as a reference to "day on which proceedings commence under this Act";

(b) to "trustee" is to be read as a reference to "monitor"; and

(c) to "bankrupt", "insolvent person" or "debtor" is to be read as a reference to "debtor company".

29 I will therefore consider whether the Agreements constitute a reviewable transaction under the BIA, keeping in mind the underlying objectives of insolvency legislation and proceedings.

Did the transaction constitute a preference?

30 Section 95 of the BIA states that

95 (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person

(a) in favour of a creditor who is dealing at arm's length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and . . .

31 The parties agree that the transaction occurred within the period prescribed in section 95 of the BIA; Energy was insolvent at the date of the transaction; and TEC was dealing with Energy and Regent at arm's length.

32 TEC disputes that Energy intended to prefer, or that the transaction had the effect of preferring, one creditor over another as required under section 95 of the BIA. Specifically, TEC argues that the Agreements have no preferential effect on the basis that TEC's initial interest was in the form of a trust, by virtue of the August IDP, such that taking the security interest actually weakened TEC's priority as a creditor.

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33 I must therefore determine whether the August IDP constitute a trust in order to determine whether the transaction had the effect of preferring one creditor over another.

Is the August IDP a trust?

34 TEC states that the August IDP makes it clear that BP Canada was to pay certain amounts owing to Holdings directly to TEC, and that the nature of the arrangement constitutes a trust in favour of TEC. TEC argues that an IDP is a class trust and that Energy intended to create a trust in the circumstances. TEC also refers to statements by Holdings that indicate that funds removed from the Accel inter-company account would be "replenished" as evidence of "trust language". Those statements were made after the inter-company payment was made to Regent, allegedly in part by funds provided to Holdings in violation of the August IDP.

35 ICC and Stream each refute this argument and submit that the IDP simply created a commercial agreement for funds to be paid from BP Canada directly to TEC, instead of to Holdings.

36 TEC relies on Van Melle v. Muir, [2000] O.J. No. 5717 (Ont. S.C.J.) for the statement that than an IDP is a classic trust document: at paras 34 — 35.

37 Van Melle states at para 34 that:

An irrevocable direction for a valuable consideration requiring that funds shall be applied to the debt owing to a creditor, creates a beneficial property interest in favour of the creditor. Such a direction, followed by receipt of the funds, on closing, makes a solicitor liable for failure to honour the equitable assignment, provided there is consideration for the direction: [citations omitted].

38 Stream notes that Van Melle relates to a solicitor-client relationship, and that subsequent case law referring to Van Melle always occurs under the same circumstances of a solicitor-client relationship. Stream argues that the nature of that relationship distinguishes Van Melle from the present circumstances because of the fiduciary nature of the solicitor-client relationship: Allan Realty of Guelph Ltd., Re (1979), 24 O.R. (2d) 21, 97 D.L.R. (3d) 95 (Ont. Bktcy.), pp 19-20.

39 Van Melle has been relied upon in three subsequent cases. In both Lucas v. Puthon, 2013 ONSC 2799 (Ont. S.C.J.) and Bilek v. Salter Estate, [2009] O.J. No. 4454, 181 A.C.W.S. (3d) 1032 (Ont. S.C.J.), the circumstances again involved solicitor- client relationships, where the funds arose from an estate or property interest and were directed to be paid to the solicitors. Further, the IDPs in both Lucas and Bilek refer to the funds being "in trust", unlike the present circumstances. In Thomas Gold Pettinghill LLP v. Ani-Wall Concrete Forming Inc., 2012 ONSC 2182 (Ont. S.C.J.), a lawyer, based on an agreement to transfer a file to that lawyer from a previous lawyer, gave a personal undertaking to the previous lawyer that he would pay the previous lawyer's unpaid account. There was no IDP in this case, and no instructions given by the client in that respect. The Court noted at para 69 that:

69 Under the law of equitable assignments, if a debtor, to repay a debt, gives his or her creditor an order upon a person who holds a specific fund for the debtor that the fund be used to repay the debt, there is an equitable assignment of the fund. There must be both an agreement to pay out of a specific fund and the intent to create a property interest in that fund: Burn v. Carvalho (1839), 4 My. & C. 690 (Eng. Ch. Div.); Rodick v. Gandell (1852), 1 De G.M. & G. 763 (Eng. L.C.); Carey v. Palmer, [1926] A.C. 703 (Australia P.C.); Family Trust Corp. v. Morra (1987), 60 O.R. (2d) 30 (Ont. Div. Ct.); Rawlings, Sumner, Tilson Electric Ltd. v. Commercial Courts of London Ltd. (1980), 32 O.R. (2d) 377 (Ont. H.C.); Bilek v. Salter Estate, [2009] O.J. No. 4454 (Ont. S.C.J.).

40 Considering the distinguishable relationship central to the circumstances in Van Melle and the fact that Van Melle is not binding on this court, I agree with Stream and ICC that an IDP does not necessarily create a trust agreement. Therefore, it is necessary to consider the circumstances of this particular IDP and the relevant requirements to establish a trust so as to determine whether a trust arose in these circumstances.

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41 In order for a trust to exist, three elements must be present: (1) certainty of intent; (2) certainty of subject matter; and (3) certainty of object: Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787 (S.C.C.) at para 23; Okanagan Equestrian Society v. North Okanagan (Regional District), 2018 BCSC 800 (B.C. S.C.) at para 192. In order to find certainty of intention, there must be an imperative obligation to hold property on trust for the benefit of another: BA Energy Inc., Re, 2009 ABQB 647 (Alta. Q.B.) at para 14.

42 For the reasons described below, I decline to find that a trust exists in these circumstances because there was no certainty of intention to create a trust. I rely on three significant reasons to support my decision that the August IDP did not constitute a trust.

43 First, there was no certainty of intention to create a trust in the language of either the August IDP itself or the Standstill Agreement, which outlined Holdings' agreement to issue the August IDP.

44 Stream relies on Luscar Ltd. v. Pembina Resources Ltd., 1994 ABCA 356 (Alta. C.A.), leave to appeal to SCC refused 24496 (17 April 1995) [[1995] 3 S.C.R. vii (S.C.C.)] to show that the August IDP did not create a trust. In Luscar at para 112, the Court of Appeal noted that, while the words "in trust" or "on trust" are not essential requirements to create a trust, the sophisticated nature of the parties in that case, being oil and gas corporations, should have rendered them aware of the onerous duties of a trustee such that they would have clearly stated if they wanted to impose those obligations. In addition, the fact that the parties used the term "shall be held in trust" in a separate part of the agreement indicated an intention not to create a trust in the provision at issue, where trust language was not used. Specifically, the Court of Appeal stated at paras 111 — 112 that:

111 D.W.M. Waters, Law of Trusts in Canada, 2nd ed. (Toronto: Carswell, 1984), at p. 107 indicated that the language must be imperative:

For a trust to come into existence, it must have three essential characteristics . . . first, the language of the alleged settlor must be imperative ... This means that the alleged settlor, whether he is giving the property on the terms of a trust or is transferring property on trust in exchange for consideration, must employ language which clearly shows his intention that the recipient should hold on trust.

112 In this case the parties were informed and capable of fully setting out their intended rights and duties in an agreement. The AMI Clause contained none of the usual indicia of trust. While the words "in trust" or "on trust" are not an iron-clad requirement to finding the existence of a trust, one would have expected them here, and their absence is telling. Their use in cl. 24(g) indicates that the parties understood the use of the trust relationship and employed trust wording when desired. There, it is stated that on the assignment of an interest, it "shall be held in trust" until the obtaining of necessary consents where required. It is anomalous that the parties did not use similar language in regard to cl. 18, if a trust was intended. There are many authorities which refer to the onerous duties that trustees bear, and a party should not be saddled with trust obligations where that intention is not clearly expressed. As sophisticated parties, they would have been aware of a trustee's onerous duties, and if they intended to impose those obligations, they would have so stated. [emphasis added].

45 While not a determinative factor, there is no language to indicate that the parties intended to create a trust. Neither the language in the Standstill Agreement nor the August IDP express an intention to create a trust relationship, whether explicitly or implicitly. Holdings simply directed BP Canada to provide funds directly to TEC, without any imposition of specific duties or creating a requirement to hold funds for TEC's benefit. These are sophisticated parties capable of rendering a clear agreement to hold funds in trust, yet there is was no indication of any intention to create a relationship beyond the simple payment arrangement contemplated in the Standstill Agreement and August IDP.

46 Second, I find the circumstances that surround the creation of the August IDP do not indicate an intention to create a trust.

47 Accel relies on Alberta Treasury Branches v. Samco Holdings Ltd., 2003 ABQB 963 (Alta. Q.B.) for the premise that a simple direction to pay does not create a trust with the object of the trust being the proceeds. Accel says that the August IDP functions to direct that Holdings' production proceeds be paid to TEC rather than directly to Holdings, but does not indicate that those funds belong to TEC upon execution of the document.

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 0016 Accel Canada Holdings Limited, Re, 2020 ABQB 204, 2020 CarswellAlta 558 2020 ABQB 204, 2020 CarswellAlta 558, [2020] A.W.L.D. 1913, 318 A.C.W.S. (3d) 538...

48 In Samco at paras 46, 49 — 53, the Court found that a simple direction to pay, albeit not necessarily in the precise form of an IDP, did not constitute a trust agreement. The Court at paras 51 — 53 provided some guidance on arrangements to pay proceeds from one party to another:

51 Suppose, for example, the direction was to pay ATB's mortgage on the property (which was in fact the case for part of the proceeds but not this part) and the mortgage was to be discharged before ATB actually received payment. It would be important that the proceeds be held for ATB's benefit in those circumstances as its security would disappear before it had actually received payment.

52 That approach is sometimes used in commercial transactions. In such circumstances, the protection given the creditor for giving up its security before it has received payment is the acknowledgment from the debtor that the funds to be received will on receipt be held in trust for the benefit of the creditor. Property held by a bankrupt for the benefit of another under a trust is not divisible among bankruptcy creditors. See s. 67(1)(a) of the BIA.

53 That kind of arrangement was not put in place in this case. The parties, through their Counsel, simply agreed that the proceeds held by Mr. Sparling would be paid to ATB rather than the Slezaks.

49 The nature of the arrangement by the parties in this case similarly does not indicate an intention to create a trust in order to secure payment owed to TEC. The arrangement did not arise in order to provide security to TEC in lieu of giving up security directly against Holdings. Rather, TEC simply agreed not to enforce any debt owed to it by Holdings as long as it received regular payments as effected by Holdings' promise to provide an IDP to its "customers, marketers and production settlement payors", which lead to the August IDP.

50 The Standstill Agreement specifically contemplates that payment might not be made, or might not be made to TEC's satisfaction, despite the IDPs, in which case TEC would be entitled to enforce its rights to the funds directly against Holdings. Any payments that were made to TEC by BP Canada would be applied against the debt owed by Holdings to TEC, and any payments that weren't made would be enforceable against Holdings. The fact that the Standstill Agreement contemplates that the IDPs might not be paid, and directs enforcement rights against Holdings, rather than BP, is not akin to a trust relationship: Van Melle at para 36. If the August IDP constituted a trust arrangement and BP Canada failed to pay TEC, then TEC would gain the unfair advantage of having recourse against both BP Canada as trustee and Holdings as debtor for the same funds.

51 For these reasons, both the Standstill Agreement and August IDP clearly underscore that there was not an intention to hold BP Canada responsible to hold and provide funds in the form of a trust to TEC.

52 Finally, in addition to a lack of clear language or evidence in the circumstances of an intention to create a trust arrangement, there is no indication that BP Canada was acting, or intended to act, in the role of a trustee.

53 In Van Melle, the Court noted that if "an individual takes dominion and control of the trust property, and knows of the trust relationship, and acts inconsistently with the trust terms, he will be liable to the beneficiary of the trust" [emphasis added]: at para 35. The importance of clearly establishing a trust arrangement, rather than a simple relationship of agency is further explained in Donovan WM Water, Mark R Gillen & Lionel D Smith, ed, Waters' Law of Trusts in Canada, 4 th ed (Toronto, Ontario: Thomson Reuters Canada, 2012), ch 3 at s 3.III:

However, it is essential if the agent is to be an express trustee, or to be made by law a constructive trustee, that there be property which the agent was required to keep separate from his own assets. If the agent, who is collecting moneys from third parties for the principal, or is required to pay over the principal's money to a third party, is to be considered a trustee of any kind, it strengthens the case if it is shown the agent was required, contractually or otherwise, to keep those moneys identifiable from other assets. Otherwise, the agent may be a debtor only.

54 The present circumstances do not indicate that BP Canada knew it was in the position of a trustee or that the parties directed it to act as a trustee. Rather, the August IDP was the creature of an arrangement, by way of the Standstill Agreement,

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 8 0017 Accel Canada Holdings Limited, Re, 2020 ABQB 204, 2020 CarswellAlta 558 2020 ABQB 204, 2020 CarswellAlta 558, [2020] A.W.L.D. 1913, 318 A.C.W.S. (3d) 538... that did not involve BP Canada. BP Canada simply received a direction to pay to TEC the funds that it would otherwise pay directly to Holdings. There is no evidence at all from BP Canada of an intention to take on the arguably onerous duties of a trustee; BP Canada was not a signatory of the Standstill Agreement or the August IDP and is not a party in this application. It is not clear that BP Canada took on the role of a trustee or intended to act as a trustee.

55 Overall, there was no indication that the parties intended to create a trust relationship. Rather, the August IDP created a simple commercial agreement. Considering the circumstances of this case and the necessary requirements to create a trust, I decline to find that a trust exists in these circumstances.

Were the Agreements entered into in order for Energy to continue in business?

56 Given my finding that the August IDP did not create a trust, TEC's submission that there was no preference because TEC actually weakened its interest against Accel no longer applies. Rather, the effect of the transaction is that it gave TEC a security interest in preference to other creditors, as explicitly stated in the Term Sheet. The Term Sheet states that Energy shall provide TEC with a "[p]erfected first priority security interest in all assets of the Borrower including all tangible and intangible assets now owned or hereafter acquired".

57 Since I have found that the transaction resulted in a preference, section 95(2) of the BIA applies.

58 Section 95(2) states that if a transaction within the meaning of section 95(1)(a) has the effect of giving the creditor a preference, it is presumed to have been done with a view to giving the creditor that preference, absent any evidence to the contrary.

59 The onus is on the creditor to prove on a balance of probabilities that the dominant intention of the debtor was not to prefer the creditor. It is the intention of the insolvent debtor which governs, and not the motivation of the creditor: Orion Industries Ltd. (Trustee of) v. Neil's General Contracting Ltd., 2013 ABCA 330 (Alta. C.A.) at para 10. The dominant intent of the debtor is an objective test: St. Anne-Nackawic Pulp Co. (Trustee of) v. Logistec Stevedoring (Atlantic) Inc., 2005 NBCA 55 (N.B. C.A.) at para 6.

60 TEC submits that any presumption of an intent to prefer is rebutted because the transaction was entered into with the bona fide expectation that it would enable the debtor to continue in business.

61 In order to show that a payment would help the debtor continue in business, there must be evidence to show that "the payment is tied to the continuation of the business or a reasonably held hope or expectation of continuance": Principal Group Ltd. (Trustee of) v. Anderson (1994), 164 A.R. 81 (Alta. Q.B.) at paras 55, (1994), 29 C.B.R. (3d) 216 (Alta. Q.B.), aff'd on other grounds (1997), 200 A.R. 169, [1997] A.J. No. 500 (Alta. C.A.). When that test is applied to the facts of this case, the question is whether Energy reasonably held a belief that the security it granted to TEC in exchange for the payroll funding would allow Energy to continue in business.

62 Accel states that it was experiencing "extreme financial difficulties" throughout 2019. By March 1, 2019, Holdings had informed TEC that it was unable to make the required payments to TEC as they became due under the relevant credit agreements between the parties. Subsequently, and with the representation by Holdings that it was working on refinancing its debt, TEC entered into the Standstill Agreement with Holdings. In July of 2019, TEC was advised that both Holdings and Energy needed funding because they were both faced with lawsuits from vendors.

63 While Accel states that it hoped to improve its financial circumstances through the Regent/Stream Agreement, Accel's financial circumstances continued to deteriorate to the point that on September 11, 2019, Accel could not meet its payroll obligations, which were due two days later on September 13, 2019. Accel states that failure to meet its payroll obligations would risk losing employees and thereby lead to a high probability of Accel assets being left untended, resulting in a risk of theft, liability, and potential environmental issues.

64 On October 21, 2019, Accel filed its Notice of Intention.

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65 The Monitor suggests that the parties could not have reasonably believed that a Payroll Advance of only $800,000 would preserve Energy's business beyond that single payroll period and points out that Energy's financial circumstances were dire, such that it filed a Notice of Intention just one month after the Agreements were executed.

66 I must consider whether Energy's dominant intent was to enter into the transaction for the purpose of continuing in business. There are several key features that I consider significant in the circumstances.

67 At the time that Energy entered into the Agreements, it had been experiencing significant financial difficulties for an extended period of time. Despite attempts to pursue alternate financing and remain afloat, Energy was aware of its precarious financial circumstances, including potential lawsuits against Accel, Accel's failure to meet its obligations as they became due, including those owing to TEC, and the likely inevitability of a restructuring. It is also telling that Energy filed its Notice of Intention within approximately one month of entering into the Agreements.

68 Despite all that knowledge, Energy effectively took on more than $12 million of secured debt in exchange for the relatively minimal amount of $800,000, which would only provide funding for one additional pay period to Accel. Further, in between execution of the Term Sheet and the Debenture, Stream exercised its Put Option, thereby triggering Regent's obligation to pay $90 million to Stream as well as Energy's guarantee to Stream for that obligation. Even considering TEC's assertion that it was told by Accel that the $800,000 would be enough to keep them afloat because of a possible future cash injection, the significant and ongoing "dire financial circumstances" of Energy does not support a finding that the Energy could have reasonably believed the transaction would have allowed it to continue in business.

69 Considering all of the foregoing, I find that TEC has failed to rebut the presumption of an intention to prefer a creditor under section 95(1) of the BIA. In this case, I find that the dominant intent of Energy in creating the preference was to provide immediate funding to its employees, likely to protect its assets in the short term from the harm that would likely result if funds were not provided, and not for the purpose of continuing on business.

70 Accordingly, I find that the Agreements created a preference of TEC over other creditors and are therefore voidable under section 95(1) of the BIA.

IV. Is it a transfer at undervalue?

71 Although my finding that the transaction created a preference is sufficient to find the Agreements void as requested by the Monitor, Stream, ICC and Accel, I will nonetheless also consider whether the transaction constituted a transfer at undervalue.

72 A transfer at undervalue is defined in section 2 of the BIA as a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor.

73 Section 96(1)(a) of the BIA allows a court to declare a transfer at undervalue void if:

(a) the party was dealing at arm's length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,

(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and

(iii) the debtor intended to defraud, defeat or delay a creditor; . . .

74 TEC submits that the only relevant factors in these circumstances are whether the debtor intended to defraud, defeat, or delay a creditor and whether Energy received sufficient consideration.

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75 TEC relies on the same arguments as addressed with the analysis of section 95 of the BIA to show that Energy did not intend to defraud, defeat, or delay a creditor. As I have already discussed, the transaction clearly caused a preference, and the circumstances as a whole show an objective intention by Energy to defeat or delay a creditor, particularly because Energy agreed to provide a new, first priority security interest to TEC to the detriment of other creditors while Energy was insolvent.

76 The Monitor further submits that proof of an intention under section 96(1)(a)(iii) of the BIA is usually based on circumstantial evidence and is established through "badges of fraud", citing Rehman, Re, 2015 ONSC 188 (Ont. S.C.J. [Commercial List]) at para 52. I would note that the use of badges of fraud to show intent is generally relevant to conveyances under provincial fraudulent conveyance legislation or the Statute of Fraudulent Conveyances, 1571, 12 Eliz 1, c 5 ["Statute of Elizabeth"], although it has also been accepted as one means of showing intent under section 96 of the BIA in Ontario case law: Urbancorp Toronto Management Inc. (Re), 2019 ONCA 757 (Ont. C.A.) at para 52. While I have already found an objective intent within section 96(1)(a)(iii) in the circumstances, I would nonetheless further agree with the Monitor that certain badges of fraud do appear to be evident in this case. For example, in the present circumstances, the consideration was grossly inadequate as discussed below, the transfer was accomplished quickly, and the transfer was of a general nature such that it included virtually all assets of the transferor: Builders' Floor Centre Ltd. v. Thiessen, 2013 ABQB 23 (Alta. Q.B.) at para 43.

77 Accordingly, I find that Energy intended to defeat or delay a creditor within the meaning of section 96(1)(a)(iii) of the BIA.

78 In order to fall within the meaning of a transfer at undervalue, it is also necessary to determine whether there was adequate consideration in the circumstances.

79 The Monitor, Stream, Accel, and ICC all submit that there was not adequate consideration advanced by TEC in these circumstances.

80 TEC argues that there was adequate consideration in this case and that it is permissible for consideration to be for the benefit of a third party, such as Regent. TEC submits that its consideration was more than adequate, especially considering the increased risk to TEC in advancing the funds despite Holdings' past defaults and given TEC's willingness to accept a lower priority security interest rather than enforce the alleged misappropriation of trust funds held by Holdings for TEC. Specifically, TEC states that it provided adequate consideration through the following means:

a) TEC did not take action directly against Energy and Regent to recover misappropriated trust property that was taken from Holdings;

b) TEC did not take action to enforce Energy and Regent's promises to replenish the diverted trust funds at the direct request of Accel;

c) Energy received $800,000 on an emergency basis, without which TEC says would have caused Energy's entire business to fail; and

d) TEC did not take action to enforce Holdings' defaults under the Standstill Agreement, including failure to pay TEC $4 million in August 2019 and the diversion of trust funds to Energy in August 2019.

81 This Court recently discussed how a court should determine whether a transaction under section 96 of the BIA is "conspicuously less than fair market value" in Hofer (Re), 2019 ABQB 405 (Alta. Q.B.) at para 31. Justice Woolley noted that the Court must identify the fair market value and whether the consideration that was paid falls conspicuously below that value based on the evidence before it, yet noted that "weighing the adequacy of consideration is not an exercise in precision but one of judgement": Hofer at para 31, citing Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406 (Ont. C.A.) at para 53.

82 Weighing the adequacy of the considerations in the present circumstances leads me to find that this transaction was undertaken for consideration "conspicuously less than market value". I reach this determination by considering the transaction as a whole, and in particular on the basis that:

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11 0020 Accel Canada Holdings Limited, Re, 2020 ABQB 204, 2020 CarswellAlta 558 2020 ABQB 204, 2020 CarswellAlta 558, [2020] A.W.L.D. 1913, 318 A.C.W.S. (3d) 538...

a) There is an obvious and significant disparity between the $800,000 advance by TEC in exchange for more than $12 million of security provided against all the assets of Energy, not to mention the potential additional obligations possibly in an amount of over $300 million as described in the Term Sheet, and especially considering that Energy did not previously owe any security obligations to TEC;

b) TEC did not provide consideration to Energy by refraining from enforcing its rights under the Standstill Agreement. The Agreements do not reference any agreement by TEC to forbear from enforcing rights under the Standstill Agreement.

Further, Energy was not a party to the Standstill Agreement. To that end, Stream submits that Energy and Holdings, while related companies, are separate corporations with separate operations, structures, lenders, and assets, such that any forbearance is not to the benefit of Energy at all. While the present proceedings do not involve a full assessment as to the interrelatedness of Energy and Holdings, I would note that TEC itself treated Energy and Holdings as at least distinct enough entities to initially operate only as the senior secured lender of Holdings and then to warrant seeking separate security from Energy.

In any event, TEC had already agreed, by virtue of the Standstill Agreement itself, to forbear from asserting any rights against Holdings until September 30, 2019, such that consideration was not provided in that respect; and

c) As previously discussed, TEC was not in a trust relationship with Holdings such that it had a right to take action against Energy to recover trust funds that TEC alleges were misappropriated by Holdings, a portion of which was then transferred to Energy, and then used by Energy. Since there was no trust, and accordingly no ability to trace those funds as advanced by TEC, TEC did not have any right against Energy in that respect and therefore could not provide consideration through forbearance.

83 Overall, it is clear that this was a transfer at undervalue that was intended to prefer TEC over the interests of other creditors while Energy was insolvent. For these reasons, I conclude that the transaction contemplated by the Agreements constituted a transfer at undervalue within the meaning of section 96 of the BIA.

What is the appropriate remedy in the circumstances?

84 The transaction arising from the Agreements is therefore a voidable transaction under either section 95 or section 96 of the BIA.

85 Section 95(1)(a) of the BIA provides that a payment determined to be a preference is void as against the trustee. Section 96(1) states that a court "may" declare a transfer at undervalue as void against the trustee or "order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor".

86 In arguments provided to this Court with respect to a subsequent application in these proceedings, the parties disagree as to whether this Court has ability to void a transaction other than as of the date of judgment.

87 The Alberta Court of Appeal stated in Principal Group at para 11:

11 The Act does more than forbid preferences and allow a suit to recover them. It makes such payments fraudulent and void: s. 95(1). If they are void, then no property passed, and the payees are in possession of some of the bankrupt's property. The duty of the trustee to collect the property of the bankrupt is elementary.

88 The Saskatchewan Court of Queen's Bench recently elaborated on that statement of the law. In HXP Debenture Trust v. Guillaume, 2015 SKQB 225 (Sask. Q.B.), the Court states at para 16 that:

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It is clear that the law is not as one dimensional as the quote from Principal Group might suggest. It is well established a transaction that is found to be a fraudulent preference is "voidable", and not "void ab initio" (See Bernard Motors Ltd., Re, [1960] S.C.R. 385 (S.C.C.)). Further, s. 3 of The Queen's Bench Act, 1998, SS 1998, c Q-1.01 confirms that this Court is a superior court of record. As such, it has the inherent jurisdiction to craft a remedy that does justice between the parties. As Baynton J. noted in PCL Industrial Constructors Inc. v. CLR Construction Labour Relations Assn. of Saskatchewan Inc. (1999), 178 Sask. R. 161 (Sask. Q.B.):

86 The inherent jurisdiction of this court includes the jurisdiction to provide an injured party with an effective and appropriate remedy. In situations in which no specific remedy is provided by the statute law, the court is required to be innovative and craft a remedy that appropriately redresses the plaintiff for the wrong that has been suffered. Obviously such a remedy must not contravene any lawful statutory provision.

89 Although HXP involved a transfer of real and personal property, rather than a security interest, the comments of the Court are useful in determining the appropriate remedy to grant under section 95 of the BIA. HXP indicates that a preference is not necessarily void ab initio, but rather is voidable: at para 16. Further, any remedy must be crafted in light of the overarching objectives of the BIA and with consideration to the discretion of the court: HXP at para 16.

90 As discussed above, I must also keep in mind the objectives underlying the CCAA, including appropriateness, good faith, and maintaining the status quo in order to be fair to all stakeholders: Century Services at paras 70, 77.

91 Of note, the $800,000 payroll advance that initiated this transaction has already been repaid within these proceedings, presumably to the satisfaction of the Monitor, who directed the repayment, and to any stakeholders, as there are none seeking to overturn that payment at this time.

92 In reaching my decision as to an appropriate remedy, I have considered the relevant statutory provisions, objectives, and the present circumstances. Accordingly, given my findings that the transactions should be set aside and in light of the aforementioned considerations, I order that the Agreements be set aside as void as of the date that repayment was made by Energy to TEC of the $800,000 loan, that being November 22, 2019. The Term Sheet and Debenture are set aside, with the result that TEC does not have a valid and enforceable claim against Energy arising from the Agreements.

93 I find that I am able to exercise my authority to provide that remedy under section 95 of the BIA, or alternatively as a means of providing for repayment to the estate under section 96 of the BIA, and further as an exercise of my discretion to provide a fit and appropriate remedy in light of the provisions and objectives of the CCAA.

Is the subordination valid?

94 TEC argued in oral submissions that it is open to this Court to find the subordination agreement valid even if the transactions are found to be void. TEC relies on section 96 of the BIA, which provides a court with discretion in determining the remedy to address a transfer at undervalue. TEC suggests that, for example, I could find the trust claim valid such that TEC's forbearance from enforcing such a claim could remain as valid consideration, even if declaring other aspects of the transaction void. In that case, TEC suggests, the subordination agreement would remain in place.

95 Based on my determination that TEC does not have a valid and enforceable claim against Energy, and in light of the fact that TEC did not have a trust interest arising out of the August IDP, there are no remaining Agreements or interests against which TEC could seek to subordinate the interests of either Regent or Stream.

Conclusion

96 As previously stated, the further relief sought by TEC in this application need not be addressed given my finding with respect to the provisions of the BIA and CCAA.

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97 TEC's application is denied. TEC does not have a valid and enforceable claim against Energy with respect to the Agreements. The transaction is void as of the date of re-payment of the $800,000 from Energy to TEC, and no outstanding interests of TEC against Energy that otherwise would have arisen out of the Agreements remain.

98 Should the parties wish to address costs of these applications, their respective right to do so is reserved. Application dismissed.

End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

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TAB 4

0024 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292...

2008 CarswellOnt 1118 Ontario Superior Court of Justice [Commercial List]

Canada (Attorney General) v. Reliance Insurance Co.

2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292, 40 B.L.R. (4th) 204, 58 C.C.L.I. (4th) 220

In the Matter of Reliance Insurance Company

And In the Matter of the Insurance Companies Act,—S.C. 1991, C.47, as amended

And In the Matter of the Winding-Up and Restructuring Act,—R.S.C. 1985, C.W.-11, as amended

The Attorney General of Canada (Applicant) and Reliance Insurance Company (Respondent)

Pepall J.

Judgment: February 29, 2008 Docket: 01-CL-4313

Counsel: Graham Smith, Lauren Butti for Moving Party, KPMG Liquidator of Reliance Canada Paul Bates, Robert Gain for Respondents, Swiss Re Frankona Ruckversicherungs AG, Swiss Re Germany AG David Chernos for Property & Casualty Insurance Compensation Corporation

Subject: Insurance; Contracts; Corporate and Commercial; Insolvency; Civil Practice and Procedure Headnote Insurance --- Contracts of insurance — Reinsurance Set-off claim by reinsurers — Liquidator of R Canada Co., which was branch of insurance company R Co., brought motion seeking order directing reinsurers to pay liquidator amounts it claimed were owing under reinsurance contracts — Reinsurers refused to pay and stated that they were entitled to set-off any indebtedness to R Canada Co. against amounts owed to them by related company R Co. and submitted that they would owe it nothing — Motion granted — By terms of two of four reinsurance contracts reinsurers potentially could set-off amounts due to R Canada Co. — Reinsurer's contractual set-off rights were preserved by and subject to s. 73 of Winding-up And Restructuring Act — Unchallenged evidence established that amounts claimed by liquidator all became due under reinsurance contracts only after commencement of winding up of R Canada Co. — Insufficient evidence existed to establish that debt of reinsurers to R Canada Co. was accruing due as of date of winding up application so that set-off was not available — Reinsurance contracts described only potential liability but not existing debt that could be characterized as accruing due — Reinsurers were obliged to pay liquidator amounts due and owing. Business associations --- Changes to corporate status — Winding-up — Under Dominion Act — Liquidator — Miscellaneous issues Set-off claim by reinsurers — Liquidator of R Canada Co., which was branch of insurance company R Co., brought motion seeking order directing reinsurers to pay liquidator amounts it claimed were owing under reinsurance contracts — Reinsurers refused to pay and stated that they were entitled to set-off any indebtedness to R Canada Co. against amounts owed to them by related company R Co. and submitted that they would owe it nothing — Motion granted — By terms of two of four reinsurance contracts reinsurers potentially could set-off amounts due to R Canada Co. — Reinsurer's contractual set-off rights were preserved by and subject to s. 73 of Winding-up And Restructuring Act — Unchallenged evidence established that amounts claimed by liquidator all became due under reinsurance contracts only after commencement of winding up of R Canada Co. — Insufficient evidence existed to establish that debt of reinsurers to R Canada Co. was accruing due as of date of winding up application so that set-off was not available — Reinsurance contracts described only potential liability but not existing debt that could be characterized as accruing due — Reinsurers were obliged to pay liquidator amounts due and owing.

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 1 0025 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292...

MOTION by liquidator of insurance company for order directing reinsurers to pay liquidator amounts it claimed were owing under reinsurance contracts.

Pepall J.:

1 KPMG Inc., the court appointed Liquidator of the Canadian branch of Reliance Insurance Company ("Reliance Canada") seeks an order declaring and directing Swiss Re Frankona Ruckversicherungs AG and Swiss Re Germany AG ("Swiss Re"), re-insurers, to pay to the Liquidator amounts it claims are owing under certain re-insurance contracts known as treaties. Swiss Re refuses to pay and states that they are entitled to set-off any indebtedness to Reliance Canada against amounts owed to them by Reliance Insurance Company ("Reliance"). They rely in particular on four re-insurance treaties (the "Treaties"). Swiss Re asserts that set-off would result in Swiss Re owing nothing to Reliance Canada.

2 The other respondents originally named in these proceedings have either settled with the Liquidator or not responded. Swiss Re is the only respondent opposing the Liquidator's motion.

Facts

3 On October 5, 2007, I gave reasons for my decision refusing Swiss Re's request to refer the issue of set-off to arbitration. The background facts relating to this proceeding are outlined in those reasons and are relied upon for these reasons.

4 The following additional facts are also relevant.

5 The Treaties govern the relationship between Swiss Re and Reliance. In each, Company is defined to include Reliance and the re-insurers are Swiss Re. The four Treaties contain the following set-off clauses:

Article XX113, Swiss Re Treaty ARA6557-93:

All amounts due either Company or Re-insurer, by reason of premiums, losses or otherwise, under this Agreement will be subject to recoupment and to offset, the rights to which may be exercised at any time and from time to time by either party, and upon exercise thereof, only the balance will be due. (emphasis added)

The sum of $25,000 is in issue with respect to this Treaty.

Article XX113, Swiss Re Treaty ARA6558-93 and Article XX113, Swiss Re Treaty ARA6559-93:

All amounts due either Company or Re-insurer by reason of premiums, losses or otherwise, under this Agreement or any other contract previously, now or later in force, between the Company and Re-insurer, whether as ceding or assuming company, will be subject to recoupment and to offset, the rights to which may be exercised at any time and from time to time by either party, and upon exercise thereof, only the balance will be due. (emphasis added)

The sums of $75,000 and $68,417.88 respectively are in issue with respect to these two Treaties.

Article XXV Swiss Re Treaty AR6427-99:

Unless otherwise required by applicable law, all amounts due either the Company or the Re-insurer, whether by reason of premium, commission, loss, ultimate net loss, or loss expense, or otherwise, under this Agreement will be subject to the right of recoupment and offset, and upon the exercise of the same, only the net balance will be due. All claims for amounts of premium, commission, loss, ultimate net loss, or loss expense, whether or not fixed in the amount at the time of the insolvency of any party to this Agreement, arising from coverage placed in effect under this Agreement prior to the insolvency of any party will be deemed pre-liquidation debts and subject to this Article. In the event of insolvency of the Company, offset will be in accord with applicable law. (emphasis added)

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 0026 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292...

Two sums of $755,583.20 (U.S.) are in issue with respect to this Treaty. There is a dispute on quantum in this regard. Swiss Re states that the Laidlaw claim should be calculated at $650,000 (U.S.) plus expenses (the "Laidlaw claim") whereas the Liquidator states that the accurate quantum is $755,583.20 (U.S.).

6 The Treaties all provide for the event of insolvency in substantially similar (although in the case of Treaty AR6427-99 not identical) language:

In the event of the insolvency of one (or more) of the reinsured companies, and the appointment of a liquidator, receiver, conservator or statutory successor for such insolvent company, reinsurance payable to such company will be payable immediately upon demand, with reasonable provision for verification, on the basis of the liability of such Company as a result of claims allowed against such company by any court of competent jurisdiction or any liquidator, receiver, conservator or statutory successor having authority to allow such claims, without diminution because of such insolvency or because such liquidator, receiver, conservator or statutory successor has failed to pay all or a portion of any claims.

The amounts stated to be due to Reliance Canada by Swiss Re under each of the Treaties are attached as Schedule A. Approximately $1.7 million is in issue. With the exception of the Laidlaw claim, the unchallenged evidence of the Liquidator is that the amounts set forth in Schedule A all became due under the Treaties after the commencement of the winding up of Reliance Canada. 1 Swiss Re's evidence is that Reliance owes Swiss Re approximately $35 million (U.S.).

7 The Liquidator of Reliance (the Pennsylvania Commissioner of Insurance) agrees with the Liquidator of Reliance Canada that the funds in issue belong to Reliance Canada without set-off and has undertaken not to seek any duplicate payment from Swiss Re for the amounts paid to the Liquidator of Reliance Canada.

Issues

8 On this motion, the following issues are raised:

1. Do all four Treaties permit set-off by Swiss Re?

2. If set-off is permitted by contract, what impact does section 73 of the Winding Up and Restructuring Act 2 ("WURA") have on the set-off rights contained in the Treaties?

3. If section 73 of the WURA is applicable, does Swiss Re meet the requirements for set-off under that section? 3

Discussion

1. The Re-Insurance Treaties

9 The Liquidator makes three arguments with respect to the Treaties. Firstly, two of the Swiss Re Treaties, namely ARA6557-93 (where $25,000 is in issue) and AR6427-99 (where approximately $1,510,000 US is in issue), only provide for set-off for amounts due under those particular agreements and not at large. Put differently, set-off is only permitted for debts due under that agreement, not between agreements. Secondly, while the other two treaties (ARA6558-93 and ARA6559-93 where $75,000 and approximately $68,000 respectively are in issue) do provide for amounts due to Swiss Re under any other contract between Reliance and Swiss Re, they are limited to amounts owing to Reliance, not the Liquidator of Reliance Canada. Thirdly, all Treaties provide that in the case of insolvency of the Reliance re-insureds, the Swiss Re re-insurance will be payable to any liquidator without diminution because of the insolvency.

10 In response, Swiss Re takes the position that clearly set-off is permitted with respect to treaties ARA6558-93 and ARA6559-93. As to ARA6557-93 and AR6427-99, the set-off clauses should not be read narrowly. Rather, they operate to allow set-off between the parties in respect of any contracts to which they are both parties. Swiss Re is permitted to set-off amounts due under the Treaties against any other sums outstanding between the parties. Reliance Canada is encompassed by

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 3 0027 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292...

Reliance. The contractual set-off rights survive insolvency. In any event, the insolvency clause does not operate until there is an amount payable under the Treaties. Here, nothing is payable because of the set-off. These contractual rights addressed principles of allocation of risk and indemnification and should be honoured.

11 As I indicated in my reasons of October 5, 2007, the Treaties were not invalidated but the arbitration proceedings were stayed. Each of the Treaties provides that the agreements are to be governed by and construed according to the laws of Pennsylvania.

12 The evidence on Pennsylvania law is limited. Swiss Re's representative deposes that he or she was informed by Joshua Broudy, a licensed attorney in Pennsylvania, as to the current state of Pennsylvania law with respect to reinsurance set-offs in the insolvency context and attaches a letter of Mr. Broudy. In that letter, Mr. Broudy states that the "offset" provision in Treaty No. ARA6557-93 expresses a right of set-off under that agreement and that the "offset" provisions in Treaty Nos ARA6558-93 and ARA6559-93 are broader. He goes on to state that the language of Treaty No. AR6427-99 provides that:

(1) the parties will be able to offset debts under the agreement in question;

(2) all claims arising from coverages placed prior to insolvency will be considered a pre-liquidation debt; and

(3) in the event of insolvency of the Company, any offset will be in accord with applicable law.

Further, Mr. Broudy notes that "In the insolvency context, courts, including those of Pennsylvania, generally hold that a contractual set-off provision cannot expand set-off rights beyond that provided by statute. See O'Neil v. Burnett (1919), 106 A. 246 (U.S. Pa. S.C. 1919) (contractual right of set-off unenforceable as creating preference)." Mr. Broudy goes on to state that the statute provides for set-off only where the obligations are mutual. Two elements of mutuality must be satisfied: mutuality of capacity and mutuality of time.

Mutuality of capacity requires that the debts must be between the same persons in the same capacity. Mutuality of time means that the subject debts must be owed contemporaneously with, or prior to, the entry of the liquidation order.

The mutuality of time requirement is codified:

No set-off or counterclaim shall be allowed in favour of any person where:

(1) the obligation of the insurer to the person would not at the date of the filing of a petition for liquidation entitle the person to share as a claimant in the assets of the insurer.

13 In Ontario, foreign law is treated as a fact and must be proved. If not proved, or insufficiently proved, the court will apply the lex fori or law of the forum. 4

14 In my view, the foreign law of Pennsylvania on the construction of the Treaties has not been properly proved insofar as I have no properly qualified expert evidence on the point. As such, I am applying Ontario law to the construction of the Treaties. That said, my own interpretation or construction of the Treaties accords with the statements attributed to Mr. Broudy. It seems to me that under Treaty ARA6557-93 and AR6427-99, set-off is for amounts due under these treaties. That is what the agreements expressly state. In addition, otherwise, the references to offset, balance, and net balance are not meaningful. There is no evidence of amounts due to Reliance under these particular agreements. As such, Swiss Re may not offset funds due by it to Reliance Canada against amounts due to it by Reliance outside of these treaties. Furthermore, the reference to insolvency in ARA6427-99 does not expand the rights Swiss Re has under that agreement.

15 In contrast, set-off is available under ARA6558-93 and ARA6559-93. There is nothing that limits the set-off rights to amounts due to Swiss Re under these two treaties. Amounts due under any other contract between Reliance and Swiss Re are subject to offset. While the origin of one amount must be the contract, that of the offsetting amount need not be.

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 0028 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292...

16 Turning then to the Liquidator's second argument, clearly according to the terms of the Treaties, Swiss Re could set-off amounts owed to it by Reliance against amounts it owed to Reliance Canada. The latter was not a separate corporation. It was simply a branch of Reliance. As to the Liquidator's third argument, I agree with Swiss Re's position. Set-off is a defence. If Swiss Re has a valid right of set-off, it does not owe the money claimed by the Liquidator. The amount payable is reduced as a result of the operation of the set-off clause not because of any insolvency. In any event, it seems to me that the insolvency clause is directed at ensuring that the reinsurers pay even if a liquidator has failed to pay all or a portion of a claim. The insolvency clause contained in the Treaties does not negate the set-off provisions.

17 In conclusion, by the terms of its Treaties with Reliance, Swiss Re may set-off amounts due to Reliance Canada under treaties ARA6558-93 and ARA6559-93 against amounts due to Swiss Re by Reliance but not with respect to treaties ARA6557-93 and AR6427-99.

2. Applicability of Section 73 of WURA

18 The next issue to consider is the impact, if any, of section 73 of the WURA on Swiss Re's contractual set-off rights under treaties ARA6558-93 and ARA6559-93. Once a winding up order has been made, the proceedings are governed by the WURA. 5

19 Section 73 provides:

The law of set-off, as administered by the courts, whether of law or equity, applies to all claims on the estate of a company, and to all proceedings for the recovery of debts due or accruing due to a company at the commencement of the winding up of the company, in the same manner and to the same extent as if the business of the company was not being wound up under this Act.

20 The Liquidator's position is that set-off is regulated by section 73 of the WURA. Only set-off strictly as allowed by section 73 is permitted and set-off in a liquidation must meet the requirements of that section. If set-off is not preserved by that section, it is not permitted. In contrast, Swiss Re submits that contractual rights to set-off are distinct and separate from legal and equitable set-off and are not extinguished but preserved by section 73 of WURA. On the basis that it is preserved, Swiss Re agrees with the Liquidator that only set-off strictly as allowed by section 73 is permitted. 6 Swiss Re goes on to state that the case of Central Guaranty Trust Co. v. Hees International Bancorp Inc. 7 should be read as permitting contractual set-off regardless of the language of section 73.

21 The policy rationale behind set-off is described by R.M. Goode in Principles of Corporate Insolvency Law 8 :

Set-off is available both outside and within bankruptcy and liquidation. In both cases it provides a speedy remedy to secure payment but the policy reason for providing the remedy is different. Where both parties are solvent, the remedy of set- off is given primarily to avoid circuity of action. By contrast the provision of insolvency set-off reflects the view that where parties have been giving credit to each other in reliance on their ability to secure payment by withholding what is due from them, it would be unjust, on the advent of liquidation, to deprive the solvent party of his security by compelling him to pay what he owes in full and be left to prove for his own claim. This is the policy justification for what is a clear exception to the pari passu principle, in that it allows the solvent party to collect payment ahead of other creditors to the extent of the set-off and thus puts him in a position analogous to that of a secured creditor. Set-off is an essential tool in the hands of a debtor who has a cross-claim against this creditor and is particularly used in banking transactions and in mutual dealings in the financial markets.

22 Section 73 of the WURA speaks of "the law of set-off, as administered by the courts, whether of law or equity." The language of section 73 was introduced in 1882. At common law, the defence of set-off was unavailable hence the need for the "statutes of set-off" which made such a defence permissible. Equitable set-off evolved through the development of jurisprudence. In the Supreme Court of Canada decision of Maritime Bank v. Troop, 9 Strong J. described section 73's predecessor and stated that it

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 0029 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292... required the court to apply "the law of set-off, as administered by courts of law or equity." The term "whether of law or equity" is descriptive of the courts, not the law of set-off. This is consistent with the French version of this section which states:

La compensation, telle qu'elle s'applique dans les tribunaux judiciaries ou d'équité, est applicable à toutes les reclamations sur l'actif d'une companie et à toutes les procedures en recouvrement de créances d'une compagnie, échues ou devenues exigibles à l'ouverture de la liquidation de la compagnie, de la même manière et dans la même mesure que si les affaires de la compagnie n'étaient pas en cours de liquidation sous l'autorité de al présente loi.

23 Set-off may arise at law or in equity or by contract. 10 Legal set-off requires a liquidated debt and mutual cross obligations. Equitable set-off permits a claim for a liquidated or unliquidated amount. There is no requirement of mutuality but there must be a close connection between the cross obligations and manifest injustice. 11 Kelly R. Palmer describes contractual set-off in The Law of Set-off in Canada. 12

Contractual set-off is, not surprisingly, more a matter of contract law than a separate application of set-off. Consequently, the normal rules of set-off regarding mutuality, liquid debts and connected debts do not apply: within the bounds of legality and public policy, parties are free to contract whatever result they wish. Accordingly, agreements to set-off which would, aside from the agreement, not be granted relief due to the absence of requirements of set-off, will be upheld.

Contracts are not terminated by the mere fact of liquidation 13 and the corporate state and powers of a company in liquidation continue. Section 19 of the WURA states:

A company, from the time of the making of a winding-up order, shall cease to carry on its business, except in so far as is, in the opinion of the liquidator, required for the beneficial winding-up thereof, but the corporate state and all the corporate powers of the company, notwithstanding that it is otherwise provided by the Act, charter or instrument of incorporation of the company, continue until the affairs of the company are wound up.

Unlike bankruptcy, title to assets does not vest in the liquidator but remains with the entity in liquidation.

24 Somewhat comparable provisions to section 73 of the WURA are found in the Bankruptcy and Insolvency Act 14 and the Companies' Creditors Arrangement Act. 15 Section 97(3) of the BIA states:

The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences.

The effect of section 97(3) is to permit a party entitled to set-off to be treated in essence as if it were secured such that its debt is paid before any general distribution to unsecured creditors. 16

25 Similarly, section 18.1 of the CCAA preserves the law of set-off. Section 18.1 of the CCAA states:

The law of set-off 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 the plaintiff or defendant, as the case may be.

26 The question all three statutes pose is does the term "the law of set-off" include contractual set-off or is it restricted to legal and equitable set-off? While a plain reading of these provisions does not make the answer readily apparent, I have concluded that the term "the law of set-off" includes contractual set-off. Firstly, both parties agree with this interpretation although Mr. Bates for Swiss Re did make an alternative secondary argument based on Central Guaranty Trust Co. v. Hees International Bancorp Inc. 17 Secondly, an insolvency statute should not govern the principles associated with legal and equitable set-off only for them to be circumvented or alternatively eradicated in the case of contractual set-off. Thirdly, had Parliament intended

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 0030 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292... to exclude contractual set-off from the parameters of the WURA, it would have done so expressly as it did with eligible financial contracts in section 22(1) of the WURA. Fourthly, the case law and the commentary are consistent with this interpretation. The case of Brunswick Chrysler Plymouth Ltd., Re 18 dealt with a contractual right of set-off in the context of a bankruptcy. This case is described in Bankruptcy and Insolvency Law of Canada 19 as follows:

Section 97(3) of the BIA preserves the application of a contractual right of set-off in the context of a bankruptcy where the debts in respect of which set-off is sought to be applied were incurred prior to the bankruptcy.

The New Brunswick Court of Queen's Bench held that where parties have entered into a contract that authorized the set- off of amounts owing between them, a subsequent bankruptcy of one of the parties does not stay the application of the set-off provision. The court further held that where the contractual right of set-off was in existence well in advance of the bankruptcy and where the contractual right of set-off arises in the ordinary course of dealing between parties, the application of such set-off does not constitute a fraudulent preference within the meaning of s. 97(3) of the BIA. Section 97(3) preserves mutuality (debts owing by the parties to each other) in the case of an assignment in bankruptcy, and it is immaterial that one of the debts was not actually payable at the date of bankruptcy. However, the court would not authorize set-off for a deposit paid after a notice of intention (and prior to the bankruptcy), as the debtor was clearly insolvent at the time and hence this would constitute a preference for the purpose of s. 97(3) of the BIA.

Palmer describes the survival of agreements to set-off in situations of insolvency as follows 20 :

Once an agreement to set-off has been reached, it has a great deal of staying power under Canadian law. Such agreements will survive the passage into receivership, bankruptcy, and winding up, although the provisions regarding fraudulent preferences will undoubtedly apply to such agreements.

Implicitly, both this case and Palmer's excerpt from The Law of Set-off treat contractual set-off rights as being subject to the provisions of section 97(3) of the BIA dealing with fraudulent preferences. It is clear from these passages that contractual set-off in bankruptcy is subject to the parameters of section 97(3) of the BIA. The reference to the law of set-off in all three insolvency statutes should be interpreted in the same manner and not in isolation, one from the other.

27 Lastly, I do not think that Central Guaranty Trust Co. v. Hees International Bancorp Inc. 21 should be interpreted as divorcing contractual set-off from the ambit of section 73. The ratio of that case was that there was a legal set-off and it was encompassed by section 73. There is only a very short reference to contractual set-off in the decision and it is unclear whether the court intended to say that contractual set-off was included in section 73 or not.

28 I have therefore concluded that Swiss Re's contractual set-off rights are preserved by and subject to section 73 of the WURA.

3. Requirements of Section 73

29 The Liquidator argues that as section 73 states that the law of set-off applies to all claims on the estate of a company, there must be a claim on the estate that is being wound up, namely that of Reliance Canada. There is no such claim and that ends the inquiry. Secondly, the Liquidator takes the position that there must be liquidated debts due or accruing due at the date of winding up and there were none here. Lastly, the debts must be mutual. Here, there is no mutuality as there are two distinct estates. The debt is to Reliance Canada. Swiss Re's claim is against Reliance in liquidation in Pennsylvania, not against the estate of Reliance Canada. Even if the distinction between the estates is ignored, the winding up broke any mutuality of interest.

30 In response, Swiss Re submits that the Treaties were intended to extend to the Canadian branch of Reliance and the Liquidator's claim is under the re-insurance Treaties. The word "company" that is used in section 73 must refer to Reliance which was the corporate entity. The term "due or accruing due" refers to debt representing an existing obligation that is payable in the future. Swiss Re relies on P. Lyall & Sons Construction Co. v. Baker 22 and Stelco Inc., Re 23 in support of this interpretation. Furthermore, there is no requirement that the debt be liquidated under section 73 unless the law otherwise so provides. So, for instance, if a party relies on legal set-off, a liquidated debt is a requirement. Such a requirement is not present for equitable

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 7 0031 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292... set-off or contractual set-off. Lastly, absent unambiguous statutory language, there should be no interference with Swiss Re's contractual rights which addressed principles of allocation of risk and indemnification.

31 With contractual set-off, as noted by Palmer, the requirements of a contract must be established. There is no issue that the subject Treaties were valid contracts. For these contracts to be enforceable under the WURA, they must in turn meet the requirements of section 73.

32 Section 73 requires that there be a proceeding for the recovery of debts due or accruing due to a company at the commencement of the winding up of the company. Clearly there is a proceeding brought by the Liquidator for the recovery of a debt. As a result of section 5 of the WURA, the application of the Act commences upon the time of service of the notice of presentation of the petition for winding up. Here, that date was December 3, 2001. Leaving aside the definition of a company, a key issue to determine is whether the debt of Swiss Re to Reliance Canada was due or accruing due as of December 3, 2001. According to the Liquidator, there were no such debts as described by section 73 as the claim of the Reliance Canada estate against Swiss Re was only a contingent possibility that later ripened into a debt once the obligation of Swiss Re to pay was crystallized under the re-insurance contracts. According to Swiss Re, debts which are accruing, that is existing and payable in the future, are contemplated by section 73 and therefore it meets the requirements of that provision.

33 What is the meaning of debts due or accruing due? In P. Lyall & Sons Construction Co. v. Baker, 24 the Ontario Court of Appeal stated,

It remains to consider whether the present record establishes a debt accruing due prior to the winding-up order. What then is debt accruing due? That question was considered by our Court of Appeal in the case of Mail Printing Company v. Clarkson (1898), 25 O.A.R. 1 and I refer particularly to the judgment of Moss, J.A. at p. 8:

A debt is defined to be a sum of money which is certainly, and at all events, payable without regard to the fact whether it be payable now or at a future time. And an accruing debt is a debt not yet actually payable, but a debt which is represented by an existing obligation; per Lindley, L.J. in Webb v. Stinton (1883), 11 Q.B.D. at p.527.

This definition includes such a claim as one arising on a progress certificate under a building contract with time of payment deferred, or a call on shares in a company made payable at a future date: Pickering v. Ilfracombe R.W. Co. (1868), L.R. 3 C.P. 235; but not a claim in respect of a debt payable on a contingency.

In The Law of Set-off in Canada, 25 Palmer states,

As in bankruptcy, contingent liabilities can result in claims which may not be due until after the commencement of the liquidation. Accordingly, while a potential liability exists, a debt will not arise until the contingency is satisfied and set- off in such a case will not be available.

34 The Liquidator argues that the debt owed to Reliance Canada is contingent in two respects. Firstly, the obligation of Swiss Re to pay only ripened into a debt when it was triggered under the terms of the Treaties and secondly, the stay of proceedings found in section 21 of the WURA and incorporated into Farley J.'s order rendered the enforcement of the contract contingent on leave of the court. Swiss Re argues that the reinsurer's obligation to indemnify arose as soon as the cedant suffered a loss.

35 The evidence filed by the Liquidator is uncontested. It states that the amounts claimed by the Liquidator all became due under the Treaties only after the Superintendent took control of the assets of Reliance Canada and after the subsequent commencement of the winding up of Reliance Canada. This unchallenged evidence establishes that the debt of Swiss Re to Reliance Canada was not due at the commencement of the winding up of the company. As to whether the debt was accruing due, Swiss Re simply relies on the wording of the Treaties themselves. In my view, the evidence is insufficient to establish that the debt to Reliance Canada was accruing due as of December 3, 2001, the date of the winding up application. The Treaties describe a potential liability but there was no existing obligation that could be properly characterized as a debt accruing due. In Stelco Inc., Re, 26 which involved a CCAA application, Farley J. gave the term "obligations due or accruing due" an expanded meaning

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 8 0032 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292... in light of the typical objectives of a CCAA proceeding. He noted that the term "obligations" is much broader than the term "debt" and the words "due and accruing due" have different legal meanings in different contexts be it the major restructuring thrust of the CCAA or the predominant liquidation thrust of the WURA. In Enterprise Capital Management Inc. v. Semi-Tech Corp., 27 Ground J. took a narrower view of the meaning of obligations accruing due:

To include every debt payable at some future date in "accruing due" for the purposes of insolvency tests would render numerous corporations, with long term debt due over a period of years in the future and anticipated to be paid out of future income, "insolvent" for purposes of the BIA and therefore the CCAA.

His interpretation of obligations due and accruing due was followed in Oblats de Marie Immaculee du Manitoba, Re. 28 Leaving aside the appropriate test to be used under the CCAA, it seems to me that Ground J.'s analysis of "obligations accruing due" under the CCAA should be applied to the term "debts accruing due" under the WURA, a statute with a liquidation history and focus. This narrower interpretation causes me to conclude that Swiss Re has failed to establish that there were any debts accruing due to Reliance Canada at the commencement of the winding up of the company. In light of this determination, there is no need for me to address all of the other arguments advanced by the parties.

36 Conclusion

37 Swiss Re is obliged to pay to the Liquidator the sums due and owing as set forth in Schedule A with the exception of the Laidlaw claim. In that regard, the claim amount is fixed at $650,000. Swiss Re is to pay the Liquidator accordingly. If the parties are unable to resolve the issue of the differential, counsel are to re-attend before me at a 9:30 appointment to address a procedure to deal with any dispute remaining with respect to any additional amount owing on that claim.

38 If they are unable to agree, the parties are to make written submissions on costs. Motion granted.

Footnotes 1 Report of KPMG Inc. dated May 23, 2007, para. 25. See also affidavit of Lu-ling Chang sworn August 16, 2007 at para. 12.

2 R.S.C. 1985, c. W-11.

3 In argument, counsel for the Liquidator indicated that he was not relying on the provisions of Farley J's orders as a separate basis on which to resist Swiss Re's submissions. In light of that concession, counsel for Swiss Re did not address the impact, if any, of Farley J.'s orders on his clients' position.

4 J-G Castel and Janet Walker, Canadian Conflict of Laws, 6 th ed. (Markham: Butterworths, 2005) at 74.

5 Breakwater Co., Re (1914), 33 O.L.R. 65 (Ont. H.C.).

6 See para. 40 of Swiss Re's factum.

7 2001 CarswellOnt 3329 (Ont. S.C.J.).

8 2 nd ed. (London: Sweet & Maxwell, 1997) at 174.

9 (1889), 16 S.C.R. 456 (S.C.C.), at 459.

10 Telford v. Holt (1987), 41 D.L.R. (4th) 385 (S.C.C.), Canada Trustco Mortgage Co. v. Sugarman (1999), 179 D.L.R. (4th) 548 (Ont. C.A.), Citibank Canada v. Confederation Life Insurance Co. (1996), 42 C.B.R. (3d) 288 (Ont. Gen. Div.), at 298.

11 Place Concorde East Ltd. Partnership v. Shelter Corp. of Canada Ltd. (2003), 43 B.L.R. (3d) 54 (Ont. S.C.J.).

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 9 0033 Canada (Attorney General) v. Reliance Insurance Co., 2008 CarswellOnt 1118 2008 CarswellOnt 1118, [2008] O.J. No. 795, 165 A.C.W.S. (3d) 66, 40 C.B.R. (5th) 292...

12 (Aurora: Canada Law Book Inc., 1993) at 264.

13 Fraser and Stewart's Company Law of Canada, 6 th ed. (Scarborough: Carswell, 1993) at 821.

14 R.S.C. 1985, c. B-3.

15 R.S.C. 1985, c. C-36.

16 Husky Oil Operations Ltd. v. Minister of National Revenue (1995), 128 D.L.R. (4th) 1 (S.C.C.), at 24; Palmer, supra note 12.

17 Supra note 7.

18 (2004), 11 C.B.R. (5th) 10, 6 B.L.R. (4th) 300 (N.B. Q.B.).

19 L. W. Houlden, G.B. Morawetz and Janis Sarra, 3rd ed., looseleaf (Toronto: Carswell, 2005) vol. 2 at F§109(1).

20 supra note 12 at 264.

21 supra note 7.

22 [1933] O.J. No. 209 (Ont. C.A.).

23 (2004), 48 C.B.R. (4th) 299 (Ont. S.C.J. [Commercial List]).

24 [1933] O.R. 286 (Ont. C.A.).

25 Supra note 12 at 215.

26 (Ont. S.C.J. [Commercial List]).

27 [1999] O.J. No. 5865 (Ont. S.C.J. [Commercial List]).

28 [2004] M.J. No. 112 (Man. Q.B.).

End of Document Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10 0034

TAB 5

0035 Brunswick Chrysler Plymouth Ltd, Re, 2005 NBQB 83, 2004 CarswellNB 705 2005 NBQB 83, 2004 CarswellNB 705, [2004] N.B.J. No. 533, 11 C.B.R. (5th) 10...

2005 NBQB 83 New Brunswick Court of Queen's Bench

Brunswick Chrysler Plymouth Ltd, Re

2004 CarswellNB 705, 2005 NBQB 83, [2004] N.B.J. No. 533, 11 C.B.R. (5th) 10, 139 A.C.W.S. (3d) 975, 284 N.B.R. (2d) 167, 6 B.L.R. (4th) 300, 742 A.P.R. 167

In the Matter of the Bankruptcy of Brunswick Chrysler Plymouth Ltd.

In the Matter of an Application of the Trustee in Bankruptcy of Brunswick Chrysler Plymouth Ltd. for payment by DaimlerChrysler Canada Ltd.

Glennie J.

Heard: November 29, 2004 Judgment: November 29, 2004 Docket: 10573, Estate 51-114814

Counsel: R. Gary Faloon, Q.C. for Brunswick Chrysler Ltd. André G. Richard, Q.C. for DaimlerChrysler Canada Ltd.

Subject: Insolvency Headnote Bankruptcy and insolvency --- Proving claim — Practice and procedure — Right to set-off Bankrupt was car dealer for D Inc. and operated pursuant to sales and service agreement which contained set-off clause — Bankrupt filed notice of intent to make proposal under Bankruptcy and Insolvency Act on February 26, 2004 — Bankrupt was indebted to D Inc. on date of notice — Bankrupt and D Inc. continued to do business in accordance with agreement — After filing proposal, bankrupt returned tires to D Inc. purchased in 2003 — Bankrupt brought motion seeking declaration that D Inc. was not entitled to set off its post February 26, 2004 debts against its pre February 26, 2004 debts — Bankrupt did warranty work for D Inc. in June 2004 and July 2004 up to date of bankruptcy — Bankrupt paid deposit to D Inc. for C.O.D. purchase of parts — Bankrupt was deemed bankrupt on July 8, 2004 under s. 57 of Act when bankrupt's proposal was rejected by creditors — Trustee in bankruptcy continued bankrupt's application — Application allowed in part — Assignment in bankruptcy did not destroy mutuality of debts — Bankrupt and D Inc. continued to operate in accordance with terms of agreement from date of notice to date of bankruptcy — Set-off was part of agreement and done in ordinary course of business — Warranty work was initiated by bona fide third party customers of bankrupt and not initiated by D Inc. to trigger set-off — D Inc.'s right of set-off was clearly preserved by s. 97(3) of Act — Valid right of set-off arising in ordinary course between parties was not preference under Act — Return of tires was in ordinary course of business and although set-off should not have occurred during stay period, it was validated by s. 97(3) of Act — D Inc.'s use of deposit as security was preference for purposes of s. 97(3) and could not be set off.

APPLICATION by trustee in bankruptcy for payment to estate by creditor alleging set-off of amounts.

Glennie J. (orally):

1 Brunswick Chrysler Plymouth Ltd. ("Brunswick") filed a Notice of Intention To Make a Proposal pursuant to subsection 50.4(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA") in the office of the Official Receiver on February 26, 2004. Subsequently, by Court Orders dated March 25, 2004 and May 6, 2004, the time for Brunswick to file a Proposal was extended to May 7, 2004 and June 4, 2004 respectively.

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2 Brunswick subsequently filed a Proposal and on July 7, 2004, the creditors of Brunswick voted against the Proposal. As a consequence, Brunswick was deemed to be bankrupt and a Certificate of Assignment in Bankruptcy was issued on July 8, 2004 pursuant to Section 57 of the BIA and Grant Thornton Limited became Trustee of Brunswick.

3 At all material times, Brunswick was a car dealer for DaimlerChrysler Canada Inc. ("DaimlerChrysler") and operated pursuant to a Sales and Service Agreement which contains a set-off provision which provides that DaimlerChrysler may apply in set-off against any amount owed to it by Brunswick any amount owing to Brunswick by DaimlerChrysler.

4 As of February 26, 2004, the date Brunswick filed its Notice of Intention to Make a Proposal, it owed DaimlerChrysler the sum of $291,563.15.

5 In November of 2003, Brunswick purchased certain tires from DaimlerChrysler for a cost of $6,049.59 inclusive of HST. After the filing of its proposal, Brunswick returned the tires to DaimlerChrysler which applied a credit against the debt of Brunswick owed to DaimlerChrysler for those tires.

6 On May 27, 2004 prior to its bankruptcy, Brunswick filed a motion seeking a Declaration that DaimlerChrysler not be entitled to set-off its post February 26, 2004 obligations to Brunswick against the pre February 26, 2004 indebtedness of Brunswick to DaimlerChrysler. Brunswick also sought an order forcing Daimler Chrysler to pay any monies owed after February 26, 2004 forthwith and continue making such payments in the future within seven days of month end.

7 Daimler Chrysler says it did not contest the application of the stay provisions found in Section 69.1 of the BIA even though there were some disagreements over what were pre-filing transactions and post-filing transactions. Daimler Chrysler says it also continued to do business with Brunswick and agreed to pay Brunswick any amounts owed to Brunswick in conformity with its established business practices.

8 The motion was adjourned on June 2, 2004 by consent and again on June 11, 2004 when the motion was adjourned to July 8, 2004.

9 As mentioned, on July 7, 2004, the creditors of Brunswick voted against the proposal. Brunswick was deemed to be in bankruptcy and a Certificate of Assignment was issued on July 8, 2004.

10 On July 8, 2004, the motion was again adjourned but Counsel for Brunswick informed the Court that he was now acting on behalf of the Trustee in Bankruptcy for Brunswick.

11 On July 22, 2004, the Deputy Registrar in Bankruptcy issued an order that these proceedings be continued with Grant Thornton Limited, Trustee in Bankruptcy of Brunswick as an Applicant and DaimlerChrysler as Defendant.

12 Brunswick did warranty work for DaimlerChrysler for an amount of $40,315.31 in June 2004 and $11,815.14 in July up to the date of bankruptcy. The June work would normally have been paid by July 20, 2004 and the July work by August 20, 2004.

13 DaimlerChrysler asserts that it is entitled to set-off post February 26, 2004 credits in favour of Brunswick against Brunswick's pre February 26, 2004 indebtedness to DaimlerChrysler.

14 The issue to be determined is whether DaimlerChrysler is entitled to set-off post February 26, 2004 credits in favour of Brunswick against Brunswick's pre February 26, 2004 indebtedness to DaimlerChrysler.

15 Section 69.(1) of the BIA provides that a stay of proceedings is imposed by operation of law when an insolvent person files a Notice of Intention To Make a Proposal.

16 In the event of a subsequent bankruptcy, Section 97(3) of the BIA provides as follows:

(3) The law of set-off applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 2 0037 Brunswick Chrysler Plymouth Ltd, Re, 2005 NBQB 83, 2004 CarswellNB 705 2005 NBQB 83, 2004 CarswellNB 705, [2004] N.B.J. No. 533, 11 C.B.R. (5th) 10...

plaintiff or defendant, as the case may be, except in so far as any claim for set-off is affected by the provisions of the Act respecting frauds or fraudulent preferences.

17 A right of set-off may arise by agreement (contractual set-off), by law (legal set-off) or in equity (equitable set-off).

18 The normal rules of set-off regarding mutuality, liquid debts and connected debts do not apply in the case of contractual set-off.

19 Section 97(3) of the BIA preserves set-off where two persons are both debtors and creditors of each other. See: Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453 (S.C.C.). The law with respect to the defences of legal set-off and equitable set-off is set out in Abacus Cities Ltd. v. Aboussafy (1981), 29 A.R. 607 (Alta. C.A.), applied in Brattberg v. Royal Bank (1987), 79 A.R. 166 (Alta. C.A.) leave to appeal refused (1987), 82 A.R. 392 (note) (S.C.C.) and in Telford v. Holt, [1987] 2 S.C.R. 193 (S.C.C.).

20 Abacus Cities Ltd. v. Aboussafy, supra, held at page 618 that legal set-off applies to "liquidated claims, although those claims may be unrelated."

21 It should be noted that Brunswick and DaimlerChrysler continued to operate pursuant to the terms and conditions of the Sales and Service Agreement during the time line from February 26, 2004, the date Brunswick filed its Notice of Intention To Make a Proposal, and July 8, 2004, the date of Brunswick's bankruptcy.

22 Unlike equitable set-off, for legal set-off there is no necessity for the debts to be connected in any manner.

23 An assignment in bankruptcy does not destroy "mutuality", in the case of an assignment mutuality is preserved by Section 97(3) of the BIA. See: Allan Realty of Guelph Ltd., Re (1979), 29 C.B.R. (N.S.) 229 (Ont. Bktcy.).

24 For set-off, there need only be mutual debts; it is immaterial that one of the debts was not actually payable at the date of bankruptcy. See: Coopers & Lybrand Ltd. v. Lumberland Building Materials Ltd. (1983), 50 C.B.R. (N.S.) 150 (B.C. S.C.).

25 Counsel for the Trustee argues that the refusal of DaimlerChrysler to pay the Trustee its obligations to Brunswick from February 26, 2004 to July 7, 2004 constitutes a preference in favour of DaimlerChrysler over all other unsecured creditors of Brunswick.

26 In Bankruptcy and Insolvency Law of Canada (Houlden and Morawetz, Looseleaf 2004-Release 5), the authors state at E20:

It is customary in a proposal to provide that creditors dealing with the debtor after the filing of a notice of intention or a proposal shall have no right of set-off. This is done to prevent creditors from purchasing goods from the debtor and claiming a right of set-off against the amount owing to them by the debtor. Even if such a term is not contained in a proposal, it would appear that there is no right of set-off, since if such a set-off were allowed, it would be a fraud on the bankruptcy law. In Re Coburn Felt Hat Co. (1925), 5 C.B.R. 622 (Ont. S.C.) after the making of a proposal, an unsecured creditor purchased goods from the debtor for which he did not pay. The proposal went into default, and the debtor went into bankruptcy. The trustee applied to the creditor for payment; the creditor asserted a right of set-off. It was held that the creditor had no such right. Fisher J. said "it is of the essence of the compositions that they should be carried out in the utmost good faith, that all creditors shall be treated equally and there shall be no secret agreement or transactions whereby one creditor shall have or obtain or be given any undue advantage over other creditors.

27 I am of the view that the Coburn case is a classic example of a preference situation which ought to be clearly disallowed. In the case of Brunswick, in the event unsecured creditors bought motor vehicles from Brunswick after Brunswick had filed its Notice of Intention To Make a Proposal and then did not completely pay or only partially paid for those vehicles on the basis of alleged set-off, those transactions would be obvious incidents of fraudulent preferences and ought to be disallowed. Such creditors would not be acting in good faith and would not be acting in the normal course of business. That type of transaction is the mischief the legislation specifically is legislating against by referencing frauds or fraudulent preferences in the provisions of Section 97(3) of the BIA.

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28 However, in the case of Brunswick and DaimlerChrysler, they were operating in the ordinary course of business in accordance with the terms of a Sales and Service Agreement which had been in place for several years prior to the filing of Brunswick of its Notice of Intention To Make a Proposal. The set-off provision was part of that agreement. In his affidavit deposed to on July 21, 2004, Daniel Hourde, the Manager of Billing and Credits for DamilerChrysler stated:

Normally any amounts owed to Brunswick Chrysler Plymouth Ltd. by DaimlerChrysler Canada Inc. is set off against purchases (parts or services) made by Brunswick Chrysler Plymouth Ltd.

29 I am satisfied on the evidence before me that this was done in the ordinary course of business pursuant to the Sales and Service Agreement which continued in full force and effect in the period between the date Brunswick filed its Notice of Intention To Make a Proposal and February 26, 2004 and the date of its bankruptcy, July 8, 2004.

30 In its brief, DaimlerChrysler stated that it had ascertained that Brunswick did warranty work for DaimlerChrysler for an amount of $40,315.31 in June 2004 and $11,815.14 in July up to the date of bankruptcy. The June work would normally have been paid by July 20, 2004 and the July work by August 20, 2004.

31 In other words, the warranty work is not something initiated by DaimlerChrysler to try to trigger an off-set or reduce the debt owing to it by Brunswick. The warranty work would have been initiated by bone fide third party customers of Brunswick in the ordinary course of business. In my opinion, this is quite different from the situation where a creditor proactively attempts to off-set by purchasing a product or service from an insolvent person or company to try to in effect better that creditor's position and take advantage of the insolvent person's situation. Such is not the case in the fact situation on this motion.

32 Parliament has explicitly recognized the right of set-off in Section 97(3) of the BIA unless it is fraudulent or a fraudulent preference. Although a person who is both a creditor and a debtor of a bankrupt and has a right of set-off may be in a better position in the bankruptcy than without the right of set-off, that is a consequence of set-off which is recognized by the BIA. As stated in Husky Oil, supra, Parliament has blessed the reordering of a creditor's priority in bankruptcy who has a right to set-off pursuant to the operation of the law of set-off.

33 Husky Oil Operations Ltd., supra recognizes that a person who has a right of set-off against a bankrupt does get a leg up over other unsecured creditors, ¶57-61. After discussing the opposing legal debates about whether this should be so the Court says, ¶ 60:

While this academic debate is undoubtedly interesting, the fact remains that our Parliament has recognized in s. 97(3) of the Bankruptcy Act that the "law of set-off applies to all claims made against the estate of the bankrupt". As a result, in the bankruptcy context, the law of set-off allows a debtor of a bankrupt who is also a creditor of the bankrupt to refrain from paying the full debt owing to the estate, since it may be that the estate will only fulfil a portion, if that, of the bankrupt's debt. Consequently, in this limited sense the party claiming set-off has Parliament's blessing for the "reordering" of his priority in bankruptcy by the virtue of the operation of the law of set-off.

34 In the 2004 Annotated Bankruptcy and Insolvency Act, the authors Lloyd W. Houlden and Geoffry B. Morawetz write at F§109:

A bankrupt's estate includes only the net amount of a debt owing to the bankrupt after proper allowances for the recognized common law right of set-off: Husky Oil Operations Ltd. v. Minister of National Revenue (1993), 22 C.B.R. (3d) 153, 116 Sask. R. 46, [1994] 1 W.W.R. 629; affirmed [1995] 10 W.W.R. 161, 128 D.L.R. (4th) 1 (S.C.C.).

The object of set-off is to avoid the perceived injustice to a man who has had mutual dealings with a bankrupt of having to pay in full what he owes to the bankrupt while having to rest content with a dividend on what the bankrupt owes him. At the same time the effect of the set-off is to prefer one creditor over the general body of creditors, and accordingly, it is confined within narrow limits. The principal limiting requirement is that of mutuality. If there is no mutuality there is

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 4 0039 Brunswick Chrysler Plymouth Ltd, Re, 2005 NBQB 83, 2004 CarswellNB 705 2005 NBQB 83, 2004 CarswellNB 705, [2004] N.B.J. No. 533, 11 C.B.R. (5th) 10...

no set-off. The requirement of mutuality is central to bankruptcy set-off and is rigorously enforced: Re Bank of Credit and Commerce International S.A. (No. 8), [1996] 2 W.L.R. 631.

35 "Mutual" means debts owing by the parties to each other.

36 In D'Auteuil, Re, 1999 CarswellQue 1170 (Que. C.A.), the debtor owed $165,583 to a creditor. The creditor filed a Notice of Intention To Make a Proposal. Following the filing of the Notice of Intention, the debtor did warranty work for the creditor for an amount of $14,000.00. The proposal was subsequently rejected and the creditor sought to set-off the $14,000.00 from the $165,583.00 owed by the debtor. The trustee opposed the set-off arguing that such a set-off would constitute a preference. The Quebec Court of Appeal held that legal set-off applied between a debtor when debts exist and are mutual at the time of bankruptcy. Set-off will apply to debts and obligations which arose in the pre-filing and post-filing period.

37 In The Law of Set-Off in Canada, the author, Kelly R. Palmer, writes at page 264:

Once an agreement to set-off has been reached, it has a great deal of staying power under Canadian law. Such agreements will survive the passage into receivership, bankruptcy, and winding up, although the provisions regarding fraudulent preferences will undoubtedly apply to such agreements.

38 On the fraudulent preference issue, it should be noted that Brunswick entered into a Sales and Service Agreement with Chrysler Canada Ltd. (now DaimlerChrysler) on May 6, 1998. It was revised effective March 1, 2001 and the revised agreement contains the following set-off provision in Section 21:

SET-OFF

DAIMLERCHRYSLER may apply in set-off against any amount owed by DEALER to DAIMLERCHRYSLER or to any of DAIMLERCHRYSLER'S affiliates any amount owing to DEALER (or any assignee of DEALER) by DAIMLERCHRYSLER or any of its affiliates.

Any assignment by DEALER of its right to any amounts owed to DEALER by DAIMLERCHRYSLER or any of its affiliates shall be subject to DAIMLERCHRYSLER'S rights of set-off referred to above whether or not any of the amounts owing by DEALER to DAIMLERCHRYSLER or any of its affiliates or owing by DAIMLERCHRYSLER or any of its affiliates to DEALER (or its assignee as a result of such assignment) which may be the subject of such set-off rights arose or became due or owing before or after such assignment or notification of such assignment to DAIMLERCHRYSLER. DEALER shall not assign to any third party its rights to any amounts owed to DEALER by DAIMLERCHRYSLER or any of its affiliates, unless, prior to executing such an assignment, DEALER notifies such third party of DAIMLERCHRYSLER'S set-off rights provided for herein and obtains from such third party, and delivers to DAIMLERCHRYSLER, an acknowledgment by such third party of such set-off rights.

39 Thus, paragraph 21 of the DaimlerChrysler Sales and Service Agreement, a copy of which was provided to Brunswick by courier letter dated January 16, 2001, contains a clear right of set-off which is contractual in nature. Although there was no right of set-off contained in the original Sales and Service Agreement dated May 6, 1998 between Brunswick as dealer and Chrysler Canada Ltd., the original agreement contained an express reservation and right to Chrysler Canada Ltd. to amend the original agreement to the extent "Chrysler Canada deemed advisable."

40 Accordingly, there had been contractual set-off in effect between Brunswick and DaimlerChrysler for several years prior to Brunswick's Bankruptcy. In other words, contractual set-off was not put in place on the eve of insolvency which might raise preference issues.

41 Provided the set-off of accounts does not constitute a fraudulent preference and there is no fraud, the ordinary law applicable to set-off will apply. See: Houlden and Morawetz Bankruptcy and Insolvency Law of Canada at F§109, Volume 2 (Looseleaf) at 4-98.

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 5 0040 Brunswick Chrysler Plymouth Ltd, Re, 2005 NBQB 83, 2004 CarswellNB 705 2005 NBQB 83, 2004 CarswellNB 705, [2004] N.B.J. No. 533, 11 C.B.R. (5th) 10...

42 A valid set-off will inevitably affect and alter the priorities in a bankruptcy but that is what the BIA contemplates. The right of set-off in this case arises in the ordinary course of business, dealings between DaimlerChrysler and its dealer, Brunswick, pursuant to the Sales and Service Agreement which was in effect for a considerable period of time prior to Brunswick's Bankruptcy and which agreement contains a specific set-off provision. As mentioned, it was not put in place on the eve of Brunswick's insolvency. The right of set-off is clearly preserved in Section 97(3) of the BIA. In my opinion, a valid right of set-off that arises in the ordinary course of dealings between parties does not give rise to a preference that can be set aside under the BIA.

43 In The Law of Set-Off In Canada, supra, the author writes at page 263:

Contractual set-off is, not surprisingly, more a matter of contract law than a separate application of set-off. Consequently, the normal rules of set-off regarding mutuality, liquid debts and connected debts do not apply: within the bounds of legality and public policy, parties are free to contract whatever result they wish. Accordingly, agreements to set-off which would, aside from the agreement, not be granted relief due to the absence of the requirements of set-off, will be upheld. This allows contractual set-off to be seen as a "substantive defence; not a mere procedural shield."

44 The author goes on to state at page 264 that the evidence required to find an agreement to set-off is "slighter" than what may be required in other cases and refers to cases where an agreement to set-off has been inferred.

45 However, in the case of the set-off rights of DamilerChrysler with respect to the debts and obligations of Brunswick, it does not have to be inferred, it has clearly been reduced to writing and forms part of the Sales and Service Agreement.

46 Counsel for the Trustee concedes that DaimlerChrysler has a right of set-off for pre-filing debts and that there was contractual set-off prior to February 26th, 2004. However, he says there were not mutual debts owing as between Brunswick and DaimlerChrysler as of the date of the Notice of Intention to Make a Proposal. However, it should be noted that the Sales and Service Agreement between DaimlerChrysler and Brunswick would have remained in full force and effect between the date of filing the Notice of Intention to Make a Proposal and the date of bankruptcy. Counsel for the Trustee asserts that the contractual right of set-off is now extinguished and DaimlerChrysler is left only with an argument for legal and/or equitable set-off. I disagree. As stated by Palmer in Law of Set-Off in Canada, contractual set-off survives a bankruptcy.

47 In Air Canada, Re (2003), 45 C.B.R. (4th) 13, 2003 CarswellOnt 4016 (Ont. S.C.J. [Commercial List]), Justice Farley comments on the requirements for legal set-off at ¶ 13:

13 The requirements for legal set-off were stated in Citibank Canada v. Confederation Life Insurance Co. (1996), 42 C.B.R. (3d) 288 (Ont.Gen.Div.) at p. 298, affirmed (1998), 37 O.R. (3d) 226 (Ont.C.A.).

For set-off at law to occur, the following circumstances must arise:

1. The obligations existing between the two parties must be debts, and they must be debts which are for liquidated sums or money demands which can be ascertained with certainty; and,

2. Both debts must be mutual cross-obligations, i.e. cross-claims between the same parties and in the same right.

(emphasis added)

48 Justice Farley then discusses the situation when a bankruptcy occurs at ¶ 14 and 15;

14 In a bankruptcy, the trustee is inserted into the proceedings. Post-bankruptcy dealings of a creditor with the trustee in bankruptcy do not involve the same party, namely the debtor before the condition of bankruptcy. When a bankruptcy occurs, there is a new estate created: there is the estate of the debtor under the direction and control of the debtor before the bankruptcy which is a different estate than the one post-bankruptcy where there is an estate of the bankrupt under the direction and control of the trustee in bankruptcy. Thus, creditors who incur post-bankruptcy obligations to trustees

Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 6 0041 Brunswick Chrysler Plymouth Ltd, Re, 2005 NBQB 83, 2004 CarswellNB 705 2005 NBQB 83, 2004 CarswellNB 705, [2004] N.B.J. No. 533, 11 C.B.R. (5th) 10...

in bankruptcy cannot claim legal set-off to avoid paying such obligations by setting-off such obligations against their proven (pre-bankruptcy) claims against the bankrupt. The same parties are not involved so there cannot be mutual cross- obligations. See S. Piscione & Sons Ltd., Re, [1965] 1 O.R. 515 (Ont.S.C.); Reid, Re (1964), 7 C.B.R. (N.S.) 54 (Ont. Bktcy.); First Canadian Land Corp. (Trustee of) v. First Canadian Plaza Ltd. (1991), 6 C.B.R. (3d) 308 (B.C. S.C.).

15 In Husky Oil Operations Ltd. v. Minister of National Revenue (1995), 128 D.L.R. (4th) 1 (S.C.C.), at pp. 24-5, Gonthier, J. for the majority observed:

... for a particularly thorough and helpful discussion of the issues relating to set-off in bankruptcy and insolvency, see Kelly Ross Palmer, The Law of Set-off in Canada (Aurora, Ont. - Canada Law Book, 1993), at pp. 157-223.

At p. 186, Palmer notes:

This case, as in receivership is fairly straight forward. The assignment of the bankrupt's property to the trustee results in a change of mutuality. Accordingly, any claim which arises after the assignment will be between the claimant and the trustee and not the claimant and the bankrupt. Mutual debts will not be present and set-off not allowed.

49 However, in the case at bar we are not dealing with a situation where a creditor incurred post-bankruptcy obligations to a Trustee in bankruptcy and is trying to avoid paying such obligations by setting-off such obligations against their proven (pre-bankruptcy) claims against the bankrupt. All of the debts, obligations and credits involved between Brunswick and DaimlerChrysler took place and were incurred prior to Brunswick's bankruptcy which occurred on July 8, 2004. I am satisfied, the Bankruptcy of Brunswick resulted in the ability of DaimlerChrysler to exercise the right of set-off against Brunswick pursuant to Section 97(3) of the BIA.

50 In the present case, the obligations existing between Brunswick and DaimlerChrysler are debts for liquidated sums or money demands which can be ascertained with certainty and both debts are mutual cross-obligations that is cross claims between the same parties and in the same right, namely pursuant to the Sales and Service Agreement.

51 In my opinion, the return of the tires was in the ordinary course of business pursuant to the Sales and Service Agreement and although the set-off ought not to have taken place during the stay period, it is now validated by Section 97(3) as a consequence of Brunswick's bankruptcy.

52 There is one transaction with respect to a $6,000.00 deposit paid by Brunswick to DaimlerChrysler after Brunswick filed its Notice of Intention to Make a Proposal which is problematic and in my opinion would constitute a preference being out of the normal course of business. After February 26, 2004, Brunswick purchased parts from DaimlerChrysler on a C.O.D. basis. Regardless of the C.O.D. process, Brunswick was also required to give a deposit to DaimlerChrysler in the amount of $6,000.00, which it did by way of a certified cheque. DaimlerChrysler has not returned the cheque although requested to do so by the Trustee. The cheque has not been cashed.

53 Counsel for DaimlerChrysler argues that the $6,000.00 deposit should be considered a form of security. He characterizes it as a form of pledge.

54 The $6,000.00 deposit was by way of a certified cheque payable to DaimlerChrysler and was dated March 16, 2004.

55 Counsel for DaimlerChrysler cites the decision of our Court of Appeal in Century Steel & Boiler Ltd., Re, 1981 CarswellNB 62 (N.B. C.A.) where a tenant made a voluntary assignment in bankruptcy in July of 1979. The landlord held a security deposit which the tenant delivered to it when the lease was signed in December of 1977. On the occurrence of the bankruptcy, the landlord applied the security deposit to reduce its preferred claim against the bankrupt tenant's estate.

56 The trustee in Century Steel & Boiler Ltd. disallowed the landlord's preferred claim to the extent of the $1,900.00 deposit. In disallowing the landlord's claim, the trustee stated that the landlord had the option of either accepting the $1,900.00 deposit in lieu of all other damages sustained or returning the security deposit and presenting a claim for the full amount of the loss or damage suffered by the landlord as a result of the breach by the tenant.

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57 The motions judge concluded that the security deposit had to be deducted from the landlord's preferred claim.

58 The Court of Appeal concluded that the landlord held a pledge of the security deposit or had a charge against the deposit and as such was a secured creditor to the extent of the $1,900.00 deposit. As a secured creditor, the Court held it was legally entitled to apply the deposit to compensate itself for the loss or damage the landlord had sustained from the breach by the tenant of its covenant to pay the taxes assessed against the property.

59 In my opinion, the facts of Century Steel & Boiler Ltd. can be readily distinguished from those in the case at bar. The security deposit in Century Steel & Boiler Ltd. had been paid by the tenant to the landlord at the time the lease was entered into, over a year and a half prior to the bankruptcy of the tenant.

60 In Houlden and Morawetz Bankruptcy and Insolvency Law of Canada (Looseleaf, Third Edition, Revised Volume 2) at page 4-98, the authors write:

If a creditor, such as a customs broker, was holding a deposit from the debtor as security for payment of its account, and when bankruptcy occurred, the creditor set off the deposit against the amount owing to it, there might be a fraudulent preference resulting form the set-off. But apart from an unusual situation such as this, it is difficult to see how the set-off of accounts at the date of bankruptcy could constitute a fraudulent preference.

61 In my opinion, the $6,000.00 deposit issued by Brunswick to DaimlerChrysler by certified cheque dated March 16, 2004 cannot be used by DaimlerChrysler as security or as a pledge or by way of set-off. Brunswick was paying for parts and inventory on a C.O.D. basis after February 26, 2004.

62 In the case of Brunswick's security deposit of $6,000.00 to DaimlerChrysler, it was made at a time when Brunswick was clearly insolvent, almost one month after Brunswick filed its Notice of Intention to Make a Proposal. In my opinion, it would be considered to be a preference for the purposes of Section 97(3) of the BIA and can not be used as a set-off. The $6,000.00 certified cheque must accordingly be returned by DaimlerChrysler to the Trustee.

Conclusion and Disposition

63 For these reasons, with the exception of the $6,000.00 certified cheque, I conclude that DaimlerChrysler's right of set- off is confirmed and preserved by Section 97(3) of the BIA and that DaimlerChrysler is accordingly entitled to set-off its post February 26, 2004 obligations to Brunswick against the pre February 26, 2004 indebtedness of Brunswick to DaimlerChrysler. Application allowed in part.

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