Court File No. 09-CL-8456-00CL BETWEEN

Court File No. 09-CL-8456-00CL

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF JAMES ROBERT TUCKER, RICHARD HEIS AND ALLAN WATSON GRAHAM OF KPMG LLP, AS JOINT ADMINISTRATORS

Applicants

AND IN THE MATTER OF AERO INVENTORY(UK) LIMITED and AERO INVENTORY PLC

Respondents

APPLICATION UNDER SECTION 46 AND FOLLOWING OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C- 36, AS AMENDED

BOOK OF AUTHORITIES OF AIR CANADA (Returnable July 24, 2014)

Dated: July 10, 2014 STIKEMAN ELLIOTT LLP Barristers & Solicitors 5300 - 199 Bay Street Toronto, Canada M5L 1B9

David R. Byers LSUC#: 22992W Tel: (416) 869-5662 Alexander D. Rose LSUC#: 49415P Tel: (416) 869-5261 Fax: (416) 947-0866

Lawyers for Air Canada

6268291 vl INDEX Court File No, 09-CL-8456-00CL

ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN:

IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF JAMES ROBERT TUCKER, RICHARD HEIS AND ALLAN WATSON GRAHAM OF KPMG LLP, AS JOINT ADMINISTRATORS Applicants

AND IN THE MATTER OF AERO INVENTORY(UK) LIMITED and AERO INVENTORY PLC Respondents

APPLICATION UNDER SECTION 46 AND FOLLOWING OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R,S,C, 1985, c. C- 36, AS AMENDED

INDEX

TAB DOCUMENT

1. Kelly R, Palmer, The Law of Set-Off in Canada, (Toronto: Canada Law Book, 1993)

2. L.W. Houlden and Geoffrey B. Morawetz, Houlden and Morawetz Bankruptcy and Insolvency Analysis, Thomson Reuters Canada Limited, electronic version, F§237

3, Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 SCR 453

4, Citibank Canada v. Confederation Life Insurance Co, (Liquidator of), [1996] OJ No. 3409 (S.C.J.)

6268291 vl - 3 -

TAB DOCUMENT

5. National Foundation for Hepatitis C (Trustee of) v. GWE Group Inc, (1999), 8 C.B,R. (4th) 281 (A.B.Q.B.)

6. Quintette Coal v. Nippon Steel Carp, (1990), 2 CBR (3d) 303 (B.C.C.A.)

7. Re Blue Range Resource Corp., 2000 ABCA 200

8. Re Blue Range Resource Corp., 1999 ABQB 1038

9. Re Canadian Airlines Corp., 2001 ABQB 146

10. NEST Energy Marketing Canada Ltd. (Trustee of) v. NGL Supply (Gas) Co., 2001 ABCA 168

11. Coopers & Lybrand Ltd, v, Lumberland Building Materials Ltd., (1983), 50 CBR (NS) 150 (B,C.S.C.)

12. Re Brunswick Chrysler Plymouth Ltd. (2004) 11 CBR (5th) 10 (N.B. Q.B.)

13. Re Hartford Computer Hardware, Inc., [2012] OJ No. 715 (S.C.J. [Comm. List]) 14. Re Air Canada, [2003] OJ No. 6058 (S.C.J. [Comm. List])

15. Bruce MacDougall, Estoppel (Markham: Lexis Nexis, 2012)

67682.9a of TAB 1 The

1.1fl, Ca 17 D. a di VI

Kelly R. Palmer, B.A. (Dist), M.B.A., LL.B. (Dist) Barrister and Solicitor, Law Society of Alberta Solicitor of The Supreme Court of England and Wales

CANADA LAW BOOK INC. 240 Edward St., Aurora, Ontario @ CANADA LAW BOOK INC., 1993 Printed in Canada All rights reserved. No part of this book may be reproduced in any form by any photographic, electronic, mechanical or other means, or used in any information storage and retrieval system, without the written per- mission of the publisher.

The paper used in this publication meets the minimum requirements of American National Standards for Information Sciences — Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984.

Canadian Cataloguing in Publication Data

Palmer, Kelly R. (Kelly Ross), 1959- The law of set-off in Canada

Includes index. ISBN D-88804-346-2

I. Set-off and counterclaim — Canada, I. Tile.

KE1485 P3 1993 346.71'077 C93-093948-4 KFI501.P3 1993 Chapter 4 Set-off in Insolvency

A. Introduction A major application of the rights of set-off arises in cases of insolvency. The assets of an insolvent individual or firm will often include claims (such as accounts receivable) which pass to a receiver, trustee in bankruptcy or liquidator (referred to in this introduction as a "trustee"), It is then the role of the trustee to profitably realize on these assets for the benefit of creditors of the insolvent. In the course of this realization, the trustee may either commence an action against a third party debtor for an outstanding debt owed to the insolvent, only to be met with a claim for set-off of a debt owed to the debtor by the insolvent; or be faced with claims made by creditors of the insolvent, against which the trustee may wish to raise a set-off of debts owed to the insolvent by the same creditors. In the first case, the debtor may wish to rely on the principles of sot-off in order to avoid paying further funds to the insolvent estate with little likelihood of getting a full return. In the second case, the trustee may attempt to maintain the value of the estate by reducing amounts paid out to specific creditors. In either case, the principles of legal or equitable set-off will be applicable. While numerous provincial statutes have an impact upon insolvency, the discussion in this chapter will be limited to the effects of set-off in four areas: receivership, the Bankruptcy and Insolvency Act, 1 the Wind- ing-up Act, 2 and the Companies' Creditors Arrangement Act. 3 While the discussion will touch upon the operation of each area, a detailed analysis and description of general principles and practices is well beyond the scope of this book, Excellent works which offer guidance in the specifics of each area of insolvency are available and will be referred to below.

1 R.S.C. 1985, c. B-3 (am. S.C. 1992, c. 27). 2. R.S.C. 1985, c. W-11. 3, R.S.C. 1985, c. C-36.

157 The Law of Set-Off in Canada

One overall point is worthy of note, The application of the principles of set-off in Canada do not differ in any meaningful way between solvent and insolvent situations. Certain issues, such as mutuality, do take on a greater importance due to the transfer of the insolvent's estate to the trustee. Few Canadian cases, however, treat the principles of set-off any differently in an insolvency than in a case where both debtor and creditor are solvent. 4 This differs from the approach taken in other jurisdictions where the application of set-off in bankruptcy can be quite different than in solvent situations. 5 Accordingly, readers seeking guidance for an insolvent set-off are referred as well to the chapters regarding legal and equitable set-off which describe the basic principles which a court will apply.

B. Set-off and Receivership

(1) Generally , A receiver will be appointed to act for a creditor pursuant to private financial arrangements between the debtor and the creditor, usually de- scribed in security documentation between the parties (such as a debenture). Once appointed, the receiver will either attempt to liquidate the assets of the debtor or to continue to operate the business of the debtor as a going concern. In either case, the receiver will either attempt to collect on debts owed to the debtor or will be faced with claims made by other creditors for outstanding debts owed by the debtor to them, The essential aspect of receivership for set-off is that the appointment of the receiver will entail an equitable assignment of the debtor's property to the receiver. 6 Kerr7 notes that: ... the principles applicable are those relating to the right of set-off as against an equitable assignee. For either the debenture contains a fixed charge upon all the future property of the company, thus assigning in equity the benefit of any contractual debt due to the company to the debenture holders immediately upon its coming into existence, or else the debenture contains a floating charge upon all the future property of the company, in which case the crystallization of the floating charge produces the same equitable assignment by way of charge against the debenture holders. Accordingly, the appointment of a receiver will result in an assignment of the debtor's assets to the receiver with the result that the issues

4. These tend to be in very limited areas. For example, the ability to purchase claims prior to a bankruptcy in order to set them of against claims owed to the insolvent estate may be different than in a solvent situation, See "Buying Up Debts" under heading, "Fraudulent preferences in non-banking cases", 5, The application of set-off in England is different in the two situations, See "Generally" under heading, "Set-Off and Bankruptcy", 'infra. 6, Re Associated Investors of Canada Ltd. (1989), 62 D.L.R. (4th) 269 at pp. 271-2, [19901 1 W.W.R. 447 (Alta. Q.B.). 7. Walton, Raymond, Hunter and Muir, eds,, Kerr on the Law and Practice as to Receivers and Administration, 17th ed, (London, Sweet & Maxwell, 1989), pp. 380-81.

158 TAB 2 HMANALY F§237 Page 1 Houlden & Morawetz Analysis F§237

F1MANALY F§237

Houlden and Morawetz Bankruptcy and Insolvency Analysis

L,W. Houlden and Geoffrey B. Morawetz

Bankruptcy and Insolvency Act Part IV (ss, 67-101.2) F§237 Set-Off

F'§237 Set-Off

See s. 97

(1) Generally

The right of set-off in bankruptcy takes its origin from the fact that jurisdiction in bankruptcy was closely connected with equity, the appoint merit of bankruptcy commissioners being made by the Lord Chancellor: see 13 Eliz, I, c. 7 and Lister v. Hoosen (1908), 1 K.B. 174 (K.11).

Section 97(3) adopts the law of set-off as it exists in the various provinces. The section is derived, not from the English Bankruptcy Act, but from s. 107 of the Insolvent Act of 1875, 38 Vict., c. 16. Section 107 provided that the law of set-off "as administered by the courts whether of law or equity" was to be applied. Although this wording was not carried into the Bankruptcy Act, there seems to be no doubt that "the law of set-off" in s, 97(3) includes both legal and equitable set-off.

A bankrupt's estate includes only the net amount of a debt owing to the bankrupt after proper allowance 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, 1993 CarswellSask 27 (C.A.); affirmed (1995), 35 C.B.R. (36) 1, 1995 CarswellSask 739, 1995 CarswellSask 740, [1995]10 W.W.II, 161, 128 D.L.R, (4th) 1 (S.C.C.),

The object of set-off is to avoid the perceived injustice to a person who has had mutual dealings with a bankrupt of having to pay in full what he or she owes to the bankrupt while having to rest content with a dividend on what the bankrupt owes him or her, 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: Re Bank of Credit and Commerce International S.A.

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(No, 8) (1995), [19961 2 W.L.R. 631 (Eng, C.A.),

A right of set-off has the effect of securing the claim of the party entitled to it. Instead of having to prove with other creditors for the whole of his or her debt, the creditor can set off dollar for dollar what he or she owes the bankrupt and prove only for or pay only the balance. The operation of set-off confers on the person claiming set-off a security interest or quasi-lien against the assets of the bankrupt estate: Husky Oil Operations Ltd. v, Minister of National Revenue, supra.

The provincial law of set-off is permitted to operate by s. 97(3), but only to the extent that provincial legislation purporting to create a set-off does not have the effect of reordering the priorities created by the Bankruptcy and In- solvency Act: _Husky Oil Operations Ltd., supra,

In Quebec, Articles 1672-82 are the sections of the Civil Code providing for set-off. In the Civil Code set-off is called "compensation", In Quebec, a claim for damages cannot be set off against a liquid sum owing by the debtor: Re Tecksol Inc. (1994), 37 C.B,R. (3d) 16, 1994 CarswellQue 150 (Que. S.C.).

In order to assert a claim for set-off against a trustee in bankruptcy, the creditor must prove its claim; the claim must not be speculative or conjectural: Re Thomas Elec. Co. (1981), 39 C.B.R. (N.S.) 20 (Ont. S.C.),

If a creditor with an alleged claim for set-off files a proof of claim for the debt owing to it, which is disallowed by the trustee and the creditor does not appeal from the disallowance, the creditor cannot set up the alleged claim as a set-off against an amount owing by the creditor to the bankrupt estate. In taking the accounts between the parties for the purpose of set-off, it is necessary to take into account everything that has actually happened between the date of bankruptcy and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt: Bank of Credit and Commerce International (Overseas) Ltd. (In Liquidation) v. Habib Bank Ltd. (1998), 1 W.L.R. 42 (Ch. Div.).

Section 97(3) of the BL4 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 authorizes 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 BI,4, Section 97(3) preserves mutuality (debt 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: Re Brunswick Chrysler Plymouth Ltd, (2004), 2004 CarswellN13 705, 11 C.B.R. (5th) 10, 6 B.L.R., (4th) 300, 2005 NBQB 83 (N.B. Q.B.).

Set-off is not available for a guarantor's claim in an action; legal set-off did not apply given the absence of mutual

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debts, and equitable set-off did not apply because the alleged fraudulent preferences arose from transactions that were completely different from the guarantee that gave rise to the security-related allegations: Duca Financial Services Credit Union Ltd. v. Bozzo (2006), 2006 CarswellOnt 6636, 26 C.B.R. (5th) 106 (Ont. C.A.).

In respect of claims for income tax, the ordinary law of set-off has no application but is replaced by the provisions of the Income Tax Act which apply notwithstanding that the taxpayer has become bankrupt: Re White Motor Corp, of Canada ( l98 I ), 38 C.B.R. (N.S.) 173, 126 D.L.R. (3d) 676 (Ont. S.C.).

It has been held by the House of Lords that it is not possible in bankruptcy proceedings to contract out of the right of set-off: Haleso-wen Presswork & Assemblies Ltd, v. National Westminster Bank Ltd, 0972), A,C. 785, [1972] 2 W.L.R. 455, [1972] 1 All ER. 641. Section 31 of the English Bankruptcy Act, 1914, was differently worded from s. 97(3). Section 31 read "the sum due from the one party shall be set off against any sum due from the other party". However, in Re Maxwell Conmnmications Corp. PLC (1993), 1 W.L.R. 1402, Vinelott J., Vinelott 1, said that the decision of the House of Lords did not rest solely on the mandatory language of s. 31, but rested also on the interest that the trustee and the general body of creditors has in ensuring that mutual debts are set off. An agreement between the debtor and the creditor excluding the creditor's right of set-off or the waiver by the creditor of the right of set-off could equally hinder the expeditious winding-up of the bankrupt estate.

If a bankruptcy in Canada of a corporation is ancillary to insolvency proceedings in the country of incorporation and the law of set-off is different in the foreign jurisdiction from that of Canada, a Canadian court should apply the Ca- nadian law of set-off in determining the claims of Canadian creditors, and in remitting the realization of Canadian assets to the foreign trustee; provision should be made to protect the set-off rights of Canadian creditors; Re Bank of Credit and Commerce. International S,A. (No. 10) (1997), 2 W.L.R. 172 (Ch, D,),

The assets sold by the receiver included the debtor's chose in action and an issue arose as to whether the purchaser of the assets could pursue a counterclaim against an unsecured creditor without regard to the action initiated by the unsecured creditor against the debtor. The Ontario Superior Court of Justice concluded that the purchaser had to recognize the original claim of the unsecured creditor as there was a mutuality of claim and counterclaim, they arose from the same transaction, and it was not reasonable that the purchaser should obtain the benefit of the assignment without the detriment of the claim by the other party; 2067850 Ontario Inc, v. Pasta Amore Corp, (2007), 2007 CarswellOnt 1377, 29 C.B.R. (5th) 242 (Ont. S.C,J.),

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claim of the creditor as a creditor was a debt of the estate in bankruptcy, not the bankrupt personally. Justice Cumming held that equitable set-off arises when there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit a set-off. The creditor claiming an equitable set-off must, as of the date of bankruptcy, have an entitlement to a remedy in its own right. Otherwise, the effect in giving the set-off would be to defeat the intent of the BM by giving one creditor a preference over other unsecured creditors. Justice Cumming held that the claim of fraud, conversion and breach of trust, although relating to the same factual background of the business relationship between the bankrupt, his company and the creditor, was a discrete claim and the adverse costs award related to that discrete matter. The claim of fraud, conversion and breach of trust was not sufficiently connected to the contractual relationship and series of business events as between the parties that gave rise to the proven claim of the creditor in the estate in bankruptcy. It was a claim of intentional tortious conduct and the creditor did not have an entitlement to a remedy in its own right as of the date of bankruptcy, It simply had, at most, a speculative cause of action, The claimed set-off in this matter did not fall within the ambit of s. 97(3) of the 81A, Because the effect of the set-off is to prefer one creditor over the general body of creditors, the permissible set-off is confined within narrow limits. The motion was dismissed: King Insurance Finance (Wines) Inc, v. 1557359 Ontario Inc, (2012), 2012 Car- swellOnt 9260, 2012 ONSC 4263 (Ont. S.C.J.).

See A. Robert Anderson, Thomas Gelbman and Benjamin Pullen, "Recent Developments in the Law of Set-off', in Janis Sarra, ed., Annual Review of Insolvency Law, 2009 (Toronto: Carswell, 2010) at 1-36; Bernard Boucher, "Eq- uitable Set-Off, Stipulation for Another and Set-Off in an Insolvency Context: The Latest Trends"; Bernard Boucher, a Compensation en equite, stipulation pour autrui et utilisation de la compensation dans un contexte nouveaux ddveloppements en ce domaine a, in Janis Sarra, ed., Annual Review of Insolvency Law, 2009 (Toronto: Carswell, 2010) at 37-98,

The Nova Scotia Supreme Court addressed the issue of set-off in the context of a court appointed receivership that followed a CCAA application, The matter called for a review of two payments. The court held that set-off applied to one of the payments, based on a contractual right of set-off: Re Scanwood Canada Ltd. (2011), 2011 CarswellNS 903, 2011 NSSC 468 (N,S.S.C.). For a discussion, see L§13 "Set-Off Against Receiver".

(2) — Legal Set-Off

Legal set-off originated in England by statute: see Telford v. Holt (1987), 2 S.C.R. 193, 78 N.R. 321, 21 C.P,C. (2d) 54 Alta, L.R. (2d) 193, [1987] 6 W.W.R. 385, 46 R.P.R. 234, 81 A.R. 385, 41 D.L.R. (4th) 385. For legal set-off, the debts had to be mutual, between the same parties and in the same capacity: Thompson v. Big Cities Really & Agency Co, (1910), 21 O.L.R. 394 at 402 (C.A,); Clarkson v. Alliston (Town) (1928), 8 C.B.R, 587 (S.C.); affirmed 10 C.B.R. 65 (Ont, H.C.). The debts could arise from transactions of a different nature, provided they could be ascertained with certainty at the relevant date: Telford v. Halt, supra.

Mutual debts are debts due from either party to the other for liquidated sums or money demands that can be ascertained with certainty at the date of bankruptcy. Each party must have the right to enforce its claim at the date of bankruptcy, and if one party cannot do so, there is no right of legal set-off: Re Northland Bank, 25 C.B.R. (3d) 166, [1994] 5 W.W.R. 610, 93 Man, R, (2d) 138, (sub nom. Alberta v, Northland Bank) 1994 CarswellMan 14 (Q.B,),

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The doctrine of set-off only applies to debts that are ascertainable. An amount is "ascertainable" when the amount to which the plaintiff is entitled can be ascertained by calculation or fixed by any scale of charges or other positive data. When the amount to be recovered depends on the circumstances of the case and is fixed by opinion or by assessment or by what might be judged reasonable, the amount is unliquidated and is not ascertainable: A. & E. Capital Funding Inc. v. Maplex General Insurance Co. (1999), 10 C.B.R. (4th) 225, 122 O.A.O. 53, 1999 CarswellOnt 1884 (C.A.).

In Ontario, by s. 124(2) of the Courts of Justice Act, 1984 (Ont.), c. 11, for set-off, debts must be mutual but they need not be of the same nature, A creditor can set off against a legal debt owing by it to the bankrupt an equitable debt owed to it by the bankrupt, provided both debts were in existence at the date of bankruptcy: Mathieson's Trustee v. Burrup, klathieson c Co,, [1927] 1 Ch, 562, 56 L.J. Ch, 148, "Mutual" means debts owing by the parties to each other.

For legal set-off, claims must be enforceable in debt; they must be liquidated, enforceable and mature. In addition, the claims must have accrued to the original debtor and creditor prior to any assignment of them. Unlike equitable set-off, for legal set-off there is no necessity for the debts to be connected in any manner, Tax liabilities are debts, Even though a taxpayer is appealing an assessment for tax, the assessed amount is still a debt if the taxing statute provides that the tax must be paid notwithstanding an appeal: Re Canadian Airlines Corp. (2001), 14 B.L.R. (3d) 258, 2001 ABQB 146, [2001] 7 W.W.R. 383, 92 Alta. L,R, (3d) 140, 2001 CarswellAlta 240, 294 A,P.R. 253 (Alta. Q.B,).

An assignment in bankruptcy does not destroy "mutuality": in the case of an assignment, mutuality is preserved by s. 97(3): Re Allan Realty of Guelph Ltd (1979), 29 C,B,R, (N.5,) 229, 24 0,R. (2d) 21, 6 E,T.R, 50, 97 D.L.R. (3d) 95 (S.C.); R(2. Raquel' (1997), 46 C.B.R. (3d) 249, 1997 CarswellAlta 578, [1997] 7 W.W.R, 767, 205 A.R. 299, 51 Alta. L.R, (3d) 247 (Alta. Q.13,),

Creditors who incur post-bankruptcy obligations to trustees in bankruptcy cannot claim legal set off to avoid their obligations by setting off such obligations against proven pre-bankruptcy claims against the bankrupt, There are no mutual cross obligations as the same parties are not involved in view of the insertion of the trustee into the proceedings: Re Air Canada (2003), 2003 CarswellOnt 4016, 45 C.B.R. (4th) 13, 39 B.L,R. (3d) 153 (Ont. S.C.J. [Commer- cial List]),

Set-off does not exist for a claim that sounds in damages. The fact that the parties have provided a formula in a contract for calculating the damages or that an industry provides such a formula does not alter the nature of the claim: it is still a claim for damages and cannot be the subject of a claim for set-off: Citibank Canada v, Confederation Li& Insurance Co. (1996), 42 C.B.R. (3d) 288, 1996 CarswellOnt 3219 (Ont. Gen, Div.); affirmed (1998), i C.B.R. (4th) 206, 1998 CarswellOnt 86, 37 O.R, (3d) 226 (C.A.), Calculation of a claim by means of a formula is not sufficient to constitute a claim a liquidated one, and a claim must be liquidated for set-off: Citibank Canada v. Confederation Life Insurance Co., supra,

Where a creditor that had commenced an action against the debtor corporation was not given notice of appointment of an interim receiver, the court stayed an order authorizing the receiver to complete a sale of the debtor's assets. The court granted a motion by the creditor to vary an order in which the creditor had been stayed in its right to pursue its claim but the counterclaim was ordered to continue, The court held that the debtor could not obtain the benefit of assignment of the counterclaim and its continuation without the detriment of the claim against it by the creditor. The

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creditor was entitled to the benefit of s. 97(3) of the B1A to assert its original claim as set-off to the counterclaim, The objective of s, 97(3) is to avoid the injustice of requiring a party who had dealings with a bankrupt to pay the full amount owing while receiving only a small dividend from the estate for the amount the bankrupt owes. The court held that in an interim receivership where there is no bankruptcy, it was not reasonable that the debtor receive the benefit of the assignment without the detriment of the claim: 2067850 Ontario Inc. v. Pasta Amore Corp, (2007), 2007 Car- swellOnt 1377, 29 C.B.R. (5th) 242 (Ont. S,C.J.).

Where at the date of bankruptcy a person that owes money to the bankrupt has a contingent liability as guarantor of a debt of the bankrupt, there is no right of set-off: Mitchell, Houghton Ltd. v, Mitchell, Houghton (Que,) Ltd. (1970), 14 C.B.R. (N.S.) 301 (Ont. S.C.).

If A operates two businesses and B is a creditor of one business and a debtor of the other, A is entitled to set off the debts, since A is only one entity. In Law Society of Upper Canada v. Merkel' (1985), 54 C.B.R. (N.S.) 153, 49 OK (2d) 345 (H,C.), the Law Society of Upper Canada operated two plans: a Legal Aid Plan and a Compensation Fund Plan, A solicitor prior to bankruptcy had money owing to him by the Legal Aid Plan but was indebted to the Com- pensation Fund Plan for money paid out on his behalf to reimburse clients. It was held that the Law Society could set off the amount owing by the Legal Aid Plan against the amount owing to the Compensation Fund Plan, since the Law Society was only one entity.

A parent company and its wholly owned subsidiary are, however, not one entity, and the parent company does not have the right to set off a debt owing by a person to one of its subsidiaries against the debt owing by the parent company to that person: Royal Bank v. Wallace Investments Ltd. (1961), 3 C.B.R. (N.S.) 34, 30 D.L.R. (2d) 280 (B,C. Co. Ct.).

In order for there to be a right of set-off, the mutuality of debts must exist at the date of bankruptcy: Mitchell Houghton Ltd. v. Mitchell, Houghton (Que,) Ltd, supra; Coopers & Lybrand Ltd. v, Lumberlatui Building Materials Ltd, (1983), 50 C.B.R. (N.S.) 150, 49 B.C.L.R. 239, 150 .D,L,R, (3d) 411 (S.C.). Thus, where a chattel mortgagee realized on its security after bankruptcy and had a surplus after paying its secured claim, it was held that the surplus could not be set off by the chattel mortgagee against an unsecured claim as there was no mutuality of debts at the date of bankruptcy. The surplus was a debt owing by the chattel mortgagee to the trustee. The debt owed by the bankrupt to the chattel mortgagee at the date of bankruptcy could not be set off against the surplus as it was owed by a different and distinct person from the trustee; Re S. _Piscione & Sons Lid (1965), 1 O.R, 515, 7 C.B.R. (N.S.) 280, 48 D.L.R. (2d) 581 (S.C.). If the sale had been made by the chattel mortgagee prior to bankruptcy, then the chattel mortgagee could have set off the surplus against its unsecured debt, as there would have been mutuality; Stephens v, Boisseau (1896), 26 S,C.R. 437 (S.C,C.); Re Worth, 19 C.B.R. 174, [1938] 1 W.W.R. 765 (Sask. K.B.).

A right of set-off not existing at the date of bankruptcy cannot be acquired afterwards, Thus, a person who at the date of bankruptcy owes a debt to the bankrupt and has no claim to set-off cannot acquire a right of set-off by taking after bankruptcy an assignment of a debt due to another creditor of the bankruptcy: Nor. Elec. Co. v. Auto Service Co. (1961), 2 C.B.R. (N.S,) 218, 46 MYR. 148 (Nfld. T.D,); Enterprises Foundry Co. v, Downey Building Supplies Ltd (1983), 48 C.B.R. (N.S.) 283, 52 N.B.R. (2d) 179, 137 A.P.R. 179 (Q.B.); United Steel Corp. v. Turnbull Elevator of Can. Ltd (1973), 2 O.R. 540, 34 D.L.R. (3d) 492 (C.A.); Paccar Financial Services Ltd. v. Peterbilt Atlantic Lid.

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(1992), 14 C,B,R, (3d) 298, 1992 CarswellNS 51 (N.S, C.A.).

If the bankrupt was indebted to a creditor prior to bankruptcy for goods supplied, and the same creditor became indebted to the trustee for work done after bankruptcy pursuant to a contract entered into before bankruptcy, there can be no set-off as they are not mutual debts: P. Lyall & Sons Const. Co. v. Baker, 14 C.B.R. 339, [1933] O.R. 286, [1933] 2 D.L.R. 264 (C.A.).

In Re Klyspin (1981), 40 C.B.R. (N,S.) 67, 35 O.R. (2d) 65, 131 D.L.R. (3d) 239 (S.C.) a doctor at the date of his bankruptcy was indebted to the Ontario Health Insurance Plan, sought to set off moneys earned by the doctor after bankruptcy against the pre-bankruptcy indebtedness. It was held that there could be no set-off as there was no mutuality of debts. O.H.r,P, had a claim against the bankrupt estate, and the doctor had a claim against O,H,1.P, for services rendered after the date of bankruptcy. was ordered to pay to the doctor in the normal manner any moneys earned by him after the date of bankruptcy. To the same effect, see Re Sabey (1996), 46 C.B.R. (3d) 77, 1996 CarswellBC 2816 (B,C, S.C,),

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: Coopers & Lybrand Ltd. v, Lumberland Building Materials Ltd. (1983), 50 C.B.R. (N.S.) 150, 49 B.C.L.R, 239, 150 D.L.R. (3d) 411 (S.C.).

Where a real estate salesperson had an agreement with his employer by which he agreed to pay certain expenses of the employer, and at the date of his bankruptcy, the salesman had commissions accruing on sales of real estate made by him which became due after the date of bankruptcy, it was held that the expenses could be deducted by the employer from the commissions in arriving at the amount that was payable to the trustee in bankruptcy: Re Halpern (1995), 32 C.B.R. (3d) 36, 1995 CarswellAlta 272, [1995] 5 W.W.R, 368 (Alta. Q.B.). The court was of the opinion that these was not a set-off; however, with respect, this was a case of legal set-off. There were mutual debts. The fact that one debt was not payable at the date of bankruptcy was immaterial, since both debts were in existence at that date: see Re Daintrey; Ex parte Mani (1900), 1 Q.B. 348, 69 L.J.Q.13, 207, 82 LT, 239, 7 Man. 107, The case of Vachon v. Canada (Employment & Immigration Commission (1985), 57 C.B,R, (N.S.) 113 (S.C.C.), which troubled the court in Re Halpern was different. In Vachon, the benefits owing to the bankrupt by the Commission came into existence after the date of bankruptcy and, consequently, there could be no set-off.

If a solicitor receives money for a client prior to bankruptcy, and the money is not saddled with a trust, the solicitor can set off against the money received an amount owing to him for legal services rendered to the client: Re Randall (1956), 36 C.B,R. 5 (B.C,S,C,). If, however, a solicitor receives funds from a client for a particular purpose, those funds are held subject to a trust and must be either used for that purpose or returned to the client. Such funds are not subject to a right of legal set-off: Canadian Comthercial Bank (Liquidator of) v. Pardee MycLaws (1989), 72 C.B.R. (N.S.) 39, 64 Alta. L,R. (2d) 218 (Q.B,),

A selling broker of real estate can set off against a listing broker, who goes into bankruptcy, money owed to the selling broker on other transactions in which the listing broker was the selling broker: Re Allan Realty qf Guelph Ltd, (1979), 29 C.B.R. (N.S.) 229 (Ont. S.C.).

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In Re Dorenwends Ltd., 4 C.B.R. 333, [1923] 4 D.L.R. 839 (Ont, S.C.); reversed on other grounds 5 C.B.R. 840, 55 0.1—k. 413, [1924] 3 D.L,R, 118 (C.A.), it was held that an amount due by a shareholder as a contributory of a bankrupt estate could not be set off against the amount owing to him under a judgment against the bankrupt company as they were not mutual debts,

The trust fund provisions of the Construction Lien Acts are no bar to the application of the law of set-off. The trust fund does not arise until the builder, contractor or sub-contractor receives money on account of the contract, and the builder, contractor or sub-contractor only receives the money after any set-off of accounts has taken place: Re P. Nicholls Ent, Ltd. (1985), 55 C.B.R. (N.S.) 261, 50 O.R. (24) 470, 11 C.L.R. 291, 8 O.A.C. 74, 17 D.L.R, (4th) 301 (C.A.). This reasoning is not, however, the law in New Brunswick. In that province, once the funds come into the hands of a trustee under the Mechanics' Lien Act, they cannot be applied to a set-off of a debt not related to the contract in issue; Harding Carpets Ltd. v. Saint John Tile & Terrazzo Co. (1988), 68 C.B.R. (N,S.) 196, 49 D.L.R. (4th) 311 (N.B, C.A.),

An indebtedness by a partnership being a joint debt cannot be set off against a debt owing to one of the partners unless there is a specific agreement that this may be done. If an indebtedness is joint and several, it may be set off against a debt owing to one of the partners; Clarkson v. Smith (1925), 7 C.B.R. 209, 58 O.L.R. 241 (Ont. C,A.); affirming (1925), 5 C.B.R. 725, 57 O.L.R. 251 (S.C.); which reversed (1925), 5 C.B.R. 615 (S.C.); Re G. W, Lankin Co. (1934), 15 C.B.R. 288 (Ont. S.C.).

The right of an executor of a creditor to retain a sufficient part of a legacy given by the creditor to the debtor in order to pay a debt due by the debtor to the creditor, is aright to payment out of a fund in hand and not aright of set-off, as there are no mutual debts. The executor will not have such a right if the debtor becomes bankrupt before the death of the testator, and the testator in his lifetime filed a proof of claim in the bankruptcy. In these circumstances, the trustee in bankruptcy will be entitled to the legacy, and the executor will only be entitled to a dividend from the bankrupt estate: Re Lussier, 8 C.B.R. 454, 61 O.L.R. 177, [1927] 4 D.L.R. 637 (Ont. S.C.).

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that the claim of fraud, conversion and breach of trust, although relating to the same factual background of the business relationship between the bankrupt, his company and the creditor, was a discrete claim and the adverse costs award related to that discrete matter. The claim of fraud, conversion and breach of trust was not sufficiently connected to the contractual relationship and series of business events as between the parties that gave rise to the proven claim of the creditor in the estate in bankruptcy. It was a claim of intentional tortious conduct and the creditor did not have an entitlement to a remedy in its own right as of the date of bankruptcy. It simply had, at most, a speculative cause of action. The claimed set-off in this matter did not fall within the ambit of s. 97(3) of the BI,4, Because the effect of the set-off is to prefer one creditor over the general body of creditors, the permissible set-off is confined within narrow limits. The motion was dismissed: King Insurance Finance (Wines) Inc. v. 1557359 Ontario Inc., 2012 CarswellOnt 9260, 99 C.B.R. (5th) 227, 2012 ONSC 4263 (Ont. S.C.J.),

The British Columbia Supreme Court reviewed the law of set-off in the context of the BIA, The issue arose when parties sought direction regarding the distribution of a bequest, and specifically, whether the balance owing by the beneficiary to the estate pursuant to a restitution order should be set-off against the amount payable under the bequest. An undischarged bankrupt had pleaded guilty to forgery, breach of trust and theft over $5,000 for her embezzlement of close to $2.9 million from her mother; the Provincial Court ordered the bankrupt to pay $2,8 million in restitution to the testatrix and others embezzled, the restitution stated to be of indefinite length and to survive the bankruptcy, Chief Justice Hinkson was not persuaded that the bankrupt's bequest under her mother's will was the result of any fraud on her mother or any coercion, The Court held that the requirements for a claim of equitable set-off are: 1) the party relying on a set-off must show some equitable ground for being protected against his or her adversary's demands; 2) the equitable grounds must go to the very root of the plaintiffs claim before a set-off will be allowed; 3) a cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim; 4) the plaintiffs claim and the cross-claim need not arise out of the same contract; and 5) unliquidated claims are on the same footing as liquidated claims, Here, equitable set-off was not available to the petitioners. To treat the estate otherwise, would be to inequitably elevate the status of the testatrix's estate in the bankruptcy from unsecured to secured creditor to the detriment of other unsecured creditors, On the issue of legal set-off, the evidence showed that the bankrupt declared bankruptcy prior to both the issuance of the restitution order and the testatrix' death. As such, both debts represented post-bankruptcy obligations involving the estate under the direction of the trustee such that they remained mutual cross-obligations. Chief Justice Hinkson was satisfied that the requirements for legal set-off had been made out and directed that the petitioners were entitled to set off the amount owing to the bankrupt under the testatrix's will against the amount still owed to her estate pursuant to the restitution order: Coffey Estate v. Co/fey, 2014 CarsweIlBC 184, 2014 BCSC 110 (B.C., S.C.),

(3) — Assignees of Book Debts

A debtor has as against the assignee of book debts, the same right of set-off as he or she would have against the assignor at the time at which he receives notice of the assignment. It is for the assignee to make inquiries if any such set-off exists and the debtor is under no duty to volunteer such information. Only if the debtor knows that the assignee is being deceived by the assignor in not disclosing that there is a sot-off, is there a duty on the debtor to disclose such information: Can. Admiral Cop, v. L.P. Dommerich & Co., 6 C.B.R. (N.S.) 64, [1964] S.C.R. 238, 43 D.L.R. (2d) 1.

The assignee of a debt takes subject to the equities affecting it in the hands of the assignor; however, these equities are

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to be determined as of the date that notice is given of the assignment. The assignee is not affected by equities arising after that date; C.LB,C v. Tucker Indust, Inc., 48 C.B.R. (N.S.) 1, 11983] 5 W.W.R. 602, 46 B.C,L.R. 8, 149 D.L.R. (3d) 172 (C.A.). If a money sum has accrued and become due prior to notice of the assignment, that can be set off as against an assignee; Telford v. Halt (1987), 2 S.C.R. 193, 78 N,R. 321, 21 C.P,C. (2d) 1, 54 Alta, L.R. (2d) 193, [1987] 6 W.W.R. 385, 46 R.P.R. 234, 81 A.R. 385, 41 D.L.R. (4th) 385. A debt that is owed but not yet payable at the date of notice of an assignment may be set off against an assignee of a debt, provided it is a debit= in praesenti at the date of the notice of the assignment Re Pinto Leite (1929), 1 Ch. 221, 98 L,J, Ch, 211, 140 L.T. 587.

In Royal Bank v. Wallace Investments Ltd. (1961), 3 C.B.R, (N.S.) 34, 30 D.L.R. (2d) 280 (B.C, Co. Ct.), a bank prior to bankruptcy received a general assignment of book debts from the bankrupt. Among the book debts was an amount owing by the defendant. The bank gave notice to the defendant of its assignment. The defendant attempted to set off against its debt an amount owing to a subsidiary company of which it had received an oral assignment. No notice of the oral assignment had been given to the bankrupt, It was held that there was no right of set-off. To assert a right of set-off, the defendant would have had to give notice to the bankrupt of the oral assignment prior to notice being received by the defendant of the bank's assignment.

In Bennett v. White (1910), 2 KB. 643 (C.A.), A was indebted to B. B was indebted to C, A purchased C's claim against 13 and received an assignment of the account. A gave notice to B of the assignment. It was held that in these circumstances A was entitled to set-off B's indebtedness to C against the amount that A owed to B. However, such a transaction must be completed before bankruptcy takes place.

In Re Galt-Can. Woodworking Machinery Ltd. (1982), 43 C.B.R. (N.S.) 228 (Ont. S.C.), B owed money to G and owed money to B. G went into receivership and the receiver of G sold B's debt to S. G then made an assignment in bankruptcy. B proved a claim against the bankrupt estate for the full amount that G owed B. The registrar held that G was entitled to do so. It was of the opinion that the assignment by the receiver had destroyed the mutuality of the debts and hence there could be no set-off. No argument appears to have been addressed to the court that equitable set-off was applicable in these circumstances: see infra.

In some cases, it has been held that an assignment destroys mutuality, and hence an assignment defeats a claim for set-off: see Eight Silver Maple Ltd. Partnership v. Brctmalea Inc. (Receiver (#) (1996), 39 C.B.R. (3d) 107, 28 O.R, (3d) 562, 1996 CarswellOnt 1343 (Gen. Div.). With respect, this is wrong; it is only if a debt has come into existence after the date of notice of an assignment that there is no right of set-off

(4) — Set-Off Against a Receiver

For a discussion of this subject, see post L§13 "Set-off Against Receiver".

(5) — Fraudulent Preferences and Set-Off

Section 97(3), in making the law of set-off applicable to all claims against the estate and to all actions instituted by the trustee for recovery of debts due to the bankrupt, expressly excepts situations where the set-off constitutes a fraud or fraudulent preference.

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Parliament has explicitly recognized the right to set off in s. 97(3) of the BL4 unless it is fraudulent or a fraudulent preference and although a person who is both a creditor and debtor of the 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 consequence is expressly recognized in the Act. An assignment in bankruptcy does not destroy mutuality of debts and the s, 97(3) right to set-off validly arises where set-off was part of an agreement in place between the parties for several years and they were operating in the ordinary course of business: Re Brunswick Chrysler Plymouth Ltd. (2004), 2004 CarswellN B 705, 1 1 C.B.R. (5th) 10, 6 B.L,R, (4th) 300, 2005 NBQB 83 (N,B, Q,B,).

It is difficult to envisage a case where a set-off could give rise to a fraudulent preference, The court speaks of this in Re Longnwre (1923), 3 C.B.R, 818 (Ont. C.A.); affirming 3 C.B.R. 550 (S.C.), but that was a case where funds were deposited into a bank and then transfen•ed by the bank into another account in which the debtor was indebted to the bank, This transfer was a hook-keeping entry, not a set-off: see infra, (6) Banks, so that the comments on set-off and fraudulent preference are obiter.

If a payment of money is made by the debtor to a creditor prior to bankruptcy and as a result, the creditor receives a preference, there is, of course, a set-off of accounts between the parties. But the set-off occurs prior to bankruptcy, and it is the payment, not the set-off, which creates the fraudulent preference. 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 from the set-off.

Where, shortly before the date of bankruptcy, a creditor receives payment of the amount owing to it and the payment is set aside by the trustee as a fraudulent preference, the creditor cannot claim a right of set-off, since the creditor could not have asserted a right of set-off if it had taken an action to enforce its claim. The creditor has no right to be paid in full. After the payment of the debt is set aside, the debtor has only a right to be paid its debt part passe with other creditors: Re a Debtor (No. 82 of 1926), [1927] I Ch. 410, 96 L.J. Ch, 75, 136 L,T. 348.

An arrangement between the debtor, a manufacturer and a supplier of raw materials by which the supplier supplied raw material to the debtor and received finished product in return and the accounts between the parties were set off does not give a preference to the supplier where it was proved that in fact the supplier's position had deteriorated over time: Royal I3ank v. Skana Forest Products Ltd. (1996), 40 C.B.R. (3d) 123, 1996 CarswellBC 867 (B.C. S.C.).

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. However, the court would not authorize set-off for a deposit paid after a notice of intention, as the debtor was clearly insolvent and hence this would constitute a preference for the purpose of s. 97(3) of the BIA: Re Brunswick Chrysler Plymouth Ltd. (2004), 2004 CarswellNB 705, 11 C.B.R. (5th) 10, 6 B.L.R. (4th) 300, 2005 NBQB 83 (N.B. Q.13.), For a full discussion, see11237 "Set-Off',

If 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: D.W. McIntosh Ltd. (Trustee ofi v. Royal Bank (1940), 21 C.B.R. 469 (Ont. S.C.).

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If a fraudulent preference is set aside, the creditor who received the preference, cannot assert a claim for set-off with respect to money owing to it by the bankrupt. Any judgment recovered by the trustee in these circumstances is a debt owing to the bankrupt estate, and hence there is no mutuality of debts. It may be that the purpose of the concluding words of s. 97(3) is to make it clear that a creditor who has to return property to the trustee as a result of the setting aside of a fraudulent preference has no right to assert a set-off.

(6) — Banks

There have been a number of cases involving set-off between a bank and a bankrupt. The relationship between a bank and its customer is that of debtor and creditor, and payments to and drawings on the customer's account can be applied against each other. This transfer of funds from an account containing a credit balance to an account with a debit balance is not a set-off in the ordinary, sense but merely a book-keeping entry: Re Sutcliffe & Sons Ltd., 14 C.B.R. 266, [1933] 0,R. 120, [1933] I D.L.R. 562 (C.A:); Ross v. Royal Bank, 8 C.B.R. (N.S.) 303, 52 D.L.R. (2d) 578, [1966) 1 O.R. 90 (S,C.). The transfer of funds does not in itself constitute a fraudulent preference: it is a book-keeping dispo- sition by the bank of its own money and not a payment within the meaning of s. 95: Re T.C. Marines Ltd., 18 C.B.R. (N.S,) 96, [1973] 2 O.R. 537, 34 D.L.R. (3d) 489 (H.C.); Re Editorialized Advertising Ltd, (1978), 29 C,B.R. (N.S.) 223 (Ont. S,C.); Re Nasky (1981), 39 C,B.R. (N.S.) 186 (Ont. S,C.); Ross v. Royal Bank, supra. The fact that the transfer was made after the date of bankruptcy is immaterial: D. W. McIntosh Ltd. (Trustee o v. Royal Bank (1940), 21 C.B.R. 469 (Ont. S.C.); Re T.C. Marines Ltd., supra.

In distinguishing TC. Marines, registrar Harrison of the Manitoba Court of Queen's Bench concluded that monies deposited by a provincial social welfare authority to an account operated by the bankrupts that was in a deficit position at the date of bankruptcy could not be set off against the amounts owed to the credit union by the bankrupts, Monies deposited before the bankruptcy would be subjected to the common law rights of setoff: Re Demare (2004), 2004 CarswellMan 32, 2004 MBQB 36, 182 Man. R. (2d) 74, 49 C.B.R. (4th) 77 (Man, Q.B.),

The fact that the debtor is deceased does not change the law as stated in Re Sutcliffe & Sons Ltd., supra. Provincial law dealing with the administration of deceased estates, if it purported to alter the result arrived at in Re Sutcliffe, might be ultra vires, since it might conflict with federal legislation dealing with banks and banking: Re Stewart Estate (1997), 46 C.B.R. (3d) 284, 1997 CarswellAlta 330, 50 Alta, L.R. (3d) 170, 31 B.L.R. (2d) 124, 17 E.T.R. (2d) 13 (Sum. Ct.).

The deposit of money into a bank account may, however, constitute a fraudulent preference, and if this is so, the bank will haven() right to apply the credit balance against an amount owing to it in another account. In Re Longmore (1923), 3 C.B.R. 818 (Ont. C.A.); affirming 3 C.B.R, 550 (S.C.), an agent of the debtor who had guaranteed the bank indebtedness of the bankrupt, concocted a scheme with the bank manager within three months of the date of bankruptcy to conduct a forced sale of the debtor's inventory and to pay the proceeds of the sale to the bank to apply on the bank's indebtedness, When the manager received the proceeds of the sale, he knew of the debtor's insolvency, In these circumstances, it was held that there could be no transfer of funds as the receipt of the proceeds of sale constituted a fraudulent preference and a fraud on the general creditors of the debtor. For a somewhat similar case, see Re B, Shea Ltd. (1977), 26 C.B.R. (N.S.) 109 (Que. C.A.); Re Lee (1929), 11 C.B.R. 156 (Ont. S.C.); Re Entex International Ltd. (1975), 21 C.B,R. (N.S.) 157 (B.C. S.C.),

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A transfer of the proceeds of a Registered Retirement Savings Plan in a bank to a customer's deposit account is not within the principle of Re Sutcliffe & Sons Ltd., supra, A payment of this kind emanates from funds that are not the property of the bank. An RRSP creates a trust in respect of the money paid into the plan; it is not a debtor-creditor relationship, and hence is not susceptible to set-off: Guttman v. Toronto Dominion Bank, 51 C.B.R. (N.&.) 221, [1984] 2 W.W.R. 443, 25 B.L.R. 47, 3 D,L.R, (4th) 723, 27 Man. R. (2d) 186 (Q.B,), affirmed 53 C.B.R. (N.S.) 120, [1984] 5 W.W.R. 529, 28 Man. R. (2d) 147 (C.A.).

See Roger Simard, "The Federal Enhanced Deemed Trust: a New Source of Liability for Financial Institutions?", in J. Sarra, ed,, Annual Review of Insolvency Law, 2008 (Toronto: Carswell, 2009).

(7) — Proposals

It is customary in a proposal to provide that creditors shall have no right of set-off for goods or services purchased by them from the debtor after the date of the filing of the notice of intention or the proposal if no notice of intention was filed. This provision to prevent creditors from purchasing goods from the debtor after the date of the proposal and claiming a right of set-off. Even if such a provision is not contained in the proposal, it would appear that there is no right of set-off in these circumstances. The New Brunswick Court of Queen's Bench would not authorize set-off for a deposit paid after a notice of intention as the debtor was clearly insolvent and hence this would constitute a preference for the purpose of s, 97(3) of the BM, However, where the contractual right of set-off was in existence well in advance of the subsequent 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 BM: Re Brunswick Chrysler Plymouth Ltd. (2004), 2004 CarswellNB 705, II C.B.R. (5th) 10, 6 B.L.R. (4th) 300, 2005 NBQB 83 (N.B. Q.B.). For a full discussion of the issue of set off in this case, see F§237(8) "Application of Set-Off in Bankruptcy". See ante E§64 "Right of Set-Off by Creditor" for a discussion of this subject.

(8)— Application of Set-off in Bankruptcy

Since there is no Federal law of set-off, resort must be had to provincial law to determine the applicable law. Where a claim for set-off is being asserted, to decide if the claim is a valid one, reference must therefore be had to the law of the province where the bankrupt estate is being administered,

By s. 97(3), set-off applies (a) to all claim of creditors, and (b) to all actions instituted by the trustee for recovery of debts owing to the bankrupt estate. Thus, if a creditor has a right of set-off, it will deduct the amount of the set-off and prove a claim in the bankruptcy for the balance, Again, if the trustee sues to recover an amount alleged to be owing by a debtor of the bankrupt, the debtor, if he or she has a valid set-off, may deduct the amount of the set-off from the amount claimed by the trustee. Although a counterclaim is not a set-off, in some provinces the court has a discretion to permit a counterclaim to be deducted from the amount owing to a plaintiff.

If a creditor is indebted to the bankrupt estate for an amount larger than its claim, the creditor does not, by reason of the right of set-off, have to file a proof of claim. After the set-off, the creditor is no longer a creditor, but a debtor of the bankrupt estate: Re Franco Canadian Auto Co. (1922), 3 C.B.R. 661 (Ont, S.C.).

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In order to assert a right of set-off against a creditor, the trustee must prove that the debtor had a valid claim against the creditor, If the claim of the bankrupt is based on an unenforceable promise, the trustee will have no right of set-off; Re Grand Specialties (1991) Inc. (1997), 47 C.B.R. (3d) 259, 1997 CarswellOnt 2851 (Ont. Gen. Div.).

The Manitoba Court of Appeal held that a claim of set-off cannot be applied against the trustee in bankruptcy's interest in the proceeds of sale of the property as the trustee in bankruptcy is seeking to liquidate an asset of the bankrupt's estate for the benefit of the bankrupt's creditors and is not seeking recovery of a debt against which a claim of set-off can be applied: McKenzie (Trustee of) v. McKenzie (2005), 2005 CarswellMan 81, 252 D.L.R. (4th) 717, 2005 MBCA 35, 1 1 C.B.R. (5th) 116 (Man. C.A.). See also F§4(2) "Partition and Sale of Property Jointly Owned by Husband and Wife".

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 authorizes 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 BM. Section 97(3) preserves mutuality (debt 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 it would constitute a preference for the purpose of s. 97(3) of the BIA: Re Brunswick Chrysler Plymouth Ltd. (2004), 2004 CarswellNB '705, 11 C.B.R. (5th) 10, 6 B.L.R. (4th) 300, 2005 NBQB 83 (N,B. Q.B.).

(9) - Equitable Set-Off

In determining whether equitable set-off should be allowed, it is necessary to first look at the connection between the claims involved and to then consider the effect the set-off would have on the equities between the parties: P.1.4, Investments Inc. v. Deerhurst Ltd. Partnership (2000), 20 C..B.R. (4th) 116, 2000 CarswellOnt 3019 (Ont. C.A.).

Equitable set-off arises where there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit set-off: Coopers & Lybrand Ltd v, Lumherland Building Materials Ltd. (1983), 50 C.B.R. (N.S.) 150, 49 B.C,L.R. 239, 150 D.L.R. (3d) 411 (S.C.); Telford v. Holt (1987), 2 S.C.R. 193, 78 N.R. 321, 21 C.P.C. (2d) 1, 54 Alta. L.R, (2d) 193, [1987] 6 W.W.R. 385, 46 R.P.R. 234, 81 A.R. 385, 41 D.L.R. (4th) 385: National Bank of Canada v, Saskatchewan Property Management Carp., 20 C.B.R. (3d) 153, [1993] 7 W.W.R. 636, 1993 CarswellSask 21 (Sask. Q,B.); Canada Trustco Mortgage Co. v. Sugarman (1999), 179 D.L.R. (4th) 548, 12 C,B.R. (4th) 1, 1999 CarswellOnt 3270, 126 O.A.C. 253 (C.A.); A. & E. Capital Funding Inc. v. Maplex General Insurance Co, (1999), 10 C.B.R. (4th) 225, 122 O.A.G. 53, 1999 CarswelOnt 1884 (C.A.). For equitable set-off, there must be a close connection and interrelatedness of the transactions sought to be set off, and if this is lacking, equitable set-off will not be allowed: Eight Silver Maple Ltd. Partnership v. Bramalea Inc. (Receiver of) (1996), 39 C.B.R. (3d) 107, 28 O.R. (3d) 562, 1996 CarswellOnt 1343 (Gen. Div.); Canada Trustco Mortgage Co. v. Sugarman, supra.

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A simple connection between a claim and a cross-claim is not sufficient for equitable set-off. For equitable set-off, a cross-claim must flow out of and be inseparably connected with the dealings and transactions that give rise to the claim, A claim by former directors and officers of a debtor company for money owing pursuant to a pension plan and a deferred compensation plan was held not to be inseparably connected with a cross-claim against the directors and officers for breaches of fiduciary duty, negligence and negligent misstatements in the administration of the affairs of the debtor so as to permit equitable set-off As a result, the directors and officers were entitled to the same dividends on their claims as had been paid to ordinary creditors on their claims, and the liquidator was not entitled to withhold payment of dividends until the actions against the directors and officers had been determined: Canada (Attorney General) v. Confederation Life Insurance Co. (2002), 39 C.B.R. (4th) 182, 2002 CarswellOnt 3681, 46 C.C.L.1. (3d) 36 (Ont. S.C.J. [Commercial List])

The Supreme Court of Canada held that equitable set-off cannot apply in Quebec in bankruptcy matters. It is clear that in Quebec, ever since the Harmonization Act came into force, civil law, not common law, is the suppletive law that applies with s, 97(3) of the B/A, Equitable set-off cannot make up for the non-application of civil law compensation, Section 54 of the Act respecting labour relations, vocational training and manpower management in the construction industry (ALRC) creates a solidaly obligation between the employer and the contractor, which allows the CCQ to claim the salary amounts from the employer or the contractor, under art. 1523 of the Code, The employer that pays the salaries can claim reimbursement from the contractor under art, 1536 of the Code, as the ultimate obligation remains the contractor's, The employer who pays the CCQ can therefore claim legal subrogation under art. 1656, para. 3 of the Code: Re DIMS. Construction Inc, (2005), 2005 CarswellQue 7955, 2005 CarswellQue 7956, 2005 SCC 52, 45 C.L.R. (3d) 161, [2005] 2 S.C.R. 564 (S,C.C.), For a full discussion of the subrogation issues in this case, see G§36(18) "Subrogated of Claims".

in v, Tucker Indust, Inc., 48 C.B.R. (N.S.) 1, [1983] 5 W.W.R. 602, 46 B.C,L.R. 8, 149 D.L.R. (3d) 172, Lambert J,A. (C,A,), Lambert J.A. said: "It [equitable set-off] can apply where mutuality is lost or never existed. It can apply where the cross obligations arise from the same contract, though mutuality has been lost, or where the cross obligations are closely related, or where the parties have agreed that the right to set-off may be asserted between them, or where a court of equity would otherwise have permitted a set-off, as perhaps, in a case where credit was granted by a debtor to his or her creditor in reliance on the availability of set-off."

For equitable set-off, there must be some equitable ground for the person claiming the set-off to be protected against a claim and the equitable ground must go to the root of the claim; Five Oaks Inc. v. 784566 Alberta Ltd. (2000), 16 C,B.R. (4th) 182, 2000 CarswellAlta 232 (Alta. Q.B.),

Equitable set-off is available where there is a claim for a money sum whether liquidated or unliquidated: A boussafy v. Abacus Cities Ltd. (1981), 39 C.B.R. (N.S.) 1 (Alta. C.A,), A claim for damages may be asserted in equitable set-off: Canada Trustco Mortgage Co. v. Sugarman, supra. It is available even if there has been an assignment of one of the debts. There is no requirement for mutuality: Telford v. Holt, supra.If notice of the assignment has been given, equitable set-off can still be claimed even though the debt accrues due after notice of the assignment: Telford v. Holt, supra. In Eight Silver Maple Ltd. Partnership v. Bratnalea Inc. (Receiver of), supra, Lederman J. of the Ontario Court, General Division, referring to the dicta in Telford v. Holt that there is no requirement for mutuality, said that for

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equitable set-off to be applicable mutuality must exist at some point in time and that the Supreme Court of Canada only meant that equitable set-off is permitted where there has been an assignment and as a result, mutuality no longer exists between the parties to the claims. Lederman 3. was of the view that for equitable set-off, the claims must at some point of time exist between the same parties and in the same right Accordingly, debts owing by the debtor to limited partners cannot be set-off against debts owing by limited partnerships to the debtor, since the claims are not at any point in time in the same right.

For equitable set-off, the claims need not arise out of the same contract nor need they both be liquidated, but the cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into account the cross-claim; Re Associated Investors of Can. Ltd, (1989), 76 C.B.R. (N.S.) 185, 69 Alta, L.R. (2d) 218, [1990] 1 W.W.R. 447, 62 D.L.R, (4th) 269 (Q.13.); Re Canadian Airlines Corp. (2001), 14 B.L.R. (3d) 258, 2001 ABQB 146, [2001] 7 W.W.R. 383, 92 Alta. L,R, (3d) 140, 2001 CarswellAlta 240 (Alta, Q.B.).

For equitable set-off, it is reasonable to treat the Crown as one entity, Thus, taxes may arise under separate Acts and be administered separately by different departments, but there is only one debt for the purposes of set-off: Re Canadian Airlines Corp., supra,

"Abatement" must be distinguished from "equitable set-off'. "Abatement" is a common law doctrine which permits a creditor to show that, as a result of the debtor's breach of contract, the goods, services, or work provided by the debtor is diminised in value, "Equitable set-off' is an equitable doctrine which permits a creditor to raise a cross-claim which is so closely connected with the debtor's claim that it would be unjust to allow a trustee in bankruptcy to enforce payment without taking the cross-claim into account. Equitable set-off operates as a true defence:, it is really a means of denying the trustee's claim in whole or part: Cam-Net Communications v. Vancouver Telephone Co. (1999), 182 D.L.R. (4th) 436, 71 B.C.L,R. (3d) 226, 132 B.C.A.C. 52, 215 W.A.C. 52, 2 B.L.R. (3d) 118, 17 C.B.R. (4th) 26, 1999 BCCA 751, 1999 CarswellBC 2808 (C.A.).

To apply equitable set-off, the claims must have arisen out of the same transaction or series of transactions or out of the same relationship between the parties. Equitable set-off will not be allowed of a claim for wrongful dismissal against money due to the bankrupt under a mortgage; Gray v. Standard Trustco Ltd. (1994), 29 C,B,R, (3d) 22, 1994 Car- sweilOnt 315 (Ont. Gen. Div.),

As well, equitable set off will not be allowed in respect of a claim for damages in tort against a receiver appointed by a mortgagee bank against monies due pursuant to a guarantee of a mortgage. The claim for damages did not go to the root of the mortgage foreclosure proceedings. The court refused to grant an injunction restraining the bank from enforcing on its mortgage as the mortgagor had failed to show a serious issue to be tried, the property was not unique and the balance of convenience favoured the bank: Robert Anthony Leathers Inc. v, Bank of Montreal (2003), 2003 CarswellMan 351, 178 Man, R, (2d) 124, 46 C.B.R. (4th) 107, 2003 MBQB 200 (Man. Q.B,).

A claim to property of the bankrupt in the possession of a creditor does not give rise to a right of equitable set-off: Re Nesmont Precious liifetals Corp. (2001), 28 C.B.R. (4th) 275, 2001 CarswellBC 2175, 2001 BCSC 1240 (B.C. S.C. [In Chambers]).

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Although equitable set-off does not require symmetry of remedies or accounts, the creditor asserting a claim to equitable set-off must at the date of bankruptcy have an entitlement to a remedy in its own right. If the remedy available to the creditor, a debenture holder, is a collective one which must be exercised by a trustee on behalf of all debenture holders, the debenture holder cannot claim equitable set-off: Re Northland Bank, 25 C.B.R. (3d) 166, 1994 Car- swellMan 14, [1994] 5 W.W.R. 610, (sub nom. Alberta v. Northland Bank) 93 Man. R. (2d) 138 (Q.B.)

A claim for equitable set-off will not be permitted where the rights of a trustee in bankruptcy have come into being. Thus in Canada Trustco Mortgage Co. v. Sugarman (1999), 179 D.L.R. 548, 12 C,B.R. (4th) 1, 1999 CarswellOnt 3270, 126 O.A.C. 253 (C.A.), to obtain money for a capital loan, two partners borrowed money from a bank. The firm agreed to repay the loans if the two partners withdrew from the partnership. When the two partners went into bank-- rutpcy, they were deemed to have withdrawn from the partnership. Both the bank and the trustee in bankruptcy claimed the money in the capital loan accounts. The firm and the bank claimed the money on the basis of equitable set-off. The Court of Appeal held that equitable set-off was not available on the facts. When bankruptcy occurred, the money in the loan accounts vested in the trustee in bankruptcy, and the firm and the bank were only unsecured creditors of the bankrupt estate. The rights of others having come into play, equitable set-off was not applicable. See article "Set-Off in Bankruptcy: The Ontario Court of Appeal Case of Canada Trsutco Mortgage Co. Sugarman" by C. Bary Tarshis, 17 Nat. Insol. Rev. 9 and article "An Insolvency Update" by David E, Baird Q.C,, 18 Nat. Insol. Rev. 33.

The residual beneficiary of a will, as an unsecured creditor, is not entitled to set-off money advanced to the bankrupt against life insurance proceeds belonging to the bankrupt estate where the effect of such set-off would be to defeat the purpose of the BIA by giving one unsecured creditor a preference over others, and where the rights of the trustee had come into being: Kratko (Trustee of) v, Kratko Estate (2003), 2003 CarswellSask 545, (sub nom. Kratco (Bankrupt), Re)) 237 Sask. R. 228, 4 E'ER, (3d) 243, 46 C.B.R. (4th) 70, 2003 SKQB 341 (Sask. Q.B.); affirmed (2003), 2003 CarswellSask 665, 242 Sask. R. 85, 46 C,B.R. (4th) 88, 2003 SKQB 440, 6 C.C.L.L (4th) 313 (Sask. Q.B.).

In Synychych v. Synychych (1992), 11 C.B.R. (3d) 211, 40 R.F.L. (3d) 237, 1992 CarswellMan 19 (Man. Q.B.) prior to her husband's bankruptcy, a wife was ordered to make an equalization payment of $16,436.83 to the husband for his share of the division of matrimonial property. The husband owed the wife $8,358.83 for costs of the matrimonial proceedings and $7,171.50, as one-half of a joint loan that the wife was required to pay in full. The husband made an assignment in bankruptcy and, for the payment of $1, obtained an assignment from the trustee of the husband's claim against the wife. The court held that this was a proper case to order equitable set-off with the result that the wife was only indebted to the husband in the amount of $879.30.

In Kushner v. Rocky Mountain Sportswear Ltd. ("Trustee of) (2001), 27 C.B.R. (4th) 259, 2001 ABQB 743, [2001] 11 W.W.R, 679, 2001 CarswellAlta 1178 (Alta, Q.B.), 0 was indebted to M. R guaranteed payment of the indebtedness and gave M a general security agreement to secure payment of its guarantee. R made an assignment in bankruptcy. The trustee in bankruptcy of R paid $40,000 to M in full satisfaction of the amount owing to M in order to obtain a release of the security agreement. At the date of bankruptcy, R owed $80,000 to 0 and 0 filed a proof of claim in the bankruptcy for that debt. The trustee claimed the right of set-off. Because there were no mutual debts at the date of bankruptcy, legal set-off was not available to the trustee. However, the court held that the trustee could rely on equitable set-off and, as well, could invoke the rule in Cherry v, Boultbee (see post (9) "The Rule in Cheri)) v. Boultbee"),

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and because the dividend was less than $40,000, 0 could not claim a dividend from the bankrupt estate,

In Coopers & Lybrand Ltd, v. Lumberland Building Materials lid. (1983), 50 C,B,R, (N,S.) 150, 49 B.C.L.R. 239, 150 D.L.R. (3d) 411 (S.C,), T, prior to bankruptcy, sold goods to L, and at the date of L's bankruptcy, L owed some $11,000 to T, In order to increase sales, T offered a volume sales rebate. At the date of bankruptcy, L was entitled to a volume sales rebate of some $6,000, but the rebate was not payable until "60 days following year end". The court held that, even if legal set-off was not available, the relationship between the parties was such that it would be inequitable not to allow a set-off.

If a joint debt is by reason of transactions between the parties held as security for a separate debt, the creditor cannot resort to that security without allowing what he has received on the separate account for which the other was security, and the converse applies in the case of a separate debt held as security for a joint debt, Thus, where A was jointly indebted to a bank as a member of a partnership, but the bank was holding a separate account of A which had been hypothecated as security for the firm account, it was held that A was entitled to have the amount in the separate account set off against the indebtedness of the firm on the basis of equitable set-off, Clarkson v. Smith (1925), 7 C.B.R, 209, (sub nom. Clarkson v. Smith & Goldberg) 58 O.L.R. 241, [1926] 1 D.L,R. 509 (C.A.).

Equitable set-off should not be permissible where its effect would be to defeat the intent of the Bankruptcy and In- solvency Act, by giving one creditor a preference over other unsecured creditors: Re/Max Metro-City Really Ltd. v. Baker (Trustee op (1993), 16 C.B.R. (3d) 308, 1993 CarswellOnt 180 (Ont. Bktcy.).

If money is entrusted to a solicitor for a particular purpose, it must be used for that purpose or returned to the client. The solicitor cannot assert a claim of equitable set-off for unpaid fees: Canadian Commercial Bank (Liquidator q!) v. Parlee MeLaws (1989), 72 C.B.R. (N.S.) 39, 64 Alta. L.R. (2d) 218, 42 B.L.R. 41, 95 A.R. 321, 56 D.L.R. (4th) 515

Equitable set-off lies against security held pursuant to s. 427 of the BankAct. Where the borrower under s, 427 security has sold the goods to a purchaser and the purchaser is entitled to allowances for volume rebates, advertising, etc,, the purchaser can claim such allowances by way of equitable set-off against the purchase price in determining the amount owing to the bank: Mercantile Bank of Can. v. Leon's Furniture Ltd, (1992), 18 C.B.R, (3d) 72, 11 0,R. (3d) 713, 98 D.L,R, (4th) 449, 62 O.A.C. 187, 1992 CarswellOnt 202. in National Bank of Canada v, Saskatchewan Property Management Corp., 20 C.B.R, (3d) 153, 1993 CarswellSask 21, [1993] 7 W.W.R. 636, Goldenberg J. was of the opinion that the Crown was not one entity, and hence there could not be legal set-off of a debt owed to a corporation that was an agent of the Crown against a debt owing to a government department, since there was not a mutuality of debts, However, he permitted equitable set-off of the debts on the ground that the funding received by the Crown corporation was obtained from tax revenue, and it would be unfair to allow the holder of an assignment of book debts to obtain funds generated by tax revenues without ensuring that a tax liability was paid.

Equitable set-off is available where there is a claim for a money sum whether liquidated or unliquidated; and it is available where there has been an assignment, with no requirement of mutuality. An individual may set-off against the

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assignee a money sum that accrued and became due prior to the notice of assignment; and an individual may set-off against the assignee a money sum that arose out of the same contract or series of events that gave rise to the assigned money sum or was closely connected with that contract or series of events. Here, the supplier had met the onus on it to claim a right of equitable set-off against the account receivable; and since carriers were now claiming directly against it for the same services, the claims were clearly connected and it would be unconscionable not to permit a claim for set-off for any amount it may be found liable to the carriers: Matrix SCL Inc. Estate (Trustee of) v. Merit Transport Ltd. (2007), 2007 CarswellMan 331, 2007 MBQB 212 (Man. Q.B.).

See Bernard Boucher, "Equitable Set Off or Compensation and Stipulation for Another: What Role Can These Con- cepts Play in the Context of a Bankruptcy?"; Bernard Boucher, "Compensation en equit6 et stipulation pour autrui: quel est le role que peuvent jouer ces concepts dans un contexte de faillite?", in J. Sarra, ed., 2006 Annual Review of Insolvency Law (Toronto: Carswell, 2007) at 451-476,

The Ontario Superior Court of Justice dismissed a creditor's motion for a declaration that it was entitled to set-off an adverse costs award in favour of the bankrupt against its provable claim in the bankruptcy. A creditor argued that it had to go to trial to prove part of its $439,000 claim in the bankruptcy proceeding arising from a personal guarantee, as the trustee had admitted only $23,000 of the claim, The personal guarantee was upheld at trial, The creditor argued that its proven claim and the costs award were between the same parties, and relied on s, 97(3) BIA to argue it was entitled to set-off, Justice Cumming noted that there are two kinds of set-off; "legal set-off' and "equitable set-off'. A "legal set-off' does not exist for a non-liquidated claim that sounds in damages. Justice Cumming held that there was not a legal set-off in this situation as the debt of the creditor for costs arose after the date of bankruptcy and there was no mutual and cross-obligation at the inception of the bankruptcy. As well, the debt for costs was a debt owed to the bankrupt personally, although it constituted after-acquired property in terms of the bankruptcy, In contrast, the proven claim of the creditor as a creditor was a debt of the estate in bankruptcy, not the bankrupt personally. Justice Cumming held that equitable set-off arises when there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit a set-off, The creditor claiming an equitable set-off must, as of the date of bankruptcy, have an entitlement to a remedy in its own right. Otherwise, the effect in giving the set-off would be to defeat the intent of the BI,4 by giving one creditor a preference over other unsecured creditors, Justice Cumming held that the claim of fraud, conversion and breach of trust, although relating to the same factual background of the business relationship between the bankrupt, his company and the creditor, was a discrete claim and the adverse costs award related to that discrete matter. The claim of fraud, conversion and breach of trust was not sufficiently connected to the contractual relationship and series of business events as between the parties that gave rise to the proven claim of the creditor in the estate in bankruptcy. It was a claim of intentional tortious conduct and the creditor did not have an entitlement to a remedy in its own right as of the date of bankruptcy. It simply had, at most, a speculative cause of action, The claimed set-off in this matter did not fall within the ambit of s, 97(3) of the BIA, Because the effect of the set-off is to prefer one creditor over the general body of creditors, the permissible set-off is confined within narrow limits. The motion was dismissed: King Insurance Finance (Wines) Inc. v. 1557359 Ontario Inc., 2012 CarswellOnt 9260, 99 C, B,R, (5th) 227, 2012 ONSC 4263 (Ont, S.C.J.).

The British Columbia Supreme Court reviewed the law of set-off in the context of the BIA. The issue arose when parties sought direction regarding the distribution of a bequest, and specifically, whether the balance owing by the beneficiary to the estate pursuant to a restitution order should be set-off against the amount payable under the bequest. An undischarged bankrupt had pleaded guilty to forgery, breach of trust and theft over $5,000 for her embezzlement of

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close to $2.9 million from her mother; the Provincial Court ordered the bankrupt to pay $2.8 million in restitution to the testatrix and others embezzled, the restitution stated to be of indefinite length and to survive the bankruptcy. Chief Justice Hinkson was not persuaded that the bankrupt's bequest under her mother's will was the result of any fraud on her mother or any coercion. The Court held that the requirements for a claim of equitable set-off are: 1) the party relying on a set-off must show some equitable ground for being protected against his or her adversary's demands; 2) the equitable grounds must go to the very root of the plaintiffs claim before a set-off will be allowed; 3) a cross-claim must be so clearly connected with the demand of the plaintiffthat it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim; 4) the plaintiffs claim and the cross-claim need not arise out of the same contract; and 5) unliquidated claims are on the same footing as liquidated claims. Here, equitable set-off was not available to the petitioners. To treat the estate otherwise, would be to inequitably elevate the status of the testatrix's estate in the bankruptcy from unsecured to secured creditor to the detriment of other unsecured creditors. On the issue of legal set-off, the evidence showed that the bankrupt declared bankruptcy prior to both the issuance of the restitution order and the testatrix' death. As such, both debts represented post-bankruptcy obligations involving the estate under the direction of the trustee such that they remained mutual cross-obligations. Chief Justice Hinkson was satisfied that the requirements for legal set-off had been made out and directed that the petitioners were entitled to set off the amount owing to the bankrupt under the testatrix's will against the amount still owed to her estate pursuant to the restitution order: Coffey Estate v. Coffey, 2014 CarswelIBC 184, 2014 BCSC 110 (B.C. S.C.).

(10) — Contracting out of Right of Set-Off

A person may contract out of a right of set-off, Where parties agreed that all money collected by a creditor would be deposited into the debtor' bank account and that the creditor would invoice the debtor weekly for its services, it was held that the creditor had negated its right to legal or equitable set-off for the amount owing to the creditor for its services: National Foundation for Hepatitis C (Trustee of) v. GWF Group Inc. (1999), 8 C.B.R. (4th) 281, 1999 CarswellAlta 50 {Alta. Q.B.).

(11) — The Rule in Cherry v. Boultbee

Where a person entitled to participate in a fund is also bound to make a contribution to that fund, that person will not be allowed to participate in the distribution of the fund until he or she has made good what is owing to the fund, This is called the Rule in Cherry v. Boultbee (1839), 4 My. & Cr, 442, 41 E,R. 171, 9 L.J. Ch. 118, 3 Jur. 1116, 2 Keen 319. The Rule is of wider application than the doctrine of set-off It is immaterial whether the amount owing is ascertained or unascertained. if the amount is unascertained, it must be ascertained in order that the rights of the arties may be adjusted: Re Rhodesia Goldfields Ltd. (1910), 1 Ch. 239, 17 Mans. 23, 79 L.J. Ch, 133, 102 L.T. 126, 54 Sol. Jo. 135. The Rule in Cherry v. Boultbee is not dependent on the existence of a formal trust; all that is required is that there is a fund which is being administered: Olympia & York Developments Ltd. v, Royal Trust Co. (1993), 1993 CarswellOnt 200, 19 C.B.R. (3d) 1, 14 O.R. (3d) 1, 9 B.L.R. (2d) 221, 103 D.L.R. (4th) 129, 64 O.A.C. 324 (C.A.); leave to appeal to S.C.C. refused {1994), 25 C.B,R. (3d) 217 (note), 17 O.R. (3d) xvi (note), 12 B.L,R. (2d) 324 (note), 110 D.L.R. (4th) vii (note), 72 O.A.C. 238 (note) (S.C.C.).

When the Rule is applied, legal set-off is not possible since there are no mutual debts. The remedy provided by the Rule is, however, very similar to that provided by equitable set-oft and, as will he seen, sometimes both the Rule and

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equitable set-off are applied.

In reviewing the principles in Cheri)) v. Boultbee, which held that a person will not be allowed to participate in the distribution of a fund until he or she has made good what is owing to that fund, the Ontario Superior Court of Justice held that a trustee in bankruptcy could only be vested with the property of the bankrupt at the time the bankruptcy order was issued. Accordingly, where a court order prior to the bankruptcy order reduced the bankrupt's assets, only the bankrupt's net assets vested in the trustee in bankruptcy; Lazanyi v. Pechan (2006), 2006 CarswellOnt 856, 19 C.B.R. (5th) 172 (Ont, S.C.J.), additional reasons at (2006), 2006 CarswellOnt 2719, 21 C,B,R. (5th) 182 (Ont. S.C.1). in Re Melton (1917), [1918] 1 Ch. 37, 87 L,J. Ch, 18, 117 L.T. 679, 34 T.L,R, 20, a testator in his lifetime had guaranteed a debt owing by one of his sons. After the father's death, the son went into bankruptcy and the estate paid the guaranteed debt. It was held that the estate was entitled on the basis of the Rule in Cherry v. Boultbee to deduct from the son's share of the estate payments made to retire the guarantee. The court found that the amount paid to satisfy the guarantee never formed part of the bankrupt estate so as to be divisible among his creditors; there was therefore no problem of double proof,

If a creditor is indebted to the bankrupt but the amount is unascertained, the creditor is not entitled to receive a dividend from the bankrupt estate until he or she has made good what is owing the estate: Re Rhodesia Goldfields Ltd, supra, In these circumstances, the trustee should retain the amount of the creditor's dividend until the amount owing by the creditor has been determined: see Re Mohawk Sports Equipment Ltd. (1971), 15 C.B.R. (N.S.) 63 (Ont. S.C.) for an order made in somewhat analogous circumstances,

In Kushner v. Rocky Mountain Sportswear Ltd. (Trustee of) (2001), 27 C.B.R. (4th) 259, 2001 ABQB 743, [2001] I I W,W,R, 679, 2001 CarswellAlta 1178 (Alta, Q.B.), 0 was indebted to M, R guaranteed payment of the indebtedness and gave M a general security agreement to secure payment of its guarantee. R made an assignment in bankruptcy. The trustee in bankruptcy of R paid $40,000 to M in full satisfaction of the amount owing to M in order to obtain a release of the security agreement. At the date of bankruptcy, R owed $80,000 to 0 and 0 filed a proof of claim in the bankruptcy for that debt. The trustee claimed the right of set-off. Because there were no mutual debts at the date of bankruptcy, legal set-off was not available to the trustee. However, the court held that the trustee could rely on equitable set-off and, as well, could invoke the rule in Cherry v, Boultbee Because the dividend was less than $40,000, 0 could not claim a dividend from the bankrupt estate.

The Rule in Cherry v. Boultbee is commonly applied where a bankrupt is entitled to a legacy from the estate of a deceased person to which he or she is indebted, In this situation, the executor has a right to retain a sufficient part of the legacy to satisfy the debt, However, if as in Cherry v. Boultbee, the legatee is bankrupt at the date of the testator's death, the executor can only prove for dividend and deduct the dividend from the amount of the legacy; the reason being that the testator at the date of bankruptcy only had the right to prove for a dividend,

If the Crown has a claim under the Income Tax Act and the trustee alleges that the bankrupt is entitled to a refund and accordingly the Crown's claim should be reduced by the amount of the refund, the rule in Cherry v. Boultbee has no application. Under the Income Tax Act, instead of making a refund, the Minister of National Revenue has a discretion to apply a refund against any other liability of the bankrupt under the Income Tax Act; the Income Tax Act therefore

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governs the accounting between the parties: Re White Motor Corp, of Canada (1981), 38 C.B.R. (N.S.) 173 ., 126 D.L.R. (3d) 676 (Ont. S.C.),

The Rule in Cherry v. Boultbee has no application to an action for damages, Accordingly, a trustee in bankruptcy or a liquidator is not entitled to refuse to make a distribution or pay a dividend pending determination of an action for damages: Canada (Attorney General) v. Standard Trust Co, (1995), 35 C.B.R. (3d) 155, C.E.B. & P.G,R. 8237, 128 D.L.R. (4th) 747, 1995 CarswellOnt 927 (Ont. Gen. Div.); Re Tecksol Inc, (1994), 37 C.B.R. (3d) 16, 1994 Car- swellQue 150 (Que. S.C.); Canada (Attorney General) v, Confederation Lift Insurance Co. (2002), 39 C.B.R. (4th) 182, 2002 CarswellOnt 3681, 46 C.C.L.I. (3d) 36 (Ont. S.C.J. [Commercial List]).

Shortly after a plaintiff was awarded judgment for $425,000 plus interest and costs against the debtor (now the bankrupt), the bankrupt made an assignment. The action was for breach of a patent and royalty agreement. The plaintiff moved to lift the automatic stay under s. 69.4, and to verify its right of set-off. Section 69.4 gives the court discretion to lift a stay when the judge is satisfied either that the person who applies to be relieved of the stay will suffer material prejudice because of it or that there are other equitable grounds for doing so. The court was satisfied that there were strong equitable grounds to lift the stay, In determining whether equitable set-off should be allowed, it is necessary to first look at the connection between the claims involved and then consider the effect the set-off would have on the equities between the parties. Section 97(3) of the NA preserves the general law of set-off in bankruptcy. Moir J. held that there is an underpinning of the bankruptcy statute that is as important as the dual purposes of equal distribution to general creditors and rehabilitation of the debtor. That underpinning is referred to as the principle in Ex parte James, and it emphasizes the equitable nature of bankruptcy, It prevents the trustee from relying on law that would result in unfairness or injustice. There was no need to resort to Ex parte James in this case, but Moir J. was of the view that in preserving equitable set-off, s. 97(3) is consistent with this underpinning. Here, Justice Moir noted that this was a single creditor bankruptcy with a total debt of $785,000. There were no significant assets, unless the royalties were payable to the estate. Justice Moir concluded that without equitable set-off, the effects of the bankruptcy would be that instead of recouping from the royalties the losses for the bankrupt's breach of contract, the royalties would first go to the trustee and the superintendent, then to CRA, then to the plaintiff equally with the other creditors. Justice demanded set-off as it would put a stop to the ten years of bad faith and would uphold the contract that was the source of the royalties: E,B.F. Manufacturing Ltd, v, White (2010), 2010 CarswelINS 364, 68 C.B.R, (5th) 282

This rule provides that where a person entitled to participate in a fund is also bound to make a contribution to that fund, that person will not be allowed to participate in the distribution of the funds until he or she has made good what is owing to the fund: Cherry v, Boultbee (1939), 41 E.R. 171 (Eng, Ch. Div,). Justice Romaine of the Alberta Court of Queen's Bench held that while a proposed set-off was a practical solution and she would have no hesitation applying the rule by way of set-off had the debt owed had been an ordinary debt, the issue was coloured by the fact that the debt arose from a contempt order, a sanction levied by the court for conduct in breach of court orders. Allowing the trustee to set-off the damages portion of the contempt order, in the circumstances of this case, would relieve the burden of the contempt order without any effort on the arty in contempt's part to satisfy the order, Romaine J, concluded that the process would be offensive to the nature and purpose of the contempt order, In the result, Romaine J. declined to allow the satisfaction of the damages portion of the contempt order through set-off. Applying the rule in Cherry v. Boultbee in its strict sense, the party in contempt was not entitled to participate in any dividends from the estate unless and until he paid the damages portion of the contempt fines: Alberta Treasury Branches v. Chocolaterie Bernard Callebaut

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Partnership (2012), 2012 CarswellAlta 704, 2012 ABQB 245 (Alta. Q.B,).

END OF DOCUMENT

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Indexed as: Husky Oil Operations Ltd. v. Canada (Minister of National Revenue - M.N.R.)

Workers' Compensation Board, appellant (respondent); v. Husky Oil Operations Ltd., respondent (applicant), and Her Majesty The Queen in right of Canada, as represented by the Minister of National Revenue, Her Majesty The Queen in right of the Province of Saskatchewan, as represented by the Minister of Human Resources, Labour and Employment, Her Majesty The Queen in right of the province of Saskatchewan, as represented by the Minister of Finance, Bank of Montreal, Erie Zimmerman, Garth Price, Trevor Brown, Arthur Gingras, Kelly Houston, Darcy Kuzio, Hans noble, Charles Pshebenicki, Terry Sapergia, SBW--Wright Construction Inc., Campbell West (1991) Ltd., Fuller Austin Insulation Inc., United Industrial Equipment Rentals Ltd., Atco Enterprises Ltd. and Deloitte & Touche Inc., as Trustee in Bankruptcy of the Estate of Metal Fabricating & Construction Ltd., respondents, and The Attorney General for Saskatchewan, respondent (intervener in the Court of Appeal), and The Attorney General for Ontario, the Attorney General for New Brunswick, the Attorney General of British Columbia, the Attorney General for Alberta, the Workers' Compensation Board of Ontario, the Workers' Compensation Board of British Columbia, the Workers' Compensation Board of Alberta and the Yukon Workers' Compensation Health and Safety Board, interveners.

[1995] 3 S.C.R. 453

[1995] S.C.J. No. 77

File No.: 23936.

Supreme Court of Canada

1995: January 25 / 1995: October 19.

Present: Lamer C.J. and La Forest, L'Heureux-Dube, Sopinka, Gonthier, Cory, McLachlin, lacobucci and Major IL

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ON APPEAL FROM THE COURT OF APPEAL FOR SASKATCHEWAN

Bankruptcy -- Priorities -- Set-off Provincial law allowing Board to seek payments of monies owed by bankrupts from the bankrupt's creditors and the creditors entitled to set off that amount from any payment made to trustee in bankruptcy -- Whether or not conflict with priorities established by Bankruptcy Act The Workers' Compensation Act, 1979, S.S. 1979, c. W-17.1 , s. 133(1), (3) — Bankruptcy Act, R.S.C., 1985, c. B-3, ss, 97(3), 136.

Constitutional law -- Division ofpowers -- Paramountcy -- Conflict between provincial and federal law -- Provincial law allowing Board to seek payments of monies owed by bankrupts from the bankrupt's creditors and the creditors entitled to set off that amount, rom any payment made to trustee in bankruptcy -- Whether or not conflict with priorities established by Bankruptcy Act.

Husky Oil Operations Ltd. (Husky) owed Metal Fabricating & Construction Ltd. (Metal Fab), a firm which, after being formally notified of its arrears to the Workers' Compensation Board (the Board) and after making a general assignment of its book debts to the Bank of Montreal, made an assignment in bankruptcy and ceased operations. The Board, when it learned that Metal Fab had ceased operations, looked to Husky for payment under s. 133(1) of The Workers' Compensation Act, 1979. Section 133(1) of the Saskatchewan Workers' Compensation Act, 1979, permitted the Board to obtain amounts owing its Injury Fund from a principal of a defaulting contractor. Husky in turn would be able to recover the amount paid on the Metal Fab's behalf by setting off that amount, pursuant to s. 133(3), from the amount it would otherwise pay Metal Fab. Husky and Metal Fab's creditors maintained that the operation of s. 133 conflicted with s. 136 of the federal Bankruptcy Act, which sets out the priorities of creditors on bankruptcy, in that the Board was able to obtain full payment to the detriment of the creditors who had a higher priority under the Bankruptcy Act. On a non-suit application made by Husky, The Workers' Compensation Act, 1979, was found to be inapplicable in a bankruptcy scenario and the Court of Appeal upheld this finding. The constitutional questions queried whether, in situations where the contractor is bankrupt, these provisions are constitutionally non- operational because of conflict with the Bankruptcy Act and whether they applied in the circumstances of this case.

Held (Sopinka, Cory, lacobucci and Major H. dissenting): The appeal should be dismissed. Section 133 is inapplicable in bankruptcy when s. 133(1) of The Workers' Compensation Act, 1979, operates in tandem with s. 133(3). Section 133 was inapplicable when the contractor entered bankruptcy.

Per Lamer C.J. and La Forest, L'Heureux-Dube, Gonthier and McLachlin E.: The gravamen of this appeal was the alleged conflict between s. 133 of the Saskatchewan Workers' Compensation Act, 1979, and s. 136(1)(h) of the Bankruptcy Act which set the priorities for recovery. The question, however, was not whether the provisions in s. 133 were independently valid, but rather, whether when combined they had the effect of reordering priorities in bankruptcy. The combined effect of the statutory deemed debt and the right to set off against property of the bankrupt, when s. 133(1) is read with s. 133(3), is to secure the Board's claim against the bankrupt's estate. In so doing, s, 133 read as a whole conflicts with Parliament's intention to accord the Board's claim the priority established in s. 136 of the Bankruptcy Act.

The first goal of ensuring an equitable distribution of a debtor's assets is to be pursued in accordance with the federal system of bankruptcy priorities. The quartet (Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la sante et de la lattp://www.lexisnexis.com/ca/legal/delivery/PrintDoc.clo?fromCartFullDoc=false&fileSize.. . 7/7/2014 Page 3 of 62

securite du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24) does not stand for the sole proposition that the provinces cannot "jump the queue" but rather embodies a consistent and general philosophy as to the purposes of the federal system of bankruptcy and its relation to provincial property anangements. The following propositions can be distilled from the quartet:

(1) provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s. 136(1) of the Bankruptcy Act; (2) while provincial legislation may validly affect priorities in a non- bankruptcy situation, once bankruptcy has occurred s. 136(1) of the Bankruptcy Act determines the status and priority of the claims specifically dealt with in that section; (3) if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province to province, an unacceptable situation; (4) the definition of terms such as "secured creditor", if defined under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for the purposes of the Bankruptcy Act; (5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; and (6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so.

The fifth and sixth propositions bear a close resemblance to the doctrine of colourability, but with two fundamental differences, First, the doctrine of colourability is a concept which only applies in assessing the pith and substance of the impugned legislation whereas propositions 5 and 6 continue to apply after the validity of the impugned provincial law has been determined. None of the quartet eases was concerned with colourable provincial legislation. Second, a legislative intention to intrude into an exclusive federal sphere is neither necessary nor sufficient to scrutinize the applicability of provincial law. The intrusion, and not the intention to intrude, is determinative for division of powers purposes.

When ss. 133(1) and (3) operate in tandem, the contractor discharges its own liability to the Board, mediated through the legally compelled agency of the principal. This is not a scheme of joint and several liability, since the principal and the contractor are not joint co-debtors at the outset and since the Board does not have an unfettered choice as to which party to sue for recovery for outstanding fund payments. This provision, rather, is more accurately characterized as creating a form of involuntary, statutory suretyship,

While the contractor is potentially liable for two debts (the debt to the Board for the unpaid assessment and the potential debt to the principal if the principal pays the contractor's assessment) in a

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formal way, these in reality are one and the same as against the contractor. The contractor cannot be liable for both cumulatively. There is thus an inseparable nexus between the Board's claim against the contractor and the principal's potential claim against the contractor.

When s. 133(1) operates in combination with s. 133(3), the effect is to secure the claim of the Board against assets of the contractor. This is accomplished through the combined operation of the statutorily deemed debt imposed on the principal in the event of the contractor's default and the right of the principal to withhold and be indemnified from monies owing to the contractor. Thus, the combined effect of the deemed debt in s. 133(1) and set-off in s. 133(3) secures the Board's claim against the contractor's assets. Parliament has recognized that the "law of set-off applies to all claims made against the estate of the bankrupt" (s. 97(3) of the Bankruptcy Act). 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. But there is an inherent limit to this deference to the provincial law of set-off. While the operation of set- off is permitted to allow for the party claiming set-off to recover from the estate ahead of the stipulated order of his claim under the Bankruptcy Act, it most emphatically is not permitted to allow for the operation of provincial legislation to reorder the priorities of third parties against the estate. The operation of s. 133 has the effect of reordering federal priorities with respect to the claims of any third parties against the estate. Prior to bankruptcy, the security device created by s. 133(3) and triggered by s. 133(1) is within the province's jurisdiction. However, if applicable in the event of bankruptcy, it would enter into conflict with the scheme of distribution under the Bankruptcy Act. Parliament has expressly indicated in s. 136(1)(h) that "all indebtedness of the bankrupt under any Workmen's Compensation Act" is to rank eighth in the list of preferred claims and is to be distributed after the claims of secured creditors. By contrast, the combined effect of ss, 133(1) and (3) of the Saskatchewan Workers' Compensation Act, 1979, is to secure the Board's claim against the bankrupt's estate ahead of its priority under the Bankruptcy Act, The two laws in their operation give rise to different and inconsistent orders of priority and are thereby in conflict. Section 133(4), which states that ' 1 [01 questions as to the right to and the amount of such indemnity shall be determined by the board", also has the effect of intruding into the exclusive federal sphere of bankruptcy. If allowed to apply in bankruptcy, this provision would have the effect of empowering a creditor of the estate (here the Board) to determine unilaterally the extent of its claim against the estate. As a result, the Board would be empowered to decide the size of the estate which is to remain available for the other secured, preferred and ordinary creditors. A province cannot empower a creditor of a bankrupt to determine the extent of a bankrupt's estate which is to be available for distribution. Thus, while otherwise perfectly valid provincial law, s. 133(4) is also inapplicable in the event of bankruptcy, Section 133 is inapplicable, rather than inoperable, in bankruptcy for intruding into an exclusive federal sphere because bankruptcy is an exclusive federal domain within which provincial legislation does not apply, as distinguished from areas of joint or overlapping jurisdiction where federal legislation will prevail, rendering provincial legislation inoperable to the extent of any conflict. As bankruptcy is carved out from the domain of property and civil rights of which it is conceptually a part, valid provincial legislation of general application continues to apply in bankruptcy until Parliament legislates pursuant to its exclusive jurisdiction in relation to bankruptcy and insolvency. At that point, provincial legislation which conflicts with federal law must yield to the extent of the conflict and it becomes inapplicable to that extent. Consistent with the presumption of lutp://www.lexisnexis.com/callegal/delivery/PrintDoc.do?fromCartFuliDoe —false&fileSize... 7/7/2014 Page 5 of 62

constitutionality -- that the enacting body is presumed to have intended to enact provisions which do not transgress the limits of its constitutional powers -- the provincial law should be interpreted so as not to apply to the matter that is outside the jurisdiction of the enacting body.

Where federal and provincial legislation potentially conflict, it must be first determined whether the laws are respectively valid federal or provincial legislation. If so, the actual operation of the laws must be examined to determine whether they are in operational conflict, and if so, the federal legislation prevails and the provincial legislation is without effect to the extent of this conflict. If the operational conflict is in a field of exclusive federal jurisdiction, the provincial legislation will be inapplicable as being ultra vires to that extent. If the conflict is in an area of concurrent or overlapping jurisdictions, the provincial legislation will remain intra vires but be inoperative. To the extent that there is operational conflict, there is no room for an incidental or ancillary effect of provincial legislation. If on the other hand, there is no operational conflict, then both laws continue to operate and both continue to have effect to the extent that operational conflict does not arise. Short of operational conflict, provincial law may validly have an effect on bankruptcy. A clear operational conflict existed here in that ss. 133(1) and (3) in their operation together entailed a reordering or subverting of the federal order of priorities under the Bankruptcy Act. Such an intrusion into an exclusive federal sphere necessarily goes far beyond an incidental and ancillary effect.

Since as outlined s. 133 has no application in the event of bankruptcy, a number of threshold factual questions need not be addressed.

Per Sopinka, Cory, lacobucci and Major J.T. (dissenting): Sections 133(1) and (3) of The Workers' Compensation Act, 1979, are severable and should be considered separately. Both are valid even where the contractor is or becomes bankrupt.

The doctrine of paramountcy, which arises where there is clear operational conflict between valid federal and provincial legislation, requires that the provincial legislation be declared inoperational to the extent of the conflict. Conflict for purposes of paramountcy analysis is found when compliance with the enactment of one level of government entails defiance with that of the other. Courts in applying the paramountcy doctrine should be restrained and look for co-existence rather than conflict.

A review of the legislative history and purpose of workers' compensation statutes did not give any indication that s. 133 was enacted for the purpose of improving the ranking of the Board in a bankruptcy.

The quartet of cases dealing with the paramountcy of the Bankruptcy Act over provincial enactments which directly interfered with the scheme of priorities established by s. 136 of the Act (Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la sante et de la securite du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24) should be given a narrow interpretation. The quartet stands for the position that only those provincial laws which directly improve the priority of a claim upon the actual property of the bankrupt over that accorded by the Bankruptcy Act are inoperative. The broader approach, which would find a province to be improperly attempting to alter the priorities of distribution any time provincial law affected the final result of a bankruptcy, would produce unacceptable results because it risks nullifying the broad array of provincial legislation underpinning the Bankruptcy Act.

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Provincial law plays a critical role in defiling both the number and type of participants in the bankruptcy process and the size of the bankrupt's estate. A bankruptcy priority is a category and its precise content can and does vary to some extent from one province to the next. Because the federal legislation already contemplates that provincial law will impact upon the bankruptcy process, the respondents must do more than simply show that s. 133 has an effect on a particular bankruptcy, They must demonstrate that s. 133 actually reorders the federally established priority scheme with regard to the property of the bankrupt by directly creating interests in that property. Section 133(1) has nothing to do with the property of the bankrupt. It creates a strict in personam obligation from the principal owing to the Board. The property of the principal is in no way subject to the Bankruptcy Act. The bankrupt is not even involved. The provision simply creates a third-party guarantee by the principal that the contractor will pay its debts to the board. Section 133(1) only alters the Board's recovery by permitting it to recover from a non-bankrupt third-party. No direct conflict within the meaning of the quartet or of paramountcy doctrine more generally exists between s. 133(1) and the Bankruptcy Act. Nothing in the Bankruptcy Act precludes any creditor, even if specifically mentioned in s. 136, from pursuing its remedies against a third-party as well as or instead of proving a claim in bankruptcy. Section 133(1) does not involve property that is related to or part of the estate of the bankrupt and it is consequently not in operational conflict with the bankruptcy scheme. Section 136 encompasses a claim against the property of the bankrupt. The Board claim under s. 133(1) targets a solvent principal. The two provisions are co-extensive and complementary, not mutually exclusive. Section 133(3) engages a more direct interference with the bankruptcy scheme than subs. (1) because, since it is the actual property of the bankrupt that is involved in the restitutionary claim launched by the principal, it constitutes the only linkage between the property of the principal and the estate of the bankrupt contractor. Section 133(3) is merely declaratory of two different remedies existing at equity, set-off and indemnification. Set-off is the more intrusive of the two since it permits the principal to stand first in the priority scheme by taking away the property of the bankrupt before it enters the estate. A claim for indemnification would have only an ancillary effect on the bankrupt's estate since it only permits the principal to join the ranks of the unsecured creditors, Neither remedy is invalid as s. 97(3) of the Bankruptcy Act, which provides that the law of set-off is to persist in bankruptcy, reconciles the priority scheme of the Act with the common law of set-off (and implicitly, of indemnification), and the claims embodied in s. 133(3) are merely reflective of those common law causes of action. Absent s. 133(3), such a claim would exist according to the law of restitution or the law of contract. In terms of restitution, it is settled that a person may claim for recoupment or reimbursement of monies expended by that person under compulsion of law if the effect of such a payment is to discharge the liability of another. Set-off, independent of s. 133(3), also arises from the contractual relationship. The contracts oblige the contractor to "comply with all laws" and indemnify the principal from any expense arising from the "negligent performance, purported performance or non-performance of the contract" by the contractors. The fact that the property of the bankrupt has been assigned to the Bank and, thus, that the debt is no longer technically owed to Metal Fab but to the Bank of Montreal, does not militate against a finding that the law of set-off applies. Equitable set-off (unlike legal set-off) can operate within the context of an assignment. The only pre-requisite to set-off against the assignee is that the claim against the

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assignee is to arise out of the same contract or series of events which gave rise to the original claim or be closely connected with that contract or series of events.

Although s. 133 renders the principal and the contractor jointly and severally liable to the Board, as between the principal and contractor, the primary liability lies with the contractor and, consequently, the solicitation of contribution for payments made on behalf of that contractor by the principal is consonant with commercial fairness.

Section 133(1) is still fully applicable in cases where there is either no indebtedness between the principal and the contractor or insufficient indebtedness to cover the full liability involved. To this end, not only does s. 133(1) operate in isolation of the bankruptcy, it also operates independently from s. 133(3). Subsection (1) is the key feature of s. 133 as a whole_ It aims at preserving the integrity of the Injury Fund. Section 133(3) is clearly secondary in this regard and s. 133(1) accordingly was not intended to operate solely in conjunction with s. 133(3). While s. 133(3) and the equitable rights it codifies might not be able to operate independently from s. 133(1), s. 133(1) can operate independently from s. 133(3).

Cases Cited

By Gonthier J.

Considered: Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la sante et de la securite du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; disapproved: Ontario (Workers' Compensation Board) v. Evelyn Stevens Interiors Ltd. (Trustee of) (1993), 100 D.L.R. (4th) 742; referred to: Royal Bank of Canada v. Larue, [1928] A.C. 187, aff'g [1926] S.C.R. 218; Director of Labour Standards of Nova Scotia and Workers' Compensation Board of Nova Scotia v. Trustee in Bankruptcy (1981), 38 C.B.R. (N.S.) 253; R. v. Morgentaler, [1993] 3 S.C.R. 463; Madden v. Nelson and Fort Sheppard Railway Co., [1899] A.C. 626; County of Parkland No. 31 v. Stetar, [1975] 2 S.C.R. 884; Re Melton; Milk v. Towers, [1918] 1 Ch. 37; Re Coughlin & Co. (1923), 4 C.B.R. 294; Lister v. Hanson, [1908] 1 K,B. 174; Fredericton Co-operative Ltd. v. Smith (1921), 2 C.B.R. 154; Atlantic Acceptance Corp. v. Burns & Dutton Construction (1962) Ltd. (1970), 14 D.L.R. (3d) 175; Stein v. Blake, [1995] 2 All E.R. 961; Re Invitation Pret-a-Porter Inc.; Miller v. Polbro Realty Co. (1979), 31 C.B.R. (N.S.) 54; Tennant v. Union Bank of Canada, [1894] A.C. 31; Crown Grain Co. v. Day, [1908] A.C. 504; Bank of Montreal v. Hall, [1990] 1 S.C.R. 121,

By Iacobucci J. (dissenting)

Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la sante et de la securite du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S,C.R. 24; Ontario (Workers' Compensation Board) v. Evelyn Stevens Interiors Ltd. (Trustee of) (1993), 100 D.L.R. (4th) 742, rev'g Re Evelyn Stevens Interiors Ltd. (1990), 72 D.L.R. (4th) 712; Serdula Construction Management Inc. v. Workers' Compensation Board, Q.B. (Regina), Q.B.M. 126/91 (April 12, 1991); Attorney-General of Ontario v. Attorney- General for the Dominion of Canada, [1894] A,C, 189; Royal Bank of Canada v. Larue, [1928] A.C. 187, affg [1926] S.C.R. 218; Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161; Bank of Montreal v. Hall, [1990] 1 S.C.R. 121; General Motors of Canada Ltd. v. City National Leasing, [1989] 1 S.C.R. 641; Medwid v. Ontario (1988), 48 D.L.R. (4th) 272; Reference re Workers' http://www.lexisnexis.com/ca/legal/delivery/PrintDoc.do?fromCartFullDoc —false&fileSize... 7/7/2014 Page 8 of 62

Compensation Act, 1983 (Nfld.) (1987), 44 D.L.R. (4th) 501, affd [1989] 1 S.C.R. 992; Re Black Forest Restaurant Ltd. (1981), 37 C.B.R. (N.S.) 176; TransGas Ltd. v. Mid-Plains Contractors Ltd., [1994] 3 S.C.R. 753; Ecarnot (Trustee of) v. Western Credit Union Ltd. (1991), 7 C.B.R. (3d) 207; John M. M. Troup Ltd. v. Royal Bank of Canada, [1962] S.C.R. 487; Panamericana de Bienes y Servicios S.A. v. Northern Badger Oil & Gas Ltd., [1991] 5 W.W.R. 577; Robinson v. Countrywide Factors Ltd., [1978] 1 S.C.R. 753; Re French River Contracting Co., [1937] O.W.N. 665; MacDonald v. Vapour Canada Ltd., [1977] 2 S.C.R. 134; Holt v. Telford, [1987] 2 S.C.R. 193; Lister v. Hooson, [1908] 1 K.B. 174; Moule v. Garrett (1872), L.R. 7 Ex. 101; Brook's Wharf and Bull Wharf, Ltd. v. Goodman Brothers, [1937] 1 K.B. 534; Government of Newfoundland v. Newfoundland Railway Co. (1888), 13 App. Cas. 199; Hanak v, Green, [1958] 2 All E.R. 141; Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd., [1985] 6 W.W.R. 14; Federal Commerce and Navigation Ltd. v. Molena Alpha Inc., [1978] 3 All E.R. 1066, affd [1979] A.C. 757; New Brunswick v. Estabrooks Pontiac Buick Ltd. (1982), 44 N.B.R. (2d) 201; Manitoba Fisheries Ltd. v. The Queen, [1979] 1 S.C.R. 101; Vickery v. Nova Scotia Supreme Court (Prothonotary), [1991] 1 S.C.R. 671; R. v. Amway Corp., [1989] 1 S.C.R. 21; Board of Industrial Relations v. Avco Financial Services Realty Ltd., [1979] 2 S.C.R. 699.

Statutes and Regulations Cited

Bankruptcy Act, R.S.C., 1985, c. B-3, ss. 2, 17(1), 67, 72(1), 95, 97(3), 136, 141, 148, 158(a), 198(a). Constitution Act, 1867, ss. 91(21), 92(13). Workers' Compensation Act, 1979, S.S. 1979, c. W-17.1, ss. 133(1), (3), (4). Workers' Compensation Amendment Act, 1993, S.S. 1993, c. 63, s. 40.

Authors Cited

Abel, Albert S. "The Neglected Logic of 91 and 92" (1969), 19 U.T.L.J. 487. Crepeau, Paul-Andre. L'intensite de l'obligation juridique ou des obligations de diligence, de resultat et de garantie. Montreal: Centre de recherche en droit prive et compare du Quebec, 1989. Dadson, Aleck. "Comment" (1986), 64 Can. Bar Rev. 755. Driedger on the Construction of Statutes, 3rd ed. By Ruth Sullivan. Toronto: Butterworths, 1994. Duncan, Lewis and John D. Honsberger. Bankruptcy in Canada, 3rd ed. Toronto: Canadian Legal Authors Ltd., 1961. Edinger, Elizabeth. "Comment" (1985), 63 Can. Bar Rev. 203. Fridman, Gerald Henry Louis. The Law of Torts in Canada, vol. 2. Toronto: Carswell, 1990. Hogg, Peter W. Constitutional Law of Canada, vol. 1, 3rd ed. (Supplemented). Scarborough, Ont.: Carswell, 1992 (loose-leaf). Houlden, L. W. and C. H. Morawetz. Bankruptcy and Insolvency Law of Canada, vol. 1, 3rd ed. Toronto: Carswell, 1993. Judge, John A. M. and Margaret E. Grottenthaler. "Legal and Equitable Set-Offs" (1991), 70 Can. Bar Rev. 91. Lacy, Philip T. "Setoff and the Principle of Creditor Equality" (1992), 43 S. Cal. L. Rev. 951. Laskin's Canadian Constitutional Law, vol. 1, 5th ed. By Neil Finkelstein. Toronto: Carswell, 1986. McCoid, John C. "Setoff: Why Bankruptcy Priority?" (1989), 75 Va. L. Rev, 15. Palmer, Kelly Ross. The Law of Set-Off in Canada. Aurora, Ont.: Canada Law Book, 1993. Roman, Andrew J. and M. Jasmine Sweatman. "The Conflict Between Canadian Provincial Personal Property Security Acts and the Federal Bankruptcy Act: The War is Over" (1992), 71 Can. Bar Rev. 77. Williams, Glanville L. Joint Torts and Contributory Negligence. London: Stevens & Sons, 1951.

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Wood, Philip R. English and International Set-Off. London: Sweet & Maxwell, 1989. Ziegel, Jacob S. "Personal Property Security and Bankruptcy: There is no War! -- A Reply to Roman and Sweatman' (1993), 72 Can. Bar Rev. 44.

APPEAL from a judgment of the Saskatchewan Court of Appeal (1993), 116 Sask. R. 46, 108 D.L.R. (4th) 681, 11 C.L.R. (2d) 1, 22 C.B.R. (3d) 153, [1994] 1 W.W.R. 629, dismissing an appeal from a judgment of Wedge J. (1992), 104 Sask. R. 225, 96 D.L.R. (4th) 495, 3 C.L.R. (2d) 194, 16 C.B.R. (3d) 290. Appeal dismissed, Sopinka, Cory, Iacobucci and Major JJ, dissenting. Section 133 is inapplicable in bankruptcy when s. 133(1) of The Workers' Compensation Act, 1979, operates in tandem with s. 133(3). Section 133 was inapplicable when the contractor entered bankruptcy,

Robert G. Richards and Evan L. Bennett, for the appellant, James S. Ehmann and Paul J. Harasen, for the respondent Husky Oil Operations Ltd. Edward R. Sojonky, Q.C., and Gordon Berscheid, for the respondent Her Majesty The Queen in right of Canada. Thomson Irvine, for the respondent the Attorney General for Saskatchewan. Brian J. Scherman, for the respondent Bank of Montreal, Hart Schwartz, for the intervener the Attorney General for Ontario. Cedric L. Haines, for the intervener the Attorney General for New Brunswick. R. Richard M. Butler, for the intervener the Attorney General of British Columbia. Written submission only by Nolan D, Steed for the intervener the Attorney General for Alberta. Written submission only by Elizabeth Kosmidis for the intervener the Workers' Compensation Board of Ontario. Written submission only by Gerald W. Massing for the intervener the Workers' Compensation Board of British Columbia. Written submission only by Douglas R. Mab for the intervener the Workers' Compensation Board of Alberta. Written submission only by Bruce L, Willis, Q,C,, for the intervener the Workers' Compensation Health and Safety Board of Yukon.

Solicitors for the appellant: MacPherson, Leslie & Tyerman, Regina. Solicitors for the respondent Husky Oil Operations Ltd.: Hleck, Kanuka, Thuringer, Regina. Solicitor for the respondent Her Majesty The Queen in right of Canada, as represented by the Minister of National Revenue: The Attorney General of Canada, Ottawa. Solicitor for the respondents Her Majesty The Queen in right of the Province of Saskatchewan, as represented by the Minister of Human Resources, Labour and Employment, and Her Majesty The Queen in right of the province of Saskatchewan, as represented by the Minister of Finance: The Attorney General for Saskatchewan, Regina. Solicitors for the respondent Bank of Montreal: Balfour, Moss, Saskatoon. Solicitors for the respondents Eric Zimmerman, Garth Price, Trevor Brown, Arthur Gingras, Kelly Houston, Darcy Kuzio, Hans Bohle, Charles Pshebenicki and Terry Sapergia: Pederson, Norman, McLeod, Regina. Solicitors for the respondent SBW--Wright Construction Inc.: Gauley & Co., Regina. Solicitors for the respondent Campbell West (1991) Ltd.: McKercher, McKercher, Laing & Whitmore, Regina. Solicitors for the respondent Fuller Austin Insulation Inc.: Johnston, Bennett & Sholter, Lloydminster. Solicitors for the respondent United Industrial Equipment Rentals Ltd,; Kirzinger, Hall, Revering &

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Wells, Lloydminster. Solicitors for the respondent ATCO Enterprises Ltd.; Nussbaum & Burrows, Saskatoon. SOlicitors for the respondent Deloitte & Touche Inc., as Trustee in Bankruptcy of the Estate of Metal Fabricating & Construction Ltd.: MacDermid, Lamarsh, Saskatoon. Solicitor for the respondent the Attorney General for Saskatchewan: The Attorney General for Saskatchewan, Regina. Solicitor for the intervener the Attorney General for Ontario: The Attorney General for Ontario, Toronto. Solicitor for the intervener the Attorney General for New Brunswick: The Attorney General for New Brunswick, Fredericton. Solicitor for the intervener the Attorney General of British Columbia: The Attorney General of British Columbia, Victoria. Solicitor for the intervener the Attorney General for Alberta: The Attorney General for Alberta, Edmonton. Solicitor for the intervener the Workers' Compensation Board of Ontario; The Workers' Compensation Board of Ontario, Toronto. Solicitor for the intervener the Workers' Compensation Board of British Columbia: The Workers' Compensation Board of British Columbia, Richmond. Solicitor for the intervener the Workers' Compensation Board of Alberta: The Workers' Compensation Board of Alberta, Edmonton. Solicitors for the intervener the Workers' Compensation Health and Safety Board of Yukon: Preston, Hillis & Co., Whitehorse.

The judgment of Lamer C,J, and La Forest, L'Heureux-Dub6, Gonthier and McLachlin D. was delivered by

1 GONTHIER J.:— I have had the benefit of the reasons of my colleague Justice Iacobucei. I respectfully disagree with his conclusion that s. 133 of The Workers' Compensation Act, 1979, S.S. 1979, c. W-17.1, is applicable in bankruptcy, and that provincial legislation can, through the operation of set-off in this manner, effectively reorder the priorities otherwise provided in the Bankruptcy Act, R.S.C., 1985, c. B-3.

2 In my opinion, the combined effect of the deemed debt in s. 133(1) and set-off against property of the bankrupt in s. 133(3) is to secure the Workers' Compensation Board's (the Board) claim against the estate of the bankrupt. When ss. 133(1) and (3) operate in tandem as intended by the Legislature, the effect is that the Board's claim is satisfied with property of the bankrupt in the form of the monies withheld by the principal. The principal becomes nothing more than a conduit for transferring to the Board monies which form property of the bankrupt's estate. The end result is that the bankrupt's estate is diminished to the extent of the contractor's liability to the Board, and the Board is correspondingly enriched by an identical amount, thereby recovering its claim in full. On the other hand, the principal's estate or patrimony remains entirely unaffected. The Board's claim is thus secured against the bankrupt's estate, mediated through the legally compelled agency of the principal. In this way, the Board recovers against the estate ahead of the priority mandated by Parliament in s. 136(1)(h) of the Bankruptcy Act, creating an operational conflict.

3 Recourse to s. 97(3) of the Bankruptcy Act, which incorporates by reference the provincial law of set-off, does not provide much assistance to the Board in this case. It is true that set-off itself may http://www.lexisnexis.com/cailegal/delivery/PrintDoc.do?fromCartFuliDoc=false&fileSize.. . 7/7/2014 Page 11 of 62

give rise to a reordering of priorities in bankruptcy in the limited sense that the party claiming set-off will secure his or her claim against the estate rather than recover under the priority otherwise provided by the Bankruptcy Act. This much is acknowledged by Parliament in enacting s. 97{3). However, the real question is the extent to which Parliament has deferred to the relevant provincial law. Here, Parliament has deferred to the extent of allowing the party claiming set-off to recover exceptionally ahead of his priority. But Parliament has not deferred to the extent of allowing third parties the same benefit as a result of the operation of provincial legislation. Set-off, in other words, is simply a defence to the payment of a debt, not a basis for validating statutory security devices which have the effect of securing the claims of third parties against the estate ahead of the priority stipulated by Parliament. The question is thus not whether the province has created a proprietary interest, but rather, it is whether that interest can have the effect of defeating the scheme of distribution under the Bankruptcy Act. Here, s. 133 not only gives a priority to the principal claiming set-off, which is permissible under s. 97{3), it also has the effect of securing the Board's claim against the estate, which most assuredly is impermissible. As a result, ifs. 133 were applicable in bankruptcy, it would enter into conflict with the order of priorities required by the Bankruptcy Act. Consistent with the presumption of constitutionality, it is my opinion that s. 133 should be read down to the extent of the conflict; that is, s. 133 is inapplicable in bankruptcy. I would therefore dismiss the appeal with costs throughout.

I. Background Facts, Relevant Legislation and the Courts Below

4 Since my colleague Iacobucci S. has helpfully summarized the relevant factual and legislative background together with the judgments of the courts below, I need not repeat that discussion. However, for reasons that will become apparent, it is important to reproduce the impugned provision, s. 133 of the Saskatchewan Workers' Compensation Act, 1979, in its entirety:

133. (1) Where a person, whether carrying on an industry included under this Act or not, in this section referred to as the principal, contracts with any other person, in this section referred to as the contractor, for the execution by or under the contractor of the whole or any part of any work for the principal, it is the duty of the principal to ensure that any sum that the contractor or any subcontractor is liable to contribute to the fund is paid and, where the principal fails to do so and the sum is not paid, he is personally liable to pay that sum to the board.

(2) The board shall have the same powers and be entitled to the same remedies for enforcing payment under subsection (1) that it possesses in respect of an assessment under this Act,

(3) Where the principal is liable to make payment to the board under subsection (1), he is entitled to be indemnified by any person who should have made the payment and is entitled to withhold, out of any indebtedness due to that person, a sufficient amount in respect of that indemnity.

(4) All questions as to the right to and the amount of such indemnity shall be determined by the board.

II. Issues on Appeal

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5 The constitutional questions raised by this appeal were stated by the Chief Justice on September 14, 1994 as follows:

1. Where a contractor as referred to in s. 133 of The Workers' Compensation Act, 1979, S.S. 1979, c. W-17.1, is in bankruptcy and but for the bankruptcy, the principal as referred to in s. 133 would be liable to pay the assessment due by the contractor under the Act, is s. 133 of the said Act inoperative or inapplicable in whole or in part, by reason of being in conflict with the Bankruptcy Act, R,S.C., 1985, c. B-3, and in particular ss. 17(1), 67, 95, 136(1)(h), 148, 158(a) and 198 (a) thereof? 2. Was s. 133 of the said Act inoperative or inapplicable in the circumstances of this case?

6 I agree with my colleague Iacobucci J. that the parties before this Court focused their arguments on the alleged conflict between s. 133 of the Saskatchewan Workers' Compensation Act, 1979, and s, 136(1)(h) of the Bankruptcy Act. Certainly, that is the gravamen of this appeal. However, I respectfully disagree with lacobucci J.'s restatement of the issues in the constitutional questions posed by the Chief Justice. Iacobucci J.'s reasons adopt the appellant's reformulation of the issues and examine the constitutional validity of ss, 133(1) and (3) separately. As will become apparent, in my view this manner of proceeding obscures the response to the constitutional questions. The question is not whether these provisions are independently valid, but rather, it is whether when combined they have the effect of reordering priorities in bankruptcy. When s. 133(1) is read together with s. 133(3), it is clear that the combined effect of the statutory deemed debt and the right to set-off against property of the bankrupt is to secure the Board's claim against the bankrupt's estate. In so doing, s. 133 read as a whole conflicts with Parliament's intention to accord the Board's claim the priority established in s. 136(1)(h) of the Bankruptcy Act.

III. Analysis A. The Purposes of Federal Bankruptcy Legislation

7 At the outset, it is useful to remember that our bankruptcy system serves two distinct goals. The first is to ensure the equitable distribution of a bankrupt debtor's assets among the estate's creditors inter se. As one commentator has noted (Aleck Dadson, "Comment" (1986), 64 Can, Bar Rev, 755, at p. 755):

Bankruptcy serves this goal by replacing a regime of individual action with a regime of collective action. While the pre-bankruptcy regime of individual action allows creditors to pursue their separate and competing claims to the debtor's assets, bankruptcy's regime of collective action sorts out those diverse claims and deals with the debtor's assets in a way which brings benefits to creditors as a group (reduced costs, increased recovery)....

The collectivization of insolvency proceedings can only be achieved by denying to creditors the use of pre-bankruptcy remedies. See also Peter W. Hogg, Constitutional Law of Canada (3rd ed. 1992), vol. 1, at p. 25-3. The second goal of the bankruptcy system is the financial rehabilitation of insolvent individuals (Dadson, supra, at

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p. 755). This goal is furthered through the opportunity for an insolvent individual's discharge from outstanding debts.

8 It has long been accepted that the first goal of ensuring an equitable distribution of a debtor's assets is to be pursued in accordance with the federal system of bankruptcy priorities. In the seminal case of Royal Bank of Canada v. Larue, [1928] A.C. 187, affirming [1926] S.C.R. 218, Viscount Cave L.C. confirmed that the exclusive federal power over bankruptcy and insolvency in s. 91(21) of the Constitution Act, 1867 enables Parliament to provide for the ranking of creditors in bankruptcy. He observed at p. 197:

In Attorney-General of Ontario v. Attorney-General for Canada, [1894] A.C. 189, 200, Lord Herschell observed that a system of bankruptcy legislation might frequently require various ancillary provisions for the purpose of preventing the scheme of the Act from being defeated, and added: "It may be necessary for this purpose to deal with the effect of executions and other matters which would otherwise be within the legislative competence of the Provincial Legislature. Their Lordships do not doubt that it would be open to the Dominion Parliament to deal with such matters as part of a bankruptcy law, and the Provincial Legislature would doubtless be then precluded from interfering with this legislation inasmuch as such interference would affect the bankruptcy law of the Dominion Parliament." Taking these observations as affording assistance in the construction of s. 91, head 21, of the Act of 1867, their Lordships are of the opinion that the exclusive authority thereby given to the Dominion Parliament to deal with all matters arising within the domain of bankruptcy and insolvency enables that Parliament to determine by legislation the relative priorities of creditors under a bankruptcy or an authorized assignment. [Emphasis added.]

9 The power to determine the priorities of distribution of the bankrupt's assets thus confirmed, Parliament has created an equitable distribution wherein the general rule is that creditors are to rank equally, with claims provable in bankruptcy being paid rateably (Bankruptcy Act, s. 141). The rule of creditor equality is subject to 10 classes of debt which are accorded priority in a stated order, the so- called list of "preferred" creditors (s, 136). Included in these classes of exceptions is "all indebtedness of the bankrupt under any Workmen's Compensation Act" in s. 136(1)(h), ranked eighth in the list. Lastly, the entire scheme of distribution is "[s]ubject to the rights of secured creditors" (s. 136) which, as Professor Hogg has noted, "enables secured creditors to realize their security as if there were no bankruptcy" (Hogg, supra, at p. 25-9).

B. The "Quartet" of Supreme Court Bankruptcy Decisions

10 In recent years, the constitutional relationship between the scheme of distribution under the Bankruptcy Act and various branches of provincial law governing property has received heightened scrutiny in the so-called "quartet" of decisions of this Court. Since my interpretation of the quartet differs from Iacobucci J.'s, I hope that I will be forgiven for re-canvassing that familiar terrain in order to explain the basis of my position.

(i) Overview of the Quartet

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11 First, in Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35 (hereinafter Re Bourgault), the trustee in bankruptcy sought to cancel a privilege registered by the Quebec Deputy Minister of Revenue on the bankrupt's immovable property under the provincial Retail Sales Tax Act, R.S.Q. 1964, c. 71. The Quebec Deputy Minister of Revenue argued that the province was a "secured creditor" under s. 2 of the Bankruptcy Act, R.S.C. 1970, c, B-3, since the Quebec Retail Sales Tax Act provided that sums due to the Crown under the Act were "a privileged debt ranking immediately after law costs".

12 Writing for the majority, Pigeon J. rejected the priority claimed by the province. In so doing, he offered the following remarks on the interpretation of s. 107(1)(j) of the Bankruptcy Act (now s. 136 (1)(j)) (at p. 44):

Accordingly, I find that the case turns upon the interpretation of para. 107(1)(j),... It is abundantly clear that this was intended to put on an equal footing all claims by Her Majesty in right of Canada or of a province except in cases where it was provided otherwise, namely, para. (c), the levy, and Para. (h), workmen's compensation or unemployment insurance assessments and withholdings for income tax. Paragraph (j) ends with the following words, "notwithstanding any statutory preference to the contrary". The purpose of this part of the provision is obvious, Parliament intended to put all debts to a government on an equal footing; it therefore cannot have intended to allow provincial statutes to confer any higher priority. In my opinion, this is precisely what is being contended for when it is argued that, because the Quebec statute creates a privilege on immovable property effective from the date of registration, the Crown thereby becomes a "secured creditor" and thus escapes the effect of the provision which gives it only a lower priority. [Emphasis in original.] Pigeon J. later concluded at p. 46:

If the contention of the Deputy Minister of Revenue in the case at bar was upheld, it would mean that the Quebec tax collector, provided his privilege was registered before the bankruptcy, would obtain a special preference on the proceeds of the sale of the immovable property in question, instead of having only the pari passu priority contemplated in the scheme of distribution established by the Bankruptcy Act. In my opinion, such result would be contrary to the intent of Parliament and no imperfection in drafting could justify it.

13 This Court confirmed and extended this approach to the relationship between the Bankruptcy Act and provincial law in Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board, [1985] I S.C.R. 785. Section 78(4)(a) of the Alberta Workers' Compensation Act, S.A. 1973, c. 87, provided that the provincial Workers' Compensation Board retained a "charge upon the property or proceeds of property of the employer" for unpaid assessments under the Act. The question before the Court was whether this provision rendered the Board a secured creditor of the bankrupt employer for the purposes of the opening words of s. 107(1) of the Bankruptcy Act which subjected the list of preferred claims "to the rights of secured creditors", or whether the Board's claim was postponed to s, 107(1)(h) which expressly addressed "all indebtedness of the bankrupt under any Workmen's Compensation Act". http://www.lexisnexis.com/ca/legal/delivery/PrintDoc.do?fromfaitFullDoc —false&fileSize... 7/7/2014 Page 15 of 62

14 A majority of the Court ruled that the Board was not a secured creditor and could only recover under s, 107(1)(h) of the Bankruptcy Act. Speaking for the majority on this point, Wilson J. cited approvingly (at pp, 804-5) the following remarks of Jones J.A. in Director of Labour Standards of Nova Scotia and Workers' Compensation Board of Nova Scotia v. Trustee in Bankruptcy (1981), 38 C.B.R. (N.S.) 253 (N.S,C.A.), at p. 260, on the ratio of the Re Bourgault decision:

Mr. Justice Pigeon made it abundantly clear that priorities of provincial claims must be determined in accordance with s. 107(1) of the Bankruptcy Act notwithstanding any statutory preference to the contrary. Debts under the Workers' Compensation Act fall under s. 107(1)(h) of the Act. Claims for wages are governed by s. 107(1)(d). With deference, it is not open to the province to provide any higher or more extensive priority for wages in view of the express provisions contained in that clause. It is clear from [Re Bourgault] that the provincial Crown cannot claim as a secured creditor under the Bankruptcy Act, notwithstanding the form of the provincial legislation, where the claim is governed by s. 107(1) of the Bankruptcy Act. [Emphasis added.]

15 In the same vein, Wilson J, later added the following important comments at p. 806:

With respect, the issue in Re Bourgault and Re Black Forest Restaurant Ltd, was not whether a proprietary interest has been created under the relevant provincial legislation. It was whether provincial legislation, even if it did create a proprietary interest, could defeat the scheme of distribution under s. 107(1) [now s. 136(1)] of the Bankruptcy Act. These cases held that it could not, that while the provincial legislation could validly secure debts on the property of the debtor in a non-bankruptcy situation, once bankruptcy occurred s. 107(1) determined the status and priority of the claims specifically dealt with in the section. It was not open to the claimant in bankruptcy to say: By virtue of the applicable provincial legislation I am a secured creditor within the meaning of the opening words of s. 107(1) of the Bankruptcy Act and therefore the priority accorded my claim under the relevant paragraph of s. 107(1) does not apply to me.... [This position] cannot be supported as a matter of statutory interpretation of s. 107(1) since, if the section were to be read in this way, it would have the effect of permitting the provinces to determine priorities on a bankruptcy, a matter within exclusive federal jurisdiction.

16 Having concluded that the case was governed by Re Bourgault, the majority of the Court considered the question of the appropriate response to the constitutional question; Was the provincial legislation inapplicable or inoperative? Wilson J. (McIntyre J. and Lamer J. (as he then was) concurring) noted that by virtue of the presumption of constitutionality, a province should be presumed to be legislating within its competence rather than outside it. As a result, she concluded that there was no conflict between s. 78(4) of The -Workers' Compensation Act and s. 107(1)(h) of the Bankruptcy Act since the former should be construed or read down as simply having no application in the event of bankruptcy (p. 808). By contrast, Chouinard J. (Dickson J. (as he then was) and Beetz J. concurring) agreed with the body of Wilson J.'s reasons but ruled that s. 78(4) was inoperative in the event of bankruptcy since it conflicted with s. 107(1)(h) of the Bankruptcy Act (pp. 788-89).

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17 This Court's decision in Deloitte Haskins is thus "significant because it confirms that any statutory lien conferred by a province on creditors listed in [s. 136] will nonetheless be inoperative [or inapplicable] in bankruptcy proceedings" (Dadson, supra, at p. 758). 18 The third decision in the bankruptcy quartet is Federal Business Development Bank v. Quebec (Commission de la sante et de la securite du travail), [1988] 1 S.C.R. 1061 (FBDB). Subject to certain restrictions, s. 49(2) of the Bankruptcy Act, R.S.C. 1970, c. B-3 (now s. 69(2)), entitled a secured creditor to "realize or otherwise deal with his security in the same manner as he would have been entitled to realize or deal with it if this section had not been passed". The question before the Court was whether federal or provincial law determined the order of priorities of distribution when a secured creditor availed himself of s. 49(2) to liquidate his security outside of the bankruptcy proceedings. Interestingly, the provincial security interest was a privilege registered on the debtor's immovable property by the Commission de la sante et de la securite du travail under s. 110(1) of the Quebec Workmen's Compensation Act, R.S.Q. 1977, c. A-3, which ranked its privilege as a claim 'ranking immediately after law costs without registration". 19 Speaking for the Court, Lamer J. noted at p. 1066 that this provincial legislation was in direct conflict with the Bankruptcy Act:

If the provincial law rules prevail, respondent is a secured creditor and its debt ranks before that of the trustee. If on the other hand the Bankruptcy Act has priority, the scheme of distribution set out in s, 107 of the Act determines the priority ranking. According to the decision of this Court in Deloitte, supra, respondent would then lose the benefit of its privilege and become merely a preferred creditor, since its claim is dealt with by s. 107(1)(h).... 20 After concluding that the immovable property remained "property of the bankrupt" within the meaning of s. 47 (now s. 67) of the Bankruptcy Act notwithstanding its seizure by the bankrupt's trustee and mandatary (p, 1068), Lamer J. stated at p. 1069:

The issue then is to determine what legislation, provincial or federal, applies here. A problem of the same type came before this Court in Re Bourgault and Deloitte, supra. In Re Bourgault, this Court held that in a bankruptcy matter s. 107(1)(j) of the Bankruptcy Act determines the priority of any claim covered by that provision. A provincial statute cannot override the scheme of distribution set out in s. 107 of the Act. To borrow the words of Pigeon J. (at p. 44), "Parliament intended to put all debts to a government on an equal footing; it therefore cannot have intended to allow provincial statutes to confer any higher priority". Similarly, the majority of the Court in Deloitte held that a creditor who holds a privilege under a provincial statute cannot claim the status of a secured creditor within the meaning of the Bankruptcy Act so as to avoid the order of distribution of s. 107 of the Act. In the event of bankruptcy, priorities are exclusively a matter for federal jurisdiction. [Emphasis added.] 21 It is important to stress that the respondent in FBDB sought to distinguish the Court's earlier decisions of Re Bourgault and Deloitte Haskins. Lamer J. stated the respondent's argument thus (at p. 1070):

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respondent is arguing that, as the hypothecated property was liquidated outside the bankruptcy proceeding, without involvement by the trustee in bankruptcy, the solution must be sought not in federal but in Quebec law. Respondent added that, as the trustee chose to realize his security himself outside the bankruptcy, he must bear the consequences of that choice and accept the order of collocation determined by provincial statutes.

But the Court rejected this attempt to circumvent the order of priorities required by the Bankruptcy Act. Lamer J. ruled at p. 1071:

... I feel that the decisions in Re Bourgault and Deloitte are conclusive as to the fate of the appeal. These cases stand for the following proposition: in a bankruptcy matter, it is the Bankruptcy Act which must be applied. If a bankruptcy occurs, the order of priority is determined by the ranking in s. 107 of the Act, and any debt mentioned in that provision must therefore be given the specified priority. [Emphasis added.]

22 As a result, Lamer J. classified the respondent as a preferred creditor in s. 107(1)(h) of the Bankruptcy Act. He accepted, at p. 1072, that this result might encourage secured creditors "to bring about the bankruptcy of their debtor in order to improve their title". Nevertheless, he was mindful that "this solution has obvious advantages". As he explained at p. 1072:

As soon as the bankruptcy occurs the Bankruptcy Act will be applied; the mere fact that a creditor is mentioned in s. 107 of the Act suffices for such creditor to be ranked as a preferred creditor and in the position indicated in that provision. As provincial statutes cannot affect the priorities created by the federal statute, consistency in the order of priority in bankruptcy situations is ensured from one province to another. [Emphasis added.]

23 Finally, in British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, at issue was whether the deemed statutory trust created by s. 18 of the British Columbia Social Service Tax Act, R.S.B.C. 1979, c. 388, in favour of the province for provincial sales tax collected was a valid trust within the meaning of s. 47(a) (now s. 67(a)) of the Bankruptcy Act, Section 47(a) exempted "property held by the bankrupt in trust for any other person" from "[t]he property of a bankrupt divisible among his creditors". A majority of the Court ruled that this deemed statutory trust was not a valid trust. Instead, the province's claim for the monies collected under the purported trust was really a Crown preferred claim under s. 107(1)(j) of the Bankruptcy Act, which covered "claims of the Crown .„ in right of Canada or of any province".

24 Speaking for the majority, McLachlin J. noted at p. 30 that the impugned deemed statutory trust lacked the essential attributes of a trust under general principles of trust law, namely the possibility of being identified and traced. She stated at p. 33:

To interpret s. 47(a) as applying not only to trusts as defined by the general law, but to statutory trusts created by the provinces lacking the common law attributes of trusts, would be to permit the provinces to create their own priorities under the Bankruptcy Act and to invite a differential scheme of distribution on bankruptcy from province to province.

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25 Significantly, McLachlin J. also stated, at pp. 33-34, the Court's preference for an interpretation of s. 47(a) consistent with "the clear intention of Parliament, in enacting the Bankruptcy Act, of setting up a clear and orderly scheme for the distribution of the bankrupt's assets", 26 Moving to the nature of the legal interests created by s, 18 of the Social Service Tax Act, McLachlin J. noted at p. 34 that at the moment of collection the "trust property is identifiable and the trust meets the requirements for a trust under the principles of trust law". However, she was cautious to note that the trust monies are soon mingled with other money in the hands of the merchant and converted to other property, and as a result they could not be traced. She observed at p. 34:

... as the presence of the deeming provision tacitly acknowledges, the reality is that after conversion the statutory trust bears little resemblance to a true trust. There is no property which can be regarded as being impressed with a trust. Because of this, s. 18(2) goes on to provide that the unpaid tax forms a lien and charge on the entire assets of the collector, an interest in the nature of a secured debt. [Emphasis added.] McLachlin J, was thus at pains to stress that the reality of the property interest created by the province ought to govern over the form, and as a result the province's claim necessarily failed. 27 McLachlin J also addressed the province's contention that it remained sovereign over the definition of what constitutes a trust. She made the following important observations at p. 35:

The province ... argues that it is open to it to define "trust" however it pleases, property and civil rights being matters within provincial competence, The short answer to this submission is that the definition of "trust" which is operative for purposes of exemption under the Bankruptcy Act must be that of the federal Parliament, not the provincial legislatures. The provinces may define "trust" as they choose for matters within their own legislative competence, but they cannot dictate to Parliament how it should be defined for purposes of the Bankruptcy Act: Deloitte Haskins and Sells Ltd. v. Workers' Compensation Board. [Emphasis added.]

28 As a result, McLachlin J. ruled that the provincial legislation was inapplicable in bankruptcy and that the province's claim was governed by s. 107(1)(j) of the Bankruptcy Act,

(ii) The Principles and Philosophy Embodied in the Quartet

29 What principles should be distilled from the quartet? The intervener Attorney General for Saskatchewan suggested that there are two possible interpretations of these decisions: what it called a broader "bottom line" approach which posits that "any time provincial law affects the final result of a bankruptcy, the province is improperly attempting to alter the priorities of distribution"; and a narrower "jump the queue" approach to the effect that "the province cannot attempt to alter the position of a person within the scheme of distribution created by Parliament, visa vis the other creditors who are claiming from the bankrupt's estate". 30 My colleague lacobucci J. properly rejects the broader "bottom line" approach since, as he indicates, such an approach "risks nullifying the broad array of provincial legislation underpinning the Bankruptcy Act" (para. 142). It is trite to observe that the Bankruptcy Act is contingent on the provincial law of property for its operation. The Act is superimposed on those provincial schemes http ://www.lexisnexis. co m/ca/legal/delivery/PrintD o c.do?fromCartFullDoc=false&fileSize... 7/7/2014, Page 19 of 62

when a debtor declares bankruptcy. As a result, provincial law necessarily affects the "bottom line", but this is contemplated by the Bankruptcy Act itself, Indeed, it is no exaggeration to say that there is no "bottom line' without provincial law. The "bottom line" approach is therefore not the appropriate characterization of the quartet.

31 However, even rejecting the simplistic "bottom line" approach, I do not agree that the quartet stands for the sole proposition that the provinces cannot "jump the queue". In my opinion, the quartet embodies a consistent and general philosophy as to the purposes of the federal system of bankruptcy and its relation to provincial property arrangements. That philosophy cannot be captured in the pithy but limited proposition that the provinces cannot "jump the queue".

32 The quartet is better stated, in my view, as standing for a number of related propositions which are themselves part of a consistent philosophy. In their lucid and thorough study of the quartet, "The Conflict Between Canadian Provincial Personal Property Security Acts and the Federal Bankruptcy Act: The War is Over" (1992), 71 Can, Bar Rev. 77, at pp. 78-79, Andrew J. Roman and M. Jasmine Sweatman state that the quartet stands for the following four propositions:

33 See also for concurrence with Roman and Sweatman's general conclusions drawn from the quartet, Jacob S. Ziegel, "Personal Property Security and Bankruptcy: There is no Wad -- A Reply to Roman and Sweatman" (1993), 72 Can. Bar Rev. 44, at p. 45.

34 My colleague Iacobucci J. states at para. 141 that the quartet "stands for the position that only those provincial laws which directly improve the priority of a claim upon the actual property of the bankrupt over that accorded by the Bankruptcy Act are inoperative" (emphasis added). This statement falls within Roman and Sweatman's proposition 1. However, as my summary of those cases has hopefully indicated, the quartet is clearly not limited to provincial "laws which directly improve the priority of a claim". To quote Roman and Sweatman, supra, at p. 78:

the reasoning in [the quartet] is not limited to trusts, nor to situations of colourable legislation attempting to give an artificial preference to government. Rather, these rulings are broad enough to encompass any potential area of conflict between provincial power to legislate in the area of

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property and civil rights, and exclusive federal jurisdiction over bankruptcy and insolvency. In a similar vein these authors add at p. 81:

The Supreme Court of Canada's quartet of decisions, although dealing with provincial statutory trusts which affected priorities in bankruptcy, has progressively and finally provided a definite ruling on the relationship between priorities under the Bankruptcy Act and any other provincial statute which directly or indirectly affects priorities. [Emphasis in original.] Importantly, they conclude at p. 105:

The law, in our opinion, is settled by these four judgments of the Supreme Court of Canada. In all four cases the issues were not whether the provinces could directly and blatantly attempt to alter the scheme of interests of secured and other creditors under what is now section 136(1) of the Bankruptcy Act. Rather, the issue was whether a province could indirectly influence priorities under the Bankruptcy Act. Even in this weaker version of influence, the Supreme Court of Canada has held that the provinces could not. And in so concluding, they are also quick to caution at p. 106:

It is also incorrect to state that in all four cases the provinces attempted to redistribute or change priorities by explicitly elevating one of the lower ranked claims to a higher rank. As seen from an examination of the dissenting judgments in Deloitte Haskins and Henfrey, the provinces were not attempting specifically to target the bankruptcy situation but, rather, to create a general priority,

35 As a result, the "jump the queue" or "directly improve bankruptcy priorities" approach captures only part of the reasoning of the quartet. As Roman and Sweatman noted, in the Deloitte Haskins and Henfrey Samson cases, for example, the provinces were not directly or intentionally attempting to influence bankruptcy priorities. Rather, the provinces enacted laws of general application which sought to create a general priority not necessarily targeted to bankruptcy, but which had the effect of altering bankruptcy priorities. This Court nevertheless ruled that such provincial laws were inapplicable in the event of bankruptcy. 36 I underline that the "effect" which Roman and Sweatman speak of is the effect on bankruptcy priorities (Roman and Sweatman, supra, at pp. 81-105). Consequently, clear conflict, that is an inconsistent or mutually exclusive result, which in this case entails a reordering of federal priorities, is necessary in order to declare a provincial law to be inapplicable in bankruptcy. 37 I also think it is important to emphasize the importance of Roman and Sweatman's proposition 3. While I agree with my colleague Iacobucci J. that complete standardization of the distribution of property in bankruptcies is not possible across Canada having regard to the diversity of provincial laws relating to property and civil rights, yet the value of a national bankruptcy system is confirmed by the placing of bankruptcy under exclusive federal jurisdiction. As Professor Hogg has explained (supra, at pp. 25-1 and 25-2): littp://www.lexisnexis.com/ca/legal/delivery/PrintDoc.do?fromCartFullDoc —false&fileSizc... 7/7/2014 Page 21 of 62

... debtors may move from one province to another, and may have property and creditors in more than one province. A national body of law is required to ensure that all of a debtor's property is available to satisfy his debts, that all creditors are fairly treated, and that all are bound by any arrangements for the settlement of the debtor's debts. Indeed, without these assurances, lenders would be reluctant to extend credit to persons who could evade their obligations simply by removing themselves or their assets across a provincial boundary.

Furthermore, as my overview of the quartet hopefully indicated, the goal of maintaining a nationally homogeneous system of bankruptcy priorities has properly been a constant concern of this Court. Were the situation otherwise, "Canada [would] have a balkanized bankruptcy regime which [would] diminish the significance of the exclusivity of federal jurisdiction over bankruptcy and insolvency.... Otherwise there could be a different scheme in every jurisdiction; ten different bankruptcy regimes would make ordinary commercial affairs extremely complex, unwieldy and costly, not only for Canadians but also for our international trading partners" (Roman and Sweatman, supra, at pp. 80 and 104). This is a prospect which this Court has been acutely mindful of in the past, and its vigilance has ensured the continuing vitality of our nation's bankruptcy legislation. In my view, its past vigilance commends itself to the present and, barring an amendment to s. 91(21) of the Constitution Act, 1867, also to the future.

38 In this regard, I agree with Iacobucci J., at para. 147, that a bankruptcy priority is a category, and also that provincial law may result in the content of such categories being different from province to province. However, provincial law does not and cannot define the content of bankruptcy priorities or categories without limitation. Indeed, crucial limitation is imposed by the order of priorities in the Bankruptcy Act itself. Thus, while individual provinces can define and rank categories such as "secured creditor" and "trust" as they each have their own purposes, those provincial laws which enter into conflict with the provisions of the Bankruptcy Act are simply without application in bankruptcy. Such, indeed, was this Court's unequivocal holding in Re Bourgault, Deloitte Haskins, and FBDB with respect to "secured creditors" and in Henfrey Samson with respect to "trusts".

39 Finally, I would observe that while in agreement with the above four propositions as embodying the reasoning of the quartet, in my view the list would be more complete with the addition of a fifth and sixth, as follows:

(5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; (6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so.

40 I would hope that these propositions need little if any explanation or defence. They are clearly important principles at work in McLachlin J.'s reasons for the majority of the Court in Henfrey Samson in concluding that while the province was clearly entitled to define "trust" as it chose for the

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purposes of provincial law, the substance of the interest created was what was really relevant for the purpose of applying the Bankruptcy Act. Furthermore, there was no suggestion in that case that the province intended to subvert the scheme of distribution of the Bankruptcy Act. Instead, it had simply enacted a valid law of general application pursuant to its exclusive jurisdiction in relation to property and civil rights in the province, and was attempting to give itself a general priority with respect to collected but unpaid sales tax revenues. The Court ruled that the legislation was only inapplicable upon the occurrence of bankruptcy, because it was then that, if it had been applicable, it would have had the effect of conflicting with the scheme of distribution of the Bankruptcy Act.

41 What is more, these fifth and sixth propositions bear a close family resemblance to the doctrine of colourability. In describing the colourability doctrine, Professor Hogg has observed (supra, at p. 15-17):

The courts are, of course, concerned with the substance of the legislation to be characterized and not merely its form. The "colourability" doctrine is invoked when a statute bears the formal trappings of a matter within jurisdiction, but in reality is addressed to a matter outside jurisdiction.

See also R. v. Morgentaler, [1993] 3 S.C.R. 463, at pp. 496-97, per Sopinka J. for the Court. The concern raised by colourable legislation has also been phrased thus: ''it is a very familiar principle that you cannot do that indirectly which you are prohibited from doing directly" (Madden v. Nelson and Fort Sheppard Railway Co., [1899] A.C. 626 (P.C.), at pp. 627-28; see also Laskin's Canadian Constitutional Law (5th ed. 1986), vol, 1, at p. 310).

42 There are, however, two fundamental differences between the doctrine of colourability and the above propositions 5 and 6. First, the doctrine of colourability is a concept which is only applicable in assessing the threshold question of the validity of the impugned legislation, which is to say, its pith and substance. The above propositions, by contrast, continue to apply after having determined the validity of the impugned provincial law when assessing its applicability in the exclusive federal sphere of bankruptcy (see Hogg, supra, at p. 15-25). In the case at bar, it has been accepted that the provincial law is valid within its sphere; the question is as to its applicability outside its sphere, when it intrudes into the exclusive federal sphere of bankruptcy and conflicts with federal bankruptcy legislation.

43 In light of this distinction, it will be evident that none of the quartet cases were concerned with colourable provincial legislation. There was no question as to the validity of the impugned legislation in any of the quartet. Those cases are devoid of any suggestion that the impugned laws were anything other than provincial laws of general application, and thus validly enacted laws under the provinces' exclusive jurisdiction in relation to property and civil rights. Instead, those cases were only concerned with the applicability of provincial laws in bankruptcy, not their validity.

44 This last observation is also an important additional reason why I respectfully believe that it is inaccurate to interpret the quartet as only prohibiting legislation which "directly improves the priority of a claim". Such a characterization suggests that the quartet was concerned with the validity of the impugned laws. However, if the provinces had been attempting to improve the priority of their claims in bankruptcy directly, presumably this Court would simply have declared their laws to be ultra vires and invalid for being in relation to an exclusive federal matter, and no question of applicability or operability would ever have arisen.

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45 The second crucial distinction between the doctrine of colourability and the above propositions 5 and 6 is that the doctrine of colourability often connotes a legislative intention to intrude into an exclusive federal sphere (see Elizabeth Edinger, "Comment" (1985), 63 Can. Bar Rev. 203, at pp. 206-11, and Albert S. Abel, "The Neglected Logic of 91 and 92" (1969), 19 U.T.L.J. 487, at p, 494). But even without such an intention, provincial legislation can quite evidently have the effect of trespassing onto an exclusive federal domain, and would thus be equally subject to an examination as to its applicability in the federal sphere. Were the situation otherwise, our constitutional law would countenance the absurd situation that valid provincial legislation of general application which entered into clear conflict with a valid federal law promulgated in an exclusive federal sphere would be exempt from constitutional challenge. In short, a legislative intention to intrude into an exclusive federal sphere is neither necessary nor sufficient to scrutinize the applicability of provincial law. It is the fact of intrusion, and not the intention to intrude, which is determinative for division of powers purposes.

46 As a result, the inquiry in the case at bar must be limited to assessing whether, if applied in bankruptcy, the effect of s. 133 of the Saskatchewan Workers' Compensation Act, 1979, would be to conflict with the scheme of distribution in the Bankruptcy Act. It is this question which I now address.

C. Application of the Quartet to Section 133 of the Saskatchewan Workers' Compensation Act, 1979

(i) The Nature of the Legal Interest Created by Section 133

47 As I indicated earlier, it is important to examine the operation of s. 133 as a whole in order to address the issue raised in this appeal. This provision creates a curious scheme of liability. Section 133(1) imposes a duty on a principal to ensure that its contractor pays into the Workers' Compensation fund, and declares the principal absolutely liable for those payments in the event of the contractor's default. Using the language of the Civil Law, one might say that the principal (or owner) is under an obligation of diligence or means to ensure that the contractor makes its payments, and in the event of the contractor's default the principal is under an obligation of guarantee to the Board for those payments (see Paul-Andre Crepeau, L'intensite de l'obligation juridique ou des obligations de diligence, de resultat et de garantie (1989), at pp. 8-14). Section 133(3) then entitles the principal to withhold and indemnify itself from any funds owing to the contractor if the principal is deemed liable for the contractor's debt to the Board. In other words, it entitles a principal to set off against monies owing to the contractor the principal's claim for having paid the contractor's assessments. Finally, s. 133(4) empowers the Board to deteimine all questions as to the right and amount of the principal's indemnity for discharging the contractor's obligation,

48 In essence, under this scheme the principal is the surety or guarantor of the contractor's obligation, with the right and extent of the principal's indemnification from the withheld funds being determined by the provincial Workers' Compensation Board. It is abundantly clear that it is the contractor's obligation which is primarily in issue, since s. 133(3) entitles the principal to be indemnified "by any person who should have made the payment" (emphasis added).

49 Furthermore, when ss. 133(1) and (3) operate in tandem as intended by this legislation, the principal's right to withhold and be indemnified from monies owing to the contractor in the event that the principal is deemed responsible for the contractor's liability means that the principal will ultimately not be responsible for that liability. Instead, the debt to the Board is effectively discharged with property of the contractor when the principal exercises its right of set-off. Differently put, when

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ss. 133(1) and (3) operate together, the principal is no worse off after having acted as the contractor's surety. The principal's estate or, to use Civil Law terminology, its patrimony remains entirely unaffected even after discharging its "personal" liability to the Board. As a result of the principal's right of set-off against monies owing to the contractor, it is the contractor's estate or patrimony which is diminished to the extent of the assessments owing to the Board. The reality of this scheme, then, is that the contractor discharges its own liability to the Board, mediated through the legally compelled agency of the principal.

50 I would add that this is not a scheme of joint and several liability, since the principal and the contractor are not joint co-debtors at the outset. Nor does the Board have an unfettered choice as to which party to sue for recovery for outstanding fund payments, as it would if the principal and contractor were jointly and severally liable for the assessments. (See, for the accepted definitions of joint and several liability: Gerald H. L. Fridman, The Law of Torts in Canada (1990), vol. 2, at pp. 350-51; Glanville L. Williams, Joint Torts and Contributory Negligence (1951), at pp. 49-50; County of Parkland No. 31 v. Stetar, [1975] 2 S.C.R. 884, at p. 899 (per Dickson J. as he then was).) Instead, upon default a personal liability of the principal is created for the amount owed by the contractor. As a result, the principal is compelled by statute to act as the surety for the contractor's obligation to the Board. I therefore believe that it is more accurate to characterize this provision as creating a form of involuntary, statutory suretyship. It is of course arguable that when the Board deems the principal liable for the contractor's default, they are jointly and severally liable for the assessment, even though the provision does not so specify expressly. But even this would only be an incident of the statutory suretyship in s, 133.

51 It is also clear that while formally the contractor is potentially liable for two debts, namely the debt to the Board for the unpaid assessment and the potential debt to the principal if the principal pays the contractor's assessment, the reality is that these are one and the same as against the contractor, The contractor cannot be liable for both cumulatively. There is thus an inseparable nexus between the Board's claim against the contractor and the principal's potential claim against the contractor. This point was well stated by Swinfen Eady L.J. in discussing the nature of suretyship in Re Melton; Milk v. Towers, [1918] 1 Ch. 37, at pp. 47-48, followed in Re Coughlin & Co. (1923), 4 C.B.R. 294, at p. 300 (Man. C.A.):

It may well be that technically there are two claims against the debtor in respect of the transaction and two separate liabilities of the debtor arising out of the transaction. One of these is the debtor's liability to the bank for the money that he owed. The other, which is a separate liability arising out of the contract of guarantee, is the debtor's liability to indemnify the sureties in respect of their liability to the principal creditor, Technically, they are two separate liabilities, but in substance they are the same; and in respect of that liability there could not be a double proof against the estate, [Emphasis added.]

52 As a result, in light of the wording of s. 133 creating a form of involuntary suretyship, I would respectfully qualify Iacobucci J.'s characterization of this provision as imposing joint and several liability on the principal and the contractor for the unpaid assessments (see paras. 129, 183, 184).

53 With these preliminary remarks on the structure of the scheme of liability in s. 133 in mind, it is clear that when s. 133(1) operates in combination with s. 133(3), the effect is to secure the claim of the Board against assets of the contractor. This is accomplished through the combined operation of the statutory deemed debt imposed on the principal in the event of the contractor's default and the right of http://www.lexisnexis ,com/ca/legal/delivery/PrintDoc.do?fromCartFullDoc=false&fileSize... 7/7/2014