On December 10, 2021, the Supreme Court of Canada (SCC) released its decision in Montréal (City) v. Deloitte Restructuring Inc. (In the matter of the CCAA Proceedings of Le Groupe SM et al) (Groupe SM), providing clarity across Canada that a CCAA court has the broad discretion in furtherance of the CCAA’s remedial objectives to stay a right to compensation or set-off of pre-filing and post-filing claims under civil and common law, and "that in the vast majority of cases an initial order will, and should, stay ...pre-post compensation". In coming to its decision, the SCC tempered the Quebec Court of Appeal (QCA) decision in Quebec (Agence du revenue) v. Kitco Metals Inc. (Kitco) that pre-post compensation is never available in CCAA proceedings.

Facts

The Groupe SM decision involved CCAA proceedings in Quebec over a debtor engineering company, Groupe SM, that had been involved in alleged fraud in public works contracts. The creditor, City of Montréal (City), continued to receive services from Groupe SM post-filing, and then sought to exercise compensation or set-off against the amounts owed to Groupe SM for such post-filing services in respect of two pre-filing claims the City alleged against Groupe SM.

The first pre-filing claim related to a settlement entered into between Groupe SM and the City under the Voluntary Reimbursement Program (VRP) established by Quebec to recover funds from fraudulent public works activities. The second claim, also grounded in fraud, related to a broader water meter contract that was subject to ongoing litigation.

In response to the City’s assertion of pre-post compensation, which would have deprived Groupe SM of payment for post-filing services, the Monitor brought an application for declaratory judgment that compensation could not be effected with respect to the amounts owed by the City to Groupe SM.

The Lower Court Decisions

The supervising judge granted the Monitor’s application for declaratory judgment because, according to the principles in Kitco, pre-post compensation is prohibited even though she found that the VRP claim was linked to an unrefuted allegation of fraud. She further concluded that the water meter contract claim was neither liquid nor exigible for set-off to apply.

The QCA came to the same conclusion, applying Kitco to find that pre-post compensation could not be effected in this case. The QCA also found that subsection 19(2)(d) of the CCAA, which provides that claims of fraud cannot be compromised under the CCAA, does not apply as an exception to the rule against pre-post compensation in Kitco. Finally, the QCA agreed with the supervising judge that the lack of liquidity and exigibility of the water meter contract claim prevented the application of compensation.

The SCC Decision

The SCC decision in Groupe SM characterized the broad discretion afforded to supervising judges to grant orders to “ensure that restructuring is successful and that the CCAA’s objectives are achieved” as the “fundamental feature” of the CCAA and the true “engine” driving the statutory scheme. Specifically, it concluded that the broad discretion under sections 11 and 11.02, which set out the stay power under the CCAA, allows the supervising judge to stay rights held by creditors if the exercise of those rights could jeopardize the restructuring process, including a creditor’s right to effect pre-post compensation.

The SCC’s analysis of the broad discretion tempers the analysis in Kitco, rejecting the absolute prohibition against pre-post compensation and concluding instead that the CCAA court has the authority to stay but also the discretion to allow pre-post compensation in appropriate circumstances. However, a supervising judge’s discretion, although broad, is not boundless. It must be exercised in furtherance of the CCAA’s remedial objectives and, in the vast majority of CCAA cases, pre-post compensation should be stayed. Only in rare circumstances should a court exercise the discretion not to stay pre-post compensation. The court interpreted the Model Initial Orders across the provinces and the general stay of rights and remedies contained therein as effectively staying pre-post compensation/set-off, and appropriately so in order to maintain the status quo at the outset of CCAA proceedings as the debtor company seeks to restructure.

The SCC also specifically addresses the application of section 21 of the CCAA, which protects compensation rights, finding that it only applies to pre-pre compensation, and further finding that the application of section 21 to pre-post compensation would be contrary to the fundamental objectives of the CCAA:

Section 21 does not authorize pre-post compensation. It does not prohibit it either. A “supervising judge therefore retains the discretion to stay or to authorize the exercise of a right of pre-post compensation, or set-off, invoked by a creditor under the civil law or the common law.”
The SCC further determined that the exception to the compromise of claims of fraud under subsection 19(2)(d) of the CCAA does not apply to the compensation analysis.

In order to assist supervising judges in determining where it is appropriate to exercise their discretion in allowing pre-post compensation, the SCC set out three baseline considerations: (1) the appropriateness of the order being sought; (2) due diligence; and (3) good faith on the applicant’s part.

Applying these considerations to the circumstances in Groupe SM, the majority of the SCC concluded that it was not appropriate in the circumstances to permit pre-post compensation. In coming to this conclusion, the majority of the SCC expressly rejected Justice Brown’s suggestion in his dissent to remand the case to the supervising judge to determine the appropriateness of allowing pre-post compensation, stating that “it would be unhelpful and contrary to the interests of justice” to do so.

Conclusion

The SCC has tempered Kitco’s absolute prohibition of pre-post compensation and set-off and confirmed a CCAA court's discretion to stay pre-post compensation and set-off, noting however that the court should generally exercise its discretion to stay pre-post compensation, and only in rare cases, refuse such a stay.