Supreme Court Of Canada Expands Discretion Of The Courts To Allow Pre-post Compensation In 'Rare' Cases

• Published date: 16 December 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Insolvency/Bankruptcy
• Law Firm: Osler, Hoskin & Harcourt LLP
• Author: Ms Sandra Abitan, Julien Morissette, Fabrice Beno't, Ilia Kravtsov and Bradley Sendel (Articling Student)

Introduction

On December 10, 2021, the Supreme Court of Canada (SCC) released its written reasons in Montréal (City) v. Deloitte Restructuring Inc.

In a 6-1 decision, co-written by Chief Justice Wagner and Justice C'té, with Justices Moldaver, Karakatsanis, Rowe and Martin concurring, the SCC upheld both the Court of Appeal of Quebec (QCCA) and Quebec Superior Court's decisions which dismissed the attempt by the City of Montréal (the City) to compensate (set-off)¹ its post-filing debt owed to SM Group (SM) against SM's pre-filing debt owed to the City.

In rendering its decision, the SCC overruled the principle established by the QCCA in Agence du revenu v. Kitco Metals Inc.² (Kitco) which categorically prohibited pre-post compensation and preserved the ability for first instance judges sitting in matters under the Companies' Creditors Arrangement Act (the CCAA) to exercise their broad discretionary powers to allow it in appropriate but rare circumstances.

Background

In the context of the notorious Charbonneau Commission on collusion and corruption in the award and management of public contracts, SM, a consulting engineering firm that had serviced the City over several years, and the Minister of Justice, acting on behalf of the City, entered into a settlement agreement (without admission of guilt) under the Voluntary Reimbursement Program (the VRP), established under the Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts (Bill 26).

SM made payments under the settlement until it ran into financial difficulties, and in August 2018, SM filed for protection under the CCAA and Deloitte Restructuring Inc. (Deloitte) was appointed as monitor.

Following the issuance of the initial order, SM continued to perform its obligations under its various contracts with the City, including those related to major infrastructure projects such as the Samuel De Champlain Bridge and the Turcot Interchange. However, the City refused to pay SM for its post-filing services on the basis that the City was entitled to effect compensation between its post-filing payables and the amounts due to it under the pre-filing VRP settlement.

Deloitte applied for a Court order to compel the City to pay for the post-filing services, arguing that pre-post compensation was prohibited pursuant to the Kitco principle. The City argued that the Kitco principle was not applicable in the circumstances, given that the...