FAST Industries Ltd v Sparta Engineering Inc, 2016 ABQB 215

Court of Queen ’ s Bench of Alberta Citation: FAST Industries Ltd v Sparta Engineering Inc, 2016 ABQB 215 Date: 20160414 Docket: 1503 08800 Registry: Edmonton Between: F.A.S.T. Industries Ltd. Plaintiff - and - Sparta Engineering Inc. and CWC Energy Services Corp. Defendants _______________________________________________________ Reasons for Judgment of R. P. Wacowich , Master in Chambers _______________________________________________________ Introduction: [ 1 ] The plaintiff F.A.S.T. Industries Ltd. (FAST) is a corporation which has worked in the oilfield services industry since 2010.

The defendant Sparta Engineering Inc. (Sparta) is a corporation which since 2009 has been in the business of design project management and design of mechanical systems including equipment used for oil and gas well maintenance. Sparta was hired by a third party, CWC

Energy Services Corp. to carry out maintenance and repair work on a CWC oil services rig (rig). CWC is no longer a party to this action. [ 2 ] Sparta and FAST had worked on similar projects in the past and in November 2014 Sparta hired FAST to conduct repairs on the rig in question. FAST was to do the hands on work and Sparta was to oversee the project and provide mechanical advice and other expertise as required. [ 3 ] The agreement between Sparta and FAST to do the work was verbal. They had previous similar agreements between them, all verbal.

FAST was to provide labour and parts to bring the rig into good working condition and subsequently bill Sparta for the parts and labour provided. [ 4 ] Previous to this agreement FAST received an invoice from Sparta dated April 11, 2014 for parts and services provided by Sparta to FAST on a previous project. As was their practice, this was pursuant to a verbal agreement. It was in the amount of $111,249.08 which debt is not in dispute. [ 5 ] FAST was one of a number of corporations involved in the oil services who were having cash flow difficulties in 2014.

This caused financial difficulties for FAST which resulted in the bill from Sparta not being paid. [ 6 ] Fast invoiced Sparta on April 6, 2015 for $348,586.68 for its work on this rig. Sparta set off the 2014 debt by FAST to it after April 6, 2015. FAST claims Sparta cannot use set off because FAST had filed a Notice of Intention to make a Proposal (NOI) on March 5, 2015. [ 7 ] FAST filed the NOI under

section 50.4(1) of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 (the BIA). This combined with

section 69 of the BIA resulted in a stay of proceedings against FAST by all its creditors which was imposed immediately on the issuance of the NOI. [ 8 ]

Section 50.4(1) of the BIA states: Before filing a copy of a proposal with a licensed trustee, an insolvent person may file a notice of intention, in the prescribed form, with the official receiver in the insolvent person’s locality, stating: (

a) the insolvent person’s intention to make a proposal .... [ 9 ] Section 69(1) of the BIA states: ... on a filing of a notice of intention under

section 50.4 by an insolvent person, (

a) no creditor has any remedy against the insolvent person or the insolvent person’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy . . . Issue [ 10 ] Was the April 2014 debt of FAST to Sparta caught by the stay of proceedings set out in

section 69 so as to preclude set-off against FAST’s invoice of April 6, 2015 for work on this rig? Analysis [ 11 ] Sparta’s position is that the majority of the FAST work was completed previous to the date of the NOI and is a debt owing. The evidence indicates that approximately 75% of the work on the rig had been completed by FAST on March 5, 2015. [ 12 ] The uncontroverted evidence of Bret Wetthuhn a director of FAST is set out in his Affidavit as follows: 21. On March 5, 2015, being the date that FAST filed a Notice of Intention to Make a Proposal, the Fast services had only been partially completed.

On that date the rig was disassembled and was in many different pieces on the floor at the Sedgewick Shop. 22. On March 5, 2015, in order for FAST to complete the FAST services, FAST still had to assemble all of the parts for the rig and paint the rig. While by March 5, 2015, the majority of the labour required to complete the FAST services had been completed, a significant amount of labour was still required by FAST employees to complete the FAST services which labour was performed after March 5, 2015 as evidenced by the Records attached as Exhibits “C”, “D”, “E”, “F” and “G” to my Affidavit.

In addition, on March 5, 2015, FAST was continuing to wait for a number of parts that had not yet arrived which were required to complete the FAST services. 23. On March 5, 2015, FAST was not in a position to invoice Sparta for the partially completed FAST services. The agreement between FAST and Sparta pursuant to the Contract was that FAST would invoice Sparta for the FAST services only once the FAST services were complete. There would be no prepaid deposits or progress payments made by Sparta to FAST until the FAST services were completed.

Not only was this the agreement for the Contract, this had been the agreement and understanding between FAST and Sparta on previous occasions where FAST had performed services for Sparta. [ 13 ] I accept this evidence of Mr. Wetthuhn. Mr. Wetthuhn was onsite and clearly stated the facts which were not altered on his Questioning on Affidavit. So the work was not complete before the NOI was issued. [ 14 ] Additionally, as indicated, the invoice by FAST to Sparta for this work for $348,586.68 plus GST was issued on April 6, 2015 after the March 5, 2015 filing of the NOI.

It was the practice of the parties to expect payment after invoices were sent. Also, Sparta did

not take possession of the rig until April 1, 2015. [15] So the work was not completed, an invoice had not been issued, and the rig was not moved off the FAST lot before the NOIissued.

Accordingly, the Applicant submits, the Sparta April 2014 invoice cannot be set off against the FAST April 2015 invoice.Simply put, it is the Applicant’s position that a creditor may only exercise right of setoff in a proposal if both of the debts concerning theset off existed as of the date of the filing of the NOI. [16] In support of that position the Applicant refers to Vachon v Canada (Employment and Immigration Commission), (SCC), 1985 CarswellNat 12, 1985 CarswellNat 668, [1985] 2 S.C.R. 417, [1985] S.C.J. No. 68, 23 D.L.R. (4th) 641, 34A.C.W.S. (2d) 379, 57 C.B.R. (N.S.) 113, 63 N.R. 81 J.E. 85-1089.

In that case the Supreme Court of Canada interpreted the equivalentstay of proceedings provision to include a stay of recovery through set-off of a pre-existing debt against the subsequent benefit accruingto the debtor. It held that the stay of proceedings effectively precludes a creditor’s right to set off debts owing to the creditor by thedebtor in the pre-bankruptcy period against the debt owed to the debtor by the creditor that arose in the bankruptcy.

Although the facts inthe Vachon decision are fundamentally different from those in the case at bar, the principle set out in Vachon is sound and applicable tothis action. [17] The Applicant submits: Subsequent case law has indicated that the reasoning and decision in Vachon is equally applicable to a creditor’s right to set-off inrespect of debt owing to the creditor by the debtor in the pre-Notice of Intention to Make a Proposal period against debt owing to thedebtor by the creditor that came into existence in the post-Notice of Intention to Make a Proposal period.

Sabey, Re (1996), 1996 CarswellBC 2816 at para 16, [1996] BCJ No 2820 (BCSC) [Sabey] Jones, Re (2003, (ON CA), 2003 CarswellOnt 3184 at para 14, 66 OR (3d) 674 (ONCA) [Jones] Consequently, in order to preserve both the fair and equal treatment of creditors under the proposal and the debtor’s ability to meet itsobligations under the proposal, it is a general principle that a creditor is prohibited from setting off a debt owed to it by the debtor thatexisted before the filing of the Notice of Intention to Make a Proposal against a debt owed by it to the debtor that came into existenceafter the filing a Notice of Intention to Make a Proposal.

Cobourg Felt Co, Re (1925), (ON SC), 1925 CarswellOnt 22, [1925] 2 DLR 997 (Ontario Supreme Court, InBankruptcy) [18] In Cobourg, Fisher, J. stated: [9] It is a duty of the Court to guard against any invasion of the equitable rights of creditors under a composition and to refuse tosanction or permit any transaction which has the effect of giving to any one particular creditor any benefit or advantage over and abovethat which he is entitled to in common with the other creditors. [19] There is no evidence of any arrangement to give Sparta an undue advantage over other unsecured creditors but there does notneed to be.

It is enough that the result of the position taken would be an undue advantage of one creditor against others. [20] The Applicant cites Aero Trades (Western) Ltd (Receiver of) v Canada (F.C.A) (1988), 1988 CarswellNat 487 at paras 18,22, 26, (1989 (1 CTCV 142 (FCA).

This case indicates that a determination of the time at which a debt comes into existence dependsprimarily upon the intention of the parties, as disclosed by the words of the contract, in particular the language regarding theperformance of services and the provisions regarding the rendering of invoices, and by the conduct of the parties with respect to theinvoicing procedures followed.

As indicated, it was the custom of the parties for the debt to be payable on an invoice being issued. [21] The Respondent submits it is only logical that an invoice would be rendered once the work was complete but that does notmean that the debt did not exist before hand. [22] Houlden and Morawetz Bankruptcy and Insolvency Analysis states: 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 thewhole 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 thebalance... A bankrupt’s estate includes only the net amount of a debt owing to the bankrupt after proper allowance for the recognized common-lawright of set off ...

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 fullwhat he or she owes to the bankrupt while having to rest content with a dividend on what the bankrupt owes him or her [citationsomitted, emphasis added] L.W. Houlden and Geoffrey B.

Morawetz, Houlden and Morawetz Bankruptcy and Insolvency Analysis, WestlawNext Canada(Consulted on March 21, 2016) [Houlden] F§237 – Set-Off (1) – Generally. [23] In order for legal set-off to apply, the debts must exist between the same parties and be capable of being ascertained withcertainty at the relevant date: Mutual debts are debts due from either party to the other for liquidated sums or money demands that can be ascertained with certainty atthe 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, thereis no right of legal set off ...

Houlden, supra at F§237 – Set-Off (2) – Legal Set-Off [ 24 ] The Respondent cites in its favour 728835 Ontario Ltd, Re (1998), 3 C.B.R. (4 th ) 211, 79 A.C.W.S. (3d) 673, 1998 CarswellOnt 2025 . It confirms the right to set-off in insolvency proceedings as codified by section 97(3) of the Bankruptcy and Insolvency Act and further confirms that, pursuant to section 66(1) of that legislation, such right of set-off applies to Proposals.

It states: Section 97(3) of the Bankruptcy and Insolvency Act specifically preserves the right of setoff in respect of all claims made against the estate of the bankrupt and section 66(1) makes this provision applicable to Proposals under the BIA. There is no question that as of May 1, 1998 (the date Cellular World filed its Notice of Intention to make a Proposal) there were mutual debts in existence.

It is immaterial that one of the debts may not actually have been payable until after the date of the Notice of Intention to file a proposal since both debts were in existence as of that date. ( 728835 Ontario Ltd, Re) [emphasis added] [ 25 ] There did not exist here and there does not have to be something akin to a fraudulent preference – an attempt by a creditor to use an artificial mechanism to gain preference over other creditors. The debt by FAST to Sparta existed at the time of the NOI. But the debt of Sparta to FAST did not exist at least until the work was completed on April 1, 2015.

More likely, the debt existed when FAST issued their invoice on April 6, 2015. [ 26 ] As indicated by Houlden and Morawetz and 728835 Ontario Ltd ., Re, both debts have to be in existence when the NOI is filed. When the NOI was filed, FAST had at best a potential claim for quantum merit for the work completed. If Sparta refused to pay it would have been in breach of contract. It could not set-off FAST’s April 2014 debt against this potential liability by FAST. [ 27 ] Sparta received what it bargained for. It received a repaired rig after the NOI was filed.

It must now stand in line with other unsecured creditors for FAST’s 2014 debt to it. [ 28 ] Accordingly, Sparta is caught by s. 69 and precluded from setting off the pre-NOI FAST indebtedness against the post NOI Sparta indebtedness. FAST is awarded

Summary Judgment for the sum of $111,249.08 being the amount of the FAST indebtedness that Sparta unjustifiably set-off and the outstanding balance of the Sparta indebtedness. [ 29 ] If the parties cannot agree on costs, they can speak to me within 30 days of the Order prepared reflecting this decision. Heard on the 4 th day of April, 2016. Dated at the City of Edmonton, Alberta this 14 th day of April, 2016. R. P. Wacowich M.C.C.Q.B.A. Appearances: Dean Hitesman Dentons Canada LLP for the Plaintiff Tyler Derksen Warren Benson Amantea LLP for the Defendants