Ville de Montréal Appellant v. Deloitte, 2021 SCC 53

SUPREME COURT OF CANADA Citation: Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53 Appeal Heard: May 20, 2021 Judgment Rendered: December 10, 2021 Docket: 39186 Between: Ville de Montréal Appellant and Deloitte Restructuring Inc. Respondent - and - Alaris Royalty Corp., Integrated Private Debt Fund V LP, Thornhill Investments Inc., Ville de Laval and Union des municipalités du Québec Interveners Official English Translation Coram: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe and Martin JJ. Joint Reasons for Judgment : (paras. 1 to 100) Wagner C.J. and Côté J. (Moldaver, Karakatsanis, Rowe and Martin JJ. concurring) Dissenting Reasons : (paras. 101 to 143) Brown J.

Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports . Ville de Montréal Appellant v. Deloitte Restructuring Inc. Respondent and Alaris Royalty Corp., Integrated Private Debt Fund V LP, Thornhill Investments Inc., Ville de Laval and Union des municipalités du Québec Interveners Indexed as: Montréal (City) v. Deloitte Restructuring Inc. 2021 SCC 53 File No.: 39186. 2021: May 20; 2021: December 10.

Present: Wagner C.J. and Moldaver, Karakatsanis, Côté, Brown, Rowe and Martin JJ. on appeal from the court of appeal for quebec Bankruptcy and insolvency — Stay of creditors’ rights and remedies — Claims that may be dealt with by compromise or arrangement — Compensation between debt arising before and debt arising after initial order — Quebec Voluntary Reimbursement Program — Whether claim arising from agreement entered into under Quebec Voluntary Reimbursement Program is necessarily claim that relates to debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation pursuant to s. 19(2) (

d) of Companies’ Creditors Arrangement Act — Whether supervising judge’s discretion in restructuring context allows judge to stay right invoked by creditor to effect compensation between debt arising before and debt arising after initial order — Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, ss. 11 , 11.02 , 19(2) (d), 21 — Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c. R-2.2.0.0.3 — Voluntary Reimbursement Program, CQLR, c. R-2.2.0.0.3, r. 1 .

In August 2018, the Superior Court made an initial order by which SM Group, a consulting engineering firm, became subject to proceedings under the Companies’ Creditors Arrangement Act (“ CCAA ”). The order stayed the rights and remedies of creditors, among other things, and appointed a monitor. Following that order, SM Group continued to perform work for Ville de Montréal (“City”). However, the City refused to pay for that work and invoked its right to effect compensation between what it owed SM Group and two claims it allegedly had against SM Group that arose before the initial order.

Those claims are related to the application of 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”) and, according to the City, result from fraud on SM Group’s part. The first claim arises from a settlement agreement entered into under the Voluntary Reimbursement Program (“VRP”) that resulted from Bill 26 (“VRP claim”).

The second claim is based on a proceeding brought by the City against SM Group, in which it claimed money from SM Group for allegedly having participated in collusion in relation to a call for tenders for a water meter contract. In response to the City’s refusal to pay for the work done by SM Group after the initial order, the monitor applied for a declaratory judgment stating that compensation could not be effected with respect to the amounts owed by the City to SM Group. The supervising judge granted the application.

The Court of Appeal reached the same conclusion as the supervising judge: that the compensation invoked by the City could not be effected. It found that a claim relating to fraud falling within s. 19(2) (

d) of the CCAA is not an exception to the rule stated in Quebec (Agence du revenu) v. Kitco Metals Inc. , 2017 QCCA 268 , whereby compensation between debts arising before and after an initial order (“pre-post compensation”) is prohibited. It was also of the view that the City had not proved that s. 19(2) (

d) applied to its claims. Finally, with regard to the water meter contract claim, the Court of Appeal agreed with the supervising judge that the conditions for judicial compensation were not met, since the certainty, liquidity and exigibility of that claim had to be determined later in a proceeding other than that of the restructuring case. Held (Brown J. dissenting): The appeal should be dismissed. Per Wagner C.J. and Moldaver, Karakatsanis, Côté , Rowe and Martin JJ. : First, a claim arising from an agreement entered into under the VRP is not necessarily a claim that relates to a debt resulting from fraud pursuant to s. 19(2) (

d) of the CCAA . In this case,

the City has not shown that the VRP claim relates to a debt resulting from fraud within the meaning of that provision. Second, with regard to pre-post compensation, a supervising judge has the discretion to stay the exercise of a right to pre-post compensation, or set-off, invoked by a creditor under the civil law or the common law. However, the supervising judge may refuse to stay this right, or may lift such a stay, only in exceptional circumstances, given the high disruptive potential of this form of compensation.

In the case at bar, the initial order stayed the City’s right to pre-post compensation, and it would not be appropriate to lift the stay in relation to the claims in issue. To answer the question with respect to compensation in the context of this appeal, the Court must first determine whether a claim arising from an agreement entered into under the VRP is necessarily a “claim that relates to” a “debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation” pursuant to s. 19(2) (

d) of the CCAA . The first step in characterizing the VRP claim is to distinguish, for the purposes of the CCAA , claims that are subject to a compromise or arrangement from those that are not. Section 19(2) provides, by way of exception, that certain claims may not be dealt with by a compromise or arrangement, including those that result from fraud. To prove that its claim relates to a debt resulting from obtaining property or services by false pretences or fraudulent misrepresentation pursuant to s. 19(2) (d), a creditor has the burden of establishing, on a balance of probabilities, the following four elements: (

i) the debtor made a representation to the creditor; (ii) the representation was false; (iii) the debtor knew that the representation was false; (iv) the false representation was made to obtain property or a service. In this case, the City did not try to prove or even allege any of these elements. The content of the VRP agreement, Bill 26 and the regulation made under it (“ VRP Regulation ”) must therefore be interpreted to determine whether the VRP claim may be dealt with by a compromise or arrangement. This

interpretation exercise confirms that s. 19(2) (

d) of the CCAA does not apply to the VRP claim. First, it is clearly stipulated in the VRP agreement entered into by the parties that the amount fixed in the agreement can in no way be considered to constitute an admission of liability. As a result, it cannot be presumed that the VRP claim is a claim that falls within s. 19(2) (

d) of the CCAA . Second, Bill 26 and the VRP Regulation do not create a statutory presumption or a presumption of fact that a debtor made fraudulent representations to a public body. The use of the words “may have been” in s. 3 of Bill 26 and in s. 1 of the VRP Regulation to describe the purpose of the VRP indicates that fraud is a possibility rather than a certainty.

Section 7 of the VRP Regulation supports this point, since it states that the fact that a natural person or an enterprise participates in the VRP does not constitute an admission of liability or of a fault committed by the natural person or enterprise. The fault in question in s. 7 is a matter of civil liability and is limited to the public contract to which a VRP agreement pertains. Where the legislature intends to refer to penal or criminal proceedings, or to civil proceedings outside the scope of a VRP agreement, it does so expressly. This

interpretation is confirmed when s. 7 of the VRP Regulation is read in conjunction with s. 8. The City is wrong to say that reading ss. 1, 3 and 10 of Bill 26 together leads to the conclusion that a natural person or enterprise that participated in the VRP necessarily defrauded a public body. Although s. 1 of Bill 26 does not refer to fraud as being hypothetical, s. 3 of Bill 26 and s. 1 of the VRP Regulation are clear: the substantive provisions of Bill 26 and the VRP Regulation contemplate fraud only hypothetically. Finally, the two schemes created by Bill 26 must not be confused.

Section 10 states that fraud was committed, but this

section is part of the scheme introduced by

Chapter III (ss. 10 to 17), which applies to judicial proceedings brought against a natural person or enterprise that allegedly participated in fraud in relation to a public contract, and not part of the VRP scheme introduced by

Chapter II (ss. 3 to 9). It is up to the courts to conclude that fraud has been committed, and the existence of fraud will be recognized by a court only under the

Chapter III scheme, which did not take effect until the VRP scheme introduced by

Chapter II ended. The reference to s. 10 in s. 3 merely serves to specify the natural persons to whom the VRP applies. Accordingly, the City has not shown that the VRP claim falls within s. 19(2) (

d) of the CCAA . Neither the content of the VRP agreement nor its legal framework supports a presumption that SM Group admitted to having committed a fraudulent act. Furthermore, a right to pre-post compensation, or set-off, invoked by a creditor under the civil law or the common law can be stayed by a court under ss. 11 and 11.02 of the CCAA . Under s. 11.02 of the CCAA , a court may stay any action, suit or other proceeding that might be brought against the debtor company.

While at first glance the language of this provision limits the power to order a stay to judicial proceedings, the courts have taken a large and liberal approach in interpreting the scope of the rights and remedies that can be included in a stay order. A court has the power to stay rights held by creditors if the exercise of those rights could jeopardize the restructuring process. This includes a creditor’s right to effect pre-post compensation. Such an

interpretation advances the CCAA ’s remedial objectives and is consistent with its scheme. In the vast majority of cases, an initial order will, and should, stay a creditor’s right to set up pre-post compensation against the debtor. However, a court may in its discretion refuse to impose such a prohibition or, if pre-post compensation was stayed by the order, lift the stay at a later date to allow an interested creditor to assert its rights. The absolute prohibition against pre-post compensation imposed by the Quebec Court of Appeal in Kitco must therefore be tempered.

However, a court must be cautious before allowing such a form of compensation, given its high disruptive potential. Moreover, s. 21 of the CCAA does not grant creditors a right to pre-post compensation that would be shielded from a supervising judge’s power to order a stay under ss. 11 and 11.02 of the CCAA . Read in light of its context, its purpose and the scheme of the CCAA , s. 21 is limited to authorizing compensation between debts that arise before an initial order is made (“pre-pre compensation”) for the purpose of quantifying creditors’ claims on the date of commencement of proceedings.

This provision does not have the effect of authorizing pre-post compensation. That being said, s. 21 of the CCAA does not prohibit this form of compensation either. It follows that a supervising judge retains the discretion to stay or to authorize the exercise of a right to pre-post compensation, or set-off, invoked by a creditor under the civil law or the common law. In exercising its discretion under the CCAA , a court must keep three baseline considerations in mind: (1) the appropriateness of the order being sought, (2) due diligence and (3) good faith on the applicant’s part.

The first consideration relates both to the order

itself and to the means that are employed. It is assessed in light of the CCAA’s remedial objectives, which include protecting the publicinterest. In very specific circumstances, a court could conclude that protection of the public interest and the CCAA’s other remedialobjectives justify authorizing pre-post compensation in favour of a creditor that has proved that it was a victim of fraud within themeaning of s. 19(2)(

d) of the CCAA. However, the court should take care not to reduce the public interest to the interests of a particularcreditor or group of creditors. The second consideration is also important because it discourages parties from sitting on their rights andensures that creditors do not strategically manoeuver or position themselves to gain an advantage. In the case at bar, the words of the stay order made by the Superior Court are broad enough to stay pre-post compensation,and it would not be appropriate to lift the stay in relation to the VRP claim.

Because the City has not proved the alleged fraud and has notrelied, in support of its position, on any of the CCAA’s remedial objectives other than protecting the public interest, it has not dischargedits burden of proving that the order being sought is appropriate. In addition, the City did not act with the diligence expected in CCAAproceedings. With regard to the water meter contract claim, the Superior Court agreed to lift the stay of proceedings to allow the City toestablish the existence and amount of its claim in that case.

That order did not authorize the City to withhold the amounts owed toSM Group for the work subsequent to the initial order with a view to effecting compensation if the City was successful in the caserelating to the water meter contract. In the circumstances, an order allowing the City to withhold the amounts owed to SM Grouppending the outcome of that case would not be appropriate for the same reasons as those relating to the VRP claim.

Per Brown J. (dissenting): The appeal should be allowed solely for the purpose of remanding the case to the Superior Courtso it can decide whether the City may effect pre-post compensation for the VRP claim and whether compensation is available in respectof the water meter claim. There is agreement with the majority that a supervising judge has a discretion under s. 11 of the CCAA as towhether to allow a creditor to effect pre-post compensation, or set-off. However, this discretion is not limited solely to the exceptionalcircumstances the majority describes.

The scope of s. 21 of the CCAA is not limited to pre-pre compensation; pre-post compensation ispermitted, but must be subject to the exercise of a supervising judge’s discretion. Moreover, nothing in s. 21 of the CCAA prohibitsjudicial compensation. The approach taken by the Quebec Court of Appeal in Kitco, according to which pre-post compensation will never beauthorized under the CCAA, involves several errors and must be rejected. To begin with, the Court of Appeal erred in relying on ajudgment rendered by the Court in the context of a bankruptcy under the Bankruptcy and Insolvency Act (“BIA”).

Although the schemeestablished by the CCAA and the one established by the BIA must be viewed as an integrated body of insolvency law, there remain manydifferences between them, including two that are fundamental. First, when an insolvent company has recourse to the CCAA, it continuesits business activities and is not divested of its property in favour of a third party, unlike with the measures put in place under the BIA thatvest the bankrupt’s property in a trustee. There is thus no loss of mutuality under the CCAA.

This mutuality, which survives the initialorder, is what makes compensation possible under the CCAA, unlike under the BIA. Secondly, the scheme established by the CCAA isflexible and allows creative solutions to be put forward to achieve the objective of restructuring a financially distressed company, incontrast to the BIA, which provides a set of pre-established rules. The CCAA’s provisions must be interpreted expansively to enable itsremedial objectives to be achieved. Because of these objectives, a broad discretion is also conferred on supervising judges by s. 11 of theCCAA.

This discretion has no equivalent in the BIA. Next, the state of the law elsewhere in Canada is clear: pre-post set-off is possible under the CCAA, subject to a supervisingjudge’s discretion to stay such set-off having regard to its effects on the status quo period, the underlying objectives of this period, theadvancement of efforts to reach an arrangement, and the remedial objectives of the CCAA. The approach proposed in Kitco has createdan asymmetry between the

interpretation given to s. 21 of the CCAA by the Quebec courts and the

interpretation given to it by the courtsof other Canadian provinces, which is contrary to the principle of homogenous

interpretation of federal statutes. Lastly, staying the remedies of an insolvent company’s creditors under the CCAA to allow the company to develop a plan ofarrangement is of critical importance. However, where a plan of arrangement cannot be contemplated and the insolvent company will beliquidated or sold in any event, to conclude that pre-post compensation is never allowed could be unfair to the company’s creditors withclaims that are certain, liquid and exigible.

In such cases, the creditors’ remedies will be stayed indefinitely and they will never be ableto effect pre-post compensation, since the insolvent company will become an “empty shell” after the sale. Moreover, allowing pre-postcompensation will not have the effect of derailing the company’s restructuring process, as there is no such process in this situation. In the instant case, there is no need to decide whether the VRP claim must be characterized as a claim based on “falsepretences or fraudulent misrepresentation” within the meaning of s. 19(2)(

d) of the CCAA.

Section 21 of the CCAA must be interpretedas allowing pre-post compensation regardless of whether a claim results from fraud for the purposes of s. 19(2)(d). It is true that proofthat the debt underlying a claim is fraudulent is a relevant factor in the exercise of a supervising judge’s discretion to permit pre-postcompensation; however, whether the City’s VRP claim results from fraud is a question to be decided by the supervising judge, not by theCourt.

Given that the supervising judge did not exercise her discretion under s. 11 of the CCAA, believing herself to be bound bythe conclusions of the Quebec Court of Appeal in Kitco, it is not for the Court to exercise that discretion in order to determine whether topermit pre-post compensation. Supervising judges are in the best position to decide whether to exercise their discretion in a particularcase. In cases involving an exercise of discretion by a court of first instance, it is not in the interests of justice for the Court to step intothat court’s shoes and decide these matters.

Cases Cited By Wagner C.J. and Côté J. Overruled: Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268; considered: North American TungstenCorp., Re, 2015 BCCA 390, 377 B.C.A.C. 6, aff’d 2015 BCCA 426, 378 B.C.A.C. 116; North American Tungsten Corp., Re, 2015BCSC 1382, 28 C.B.R. (6th) 147; Air Canada, Re (2003), (ON SC), 45 C.B.R. (4th) 13; referred to: R. v. Fedele,

2018 QCCA 1901; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; 9354-9186 Québec inc. v.Callidus Capital Corp., 2020 SCC 10; Léger v. Ouellet, 2011 QCCA 1858; Dupuis v. Cernato Holdings Inc., 2019 QCCA 376; Berger,Re, 2010 ONSC 4376, 70 C.B.R. (5th) 225; Lambert v. Macara, (QC CA), [2004] R.J.Q. 2637; Canada Mortgageand Housing Corp. v. Gray, 2014 ONCA 236, 119 O.R. (3d) 710; Terrain DEV Immobilier inc. v. Charron, 2021 QCCA 417; Pelletier v.CAE Rive-Nord, 2019 QCCA 2164; Tavan v. Rostami, 2014 QCCA 304; Guilbert v.

Economical Mutual Insurance Co., 2020 MBQB179, [2021] I.L.R. ¶I-6280; Sharma v. Sandhu, 2019 MBQB 160; Royal Bank of Canada v. Hejna, 2013 ONSC 1719; Re Horwitz(1984), 52 C.B.R. (N.S.) 102, aff’d (1985), 53 C.B.R. (N.S.) 275; Agriculture Financial Services Corp. v. Zaborski, 2009 ABQB 183, 58C.B.R. (5th) 301; Szeto, Re, 2014 BCSC 1563, 15 C.B.R. (6th) 255; The Toronto-Dominion Bank v. Merenick, 2007 BCSC 1261;Johnson v. Erdman, 2007 SKQB 223, 34 C.B.R. (5th) 108; Coyle (Bankrupt), Re, 2011 NSSC 238, 304 N.S.R. (2d) 369; MeridianDevelopments Inc. v. Toronto Dominion Bank (1984), (AB KB), 32 Alta.

L.R. (2d) 150; Stelco Inc. (Re) (2005), (ON CA), 253 D.L.R. (4th) 109; Quinsam Coal Corp., Re, 2000 BCCA 386, 20 C.B.R. (4th) 145; Muscletech Research &Development Inc., Re (2006), (ON SC), 19 C.B.R. (5th) 54; Parc industriel Laprade inc. v. Conporec inc., 2008QCCA 2222, [2008] R.J.Q. 2590; Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 92 O.R. (3d) 513;Quintette Coal Ltd. v. Nippon Steel Corp. (1990), (BC CA), 51 B.C.L.R. (2d) 105; Smoky River Coal Ltd., Re, 1999ABCA 179, 71 Alta. L.R. (3d) 1; Associated Investors of Canada Ltd. (Manager of) v.

Principal Savings & Trust Co. (Liquidator of)(1993), 1993 ABCA 259 , 13 Alta. L.R. (3d) 115; Rizzo & Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 S.C.R. 27;Husky Oil Operations Ltd. v. Minister of National Revenue, (SCC), [1995] 3 S.C.R. 453; Stein v. Blake, [1996] 1 A.C.243; Woodward’s Ltd., Re (1993), 79 B.C.L.R. (2d) 257; Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24; HawkairAviation Services Ltd., Re, 2006 BCSC 669, 22 C.B.R. (5th) 11; Ernst & Young Inc. v.

Essar Global Fund Ltd., 2017 ONCA 1014, 139O.R. (3d) 1; Canadian Red Cross Society/Société canadienne de la Croix-Rouge, Re (1998), (ON SC), 5 C.B.R.(4th) 299. By Brown J. (dissenting) Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268; D.I.M.S. Construction inc. (Trustee of) v. Quebec(Attorney General), 2005 SCC 52, [2005] 2 S.C.R. 564; Husky Oil Operations Ltd. v. Minister of National Revenue, (SCC), [1995] 3 S.C.R. 453; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; 9354-9186 Québecinc. v.

Callidus Capital Corp., 2020 SCC 10; Stelco Inc. (Re) (2005), (ON CA), 253 D.L.R. (4th) 109; Quintette CoalLtd. v. Nippon Steel Corp. (1990), (BC CA), 51 B.C.L.R. (2d) 105; Cam-Net Communications v.

Vancouver TelephoneCo., 1999 BCCA 751, 71 B.C.L.R. (3d) 226; North American Tungsten Corp., Re, 2015 BCCA 390, 377 B.C.A.C. 6, aff’d 2015 BCCA426, 378 B.C.A.C. 116; Re Just Energy Corp., 2021 ONSC 1793; Crystallex International Corp., Re, 2012 ONSC 6812, 100 C.B.R.(5th) 132; Air Canada, Re (2003), (ON SC), 45 C.B.R. (4th) 13; North American Tungsten Corp., Re, 2015 BCSC1382, 28 C.B.R. (6th) 147; Canadian Broadcasting Corp. v. Manitoba, 2021 SCC 33. Statutes and Regulations Cited Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Income Tax Act, S.C. 1997, c. 12.

Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with publiccontracts, CQLR, c. R-2.2.0.0.3, ss. 1,

Chapter II, 3 to 9,

Chapter III, 10 to 17. Act to give effect to the Charbonneau Commission recommendations on political financing, S.Q. 2016, c. 18. Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 71, 97(3), 121(1), 178(1)(e). Civil Code of Québec, art. 2849. Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, ss. 6(1),

Part II, 11, 11.01, 11.02, 11.08, 11.1,

Part III, 19, 20, 21, 32. Integrity in Public Contracts Act, S.Q. 2012, c. 25. Voluntary Reimbursement Program, CQLR, c. R-2.2.0.0.3, r. 1, ss. 1, 4, 7, 8. Winding-up and Restructuring Act, R.S.C. 1985, c. W-11, s. 73(1). Authors Cited Alberta. Court of Queen’s Bench. Alberta Template CCAA Initial Order, January 2019 (online:https://www.albertacourts.ca/docs/default-source/qb/cal01---2470918-v2-ccaa-order-(alberta)---jakr-markup65b9d3391b316d6b9fc9ff00001037d2.pdf?sfvrsn=e986ad80_4; archived version: https://www.scc-csc.ca/cso-dce/2021SCC-CSC53_1_eng.pdf). Anderson, A.

Robert, Thomas Gelbman and Benjamin Pullen. “Recent Developments in the Law of Set-off”, in Janis P. Sarra, ed.,Annual Review of Insolvency Law 2009. Toronto: Carswell, 2010, 1. Boucher, Bernard. “Procédures en vertu de la

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APPEAL from a judgment of the Quebec Court of Appeal (Rochette, Healy and Ruel JJ.A.), 2020 QCCA 438 , [2020] J.Q. n o 1852 (QL), 2020 CarswellQue 1987 (WL Can.), affirming a decision of Corriveau J., 2019 QCCS 2316 , [2019] J.Q. n o 4840 (QL), 2019 CarswellQue 5032 (WL Can.). Appeal dismissed, Brown J. dissenting. Raphaël Lescop and Eleni Yiannakis , for the appellant. Guy P. Martel and Danny Duy Vu , for the respondent. Alain Tardif , for the interveners the Alaris Royalty Corp. and the Integrated Private Debt Fund V LP. Luc Béliveau , for the intervener Thornhill Investments Inc.

Elizabeth Ferland , for the intervener Ville de Laval. Marc Duchesne , for the intervener Union des municipalités du Québec. English version of the judgment of Wagner C.J. and Moldaver, Karakatsanis, Côté, Rowe and Martin JJ. delivered by The Chief Justice and Côté J. — TABLE OF CONTENTS Paragraph I. Introduction 1 II. Facts 6 III. Judicial History 14 A. Quebec Superior Court, 2019 QCCS 2316 (Corriveau J.) 14 B. Quebec Court of Appeal, 2020 QCCA 438 (Rochette and Healy JJ.A., Ruel J.A. Dissenting in Part) 15 IV. Issues 17

V. Analysis 19A. Voluntary Reimbursement Program Claim 21(1) Characterization of the Voluntary Reimbursement Program Claim 21(2) Compensation Between Debts Arising Before and After an Initial Order (Pre-post Compensation) 44 (

a) Power to Grant and Lift a Stay of the Right to Pre-post Compensation 54(

b) Scope of

Section 21 of the CCAA 63(

c) Application 83B. Water Meter Contract Claim 96VI. Conclusion 100 I. Introduction [1] This appeal raises an issue relating to compensation, or set-off in a common law setting, between two debts in thecontext of proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). The question is whethercompensation is permitted for debts between the same parties: on the one hand, a debt resulting from the Act to ensure mainly therecovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c.

R-2.2.0.0.3(“Bill 26”), that predates an initial order made under the CCAA and, on the other hand, a debt between the same parties that postdatesthat order. In these reasons, we will use the expression “pre-post compensation” to refer generally to compensation between debts arisingbefore and after an initial order. [2] This question thus affords the Court an occasion to interpret, for the first time, certain provisions of Bill 26 as wellas the regulation made under it, the Voluntary Reimbursement Program, CQLR, c. R-2.2.0.0.3, r. 1 (“VRP Regulation”).

In doing so, wewill clarify for public bodies the burden of proof that rests on them in seeking to establish that a claim arising from an agreement enteredinto under the Voluntary Reimbursement Program (“VRP”) is fraudulent. [3] Bill 26 was passed by the Quebec National Assembly in March 2015 in response to a commission of inquiry thathad brought to light the existence of schemes involving collusion and corruption in the awarding and management of public contracts inthe construction industry (“Charbonneau Commission”), and the VRP Regulation was made a few months later.

The program resultingfrom this legislation, which was in effect for two years, allowed enterprises to “reimburse certain amounts improperly paid in the courseof the tendering, awarding or management of a public contract in relation to which there may have been fraud or fraudulent tactics” (s. 3of Bill 26). [4] To answer the question with respect to compensation in the context of this appeal, the Court must first determinewhether a claim arising from an agreement entered into under the VRP is necessarily a “claim that relates to” a “debt or liabilityresulting from obtaining property or services by false pretences or fraudulent misrepresentation” pursuant to s. 19(2)(

d) of the CCAA. Wewould answer this question in the negative. It cannot be presumed that a claim arising from the VRP falls within that provision where noevidence to this effect has been tendered. We also conclude that a court should generally exercise its discretion to stay pre-postcompensation, although it may, in rare cases, refuse such a stay. As well, the court may later lift the stay of the right to pre-postcompensation in appropriate cases.

In the case at bar, however, we conclude that the initial order stayed the right of the appellant, Villede Montréal (“City”), to pre-post compensation and that it would not be appropriate to lift the stay in relation to the claims in issue. [5] The appeal should therefore be dismissed. II. Facts [6] SM Group, which at the relevant time was a consulting engineering firm, performed a variety of contracts for theCity over a period of several years. The Charbonneau Commission’s work uncovered a link between SM Group and certain centralplayers in the collusion schemes.

Two of its former officers were in fact charged with criminal offences. SM Group subsequently becameinsolvent. [7] On August 24, 2018, the Quebec Superior Court made an initial order by which SM Group became subject toproceedings under the CCAA and the rights and remedies of creditors were stayed. The respondent, Deloitte Restructuring Inc.(“Deloitte”), was appointed as monitor. Following that order, SM Group continued to perform work for the City, including theconstruction of the Samuel De Champlain Bridge and the rebuilding of the Turcot Interchange. [8] The City refused to pay for that work.

On November 7, 2018, it invoked its right to effect compensation between itsdebt to SM Group for the work done after the initial order and two claims against SM Group that, according to the City, arose before theorder and resulted from fraud on SM Group’s part. [9] On November 12, 2018, the Superior Court approved the sale of some of SM Group’s assets to ThornhillInvestments Inc. (“Thornhill”). One week later, SM Group’s contracts were assigned to Thornhill. [10] The two claims raised by the City are related to the application of Bill 26.

The purpose of that statute, read inconjunction with the Integrity in Public Contracts Act, S.Q. 2012, c. 25, enacted in 2012, and the Act to give effect to the CharbonneauCommission recommendations on political financing, S.Q. 2016, c. 18, enacted in 2016, is to strengthen public confidence in governmentinstitutions by addressing the revelations made by the Charbonneau Commission. Bill 26 has been described as [translation] “a statutorybenchmark for establishing a lack of ethics and lax (if not criminal) morals in a number of enterprises in relation to the awarding ofpublic contracts in Quebec” (R. v.

Fedele, 2018 QCCA 1901, at para. 44 ). [11] The first claim the City alleges it has against SM Group arises from a settlement agreement entered into in

November 2017 by SM Group and the Minister of Justice, acting on the City’s behalf, under the VRP (“VRP claim”).

The second is based on a proceeding brought by the City against SM Group in September 2018, in which it claimed more than $14 million from SM Group for allegedly having participated in collusion in relation to a call for tenders for a water meter contract (“water meter contract claim”). [ 12 ] Because SM Group had failed to repay the VRP claim and because the sale of certain assets to Thornhill was imminent, the City advised SM Group that it intended to effect compensation between what it owed SM Group and the above-mentioned claims, noting that those claims could not be discharged or dealt with by a compromise or arrangement in the planned restructuring process given that they resulted from fraud and from a misappropriation of public funds. [ 13 ] In response, Deloitte applied for a declaratory judgment stating that compensation could not be effected with respect to the amounts owed by the City to SM Group for work performed for the City.

III. Judicial History A. Quebec Superior Court, 2019 QCCS 2316 (Corriveau J.) [ 14 ] The supervising judge granted Deloitte’s application for a declaratory judgment and held that pre-post compensation could not be effected in favour of the City. Even though, in her view, the VRP claim was linked to an allegation of fraud that had not been refuted by SM Group, she concluded that, according to the principles laid down in Quebec (Agence du revenu) v. Kitco Metals Inc. , 2017 QCCA 268 , pre-post compensation was not possible.

She also concluded that the water meter contract claim was neither liquid nor exigible, which precluded compensation. B. Quebec Court of Appeal, 2020 QCCA 438 (Rochette and Healy JJ.A., Ruel J.A. Dissenting in Part) [ 15 ] Rochette J.A., writing for the majority, rejected the City’s argument regarding the VRP claim. Relying on Kitco , he reached the same conclusion as the supervising judge: that pre-post compensation could not be effected in this case. He also rejected the City’s argument that a claim relating to fraud falling within s. 19(2) (

d) of the CCAA is an exception to the rule stated in that case. In any event, he expressed the view that the City had not proved that s. 19(2) (

d) applied to its claims. Finally, with regard to the water meter contract claim, Rochette J.A. added that the conditions for judicial compensation were not met, since the certainty, liquidity and exigibility of that claim had to be determined later in a proceeding other than that of the restructuring case. [ 16 ] Ruel J.A., dissenting in part, agreed with his colleagues on the nature of the water meter contract claim. However, he was of the view that the VRP claim had to be presumed to fall within s. 19(2)(

d) of the CCAA and that Kitco had to be distinguished on the basis that it had been rendered in a different context. In the final analysis, Ruel J.A. found that s. 19(2) (

d) of the CCAA represents an exception to the principle established in that case and that it therefore allowed pre-post compensation between the two parties’ respective debts. IV. Issues [ 17 ] This appeal raises the following three questions: 1. Is the VRP claim a claim that relates to a debt resulting from fraud pursuant to s. 19(2) (

d) of the CCAA ? 2. Does the CCAA permit compensation between a debt that arises before an initial order and one that arises after that order? 3. If compensation is permitted, should the City be authorized to withhold the payments owed to SM Group until judgment is rendered in the case relating to the water meter contract? [ 18 ] We will deal with these questions by considering each of the City’s claims separately. V. Analysis [ 19 ] In essence, the City argues that the VRP claim cannot be dealt with by a compromise or arrangement because it relates to a debt resulting from fraud pursuant to s. 19(2) (

d) of the CCAA . According to the City, such a claim falls outside the absolute prohibition against pre-post compensation imposed by Kitco . The City also argues that the absolute nature of the Kitco rule is inconsistent with the broad discretion conferred on supervising judges by the CCAA . It submits that supervising judges can, in exercising their discretion, authorize pre-post compensation in appropriate circumstances. The exercise of this discretion is particularly appropriate where fraud is involved. [ 20 ] For the reasons that follow, we are of the view that the VRP claim in this case is not a claim that relates to a debt resulting from fraud pursuant to s. 19(2) (

d) of the CCAA . We also conclude that a right to pre-post compensation, or set-off, invoked under the civil law or the common law can be stayed under ss. 11 and 11.02 of the CCAA . In our opinion, however, a supervising judge has the discretion to authorize pre-post compensation only in exceptional circumstances, given the high disruptive potential of this form of compensation. In this regard, the fact that the debt underlying a VRP claim is fraudulent, where this is shown, is a relevant factor in the exercise of the supervising judge’s discretion.

In this case, we find that it would not be appropriate to allow the City to effect compensation with respect to the VRP claim. Nor would it be appropriate to authorize the City to withhold the payments owed to SM Group pending the outcome of the case relating to the water meter contract. A. Voluntary Reimbursement Program Claim

(1) Characterization of the Voluntary Reimbursement Program Claim [ 21 ] We must begin by determining whether the VRP claim is a claim that relates to a fraudulent debt, because this is the

premise behind the City’s reasoning. For the reasons that follow, we conclude that this basic premise is not correct: the VRP claim is nota claim that relates to a debt resulting from fraud pursuant to s. 19(2)(

d) of the CCAA. The mere fact that a debtor company participatedin the VRP is not sufficient to infer that the company defrauded a public body. In light of this conclusion, it is not necessary for us to dealwith Deloitte’s alternative argument that s. 19 of the CCAA is inapplicable in this case because there is no plan providing for acompromise or arrangement. [22] The first step in characterizing the VRP claim is to distinguish, for the purposes of the CCAA, claims that are subjectto a compromise or arrangement from those that are not. Section 19(1) of the CCAA sets out the general scheme governing claims thatmay be dealt with by a compromise or arrangement: 19

(1) Subject to subsection (2), the only claims that may be dealt with by a compromise or arrangement in respect of a debtor companyare (

a) claims that relate to debts or liabilities, present or future, to which the company is subject on the earlier of (

i) the day on which proceedings commenced under this Act, and (ii) if the company filed a notice of intention under

section 50.4 of the Bankruptcy and Insolvency Act or commenced proceedings underthis Act with the consent of inspectors referred to in

section 116 of the Bankruptcy and Insolvency Act, the date of the initial bankruptcyevent within the meaning of

section 2 of that Act; and (

b) claims that relate to debts or liabilities, present or future, to which the company may become subject before the compromise orarrangement is sanctioned by reason of any obligation incurred by the company before the earlier of the days referred to insubparagraphs (a)(

i) and (ii). [23] As an exception to this scheme, s. 19(2) of the CCAA provides that certain claims may not be dealt with by acompromise or arrangement, including those that result from fraud:

(2) A compromise or arrangement in respect of a debtor company may not deal with any claim that relates to any of the following debtsor liabilities unless the compromise or arrangement explicitly provides for the claim’s compromise and the creditor in relation to thatdebt has voted for the acceptance of the compromise or arrangement: . . . (

d) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debtor liability of the company that arises from an equity claim; . . . [24] The burden of proof applicable to this scheme can be determined by referring to the case law and academiccommentary on s. 178(1)(

e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), which is analogous in every respect tos. 19(2)(

d) of the CCAA. As this Court noted in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379,these two statutes “for[m] part of an integrated body of insolvency law” (para. 78; see also 9354-9186 Québec inc. v.

Callidus CapitalCorp., 2020 SCC 10, at para. 74). [25] To discharge its burden of proving that its claim relates to a debt “resulting from obtaining property or services byfalse pretences or fraudulent misrepresentation”, a creditor must establish, on a balance of probabilities, the following four elements: (i)the debtor made a representation to the creditor; (ii) the representation was false; (iii) the debtor knew that the representation was false;(iv) the false representation was made to obtain property or a service (Léger v. Ouellet, 2011 QCCA 1858, at para. 30 ; Dupuisv.

Cernato Holdings Inc., 2019 QCCA 376, at para. 37 ; see also L. W. Houlden, G. B. Morawetz and J. Sarra, Bankruptcy andInsolvency Law of Canada (4th ed. rev. (loose-leaf)), vol. 3, at H§63; Berger, Re, 2010 ONSC 4376, 70 C.B.R. (5th) 225, at para. 28;J. P. Sarra, G. B. Morawetz and L. W. Houlden, The 2020-2021 Annotated Bankruptcy And Insolvency Act (2020), at pp. 1001 and 1006;D. Brochu, Précis de la faillite et de l’insolvabilité (5th ed. 2016), at pp. 502-3). Once these elements have been proved, the creditor of aclaim to which s. 19(2)(

d) of the CCAA applies is in a better position than other ordinary creditors, insofar as such a claim, while notconferring secured creditor status, cannot be dealt with by a compromise or arrangement (see Houlden, Morawetz and Sarra, at H§63).This exception to the general scheme established by s. 19(1) of the CCAA must be interpreted narrowly (see, e.g., by analogy, Lambert v.Macara, (QC CA), [2004] R.J.Q. 2637 (C.A.), at para. 96; Canada Mortgage and Housing Corp. v.

Gray, 2014ONCA 236, 119 O.R. (3d) 710, at para. 24). [26] The City’s burden was certainly not negligible: it had to prove that SM Group had knowingly made a falserepresentation that led to the VRP claim.

However, the City considered it sufficient for that purpose to mention that the claim existed,and did not try to prove or even allege any of these elements, presuming or assuming that the VRP claim resulted from fraudulentrepresentations. [27] As a result, the content of the VRP agreement, Bill 26 and the VRP Regulation must be interpreted to determinewhether the VRP claim may be dealt with by a compromise or arrangement. In this regard, and for the reasons that follow, we agree withthe majority of the Court of Appeal that s. 19(2)(

d) of the CCAA does not apply to the VRP claim. [28] First, the content of the VRP agreement itself is a complete bar to the City’s argument that participation in theprogram in itself justifies a finding that the City’s claim results from SM Group’s fraudulent activities. Because this confidentialagreement entered into by the parties clearly stipulates that the amount fixed in the agreement can in no way be considered to constitutean admission of liability, it cannot be presumed that the VRP claim is a claim that falls within s. 19(2)(

d) of the CCAA. The onus wastherefore on the City to prove, in accordance with the provisions of that statute, that SM Group had knowingly made a falserepresentation to it in order to obtain property or a service. [29] In this regard, there is, moreover, a well-established principle in the case law that a court must generally make its

own findings of fact in applying s. 19(2)(d) (see Houlden, Morawetz and Sarra, at H§63). This is true, for example, even where findingspossibly linked to fraud have been made in a previous trial or where a default judgment or a consent to judgment might have containedsuch findings. It can be inferred by analogy from the case law on s. 178(1)(

e) of the BIA that the courts have been particularly consistentand rigorous in assessing the evidence presented to them in this regard (see, e.g., Terrain DEV Immobilier inc. v. Charron, 2021 QCCA417, at para. 2 ; Dupuis, at paras. 36-40; Pelletier v. CAE Rive-Nord, 2019 QCCA 2164, at paras. 13-19 ; Tavan v.Rostami, 2014 QCCA 304, at paras. 3-6 ; Léger, at paras. 30-40; Guilbert v. Economical Mutual Insurance Co., 2020 MBQB179, [2021] I.L.R. ¶I-6280, at paras. 20-25; Sharma v.

Sandhu, 2019 MBQB 160, at paras. 38-45 ; Royal Bank of Canada v.Hejna, 2013 ONSC 1719, at paras. 90-92 ; Berger, at paras. 28-35; Re Horwitz (1984), 52 C.B.R. (N.S.) 102 (Ont. H.C.J.), atpp. 106-7, aff’d (1985), 53 C.B.R. (N.S.) 275 (C.A.); Agriculture Financial Services Corp. v. Zaborski, 2009 ABQB 183, 58 C.B.R. (5th)301, at paras. 12-18; Szeto, Re, 2014 BCSC 1563, 15 C.B.R. (6th) 255, at paras. 37-63; The Toronto-Dominion Bank v. Merenick, 2007BCSC 1261, at paras. 30-48 ; Johnson v.

Erdman, 2007 SKQB 223, 34 C.B.R. (5th) 108, at paras. 10-12; Coyle (Bankrupt), Re,2011 NSSC 238, 304 N.S.R. (2d) 369, at paras. 53-58). [30] Second, Bill 26 and the VRP Regulation published in the Gazette officielle du Québec pursuant to ss. 3 and 4 of thatstatute do not provide any greater support for the City’s position. We agree with the majority of the Court of Appeal, who rejected theidea of a statutory presumption or a presumption of fact that a debtor made fraudulent representations based solely on the fact that itparticipated in the VRP.

That scheme, which was in effect from November 2015 to December 2017, created no such presumption. [31] The purpose of the VRP as defined in s. 3 of Bill 26 — in

Chapter II, entitled “Reimbursement Program” — supportsthis conclusion: 3. The Minister publishes in the Gazette officielle du Québec a voluntary, fixed-term reimbursement program to make it possible foran enterprise or a natural person mentioned in

section 10 to reimburse certain amounts improperly paid in the course of the tendering,awarding or management of a public contract in relation to which there may have been fraud or fraudulent tactics. [32] The use of the words “may have been” in the phrase “there may have been fraud or fraudulent tactics” clearlycontradicts the City’s argument. Moreover, the same words are also used in s. 1 of the VRP Regulation in describing the purpose of thatprogram: 1.

The Voluntary Reimbursement Program makes it possible for every natural person and every enterprise to reimburse certainamounts improperly paid by a public body in the course of the tendering, awarding or management of a public contract entered into after1 October 1996 in relation to which there may have been fraud or fraudulent tactics. [33] The fact that fraud is characterized as a possibility rather than a certainty is by no means surprising.

Given theVRP’s purpose of recovering amounts paid improperly by public bodies, it stands to reason that Bill 26 does not provide for anymechanism to determine whether amounts agreed to under the VRP are in fact related, in whole or in part, to fraud.

Section 7 of the VRPRegulation supports this point, since it states the following: 7. The fact that a natural person or an enterprise participates in the Program does not constitute an admission of liability or of a faultcommitted by the natural person or enterprise. [34] The fault in question in s. 7 is a matter of civil liability and is limited to the public contract to which a VRPagreement pertains. Where the legislature intends to refer to penal or criminal proceedings, or to civil proceedings outside the scope of aVRP agreement, it does so expressly. This

interpretation is confirmed when s. 7 of the VRP Regulation is read in conjunction with s. 8: 8. Every natural person or enterprise participating in the Program acknowledges that revealing information or sending documentswithin the Program framework does not restrict in any manner whatever a public body’s capacity to bring civil proceedings against thenatural person or enterprise in relation to public contracts for which a settlement has not been reached under the Program or to which theAct does not apply.

Every natural person or enterprise acknowledges that participation in the Program and the conclusion of an agreement under it in nomanner protects the natural person or enterprise, or its officers, against any penal or criminal proceedings that have been or may bebrought in connection with public contracts entered into by the natural person or enterprise. [35] Evidence that a natural person or enterprise participated in the VRP therefore cannot on its own justifycharacterizing a claim as being related to a debt resulting from fraud pursuant to s. 19(2)(

d) of the CCAA. [36] However, the City submits that reading ss. 1, 3 and 10 of Bill 26 together leads to an entirely different conclusion,namely that a natural person or enterprise that participated in the VRP necessarily defrauded a public body. In our view, the City iswrong. [37] It is true that s. 1 of Bill 26 does not refer to fraud as being hypothetical: 1. This Act provides for exceptional measures for the reimbursement and recovery of amounts improperly paid as a result of fraud orfraudulent tactics in the course of the tendering, awarding or management of public contracts.

As we saw above, however, s. 3 of Bill 26 and s. 1 of the VRP Regulation are clear: there is no question that, unlike s. 1 of Bill 26, whichsets out the purpose of that statute generally, the substantive provisions of Bill 26 and the VRP Regulation contemplate fraud onlyhypothetically. In addition, the City’s

interpretation cannot be reconciled with ss. 7 and 8 of the VRP Regulation, which are reproducedabove. [38] That being said, the City points out that s. 3 of Bill 26 refers to s. 10, which specifically states that fraud wascommitted:

10. Any enterprise or natural person who has, in any capacity, participated in fraud or fraudulent tactics in the course of the tendering,awarding or management of a public contract is presumed to have caused injury to the public body concerned. In such a case, the officers of the enterprise in office at the time the fraud or fraudulent tactics occurred are held liable unless theyprove that they acted with the care, diligence and skill that a prudent person would have exercised in similar circumstances.

The directors of the enterprise in office at the time the fraud or fraudulent tactics occurred are also held liable if it is established thatthey knew or ought to have known that fraud or fraudulent tactics were committed in relation to the contract concerned, unless theyprove that they acted with the care, diligence and skill that a prudent person would have exercised in similar circumstances. The enterprises and natural persons referred to in this

section are solidarily liable for the injury caused, unless such liability is waivedby the public body. [39] We do not agree with the City’s

interpretation on this point. It is up to the courts to conclude that fraud of this kindhas been committed. More precisely, we are of the view that the City is confusing two schemes created by Bill 26: one — the VRP (ss. 3to 9) — introduced by

Chapter II and the other by

Chapter III, which is entitled “Special Rules Applicable to Judicial Proceedings”(ss. 10 to 17). The first scheme was designed to encourage — for a two-year period — natural persons or enterprises fearing that a publicbody would bring civil proceedings against them to participate in the VRP with a view to entering into an agreement through acompletely confidential process (s. 7 of Bill 26; s. 4 of the VRP Regulation).

It was only once the first scheme ended that the second, oneof an entirely different nature, took effect. [40] The scheme provided for in ss. 10 to 17 of Bill 26 is one that deviates from the general law. It applies to judicialproceedings brought by a public body, or by the Minister of Justice on behalf of a public body, against a natural person or enterprise thatallegedly participated in fraud in relation to a public contract.

When a court allows such an action, not only can it assume that thedefendant caused injury to the public body through its fraudulent act (s. 10 para. 1), but in addition, “[t]he injury is presumed tocorrespond to the amount claimed by the public body concerned for the contract concerned if the amount does not exceed 20% of thetotal amount paid for that contract” (s. 11 para. 1). The enterprises and natural persons contemplated by the statute are solidarily liablefor such injury (s. 10 para. 4).

An amount granted “bears interest from the date the work is accepted by the public body concerned forthe contract concerned” (s. 11 para. 3).

As well, the court “must add a lump sum equal to 20% of any amount granted for injury, to coverexpenses incurred for the purposes of th[e] Act” (s. 14). [41] In other words, these provisions are designed to make it easier to prove causation and injury when such a proceedingis brought, but it should be noted that they are of no effect if a court finds that the evidence of fraud is insufficient; as well, and mostimportantly, they in no way make it easier to prove such a fault.

Section 10 of Bill 26 is therefore of no assistance to the City, which inany event has not sought to show, on any basis other than the mere existence of the VRP agreement, that SM Group took

part in fraud inconnection with a contract the City awarded to it. The schemes created by Bill 26 suggest that a court will recognize the existence offraud only under the

Chapter III scheme. Moreover, it appears that the reference to s. 10 in s. 3 merely serves to specify the naturalpersons to whom the VRP applies, namely directors and officers of enterprises. [42] Lastly, it should be mentioned that it can easily be imagined that an enterprise that entered into a potentiallycontentious public contract with a public body would make the strategic choice to participate in the VRP out of fear of bad publicity or toavoid exposing itself to the exceptional scheme of

Chapter III of Bill 26, the result of which, if the proceeding were decided in the publicbody’s favour, would likely be significant additional financial liability for the enterprise on top of the legal fees it would have to pay. [43] In sum, neither the content of the VRP agreement nor its legal framework supports a presumption that SM Groupadmitted to having committed a fraudulent act; nor does the VRP agreement constitute a serious, precise and concordant presumption offact (art. 2849 of the Civil Code of Québec). It follows that the City has not shown that the VRP claim falls within s. 19(2)(

d) of theCCAA.

(2) Compensation Between Debts Arising Before and After an Initial Order (Pre-post Compensation) [44] The bankruptcy of large companies often resulted in “the entire disruption of the corporation, loss of goodwill, andsale of assets on a discounted basis” (J. P. Sarra, Rescue! The Companies’ Creditors Arrangement Act (2nd ed. 2013), at pp. 22-23; seealso Century Services, at para. 16).

Parliament, wishing to protect the survivability of such companies, which are essential to economicprosperity and to a high rate of employment, therefore set up a restructuring process in the CCAA that was designed to prevent them frombeing dismantled and having their assets liquidated at a discount (Century Services, at paras. 17-18 and 70; Callidus, at paras. 41-42). [45] Initially, restructuring under the CCAA was done through a plan of arrangement or compromise negotiated betweenthe debtor company and its creditors that averted the company’s bankruptcy by allowing it to adjust its debts and reorganize its business(S.

E. Edwards, “Reorganizations Under the Companies’ Creditors Arrangement Act” (1947), 25 Can. Bar Rev. 587, at pp. 588-90 and592). Later, liquidation under the CCAA emerged as a practice. Liquidation can also serve as a tool for restructuring a struggling business“by allowing the business to survive, albeit under a different corporate form or ownership” (Callidus, at para. 45; see also Sarra, atp. 169; K. P.

McElcheran, Commercial Insolvency in Canada (4th ed. 2019), at p. 311). [46] The primary tool that allows the CCAA to achieve its restructuring objective is a stay of proceedings and of creditors’rights (Sarra, at pp. 17 and 52; McElcheran, at p. 5). The direct effect of a stay is that it creates a status quo period that stabilizes thedebtor company’s situation by shielding it from its creditors while the restructuring process is under way (Century Services, at para. 60;see also Kitco, at para. 43 ).

Without such a period, there would be a free-for-all in which individual creditors would fight it outto enforce their rights without regard for the company’s survival or the maximization of its liquidation value (Century Services, atpara. 22). [47] During the status quo period, the debtor company can therefore continue operating without fear of being driven intobankruptcy by its creditors.

This temporary respite creates an environment conducive to fair negotiations between the variousstakeholders and gives the debtor the necessary time to prepare a plan of compromise or arrangement ensuring its survival, or to take

steps to maximize the value of the business it operates with a view to its liquidation under the CCAA (Meridian Developments Inc. v.Toronto Dominion Bank (1984), (AB KB), 32 Alta. L.R. (2d) 150 (Q.B.), at para. 15; Kitco, at para. 43; Callidus, atparas. 40 and 46). [48] The fundamental feature of the CCAA is a grant to the courts that apply it of a broad discretion to make any ordersneeded to ensure that restructuring is successful and that the CCAA’s objectives are achieved (Century Services, at para. 19).

The true“engine” driving the statutory scheme (Callidus, at para. 48, citing Stelco Inc. (Re) (2005), (ON CA), 253 D.L.R.(4th) 109 (Ont. C.A.), at para. 36), this judicial discretion also plays a prominent

part in stays of proceedings. [49] In principle, a court may deny a stay application. Such applications are rarely denied, however, to the point where theterms “initial order” and “stay order” have, in practice, become interchangeable (Sarra, at p. 51). Stays are in fact requested and grantedsystematically, other than in certain exceptional cases (p. 51). [50] A stay is a temporary measure, however; once it has been lifted, creditors regain their ability to fully exercise theirrights and remedies (Quinsam Coal Corp., Re, 2000 BCCA 386, 20 C.B.R. (4th) 145, at paras. 9 and 14).

On an initial application inrespect of a debtor company, a court may include in its initial order a first stay period of no more than 10 days (s. 11.02(1) of the CCAA).After that, the court may renew the stay for any period it considers necessary (s. 11.02(2) of the CCAA).

When a stay is renewed, or atany other time in the course of the proceedings, an interested creditor may, in accordance with the procedure set out in the initial order,apply to the court to lift a stay affecting any of its rights or remedies (Sarra, at pp. 58-60 and 88; see also Muscletech Research &Development Inc., Re (2006), (ON SC), 19 C.B.R. (5th) 54 (Ont.

S.C.J.), at para. 5; Parc industriel Laprade inc. v.Conporec inc., 2008 QCCA 2222, [2008] R.J.Q. 2590, at paras. 7-8 and 14-15). [51] While it is true that the BIA and the CCAA form part of an integrated body of insolvency law, there are nonethelesssome fundamental differences between the two schemes (Century Services, at para. 78). Unlike the BIA, the CCAA gives courts a broaddiscretion to decide whether a stay is appropriate, to determine how long it should last and to adjust its scope depending on what isneeded to restructure the debtor company and to achieve the objectives of the CCAA.

In this regard, the CCAA has been described as a“skeletal” statute that does not contain “a comprehensive code that lays out all that is permitted or barred” (Century Services, at para. 57,quoting Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 92 O.R. (3d) 513, at para. 44). [52] To fully understand the rights and restrictions applicable in a given case, it is therefore not enough to read thelegislation; it is also important to consider the court’s exercise of its discretion, which is reflected in all of the many orders madethroughout the proceedings. [53] The question raised by this appeal is therefore whether a court’s discretion allows it to stay a right to pre-postcompensation, or set-off, invoked by a creditor under the civil law or the common law and, by extension, to authorize pre-postcompensation in appropriate cases. (

a) Power to Grant and Lift a Stay of the Right to Pre-post Compensation [54] In our view, the broad discretion conferred on a court by ss. 11 and 11.02 of the CCAA allows it to stay rights held bycreditors if the exercise of those rights could jeopardize the restructuring process. This includes a creditor’s right to effect pre-postcompensation. [55] Under s. 11.02 of the CCAA, a court may stay any action, suit or other proceeding that might be brought against thedebtor company.

Despite the language of s. 11.02, which at first glance limits the power to order a stay to judicial proceedings, the courtshave taken a large and liberal approach in interpreting the scope of the rights and remedies that can be included in a stay order (seeMeridian, at para. 26; Quintette Coal Ltd. v. Nippon Steel Corp. (1990), (BC CA), 51 B.C.L.R. (2d) 105 (C.A.), atpp. 113-14; Smoky River Coal Ltd., Re, 1999 ABCA 179, 71 Alta. L.R. (3d) 1, at paras. 31-33; McElcheran, at pp. 135 and 245-46;R. J. Wood, Bankruptcy and Insolvency Law (2nd ed. 2015), at p. 363).

For example, in Quintette Coal, the British Columbia Court ofAppeal concluded that a creditor’s right to pre-post set-off can be stayed just like any other enforcement measure with a high disruptivepotential (see also Associated Investors of Canada Ltd. (Manager of) v. Principal Savings & Trust Co. (Liquidator of) (1993), 1993ABCA 259 , 13 Alta. L.R. (3d) 115 (C.A.), at paras. 23-24; North American Tungsten Corp., Re, 2015 BCCA 390, 377B.C.A.C. 6, at paras. 13-16, aff’d 2015 BCCA 426, 378 B.C.A.C. 116, at paras. 28-30). In our view, this

interpretation is the correct one,as it advances the CCAA’s remedial objectives and is consistent with its scheme. [56] It can also be seen from the various model initial orders adopted by the country’s superior courts that prohibitionsagainst setting off debts are standard practice, and in the vast majority of cases take effect as soon as an initial order is made (see Courtof Queen’s Bench of Alberta, Alberta Template CCAA Initial Order, January 2019 (online), at paras. 14 and 16; Supreme Court ofBritish Columbia, Model CCAA Initial Order, August 1, 2015 (online), at paras. 16 and 18; Ontario Superior Court of Justice,Commercial List, Initial Order, January 21, 2014 (online), at paras. 15-16; Superior Court of Quebec, Commercial Division, InitialOrder, May 2014 (online), at paras. 10 and 12; Court of Queen’s Bench for Saskatchewan, Saskatchewan Template CCAA Initial Order,December 6, 2017 (online), at paras. 15-16). [57] A court’s discretion is therefore broad enough to allow it to stay the right of creditors to effect pre-postcompensation.

In such a case, the prohibition against pre-post compensation flows directly from the stay order. Conversely, a court mayin its discretion refuse to impose such a prohibition or, if pre-post compensation was stayed by the order, lift the stay at a later date toallow an interested creditor to assert its rights.

On this point, we reject the absolute prohibition proposed by the Quebec Court of Appealin Kitco, because we conclude that a court has the discretion to allow pre-post compensation in appropriate cases. [58] The instances in which a court should not stay the right to effect pre-post compensation in an initial order will berare, however. It must be borne in mind that a supervising judge’s discretion, although broad, is not boundless.

It must be exercised infurtherance of the CCAA’s remedial objectives (Callidus, at para. 49). [59] The status quo period could be rendered pointless if creditors were allowed to effect pre-post compensation without

restraint (see Kitco, at paras. 20 and 43). Tungsten, in which the court stayed pre-post set-off, provides a good example of the disruptivepotential of this form of set-off (North American Tungsten Corp., Re, 2015 BCSC 1382, 28 C.B.R. (6th) 147 (“Tungsten (S.C.)”), atpara. 32, aff’d 2015 BCCA 390, 377 B.C.A.C. 6, at paras. 16, 20 and 25, and 2015 BCCA 426, 378 B.C.A.C. 116, at para. 29). If acreditor could rely on compensation to refuse to pay for goods or services supplied by the debtor during the status quo period, therestructuring could be torpedoed.

The debtor would have a disincentive to provide its creditors with goods and services because it wouldfear not being paid for them; it would then be deprived of the funds needed to continue operating (see Kitco, at paras. 46-48).

Section 32of the CCAA in fact gives the debtor a right — subject to the limits and formal requirements provided for in that provision — to disclaimor resiliate any agreement to which it is a party on the day on which the restructuring proceedings commence. In addition, an interimlender would most likely refuse to continue to finance the debtor’s operations during this period if the loaned funds were destined toenrich another creditor at its expense.

Lastly, the rampart set up by a stay to protect against attacks from all sides by creditors would alsocrumble, thereby increasing the risk of the debtor’s collapse and bankruptcy (see also A. R. Anderson, T. Gelbman and B. Pullen,“Recent Developments in the Law of Set-off”, in J. P. Sarra, ed., Annual Review of Insolvency Law 2009 (2010), 1, at pp. 22 and 29). [60] The inevitable interruption of the business relationship between the debtor and those who are at once creditors andcustomers could not come at a worse time.

Without these contracts and without the payment of accounts receivable and interim financingto replenish the debtor’s working capital, the resale value of its business would melt away, thus setting up roadblocks for restructuring itby way of liquidation. And such a situation could also be unfavourable to creditors that wish to effect compensation.

If the debtorterminates a contract and refuses to perform it, the creditor concerned will be deprived of the benefit of the contract and will have to finda new contracting party in place of the debtor, with no guarantee that the price will remain the same. [61] Furthermore, where pre-post compensation has been stayed, the court retains the discretion to lift the stay based onthe specific facts of each case.

However, it must be cautious in doing so, given the high disruptive potential of such compensation. [62] In conclusion, we are of the view that ss. 11 and 11.02 of the CCAA authorize a court to stay pre-post compensation.Although we would temper the rule from Kitco, which involves an absolute prohibition against pre-post compensation, it is our view thatin the vast majority of cases an initial order will, and should, stay a creditor’s right to set up pre-post compensation against the debtor.Finally, where an initial order has stayed the right of creditors to pre-post compensation, the court retains the discretion to lift the stayhaving regard to the circumstances. (

b) Scope of

Section 21 of the CCAA [63] In addition, we note that s. 21 of the CCAA does not grant creditors a right to pre-post compensation that would beshielded from a supervising judge’s power to order a stay under ss. 11 and 11.02 of the CCAA. Although s. 21 of the CCAA indicates thatthere is a right to effect compensation in proceedings under that statute, we are of the opinion that it applies only to compensationbetween debts that arise before an initial order is made (in other words, “pre-pre compensation”).

The modern approach to statutoryinterpretation dictates this conclusion (Rizzo & Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 S.C.R. 27, at para. 21, citingE. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87). Our

interpretation of s. 21 of the CCAA is not based on an inappropriateanalogy with the provisions of the BIA. [64]

Section 21 does state that it is possible to effect compensation in insolvency proceedings under the CCAA, but it doesnot specifically deal with pre-post compensation. It reads as follows: Law of set-off or compensation to apply 21 The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for therecovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as thecase may be.

Read in light of its context, its purpose and the scheme of the CCAA, s. 21 is, in our view, limited to authorizing pre-pre compensationfor the purpose of quantifying creditors’ claims on the date of commencement of proceedings. [65] With regard to the context, s. 21 is in a different part of the statute than the one that provides for a court’s discretionto order a stay. The power to order a stay (ss. 11 and 11.02) and most of the exceptions to it (see, e.g., ss. 11.01, 11.08 and 11.1) appearin

Part II, which is entitled “Jurisdiction of Courts”.

Section 21, meanwhile, is in the division of

Part III entitled “Claims”, which alsoincludes ss. 19 and 20. This indicates that Parliament probably did not consider s. 21 to be an exception to the stay period. If Parliamenthad in fact intended s. 21 to be an exception, it would have included it in

Part II or expressly stated that it was an exception. [66] What is more, when s. 21 is considered in the broader context of the “Claims” division, it becomes clear that thisprovision is part of a set of rules governing the claims that may be dealt with by a compromise or arrangement and the quantification ofthe resulting amounts. [67]

Section 19 specifies which claims may be dealt with by a compromise or arrangement (s. 19(1)) and those whichwill remain intact despite the creditors’ agreement to a compromise or arrangement and its sanction by a court (s. 19(2)). Only claimsarising before the date of commencement of bankruptcy or insolvency proceedings are “claims” that fall under s. 19 and therefore givecreditors a right to vote on a compromise or arrangement. As for s. 20, it contains rules for determining the amount of claims. Once that amount has been determined, it can then be used to define the relative weight of the voting rights of each creditor with a claim.[1] [68]

Section 21 complements ss. 19 and 20; the compensation authorized by s. 21 is intended, among other things, todetermine the value of the claim that a creditor may have against the debtor on the date of commencement of proceedings. In otherwords, the purpose of s. 21 is to provide an accurate picture of the pecuniary interest each creditor has in the restructuring on the date ofcommencement of proceedings, and of the number of votes each creditor should have (see Kitco, at para. 83).

This provision is notconcerned with what might happen to the debtor’s business after that date, because the date of commencement of proceedings is when[translation] “the claims must be established” and therefore when the mutuality of debts must be assessed (B. Boucher, “Procédures en

vertu de la

Loi sur les arrangements avec les créanciers des compagnies”, in JurisClasseur Québec — Collection Droit des affaires —Faillite, insolvabilité et restructuration (loose-leaf), by S. Rousseau, ed., fasc. 14, at No. 70; see also Kitco, at para. 34). [69] With all due respect for our colleague, in light of the context of s. 21, it is evident that this provision is not meant tolegitimize pre-post compensation. [70] This contextual

interpretation of s. 21, which limits its scope to pre-pre compensation, is also confirmed by thesection’s purpose. It was added to the CCAA to prevent the unfair situation that would result from a creditor being required to pay itsdebt to the debtor company in full but receiving almost nothing from the debtor in payment of its claim under an arrangement orcompromise.

The effect of s. 21 is that the creditor receives payment of its claim up to the value of the debt it owes to the debtor(Anderson, Gelbman and Pullen, at p. 27; Boucher, at No. 70; McElcheran, at p. 116). [71] It is true that compensation “creat[es] a type of security interest in the [insolvent company’s] estate” because it“[authorizes] the party claiming set-off [to] ‘reorde[r]’ . . . his priority” by reducing the value of that party’s claim (Husky Oil OperationsLtd. v. Minister of National Revenue, (SCC), [1995] 3 S.C.R. 453, at paras. 59-60; see Kitco, at paras. 63-68).

Thecreditor uses its indebtedness to the debtor as a form of security for its claim, security that is equal in value to its debt to the insolventcompany (Stein v. Blake, [1996] 1 A.C. 243 (H.L.), at p. 251). This portion of its claim is therefore sure to be paid in full (Husky Oil, atpara. 58).

The effect of compensation is thus to deviate from the principle of equality among ordinary creditors, a fundamental principleof insolvency law that applies with equal force in proceedings under the CCAA, one of the remedial objectives of which is to ensure thefair and equitable treatment of the claims made against a debtor (Callidus, at para. 40). The exception created by compensation musttherefore be interpreted narrowly.

As a general rule, “[o]nce a formal insolvency process commences, all unsecured creditor remedies arestayed and the creditor must stand in line behind secured and preferred creditors and share any remaining recoveries in the estate prorata with all other unsecured creditors” (McElcheran, at p. 78). [72] The prejudice suffered by a creditor wishing to effect pre-post compensation does not justify expanding the scope ofs. 21. When the debt owed by the creditor arises after a stay order has been made, prejudice is merely illusory.

The fact that the creditorcontracted obligations toward the debtor company during the stay period does not place it in a worse situation than it would have been inhad it contracted with a third party instead. If it had contracted with a third party, it would likewise have had to pay the full price of thegoods or services it obtained (Tungsten (S.C.), at para. 27).

A creditor that contracts with the debtor company during the status quoperiod knows or ought to know that it will probably receive only pennies on the dollar in payment of its pre-order claim and that paymentof its post-order debt will benefit it and the other creditors. [73] Because there is really prejudice only in the case of pre-pre compensation, this exception to the principle of equalityshould apply to only one of the debtor’s assets on the date of commencement of insolvency proceedings, that is, the debt owed to it bythe creditor (Kitco, at para. 68; Husky Oil, at para. 59).

Otherwise, giving the green light to pre-post compensation would amount togranting certain creditors an additional “type of security interest” in respect of new assets acquired by the debtor after the commencementof proceedings (for example, amounts received as interim financing). Professor Wood aptly describes the injustice that would thus befallthe other ordinary creditors whose rights and remedies have been stayed: The ability to exercise a right of set-off in restructuring proceedings can operate to improve greatly the position of one creditor at theexpense of the other creditors.

This is illustrated in the following example. Suppose that the debtor company owes $1,000 to a creditor.The debtor company then initiates restructuring proceedings. While the proceedings are under way, the debtor company sells anddelivers goods to the creditor for $1,000.

By exercising its right of set-off, the creditor obtains full recovery of its claim at the expense ofthe other unsecured creditors whose claims will be compromised or otherwise affected by the plan. [p. 400] [74] Yet the very purpose of the stay period is to ensure that no creditor gains an advantage over the others while therestructuring of the debtor company is under way (Woodward’s Ltd., Re (1993), 79 B.C.L.R. (2d) 257 (S.C.), at para. 12; LehndorffGeneral Partner Ltd., Re (1993), 17 C.B.R. (3d) 24 (Ont. C.J. (Gen. Div.)), at para. 6); Hawkair Aviation Services Ltd., Re, 2006 BCSC669, 22 C.

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