2012 QCCA 1476, 2012 QCCA 1476

Unofficial English Translation Banque Canadienne Impériale de Commerce c. Fiducie Desjardins inc. 2012 QCCA 1476 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No. 500-09-020976-106 (500-05-017741-925) DATE: July 25, 2012 CORAM: THE HONOURABLE ANDRÉ FORGET, J.A. FRANÇOIS PELLETIER, J.A. MARIE ST-PIERRE, J.A. CANADIAN IMPERIAL BANK OF COMMERCE APPELLANT/INCIDENTAL RESPONDENT – Defendant v. DESJARDINS TRUST INC.

RESPONDENT/INCIDENTAL APPELLANT – Plaintiff JUDGMENT [ 1 ] THE COURT; – Ruling on the appeal from a judgment rendered on July 29, 2010, by the Superior Court, District of Montreal (the Honourable Madam Justice Anne-Marie Trahan), ordering the Canadian Imperial Bank of Commerce to pay Desjardins Trust Inc. $1,788,200.96 with interest and the additional indemnity as of October 29, 1992, as well as costs; [ 2 ] For the reasons of Forget J.A., with which Pelletier and St-Pierre JJ.A. agree; [ 3 ] ALLOWS the appeal, with costs;

[ 4 ] QUASHES the judgment a quo; [ 5 ] DISMISSES the action instituted by Desjardins Trust Inc. against the Canadian Imperial Bank of Commerce, with costs; [ 6 ] DISMISSES the oral motion for new evidence, without costs; [ 7 ] DISMISSES the incidental appeal, without costs. ANDRÉ FORGET, J.A. FRANÇOIS PELLETIER, J.A. MARIE ST-PIERRE, J.A. Mtre Yves Martineau and Mtre.

Alexandre Thériault-Marois STIKEMAN, ELLIOTT For the appellant Mtre Yves Bélanger CAIN, LAMARRE, CASGRAIN, WELLS For the respondent Date of hearing: June 6, 2012 REASONS OF FORGET, J.A. [ 8 ] The Canadian Imperial Bank of Commerce (CIBC) appeals from a judgment ordering it to pay Desjardins Trust Inc. (the Trust) $1,788,200.96 with interest and the additional indemnity as of October 29, 1992, as well as costs. [ 9 ] The trial judge concluded that the Trust, pursuant to a trust deed, is entitled to $1,788,200.96, the amount entered in bank account number 93-07516 of Villa Mont-Royal Inc. (VMR) with CIBC on April 16, 1992. [ 10 ] The Trust lodged an incidental appeal that does not concern the conclusions of the trial judgment but contests the decision establishing the amount of its claim and reiterates a ground that was not addressed by the trial judge, given her conclusion on the merits.

THE FACTS [ 11 ] Groupe Carex, and more particularly its subsidiary VMR, is at the heart of the dispute. [ 12 ] Groupe Carex is made up of the parent company Services Carex and its subsidiaries, including VMR. Operating in the field of retirement homes, the group benefited from the real estate boom of the late 1980s but then suffered backlash when the market collapsed in 1991.

VMR was then bound by agreement to the two parties to this dispute, which are arguing over a sum of money entered in a bank account. [ 13 ] On April 10, 1989, the Trust was appointed as trustee in a trust deed entered into with VMR to guarantee the repayment of a $13,000,000 loan granted by Desjardins Life Insurance to VMR and Services Carex. The trust deed grants the Trust various guarantees, including a hypothec on an immovable acquired by VMR in 1985 and a floating charge on certain assets, including [TRANSLATION] “the claims of record and the accounts receivable”.

In case of default, the Trust could take possession of the secured assets and sell them. In the meantime, VMR remained the owner and retained the ability to alienate or pledge its property as long as the trust had not already exercised this right. [ 14 ] On June 29, 1989, CIBC granted a line of credit. The relevant sections thereof indicate: [TRANSLATION] BORROWER : SERVICES CAREX INC. ET AL.

AMOUNTS : $1 000 000 Operating loans granted under the Centralized Cash Control service pursuant to a joint borrowers agreement entered into by Services Carex Inc., Carex Equities Inc. and Villa Mont-Royal Inc. [ 15 ] The same day, the three companies that make up Groupe Carex (Services Carex, Carex Equities and VMR) signed an initial agreement for joint bank operations. The relevant clauses of that agreement are as follows: [TRANSLATION] 1.

The signatories hereby confirm their intention to avail themselves of certain loans and credits that the Bank may, at its discretion, grant them from time to time and, to facilitate their banking operations, the signatories wish to have transferred on a daily basis the balance of their current accounts in Canadian dollars indicated in

Part 1 of

Schedule A attached hereto (the “Current Accounts”). . . . 3. The signatories hereby give the Bank instructions to transfer, each business day at closing, as of July 10, 1989, the debit or credit balance of the Current Accounts to their joint account in the same currency, as indicated in

Part II of

Schedule A attached hereto (the “Compensation Account”). To that end, the Bank is fully authorized to make all the entries required in the Current Accounts and the Compensation Account . 4.

It is the very essence of this Agreement that, regarding any debit balance and any overdraft in the Compensation Account, as well as all loans or other credits granted by the Bank to the signatories or to one of them and, regarding all the securities that are or shall be held by the Bank against the signatories or one of them, all the signatories shall be considered as one and the same borrower and all the obligations of the signatories toward the Bank in that regard shall be joint and several, and indivisible, with each of the signatories being considered a principal debtor, not a surety , the whole in accordance with articles 1103 et seq . and

article 1126 of the Civil Code of Lower Canada.

[Emphasis added.] [ 16 ] Also on June 29, 1989, the three signatories adopted resolutions authorizing them to adhere to the agreement with CIBC, according to which they agree to be joint and several borrowers and debtors, to pool the balances of their bank accounts and to pledge certain collateral to guarantee the payment of their obligations toward CIBC. For example, the VMR resolution states: [TRANSLATION] 1.

THAT the corporation be hereby authorized to adhere to an AGREEMENT with the CANADIAN IMPERIAL BANK OF COMMERCE (the “Bank”) according to which the corporation and a number of other entities designated in the said Agreement (the “Group”) agree, in order to facilitate their banking, to be joint and several borrowers and debtors toward the Bank, regarding all loans or other credits, present and future, granted to the Group by the Bank, to pool the balances of their bank accounts and to give collateral to guarantee the full and complete payment of all their debts and obligations, present and future, toward the Bank, regardless of their origin or nature; . . . [ 17 ] On November 20, 1989, CIBC granted a new line of credit, the relevant sections of which read as follows: [TRANSLATION] BORROWER : SERVICES CAREX INC.

AMOUNTS : $1 000 000 Operating loans pursuant to an Overdraft Loan Agreementor granted under the Centralized Cash Control Service, under a joint borowers agreement respecting Services Carex Inc., Carex Equities Inc., Villa Mont-Royal Inc. and Château Westmount

(1989) Inc. [ 18 ] A new agreement regarding joint banking operations was entered into on February 26, 1990, to add two signatories from Groupe Carex, namely, 156827 Canada Inc. and Château Westmount

(1989) Inc. The rest of the agreement was identical to that of June 29, 1989. [ 19 ] Starting in June of 1990, CIBC began to be concerned about the precarious financial situation of Groupe Carex and wanted to reduce its financial involvement. On March 13, 1991, VMR signed an Agreement Regarding Pledge of Current Account , in which it authorized CIBC to retain as collateral all the amounts credited to account number 93-07516.

VMR further undertook not to withdraw amounts without CIBC’s consent and to replace any amount withdrawn with a subsequent deposit. [ 20 ] On April 1, 1992, CIBC’s attorneys notified Groupe Carex that it had defaulted on its obligations toward CIBC and that it owed CIBC $764,406. If it failed to correct the default by April 17, 1992, CIBC would claim repayment of the loan and would exercise its rights and recourses. [ 21 ] As for the Trust and Desjardins Life Insurance, the $13,000,000 loan granted on April 10, 1989, was repaid only by VMR, though irregularly.

Having defaulted on the monthly payments since October of 1991, VMR and Services Carex received a formal notice from the attorneys for Desjardins Life Insurance on April 2, 1992. [ 22 ] At closing on April 16, 1992, Groupe Carex’s bank accounts reflected the following: Div. net situation

Services Carex Inc. 971,767.29 DR Carex Equities Inc. 4,483.97 DR Villa Mont Royal Inc. 1,788,200.96 CR Château Westmount 1,117,214.19 DR (1989) 156827 Canada Inc. 71,821.48 DR Total for the group 377,085.97 DR [1] [ 23 ] On April 17, 1992, the Trust obtained an order from the Superior Court, [2] by default, allowing it to take possession of VMR’s assets held by CIBC. The same day, the Trust exercised the powers granted to it under the trust deed.

At 1:30 p.m., it served a motion to take possession of, among other things, any amounts in VMR’s CIBC bank account number 93-07516. [ 24 ] CIBC then reduced VMR’s account number 93-07516 to zero and backdated that entry to April 16, 1992. [ 25 ] On April 27, 1992, CIBC appealed from the order of April 17, 1992. PROCEEDINGS [ 26 ] On November 30, 1992, the Trust brought its action before the Superior Court, under another docket number (Montreal 500-05- 017741-925 (Sup. Ct.)).

It claimed $1,788,200.86 from CIBC, the amount that it said was entered in VMR’s account at closing on April 16, 1992. [ 27 ] A motion to dismiss filed by CIBC, on the ground that the judgment of April 17, 1992, had been appealed, was referred to the trial judge. [ 28 ] On October 29, 1992, a judgment allowed the Trust to sell VMR’s immovable, hypothecated in its favour, by court order, and the immovable was subsequently awarded to the Trust.

On October 1, 1993, the immovable and the furniture included in the guarantee under the trust deed were sold for a total consideration of $15,500,000. [ 29 ] In March of 1993, CIBC filed its defence, invoking the agreements of June 29, 1989, and February 26, 1990. In February of 1996, the Trust filed its reply, after CIBC had filed an application for peremption of suit. A series of amendments to the parties’ proceedings followed from January of 1997 to November of 2002.

A new application for peremption of suit was filed by CIBC in June of 2006, and then additional amendments were made to the proceedings. [ 30 ] The hearing was held on June 9, 10, 11 and 12, 2009, and January 26, 2010. After the parties filed written arguments, Trahan J. took the case under advisement on April 13, 2010, and rendered her decision on July 25, 2010. JUDGMENT A QUO [ 31 ] The trial judge considered that, contrary to the instructions given to CIBC in the agreements of June 29, 1989, and February 26, 1990, CIBC had not made daily transfers into the compensation account.

Since the agreements provided that compensation would occur at closing, the trial judge considered that CIBC could not make a transfer after the motion for taking possession had been served, at 1:30 p.m., and CIBC also could not argue the legal compensation provided for in the Civil Code of Lower Canada. The trial judge concluded that, at 1:30 p.m. on April 17, 1992, VMR had a recorded claim against CIBC in the amount of $1,788,200.96 and that the

Trust could take possession of that claim pursuant to the trust deed. [ 32 ] Given that conclusion, the trial judge did not rule on the Trust’s argument that the agreements of June 29, 1989, and February 26, 1990, constituted financial assistance prohibited under the terms of

section 123.66 of the Companies Act . [3] [ 33 ] As for the amount of the Trust’s claim, the trial judge set the unpaid balance of the loan granted to VMR at $969,851. She rejected the claim for $143,580.90 for legal costs and reduced the expenses required to preserve the immovable to $66,047.60. The claim therefore totalled $1,056,009.69. [ 34 ] The trial judge rejected CIBC’s argument the that the sale of VMR’s immovable on October 1, 1993, extinguished the Trust’s claim.

Although the unpaid balance ($1,056,009) was less than the amount entered in VMR’s account ($1,788,200), the trial judge considered that CIBC owed VMR the amount entered in the account, because of the nature of the banking agreement, which was considered a loan, not a deposit. According to her, the Trust acted as mandatary of the bondholder Desjardins Life Insurance, but also as mandatary of VMR, on behalf of which it administered the property of which it took possession.

Thus, the sum of $1,056,009 would be paid to Desjardins Life Insurance and the surplus of $732,191 would be remitted to VMR. [ 35 ] The trial judge did not accept CIBC’s contestation regarding the obligation to pay interest and the additional indemnity as of October 29, 1992. [ 36 ] As for CIBC’s rights under the pledge deed (D-4), the trial judge considered that she could not rule on the subject since the defence contained no conclusion in that regard. [ 37 ] The trial judge also rejected CIBC’s argument that the trust deed of April 10, 1989, and the loan agreement dated the same day in the amount of $13 million constituted prohibited financial assistance.

She was of the opinion that the parties to the agreements, as well as the directors, should necessarily be impleaded because they were directly affected by the decision. [ 38 ] The trial judge therefore maintained the action of the Trust and ordered CIBC to pay $1,788,200.96 with interest at the legal rate and the additional indemnity provided for in the Civil Code of Lower Canada , as of October 29, 1992, as well as costs. QUESTIONS IN DISPUTE [ 39 ] CIBC submits the following questions: 39.1.

Did the trial judge err in her understanding of how the agreements of June 29, 1989, and February 26, 1990, and the transfers made worked? 39.2. Did the trial judge err by failing to recognize that the agreements could be set up as against the Trust? 39.3. Did the trial judge err by failing to dismiss the action on the basis of the pledge granted by VMR to CIBC? 39.4. Did the trial judge err in concluding that CIBC could not avail itself of legal compensation? 39.5. Did the trial judge err in determining the balance of the claim? 39.6.

Could the trial judge order CIBC to pay $1,788,200, whereas the Trust’s claim was less than that?

39.7. Should the trial judge have concluded that the debtor was discharged? 39.8. Did the trial judge err in granting the additional indemnity? [ 40 ] In its incidental appeal, the Trust submits the following questions: 40.1. What is the amount of the Trust’s claim? 40.2. Do agreements D-2 and D-3, and deed D-4 constitute prohibited financial assistance to VMR and could they be set up as against the Trust? 40.3. Is the request for a declaration of nullity and inoperability prescribed?

ANALYSIS [ 41 ] To settle this dispute, it is sufficient, in my opinion, to analyze the scope of the agreements of June 29, 1989, and February 26, 1990, to recall the rules that govern an automatic set-off and to ascertain whether the agreements between CIBC and VMR contravened the prohibition forest out in

section 123.66 of the Companies Act . The agreements and the mirror accounts [ 42 ] CIBC states that the agreements with Groupe Carex set up a system of mirror accounts. This is the heart of CIBC’s contentions. The trial judge, however, did not address that issue. [ 43 ] Author Bradley Crawford [4] explained the purpose and functioning of mirror accounts: Cash Management; Mirror Accounts In Crawford and Falconbridge I discussed what was then a new development: mirror accounting systems.

I wrote that, in performance of their cash management services at that time, banks had just begun to create and operate such systems to reflect real or notional transfers of customer's funds in accounts of the bank without cluttering up the statements of account prepared periodically by the bank for submission to the customer . Customers who wish to participate in the systems sign a special form of contract with the bank, establishing the terms and conditions of participation.

The legal consequences of such agreements must, of course, be determined in each case by a careful construction of the terms of the agreement in that case. . . . Another class or type of mirror accounting system arises to service the needs of a group of affiliated or associated corporations having separate bank accounts at the same or different branches, but a need to share their credit balances from time to time in order to reduce the demand of the group as a whole for financing from the bank.

In this latter case, the system establishes both a mirror or offset account for each designated account for each participating customer, as well as a single concentration account, usually in the name of the parent or controlling corporation. At the end of each banking day, the bank's system computers create entries in each mirror account in a sum equal and opposite to the final balance entry in each participating account.

The corresponding debits and credits to these entries are then recorded in the concentration account, such that the single net position of all of the participating customers vis-à-vis the bank is the debit or credit balance in the concentration account . In this type of system, the entries to the mirror and concentration accounts do represent actual movements of funds, even though they are not recorded in the designated accounts. The system thus prevents the nightly operation of the mirror accounting system from cluttering up the accounting records of each of the participating accounts, while making only any

net credit balance (that is, net of all of the mirror entries that evening) available to the persons controlling the concentrator account or, where that net balance is in debit, requiring the operator of the concentrator account to finance only the net overdraft of all the participating customers. . . . . . . The simple fact that no entries appeared in the designated accounts is not indicative of either analysis. One of the purposes of mirror accounting systems is to keep the nightly entries from cluttering up the records of the designated accounts.

The absence of such entries is evidence only that the purpose was achieved; it does not tend toward identifying the transfers as either real or notional. . . . [References omitted.] [Emphasis added.] [ 44 ] In Gestions Panaber Inc. v. Banque Toronto-Dominion , [5] Jacques Dufresne J., as he was then, analyzed and gave effect to a system of mirror accounts: [TRANSLATION] [1] Gestions Panaber inc. (Panaber) is claiming from the defendant, the Toronto-Dominion Bank (the Bank) the sum of $129,150.78, with interest from October 25, 1994.

The amount of its claim corresponds to the credit balances of Panaber’s two current accounts at the Bank’s branch situated at 8200, boulevard Décarie. [2] The Bank contests that claim. It contends that Panaber was a party to a mirror account agreement and that, on the default date of the company acting as concentrator under the agreement, i.e.

Finmark Realties Inc. (Finmark Realties), the amounts appearing as credit in Panaber’s current accounts had already been transferred to the concentration account held by Finmark Realties. . . . [37] The bank stresses that Panaber criticizes an agreement to which it was a party and which was duly signed by one of its directors and officers.

The Bank explains that it was at the request of Philip Napier that the mirror accounts system was set up. [38] The Bank considers that it did not fail to meet its obligations toward Panaber, which, for nearly five years, availed itself of the same advantages as the other companies and corporations in the group. [39] According to the Bank, Panaber was ableto check the balance of its account every day, which balance appeared, as it did for all the other companies in the group, on the page produced by the “Money Monitor” system.

That bank statement of account showed the existence of a mirror account. [40] The people mandated by Panaber to do business with the Bank were, at all times, duly informed by the Bank and received periodic statements of account. In its opinion, the lack of communication among Panaber’s partners was not attributable to the Bank, which properly met its obligation to provide information. . . . [76] Nature of the agreement. The bank accounts of the companies or corporations that were parties to the agreement (the

participants) in which they carried out their daily banking transactions are called “Designated Accounts”. For each designated account there was a “Mirror Offset Account”. [77] The mirror account did not allow its holder to draw cheques on it and it did not pay interest.

At the end of each day, the balance of the mirror account was the reverse of the balance of the corresponding designated account, such that when the balances of the two accounts were added at the end of each day, the result equalled zero. [78] In the same way, the balance of the “Concentration Account” reflected a balance that was the inverse of the total of the mirror accounts, such that the difference between the amount in the mirror accounts and the balance of the concentration account was equal to zero at the end of each day. [79] The purpose of the mirror account agreement was to set up a concentration program (a kind of pool) for the funds of the participating companies or corporations.

In a mirror account system, the bank line of credit is generally granted to the person holding the concentration account, who is designated as the “concentrator” (concentrator or holder of the concentration account). [80] Purpose of the agreement.

The mirror account agreement, also known as “Cash Consolidation”, “Concentration Services” or “Cash Management”, facilitates the banking management of several separate current accounts: [TRANSLATION] “Cash Consolidation”, “Concentration Services” and “Cash Management” agreements are used when a commercial enterprise with a number of accounts (in its own name or that of subsidiaries) wants all those accounts to be combined on a daily basis for the purpose of determining its overall financial situation in regard to the bank (Mirror Account).

This facilitates the calculation of interest on the overall debit or credit position, rather than on each of the accounts. [81] Although it may appear that such an agreement is naturally more suited to the management of the bank accounts of a group of companies under the same control (a parent company and its subsidiaries), there is no reason for such an agreement not to exist for joint bank management, as in this case. . . . [84] The landmark ruling in Canada to date in regard to mirror accounts is that of the Court of Appeal for Ontario in Arthur Andersen Inc. v. Toronto-Dominion Bank.

That judgment confirmed the legality of an agreement that set up a system of mirror accounts, while recognizing that such a system cannot include accounts in which amounts are deposited in trust. . . . [86] The majority judges in Arthur Andersen concluded that the transfers of funds to the concentration account through the system of mirror accounts were real, not virtual: . . ., we are of the view that, in this case, the transfers had to be real.

They resulted in the automatic availability to all Stolp companies of funds transferred to the concentration account via the mirror system, at times when those accounts otherwise would have been overdrawn. [87] That conclusion holds true in this case as well. Paragraph 5 of the agreement of February 16, 1993, sees to it. . . .

[95] The February 16, 1993, mirror account agreement, like the one before it, allows cheques to be drawn on a designated account regardless of its balance, as long as the concentration account permits it. In accordance with the Agreement, at the end of each day, the concentration account was supplied by the transfer of the credit balances among the designated accounts, via the mirror accounts system, and was depleted, via this same transfer system, by the debit balances among the designated accounts. [96] Only the concentration account had a line of credit. None of the designated accounts did.

That was, in fact, the case for Panaber. The Bank did not require Panaber to provide security or a guarantee even though it could avail itself of Finmark Realties’ line of credit. The guarantees provided in this case regarding Finmark Realties’ line of credit were given by its shareholder and director and its closely related companies. [References omitted.] [ 45 ] Counsel for the Trust concedes that CIBC set up a system of mirror accounts. He contends, however, that, contrary to this case, the agreement provided for this explicitly in the Gestions Panaber Inc. case, .

Although that is true, it is, however, indisputable that Groupe Carex, and particularly VMR, understood the mirror accounts mechanism, applied it and derived benefit from it as of July 11, 1989, until their relations ended. [ 46 ] The trial judge provided no explanation for VMR’s mirror account number 01-18117, whose first entry is dated July 11, 1989, the day after the daily transfers came into effect. Account number 01-18117 then showed a credit of $50.84, i.e., an amount mirroring the debit of $50.84 entered in current account number 93-07516.

From that date until April 16, 1992, the balance of mirror account number 01-18117 would faithfully reflect the daily balance of current account number 93-07516. [ 47 ] The main purpose of the mirror account was to allow a daily transfer to the joint account by means of an accounting mechanism adapted to the needs of Groupe Carex and CIBC. [ 48 ] It is difficult to understand how the trial judge could first conclude that the transfers that CIBC had to make every day at closing were always made [TRANSLATION] “later”, [6] and then wonder that CIBC never made daily transfers from the time the agreements were signed. [ 49 ] The “transfer” of $1,788,200 from account number 93-07516 was, in fact, entered in mirror account number 01-18117, the balance of which, showing an overdraft of $1,788,200, was also reduced to zero [TRANSLATION] “to avoid any ambiguity” related to the service of the motion.

The amount of $1,788,200 was never transferred to the joint account bearing number 00-06602. [ 50 ] The agreements of June 29, 1989, and February 28, 1990, only make sense with current accounts, mirror accounts and a joint account.

The first clause of the agreements indicates the intention of the subsidiaries of Groupe Carex: [TRANSLATION] The signatories hereby confirm their intention to avail themselves of certain loans and credits that the Bank may, at its discretion, grant them from time to time and, to facilitate their banking operations, the signatories wish to have transferred on a daily basis the balance of their current accounts in Canadian dollars indicated in

Part 1 of

Schedule A attached hereto (the “Current Accounts”). [Emphasis added.] [ 51 ] The resolution adopted by each subsidiary is to the same effect and provides for pooling the balances of their bank accounts. [ 52 ] Clause 3 sets out instructions to CIBC that are in no way ambiguous: [TRANSLATION]

The signatories hereby give the Bank instructions to transfer, each business day at closing, as of July 10, 1989, the debit or credit balance of the Current Accounts, to their joint account. . . [ 53 ] It is inconceivable that CIBC could, depending on its diligence or negligence, carry out daily transfers or not.

That leeway would be contrary to the very essence of the agreements set out under clause 4, which stipulates the following: [TRANSLATION] all the signatories shall be considered as one and the same borrower and all the obligations of the signatories toward the Bank in that regard shall be joint and several, and indivisible, with each of the signatories being considered a principal debtor, not a surety. . . [ 54 ] Moreover, I am of the opinion that the effect of these agreements is, in fact, a real and automatic daily transfer of the balance of each current account to the joint account. [ 55 ] As stated earlier, although the agreements do not provide specifically for the creation of mirror accounts, the system set up by Groupe Carex and CIBC is, from all standpoints, a system of mirror accounts as described by Crawford and applied by Dufresne J. in Gestion Panaber Inc . [ 56 ] The mirror accounts system meets the needs of a group of companies under the same control (a parent company and its subsidiaries), not those of a single corporate customer holding several accounts.

Groupe Carex wanted to pool the balances of the bank accounts for the purpose of financing by CIBC. The system established a current account with a mirror account for each company and a joint account [7] in the name of the parent company, Services Carex. [ 57 ] An examination of VMR’s bank accounts number 93-07516 (a current account) and number 01-18117 (a mirror account), and of joint account number 00-06602 shows that an entry indicating an amount opposite that of the balance in the current account was created every business day in the mirror account.

The position of the group as a whole in relation to CIBC was recorded in the joint account. According to Crawford, the daily entries in the mirror accounts and the joint account represented real movements of funds, although they did not appear in the current accounts. [ 58 ] Hence, it is correct that the balance of account number 93-07516 was a credit of $1,788,200 at closing on April 16, 1992.

However, accounts number 93-07516 (a current account) and number 01-18117 (a mirror account) must be considered as a whole, the combined balances of which equalled zero at the end of each business day, including April 16, 1992.

That accounting mechanism made a real and automatic transfer possible, on a daily basis, of the balance of the current account to joint account number 00-06602 (i.e., a credit of $1,788,200 on April 16, 1992), according to the pooling (or centralization) of the balances set out in the agreements. [ 59 ] The accounting manipulation performed by CIBC on April 17, 1992, after the order to take possession was served may not have been in keeping with the agreements, but it cannot be considered a transfer to the joint account. [ 60 ] The agreements could be asserted against the Trust.

Pursuant to them, the real balance of Groupe Carex in regard to CIBC at closing on April 16, 1992, was an overdraft of $377,085. The fact that the accounting entry was performed manually (and backdated to April 16, 1992) makes no difference to VMR’s financial situation, which was, in any case, a joint and several debtor because of the overdraft of $377,085, as provided for in clause 4 of the agreements.

I am therefore of the opinion that the trial judge erroneously concluded that, at 1:30 p.m. on April 17, 1992, VMR had a recorded claim against CIBC in the amount of $1,788,200.96. [ 61 ] That documentary evidence is, from all standpoints, in keeping with the testimony of both CIBC’s and VMR’s managers at the time. [ 62 ] Mr. Claude Rochon, who was in charge of the account at CIBC at the time and whose testimony was not contradicted, explained the mechanism in place:

(Vol. 4 at 866–867) [TRANSLATION] A- O.K. So, all the transfers or entries reducing the mirror accounts to zero (0) are performed automatically by computer. It was not . . . it was done by computer, automatically every day. Q- So could you tell us. . . I understand that, for each corporation affiliated with Services Carex, there was a mirror account. Is that right? A- Yes, that’s right. Q- And more specifically in the case of Villa Mont-Royal, the mirror account bore the number zero one dash eighteen one hundred and seventeen (01-18117). Is that right? A- That’s right.

Q- Could you tell us how the information on the statements of transactions in the Villa Mont-Royal accounts, that is, ninety-three zero seven five hundred and sixteen (93-07516) and zero one eighteen one hundred and seventeen (01-18117), was transferred or compiled in the statement of transactions that you provided us for the account of Services Carex Inc.? A- O.K. So, what the computer system did was that, every day, it took the net position of the transactions carried out in account ninety-three zero seventy-five sixteen (93-07516).

That amount was transferred to account zero one eighteen one hundred and seventeen (01-18117) so that the two (2) mirror accounts completely cancelled each other out. That balance was then transferred, again by computer, to account zero zero zero sixty-six zero two (00-06602) in order to amend or update the net position of the group regarding the bank. [63] Claude Rochon testified again: (Vol. 5 at 1191) [TRANSLATION] A- O.K., so the one million seven hundred thousand (1,700,000) involved here was not a true transfer of funds; it was just an accounting entry.

It may be necessary to explain this in more depth, but each company in the group had . . . OK, Villa Mont-Royal had its account and Villa Mont-Royal had a mirror account. What was credited, for example, in the Villa Mont-Royal account, the same amount was reflected as a debit, if you like, in the mirror account, so that the balance of the two (2) was always zero. So, every day, for each entity, its own account and its mirror account were at zero. . . . (Vol. 5 at 1196) [TRANSLATION]

A- . . . the joint account was the only account that showed the position of the group of borrowers with respect to the Bank. That was the concentration account. The mirror accounts were just to help the company manage its business. The figures were separated for the needs of the company to say: “Well, in Villa Mont-Royal, the entries are for Villa Mont-Royal; here the entries are for Services Carex Inc., and, in another account, the entries are for Château Westmount, for example”. But for the Bank, all of that, it was always, always the concentration account that showed the true position.

As account manager, in the morning, when I do it, I look at the positions of all my customers. I have a list and, for Services Carex, for example, I had a single amount that was the concentration account. It was the only account that was of interest to me in the morning. There could be five million (5,000,000) in one account in the group and an overdraft of five million (5,000,000) in another account in the same group. For me, it was zero, because the five million (5,000,000) was compensated there by the other five million (5,000,000) in an overdraft elsewhere, as it was a joint account.

So, if I, I had... . . . (Vol. 5 at 1197) [TRANSLATION] Q- So, what you’re saying is that the joint account was the only one that mattered. A- That’s . . . absolutely. Q- . . . for CIBC? A- Absolutely. [64] The confusion perhaps stemmed from something done by Claude Rochon: (Vol. 4 at 870) [TRANSLATION] A- Because that day, we made entries manually because following the seizure served on us, we deemed it appropriate to reduce the mirror accounts to zero (0) to avoid any ambiguity. . . . (Vol. 4 at 871) [TRANSLATION] A- . . .

So, the two (2) mirror accounts always cancelled each other out, the balance of the two (2) mirror accounts was always zero (0), but each of the two (2) accounts had its own balance. And as I was saying earlier, the reason that the accounts were reduced to zero (0) as of April sixteenth (16th) and thereafter was to avoid any ambiguity in that regard.

What we did, in fact, was to modify the service we provided for the customer to be certain that there was no ambiguity. [65] Sylvain Dugas, chartered accountant employed by Villa Mont-Royal at the time, testified to the same effect: (Vol. 5 at 1144) [TRANSLATION] A- Well, in fact, given the financial situation of Services Carex, every day I had to print the bank balance in order to estimate the disbursements, the receipts, in order to know what suppliers I had to pay. I was, in fact, monitoring the cash flow situation of Services Carex as a whole.

So every morning I printed a document based on which we would decide who to pay, what receipts were about to come in, the rents, the taxes, those things. Q- O.K., the amount mentioned there, there . . . well . . . A- So what you see is an opening balance from the preceding day with the transactions that occurred during the day, which gives you, let’s say, the situation on the day you printed the document. . . . (Vol. 5 at 1162) [TRANSLATION] Q- Can you explain to us briefly what is the centralization of balances?

A- It is a line of credit, in fact, that was operational, within which . . . at the time, I knew that the maximum amount authorized varied according to negotiations with the Bank. But if we take, for example, one million dollars ($1,000,000), let’s say, in authorized credit, at that point, I had to be sure, that the disbursements I made or anything else really, that the net situation at the end of the third column in the document did not exceed one million (1,000,000).

So I had to estimate my disbursements and receipts, and ensure that the figure appearing as the total for the group at the bottom did not exceed one million (1,000,000). . . . (Vol. 5 at 1162) [TRANSLATION] Q- So if we take the statement date of the seventeenth (17th) of April ninety-two (92) . . .

A- But it was at closing on the sixteenth (16th) of April. Q- That’s right. A- Yes. Q- So, we have the balance at closing on the sixteenth (16th) of April . . . A- That’s right. Q- . . . which was how much? A- A debit in the amount of three hundred seventy-seven thousand zero eight-five and ninety-seven (377,085.97). Q- So, a debit, that means a debt in that amount owed to CIBC? A- If you add together all the credit-debit accounts, yes, exactly, that gives you the debit balance owed to CIBC. . . . (Vol. 5 at 1172) [TRANSLATION] Q- And when Mtre.

Bélanger told you there was one point seven (1.7) million in the account . . . A- Villa Mont-Royal’s account. Q- . . . of Villa Mont-Royal, that doesn’t mean that you could write cheques for one point seven (1.7) million, right? A- No, given the banking agreement in which there was a limit on the deficit of all the accounts together, we could not exceed . . . I can’t remember . . . let’s say, one million (1,000,000), I remember that . . . Q. Indeed, it varied. We have the documents. Sometimes, it was more and sometimes less.

So, you actually used the monthly statements for the current account for internal accounting purposes? A. That’s right.

Q. And for your daily operations, you worked with the centralized balance, didn’t you? A. Yes, I worked with that document in order to know my . . . my financial situation, yes. Q. When you say “that document”, for recording purposes? A. P-7. [8] [66] Mr. Dugas testified that he used the compensation account on a daily basis, whereas the other accounts, for which he received copies on a monthly basis, were used solely to facilitate the individual accounting for each of the components of Groupe Carex. [67] Mr.

Dugas knew full well that he could not go to the counter of the CIBC branch in the morning of April 17, 1992, and withdraw $1,788,200.86 or have a cheque in that amount certified. [68] I am therefore of the opinion that, on April 17, 1992, VMR did not have a claim of $1,788,200.86 against CIBC. Legal compensation [69] Another reason prompts me to conclude that VMR did not have a claim against CIBC, namely, the principles of legal compensation.

On the contrary, VMR was jointly and severally indebted toward CIBC in the amount of $377,085.97, with the other members of Groupe Carex. [70] The trial judge wrote that [TRANSLATION] “the funds were still in VMR’s account” at 1:30 p.m. on April 17, 1992. [71] That statement seems to demonstrate some confusion about the legal nature of the banking agreement. [72] It was not a “deposit” within the meaning of Quebec civil law and the customer was not the owner of the funds entered in its [TRANSLATION] “bank book”.

It simply held a claim against the bank. [73] Bernier J.A. wrote the following in In re Hil-A-Don: Bank of Montreal v. Saul Kwiat : [9] [TRANSLATION] The trial judge assumed that the credit balance of a current account was, on the date of the bankruptcy, the company’s property, which was thus transferred to the trustee because of the bankruptcy. First, the legal nature of the banking agreement must be recalled. The money paid into a bank account does not constitute a deposit according to the Civil Code , but a loan to the bank.

Through the banking agreement, the bank serves as the debtor of its customer, the “depositor”, up to the amount of money that the customer pays into that account, minus the agreed-upon banking fees. The claim is always liquid and exigible. That is what Rinfret J., then of the Supreme Court, pointed out in Corporation Agencies Ltd. v. Home Bank of Canada : There is this difference however between the supposed deposit in a vault and in a bank, that in the case of banking, there is no “depot régulier" [regular deposit].

A banker is not a depositary “bound to restore the identical thing which he has received in deposit” (art. 1904 C.C.). The customer parts with the title of his money and loans it to the banker, the result being to make the bank the debtor of his customer with the sole obligation of honouring the customer's drafts or cheques.

In contradiction to the depositary under the Civil Code (art. 1803), the banker is authorized to use the money deposited, and his only obligation is to remit an equal sum of money. . . . Therefore, the credit balance in the company’s current account was a liquid and exigible claim in favour of the company against the bank and was thus subject to compensation. Furthermore, there co-existed in the bank’s favour a reciprocal claim resulting from a loan, which claim was essentially liquid and, given the note evidencing it, was also exigible: it was a promissory note.

The evidence shows that the bank paid itself monthly interest by withdrawals from the current account and that, regarding repayment of the principal, the company was supposed to make $500 monthly payments. The evidence does not show what the nature of the agreement was. Given the fact that it was not recorded in writing and that the note was not amended, however, it was merely a form of accommodation, without the bank having waived its right to demand payment of the balance at any time , and that the claim was still exigible although it had not yet been .

As a result of the foregoing, for the time that the claims co-existed and the credit balance of the current account was lower than the balance of the loan, through the play of legal compensation effected by the sole operation of law (art. 1188 C.C.L.C. ), the company in fact had no claim against the bank and the balance appearing in the current account was nothing more than one of the accounting entries evidencing the various items to be included in the calculation of the bank’s residual claim against the company.

That was the situation on the date of the bankruptcy; the account’s credit balance was never part of the bankruptcy’s patrimony. [Reference omitted.] [74] Authors Nicole L'Heureux, Édith Fortin and Marc Lacoursière have explained the principle of compensation between the customer’s claim and the bank’s claim: [TRANSLATION] 1.16 Right to compensation on the basis of deposited funds For accounting purposes, the customer can hold several accounts.

However, from the bank’s standpoint, between the bank and its customer, there is only a single creditor-debtor relationship for which all the payments and all the accounts must be taken into consideration. Since an ordinary right of claim is involved, the bank has a right to compensation between the credits appearing in the account and the customer’s owed and exigible debts to the bank (art. 1673 C.C.Q. ). Compensation takes place even if the entry in the account, which is merely an accounting regularization, has not yet been performed .

However, the bank cannot compensate if, to its knowledge, the funds belong to a third party or if there is an agreement with the creditor of the funds to be compensated (art. 2497 C.C.Q. ). . . . (

b) Civil law In civil law, the bank’s right to compensation, between the debts of its customers and the deposits in their accounts, does not originate in the agreement, but in the law . A person who has a liquid and exigible debt can deduct it from any liquid amount immediately payable by the person’s creditor. The person relieves his or her indebtedness by paying the net balance to the creditor. However, if the customer has a number of accounts for separate purposes, for the duration of the account, the bank must abide by the wishes of the customer, unless the bank’s claim is at risk. That is the way we must interpret the stipulation in the banking agreement authorizing the bank to

compensate when it pleases (cf. infra, No. 1.28). The same rule concerns the bank’s right to consolidate the various accounts if there is a debt balance in one account and a credit balance in another, even if they are in separate branches. The bank’s right covers all the funds deposited by the customer in his or her accounts and the indebtedness resulting from the advances granted or the amounts owed for discounts.

However, the bank can compensate only liquid and exigible debts. [10] [References omitted.] [Emphasis added.] [75] It is clear from the agreements and resolutions that all the signatories of the agreement were joint and several debtors. Compensation was effected by the sole operation of law without having to make an entry in the books.

Moreover, as soon as an amount was deposited by VMR or any other member of Groupe Carex, compensation was instantly effected with the claims that CIBC held against each and every component of Groupe Carex. [76] With respect for the trial judge, I cannot understand why compensation would not have occurred by the sole operation of law between the claims of Groupe Carex against the Bank and the claims of the Bank against Groupe Carex, leaving, at closing on April 16, a debt balance of $377,085.97 in favour of CIBC.

Prohibited financial assistance [77] The Trust contended that the agreements of June 29, 1989, and February 26, 1990, constituted financial assistance prohibited by the Companies Act within the meaning of the following sections: 123.66.

A company may in no case grant a loan, give security or furnish any other form of financial assistance to a shareholder, a shareholder of its parent legal person or a person to assist him in purchasing its shares if there is reasonable ground to believe that, as a consequence, (1) it could not discharge its liabilities when due, or (2) the book value of its assets would be less than the sum of its liabilities and its issued and paid-up share capital account. . . . 123.68. Financial assistance granted in contravention of

section 123.66 does not entail the nullity of the contract granting the assistance in respect of the company and the lender in good faith. 123.69. Directors who authorize the granting of financial assistance in contravention of

section 123.66 are solidarily liable for the sums involved and not yet recovered. . . . 123.168. The right of action derived from sections 123.58, 123.64, 123.69, 123.71 and 123.121 is prescribed by two years from the deed impugned. [78] From the start, CIBC raised grounds for dismissing the Trust’s contention:

78.1. The lack of requisite interest; 78.2. The failure to implead all the interested parties; [11] 78.3.

Prescription. [79] It is not necessary to examine these grounds for dismissal, since I am of the opinion that CIBC is correct regarding the merits of the issue. [80] When VMR signed the agreements of June 29, 1989, and February 26, 1990, in which it agreed [TRANSLATION] “to be joint and several borrowers and debtors” with other companies in Groupe Carex, it did not give Services Carex prohibited financial assistance. [81] VMR did not grant “ a loan, give security or furnish any other form of financial assistance to a shareholder”.

Rather, the financial assistance was granted by CIBC to the members of Groupe Carex. [82] In fact, on April 7, 1989, the $1 million line of credit was granted solely to Services Carex, with the possibility that co-borrowers could be added if the balance centralization service was used. [83] Beginning on June 29, 1989, the line of credit was granted to Services Carex, Carex Equities and VMR, and those three companies signed an initial agreement regarding joint banking operations.

The second agreement, dated February 26, 1990, can be considered an amendment for the sole purpose of adding two signatories to Groupe Carex. [84] If CIBC had required guarantees from VMR to grant the loan to Services Carex, there would certainly have been financial assistance from the subsidiary to its parent company.

In this case, those agreements were, instead, in the nature of a joint loan and, at most, allowed mutual financial assistance between the various companies of Groupe Carex. [85] If it had been “financial assistance”, would it have been prohibited? [86] As author Louis Payette wrote: [TRANSLATION] The law prohibits financial assistance if there are valid reasons to believe that the assistance will result in either the company being unable to pay its liabilities when due or the realizable value of its assets, minus the amount represented by the value of the assistance granted, becoming less than its liabilities and its stated capital in each share class. . . .

If neither the corporation nor the lender had valid reasons to anticipate the occurrence of either of the consequences, there would be no violation of the section. [12] [87] The granting of financial assistance must be analyzed on the date of June 29, 1989, not a posteriori , when the group’s finances deteriorated. Author Louis Payette points out that, as regards lines of credit, the subsequent circumstances must not affect the assessment of the prohibited nature of the financial assistance: [TRANSLATION]

The security that the corporation reportedly granted as financial assistance remains valid, even if the company becomes unable to meet any of the solvency tests after the fact. . . .

The validity of the financial assistance must be assessed in light of the circumstances at the time it is granted. [13] [88] Nothing shows that, on June 29, 1989, VMR could have had valid reasons to believe that it would be unable to pay its liabilities when due because of the agreements. [14] Nothing supports the Trust’s claim that CIBC required VMR to be a party to the agreements. [15] [89] Of course, VMR’s credit enabled certain companies in the group, including its parent company, Services Carex, to become more indebted. But the opposite is also true.

Between October 1989 and June 1990, VMR made ample use of the line of credit and had a deficit that often exceeded $1,000,000. So it was the other members of the group that enabled VMR to see to its cash requirements and meet its obligations, particularly the monthly payments owed AVD. [90] For those reasons, I am of the opinion that the agreements did not constitute prohibited financial assistance by VMR to its shareholder Services Carex within the meaning of

section 123.66 of the Companies Act . [91] Furthermore, CIBC cannot, in this case, be considered to be a bad faith lender, as no evidence suggests that it may have colluded with the shareholder Services Carex. [16] [92] As for avoidance pursuant to articles 1032 et seq. of the Civil Code of Lower Canada , [17] I am of the opinion that the agreements of June 29, 1989, and February 26, 1990, cannot be impugned by the Trust, since the evidence does not show that, at the time they were signed, VMR intended to defraud or injure the Trust.

As we have seen, the agreements actually enabled VMR to pay the amounts owed the Trust from the line of credit. Be that as it may, the civil recourse for inoperability, which is subject to a deadline of one year, [18] is prescribed.

CONCLUSION [93] I am therefore of the opinion that the appeal should be allowed, the judgment appealed from should be quashed and the proceedings instituted should be dismissed, the whole with costs in the two courts. [94] Considering that conclusion, it is not necessary to rule on the Trust’s oral motion for new evidence in order to establish that the companies have ceased to exist and cannot be impleaded. ANDRÉ FORGET J.A. [17] Now replaced by arts. 1631 et seq. C.C.Q.