2017 QCCA 268, 2017 QCCA 268

Arrangement relatif à Métaux Kitco inc. 2017 QCCA 268 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL Nos. 500-09-025913-161 / 500-09-025914-169 (500-11-040900-116) DATE: February 20, 2017 CORAM: THE HONOURABLE PAUL VÉZINA, J.A. LORNE GIROUX, J.A. ÉTIENNE PARENT, J.A. IN THE MATTER OF THE PLAN OF ARRANGEMENT WITH THE CREDITORS OF KITCO METALS INC., DEBTOR ( COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c. C-36): No. 500-09-025913-161 AGENCE DU REVENU DU QUÉBEC APPELLANT – creditor – respondent v. KITCO METALS INC.

RESPONDENT – debtor – applicant and ATTORNEY GENERAL OF CANADA IMPLEADED PARTY – creditor – respondent and ATTORNEY GENERAL OF QUEBEC IMPLEADED PARTY – impleaded party and RICHTER LLP IMPLEADED PARTY – monitor / impleaded party and HERAEUS METALS NEW YORK LLC IMPLEADED PARTY – impleaded party and CANADIAN ASSOCIATION OF INSOLVENCY AND RESTRUCTURING PROFESSIONALS (CAIRP) INTERVENER No. 500-09-025914-169 ATTORNEY GENERAL OF CANADA APPELLANT – creditor – respondent v. KITCO METALS INC.

RESPONDENT – debtor – applicant and RICHTER LLP IMPLEADED PARTY – monitor – impleaded party and HERAEUS METALS NEW YORK LLC IMPLEADED PARTY – impleaded party and ATTORNEY GENERAL OF QUEBEC IMPLEADED PARTY – impleaded party and AGENCE DU REVENU DU QUEBEC IMPLEADED PARTY – creditor – respondent

and CANADIAN ASSOCIATION OF INSOLVENCY AND RESTRUCTURING PROFESSIONALS (CAIRP) INTERVENER JUDGMENT [ 1 ] The appellants, the Agence du revenu du Québec and the Attorney General of Canada, appeal from a judgment rendered on February 1, 2016, by the Superior Court, District of Montreal (the Honourable Madam Justice Marie-Anne Paquette), which condemned them respectively to pay Kitco $1, 443,713.16 and $335,866.78, as refunds of the Goods and Services Tax (GST) and the Quebec Sales Tax (QST) owed to Kitco up to November 30, 2015, with interest and the additional indemnity. [ 2 ] For the reasons of Vézina, J.A., with which Giroux and Parent, JJ.A. agree, THE COURT : [ 3 ] DISMISSES the appeals with legal costs in favour of the respondent (Kitco) and the impleaded parties (Richter LLP and Heraeus Metals New York LLC), with but no costs against the intervener (CAIRP).

PAUL VÉZINA, J.A. LORNE GIROUX, J.A. ÉTIENNE PARENT, J.A. Mtre Daniel Cantin Larivière Meunier (Revenu Québec) For the Agence du revenu du Québec Mtre Chantal Comtois Department of Justice Canada For the Attorney General of Canada Mtre Yves Ouellette Mtre Alexandre Bayus Mtre Lysandre Laferrière Chevrefils Gowling WLG (Canada) For Kitco Metals Inc. Mtre Sylvain A. Vauclair Woods For Richter LLP Mtre C.

Jean Fontaine Stikeman Elliot For Heraeus Metals New York LLC Mtre Éric Vallières McMillan For CAIRP Date of hearing: November 8, 2016 REASONS OF VÉZINA, J.A. [ 4 ] The debtor “company” Kitco Metals Inc. purchases scrap gold (jewelry, chains, cutlery, etc.), and extracts the pure gold, which it subsequently sells.

[ 5 ] Scrap metal purchases are subject to the Goods and Services Tax (GST) and the Quebec Sales Tax (QST), whereas pure gold transactions are exempt. The Agence du revenu du Québec (ARQ) collects both taxes, which explains why the attorney generals of Quebec and Canada are speaking with a single voice in the present proceedings, with the ARQ. [ 6 ] The tax collection system includes a refund mechanism that operates as follows. Upon the purchase of scrap metal, which constitutes an [ translation ] “input” in its operations, Kitco must pay the taxes to its suppliers, which remit them to the ARQ.

When pure gold is sold, however, since the law exempts buyers from paying the GST and QST on it, Kitco is entitled to a refund of the tax paid when it purchased the input. [ 7 ] In this way, in 2010 and 2011, Kitco claimed and obtained tax refunds of over $300 million from the ARQ. [ 8 ] The problem is that Kitco’s suppliers allegedly used a fraudulent billing scheme and remitted no taxes at all to the ARQ. Therefore, the ARQ “refunded” Kitco for taxes never collected. [ 9 ] When the ARQ discovered the scheme, it concluded that Kitco was party to it.

Kitco had repeatedly sold its pure gold to its own suppliers, resulting in a surprisingly high sales volume. According to the ARQ, this was a fraudulent cycle set up to defraud the ARQ. The suppliers incorporated the pure gold into crude jewelry that they immediately sold as scrap gold to Kitco.

By increasing the transactions, they increased their refunds of taxes that had in fact never been collected by the ARQ in the first place. [ 10 ] Following its investigation, the ARQ sent Kitco an assessment for the millions it had swindled out of the Agency. [ 11 ] Kitco protests strenuously that it was innocent and contests all of the assessments.

It writes: To Kitco’s understanding, the ARQ [l’Agence] claims that, for several years, some companies linked to the goldsmith trade have been using a fraudulent scheme to wrongfully avoid the remittance of the GST and QST paid to them by Kitco or others, and that Kitco is somehow part of this scheme (an allegation that Kitco has always strongly denied); Prior to even receiving the draft notices of assessment, Kitco supplied the ARQ with all the useful and relevant information to demonstrate that it is not and could not be part of the alleged scheme contemplated by the ARQ; [ 12 ] It is well known that assessed taxes are nevertheless payable immediately, even when they are contested. [1] On June 7, 2011, the ARQ proceeded with compulsory execution. [ 13 ] The next day, on June 8, 2011, Kitco filed a notice of intention to make a proposal under

section 50.4 of the Bankruptcy and Insolvency Act , [2] which stayed any “remedy against the insolvent person or the insolvent person’s property” by its creditors (s. 69 BIA ), including the ARQ’s execution proceedings. [ 14 ] Then, on July 7, 2011, Kitco obtained an “initial order” under the Companies’ Creditors Arrangement Act ( CCAA ) [3] continuing the stay, which still holds today and will remain in effect until May 31, 2017.

The Court could continue it if it considers it appropriate. [ 15 ] The question of whether or not Kitco participated in the fraudulent scheme against the ARQ is now before a criminal court. The trial is underway, and it looks like it could go on for months or even longer. The validity of the assessments of the taxes owed by Kitco depends on the outcome of the trial.

Until then, the company remains under the protection of the CCAA , unless the Court issues a new order. [ 16 ] In the meantime, since June 8, 2011, Kitco has continued operating – at a reduced volume, we are told – and pays taxes on inputs and then claims refunds from the ARQ, which acknowledges owing Kitco over $1.7 million. The ARQ does not remit that amount to Kitco, however, but applies it as compensation against the amounts assessed. [ 17 ] Kitco, which considers the compensation illegal, filed a motion to compel the ARQ to refund it the $1.7 million.

The Superior Court ruled in Kitco’s favour [4] and ordered the refund.

This is the reason for the ARQ’s appeal. [ 18 ] The following reason appears in that judgment: [ translation ] [118] . . . the CCAA , as interpreted by the jurisprudence, does not allow compensation between the Disputed Fiscal Debt, which was incurred before the insolvency proceedings, and the debt related to the Undisputed Credits, which was incurred after those proceedings. [ 19 ] According to the ARQ, this reason is unfounded because the wording of the provision permitting compensation (s. 21 CCAA , infra ) does not limit it to debts arising before the insolvency proceedings.

It writes: [ translation ] The trial judge was wrong to conclude that, according to the wording of

section 21 CCAA , the two compensating claims have to arise before proceedings are instituted. [ 20 ] In my opinion, the ARQ’s literal

interpretation is not correct because it creates an obstacle to the restructuring of large companies in difficulty, which is the primary objective of the CCAA , and also goes against the well-established principle in insolvency law of treating unsecured creditors equally. The ARQ also submits a ground based on the hypothesis that Kitco will fail to submit a plan of arrangement.

[ 21 ] In my opinion, the judge’s reason is well founded and is sufficient to uphold the judgment. The following is my four-part analysis: (

A) The reason, with a few clarifications; (

B) Compensation versus corporate restructuring; (

C) Compensation versus treating unsecured creditors equally; (

D) The potential failure of Kitco to submit a plan of arrangement. (

A) The reason, with a few clarifications [ 22 ] To begin with, it is useful to explain the contents of the judge’s reason, to wit: (1) “The CCAA ,”

(2) The “Disputed Fiscal Debt,”

(3) The “Insolvency proceedings” and

(4) A debt “incurred before the insolvency proceedings” and another “incurred after” those proceedings. (1) “ The CCAA ” [ 23 ] First, the provision in question is

section 21, which permits compensation. The act as a whole, however, is the source of the underlying objectives and principles that must be taken into account to ensure an accurate

interpretation of the provision in accordance with the recognized modern approach. [ 24 ]

Section 21 CCAA reads as follows: 21 Les règles de compensation s’appliquent à toutes les réclamations produites contre la compagnie débitrice et à toutes les actions intentées par elle en vue du recouvrement de ses créances, comme si elle était demanderesse ou défenderesse, selon le cas 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 the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may be. [ 25 ] As it is in my view important to point out the close relationships between the CCAA and the BIA , here is the provision of the latter statute respecting compensation, which is to the same effect: Compensation 97

(3) Les règles de la compensation s’appliquent à toutes les réclamations produites contre l’actif du failli, et aussi à toutes les actions intentées par le syndic pour le recouvrement des créances dues au failli, de la même manière et dans la même mesure que si le failli était demandeur ou défendeur, selon le cas, sauf en tant que toute réclamation pour compensation est atteinte par les dispositions de la présente loi concernant les fraudes ou préférences frauduleuses. Law of set-off or compensation 97

(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences. (2) “ Disputed Fiscal Debt ” [ 26 ] This refers to the notices of assessment that the ARQ issued against Kitco, which Kitco is contesting. [ 27 ] With respect to the contestation, another point debated in appeal should be eliminated. [ 28 ] For compensation to be effected between debts, the Civil Code requires that the debts be “certain” (art. 1673).

Does the fact that the assessments are contested make them uncertain, or does the fact that they are immediately exigible make them certain within the meaning of that provision? [ 29 ] That question need not be answered, because, even if we adopt the hypothesis favourable to the ARQ whereby the assessments are certain, the question remains whether compensation can be effected between the two debts where one is incurred before the insolvency proceedings and the other is incurred after. The answer to that question will be sufficient to decide the dispute.

(3) The “ Insolvency proceedings ” [ 30 ] These are the proceedings instituted in accordance with the CCAA or the BIA , which are the two laws that shape the integrated body of insolvency law. [ 31 ] In this case, the first proceeding was the notice of intention ( BIA ) dated June 8, 2011, followed by the second, the order ( CCAA )

dated July 7, 2011. The first stayed the creditors’ remedies and the second continued that stay. This constitutes another close connection between the two statutes. [ 32 ] The creditors’ claims were also established and evaluated as at June 8, pursuant to the CCAA , which refers to the BIA : ( CCAA ) Réclamations 19

(1) Les seules réclamations qui peuvent être considérées dans le cadre d’une transaction ou d’un arrangement visant une compagnie débitrice sont :

a) celles se rapportant aux dettes et obligations, présentes ou futures, auxquelles la compagnie est assujettie à. . . (ii) la date de la faillite, au sens de l’

article 2 de la

Loi sur la faillite et l’insolvabilité , si elle a déposé un avis d’intention sous le régime de l’article 50.4 de cette loi ou. . . Claims 19

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

a) claims that relate to debts or liabilities, present or future, to which the company is subject. . . ( ii) if the company filed a notice of intention under

section 50.4 of the Bankruptcy and Insolvency Act or. . . ( BIA ) Définitions 2 Les définitions qui suivent s’appliquent à la présente loi. . . . ouverture de la faillite Relativement à une personne, le premier en date des événements suivants à survenir : . . .

c) le dépôt d’un avis d’intention par elle; . . .

Definitions 2 In this Act, . . . date of the initial bankruptcy event , in respect of a person, means the earliest of the day on which any one of the following is made, filed or commenced, as the case may be: . . . (

c) a notice of intention by the person, . . . [ 33 ] This led to the Court order of April 18, 2012, which states: e) “Claim” means any rights [[ translation ] of a creditor] existing prior to the Determination Date, or which would have been claims provable in bankruptcy had the Petitioner become bankrupt on the Determination Date, and. . . . . . n) “Determination Date” means June 8, 2011; o) “Excluded Claims” means any right of any Person against the Petitioner in connection with (

i) any indebtedness, liability or obligation of any kind which came into existence after the Determination Date and…. [ 34 ] June 8 is thus the date of institution of proceedings in insolvency and of the stay of the creditors’ remedies, as well as the date when their claims must be established (the Determination Date or Determination).

(4) A debt “incurred before the insolvency proceedings” and another “incurred after” those proceedings [ 35 ] In appeal, the parties take up the distinction drawn by the trial judge between the debts incurred before the Determination and those incurred after it, referring to [ translation ] “pre-” and [ translation ] “post-” debts, which simplifies the wording. [ 36 ] Since the claims were established as at the Determination Date, they are all pre-debts, to which the “law of set-off or compensation applies” (s. 21 CCAA and s. 97(3) BIA ).

[ 37 ] Here, the parties admit that the ARQ’s claim based on the assessments is a pre-debt, to which compensation applies. [ 38 ] According to the ARQ, the $1.7 million refund claimed by Kitco is a post-debt against which compensation can also be effected.

It argues that [ translation ] “[c]ompensation of a claim by a debt arising during the status quo is permitted.” The phrase [ translation ] “during the status quo ,” means arising in the period from the day of Determination and as long as the stay of the creditors’ remedies ordered by the Court continues. [ 39 ] It argues that, while its claim must be “pre” for compensation to be effected, the same is not true of its debt to the debtor, which can be “post.” It writes: [ translation ] Naturally, the compensated claim must be related to a debt or liability of the debtor prior to the institution of insolvency proceedings.

It can, however, be compensated against “any action instituted by the debtor for the recovery of debts” with no regard for the point in time when the underlying rights arose. [ 40 ] It is a fact that, as at the day of Determination, Kitco had no right to the claimed refund. That right arose from the continuation of its business and the taxes it has paid to its suppliers on the input for its operations since Determination.

The refund is indeed a post- debt. [ 41 ] It will be necessary to revisit this distinction between pre- and post-debts through a review of the case law, as there is some confusion in this respect. (

B) Compensation in relation to corporate restructuring [ 42 ] The ARQ submitted an

interpretation of

section 21 that follows the text very closely, which is not an unreasonable approach. Since the “law of set-off or compensation applies to … all actions instituted by [the debtor company] for the recovery of debts …,” the ARQ can invoke compensation as a defence against Kitco’s claim for a tax refund of $1.7 million. [ 43 ] In my opinion, this literal

interpretation goes against the primary objective of the CCAA , which is the restructuring of large companies in difficulty to ensure their survival, because it undermines the status quo period intended by the statute during which the company can develop a plan of arrangement to be presented to its creditors. In Century , [5] the Supreme Court wrote: - On the necessity of the status quo : [60] Judicial decision making under the CCAA takes many forms. A court must first of all provide the conditions under which the debtor can attempt to reorganize.

This can be achieved by staying enforcement actions by creditors to allow the debtor’s business to continue, preserving the status quo while the debtor plans the compromise or arrangement to be presented to creditors, and supervising the process and advancing it to the point where it can be determined whether it will succeed . . . [Citations omitted.] - On the importance of the survival of companies: [60] . . .

In doing so, the court must often be cognizant of the various interests at stake in the reorganization, which can extend beyond those of the debtor and creditors to include employees, directors, shareholders, and even other parties doing business with the insolvent company . . .

In addition, courts must recognize that on occasion the broader public interest will be engaged by aspects of the reorganization and may be a factor against which the decision of whether to allow a particular action will be weighed . . . [Citations omitted.] [ 44 ] The objective of restructuring is so important that the CCAA even allows debtors to borrow, subjecting their property to a security that ranks in priority over the claim of any secured creditor. [ 45 ] To explain how a literal

interpretation of

section 21 creates an obstacle to the objective of restructuring, I will borrow from “Recent Developments in the Law of Set-off” [6] by Anderson, Gelbman and Pullen, in which they ask “whether set-off is available in the CCAA context as between pre-filing debts and post-filing debts.” [ 46 ] In the article, the authors analyse Re Air Canada , [7] referred to by the ARQ, which they assert wrongly opens the door to compensation between pre- and post-debts.

They describe “the following typical scenario”: [8] • A and B are in a trading relationship, and each month either party could be a net payor; • A becomes insolvent and seeks court protection pursuant to the CCAA ; • As of the filing date, A owes B a pre-filing debt; • A and B continue commercial relations in the ordinary course post-filing; and • Post-filing, B becomes a net payor and purports to set off the amount it owes to A against the pre-filing amounts owed by A to B, potentially until the entire pre-filing debt is extinguished.

If Air Canada stands, it would appear that a set-off would be allowed in the scenario. However, the mischief created by such a set-off is clear; it creates an incentive for a creditor with a pre-filing claim to procure goods or services from the debtor company in the post-filing

period and withhold payment for such goods or services to retire the pre-filing debt. At the same time, it creates a disincentive for the debtor company to continue to do business with its suppliers or customers to avoid having to “work off” the pre-filing debt, an action which, depending on the amounts involved, could dissipate significant assets and jeopardize a successful restructuring. [ 47 ] This scenario corresponds to the situation before us, in which the ARQ owes a post-debt, namely, tax refunds, which it uses to effect compensation against the assessments, which are pre-debts.

The post-debt accounts for 15% of Kitco’s sales revenue, such that, if the status quo persists – which is to be feared – the compensation will continue “until the entire pre-filing debt is extinguished.” [ 48 ] How can Kitco keep its business going if, like its competitors, it pays 15% in taxes on its inputs, but, unlike them, it does not receive a refund? This is an untenable situation. The authors write: [9] If a debtor company provides goods or services and receives no payment in return, the restructuring process will be rendered impossible. This result is especially true if multiple creditors are involved.

It is difficult to imagine that the legislators of the day intended that result. [ 49 ] The authors quote the leading authorities in insolvency law, Houlden, Morawetz and Sarra, who come to the same conclusion: [10] It is customary in a proposal to provide that creditors dealing with the debtor after the filing of a notice of intention or a proposal shall have no right of set-off. This is done to prevent creditors from purchasing goods from the debtor and claiming a right of set-off against the amount owing to them by the debtor.

Even if such a term is not contained in a proposal, it would appear that there is no right of set- off, since if such were allowed it would be a fraud on the bankruptcy law. . . If set-off were allowed, it would make it difficult, if not impossible, for a trading company to make a successful proposal. [ 50 ] The correct

interpretation of

section 21 must be consistent with the objective of restructuration. (

C) Compensation in relation to treating unsecured creditors equally [ 51 ] To begin with, it is useful to focus on the close links between the CCAA and the BIA , which mean that case law and scholarly opinion can be applied to both equally. [ 52 ] These laws form a part of an integrated body of insolvency law, as the Supreme Court has said: [11] [78] Tysoe J.A. therefore erred in my view by treating the CCAA and the BIA as distinct regimes subject to a temporal gap between the two, rather than as forming part of an integrated body of insolvency law.

Parliament’s decision to maintain two statutory schemes for reorganization, the BIA and the CCAA , reflects the reality that reorganizations of differing complexity require different legal mechanisms . . . [ 53 ] The “two statutory schemes for reorganization” are, first, the entire arrangement procedure under the CCAA , and, second, the “proposals” under

Part III BIA with a view to an arrangement. An arrangement is a contract with the creditors to erase past deficits and relaunch the company. [ 54 ] The two schemes prescribe a combined procedure that ensures maintenance of the status quo by the stay of creditors’ individual remedies for the time needed to prepare a restructuring plan to be presented to them with a view to an arrangement or compromise. [ 55 ] In Century , [12] the Supreme Court restored the trial decision that “fostered a harmonious transition” between the two laws in order to provide a “single collective proceeding” with respect to insolvency.

It wrote: [77] The CCAA creates conditions for preserving the status quo while attempts are made to find common ground amongst stakeholders for a reorganization that is fair to all. Because the alternative to reorganization is often bankruptcy, participants will measure the impact of a reorganization against the position they would enjoy in liquidation.

In the case at bar, the order fostered a harmonious transition between reorganization and liquidation while meeting the objective of a single collective proceeding that is common to both statutes. [ 56 ] There are two schemes: the BIA , which is directed at SMEs, , and the CCAA , which is directed at large businesses. Since SME proposals are numerous and have more common elements, the BIA sets out a number of rules for dealing with them.

In cases of large businesses in difficulty, which are fortunately less common, every situation is unique, and the CCAA accordingly provides for greater flexibility to ensure the solution is tailored to the situation. [ 57 ] The two schemes are integrated, as can be seen from their many corresponding provisions, such as the rules for compensation, the definition of provable claims and the manner they are dealt with, and the stay of creditors’ remedies that begins under one scheme and continues under the other. [ 58 ] It should also be noted that section 97(3) BIA , which provides for compensation in the event of bankruptcy, also applies to proposals under section 66(1) BIA . [13] [ 59 ] In addition to these provisions, there are also those covering the notion of a secured creditor, which are the same: “a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property.” (See the

definitions in

section 2 of both laws.) [ 60 ] The ARQ itself draws attention to these close ties by employing the expression [ translation ] “the plan or proposal” a number of times. For example, noting the common objective of the two schemes, it writes: [ translation ]

Under the CCAA or a proposal, a stay of proceedings is established to allow the debtor to restructure and present its creditors with a planor proposal.* _______________ *

Section 11.2 CCAA and sections 69 and 69.1 BIA. [61] This concordance now established, we may consider the Supreme Court’s comments on the rule of compensation in insolvencycases. In D.I.M.S. Construction inc. (Trustee of) v.

Québec (Attorney General),[14] it writes: [55] … Since s. 97(3) BIA is an exception to the rule of equality between creditors, it must be interpreted narrowly. … [56] … The general principles of the BIA preclude any transaction that would have the effect of granting a security that did not existbefore the bankruptcy. … [62] Equal treatment of creditors, subject to the priorities set out in the statute, is a recognized principle of insolvency law. [63] The ARQ claims, however, that it has priority by virtue of compensation. It writes: [translation] In Husky Oil Operations Ltd. v.

M.N.R.15 [Husky Oil], the Supreme Court recognized that compensation creates a form of prioritypermitted in the context of insolvency.

Parliament thus authorizes the party that invokes it to change the established order of priority. _______ 15 (SCC), [1995] 3 SCR 453 at paras. 60–61. [64] Further on in Husky: [Emphasis added.] [57] In the bankruptcy context, a right to set-off necessarily has the effect of securing the claim of the party claiming set-off againstassets of the bankrupt's estate. … …. [59] Indeed, as a result of creating a type of security interest in the estate, the operation of set-off in bankruptcy has been the subjectof academic criticism. … [60] … in the bankruptcy context, the law of set-off allows a debtor of a bankrupt who is also a creditor of the bankrupt to refrainfrom paying the full debt owing to the estate, since it may be that the estate will only fulfil a portion, if that, of the bankrupt's debt.Consequently, in this limited sense the party claiming set-off has Parliament's blessing for the "reordering" of his priority in bankruptcyby virtue of the operation of the law of set-off. [65] In the civil law, this “priority” created by set-off is difficult to understand because compensation “is effected by operation oflaw upon the coexistence of debts…” (art. 1673 CCQ), essentially automatically.

It is easier in the common law, where the operation isnot automatic and the two debts exist independently and survive in parallel when bankruptcy occurs. [66] In the civil law, on the day of Determination, compensation is effected and a balance is calculated in favour of the creditor orthe debtor, if the two debts are liquid and exigible. It is also effected if the debt is not exigible since a “debtor loses the benefit of theterm if he becomes insolvent” (art. 1514 CCQ).

Lastly, if judicial liquidation is required (art. 1672 CCQ), the balance is calculatedretroactively to the day of Determination, since the claims must be established as at that date. [67] In the common law, the two debts survive Determination. Owing to the cleavage between the bankrupt’s assets and liabilities,creditors retain provable claims for the entire amount owing to them but, in return, the entire amount of their debt must be paid to thetrustee.

This [translation] “shocking” result is fortunately averted by the fact that both insolvency regimes allow for compensation. [68] In this common law context, compensation can be seen as a form of priority security. The creditor is secured, but with respect toonly one piece of the debtor’s property controlled by the trustee, namely, the debtor’s claim against the creditor.

Once that security isreceived by way of a reduction in the amount of the debtor’s debt by the amount of the debtor’s claim, however, the creditor becomes anordinary creditor with respect to the balance, with no security on any of the debtor’s other property. [69] How does this apply to the ARQ’s claim on Kitco’s property? [70] As at the day of Determination, the ARQ was one of Kitco’s creditors for the amounts assessed, but it was also one of Kitco’sdebtors since it owed a tax refund for prior operations (not including the $1.7 million for operations subsequent to Determination). The

compensation was effected. The ARQ reduced the assessments by the amount of the refund, which it did not pay to Kitco, thus realizing its security on that piece of Kitco’s property by trading its claim for a refund.

Once its security was realized through compensation, it no longer held any security on Kitco’s other property, and Kitco could keep that property to maintain its operations and restructure its business. [ 71 ] When the ARQ later seeks to effect another compensation for $1.7 million, it is clear that it is claiming a security interest on other property belonging to Kitco and assigning itself priority to the detriment of other ordinary creditors.

This is an operation prohibited under the statute, as the Supreme Court notes in the passage from D.I.M.S. , cited above: [56] … The general principles of the BIA preclude any transaction that would have the effect of granting a security that did not exist before the bankruptcy. … [ 72 ] Once again the ARQ argues that the case law allows compensation to be effected between pre- and post-debts. I will not revisit Air Canada , the judgment criticized in the commentary. [ 73 ] According to the ARQ, the compensation rule in bankruptcy matters must be given a broad

interpretation. It writes: [ translation ] . . . since D.I.M.S. Construction inc. (Trustee of) v. Québec (Attorney General) [ D.I.M.S. ], it has been established that equitable set-off is no longer applicable in Quebec. This is what led this Court, in Daltech Architectural inc. (Syndic de) [ Daltech ], to conclude that legal compensation under the CCQ must be interpreted broadly:…. Compensation of related debts that are not necessarily certain, liquid or exigible as at the date of institution of insolvency proceedings is thus permitted under Quebec civil law.

This right was in fact reaffirmed by the Court in Commission de la santé et de la sécurité du travail v . Dolbec Transport inc. [ [15] ] … [Citations omitted.] [ 74 ] So far, so good. But problems arise when, at the end of the last paragraph cited, the ARQ adds: [ translation ] Regarding this aspect, the trial judge failed to take into account any of the foregoing judgments; she erred. [ 75 ] According to the ARQ, the [ translation ] “broad

interpretation” of the case law would have led the Court in Dolbec to allow compensation to be effected between pre- and post-debts. This is not the case. [ 76 ] In Dolbec , the Court noted that both of the debts to which set-off was applied were incurred before Determination.

It wrote: [ translation ] [37] This is why, although, following approval by the Court and payment of a dividend, the CSST was bound by the proposal and could no longer claim the balance of its debt under section 62(2) BIA , the Court is nevertheless of the opinion that, to defend itself against Dolbec’s action, the CSST could still avail itself of the provisions of section 97(3) BIA and effect compensation against the balance of the debt since there is nothing in the proposal to prevent this, the debts are related, and both occurred after Dolbec had filed its notice of intention to make a proposal under the Bankruptcy and Insolvency Act . [ 77 ] The source of the error lies in the fact that the pre-debts include those incurred after Determination where they result from an obligation that originated before Determination .

Post-debts are only those incurred after and also resulting from an obligation originating after Determination, such as the $1.7 million tax refund claimed after Determination and resulting from the company’s post- Determination operations. [ 78 ] Certainly, an obligation can be contingent, unliquidated, or not exigible as at the day of Determination, but existing and able to give rise to a claim if a court decision “deems it provable,” as provided in sections 121(1) and (2), which refer to 135(1.1) and

(4) BIA .

Art. 121 (1) Réclamations prouvables 121

(1) Toutes créances et tous engagements, présents ou futurs, auxquels le failli est assujetti à la date à laquelle il devient failli, ou auxquels il peut devenir assujetti avant sa libération, en raison d’une obligation contractée antérieurement à cette date, sont réputés des réclamations prouvables dans des procédures entamées en vertu de la présente loi. Décision

(2) La question de savoir si une réclamation éventuelle ou non liquidée constitue une réclamation prouvable et, le cas échéant, son évaluation sont décidées en application de l’article 135. 135 … Réclamations éventuelles et non liquidées

(1.1) Le syndic décide si une réclamation éventuelle ou non liquidée est une réclamation prouvable et, le cas échéant, il l’évalue; sous réserve des autres dispositions du présent article, la réclamation est dès lors réputée prouvée pour le montant de l’évaluation. … Effet de la décision

(4) La décision et le rejet sont définitifs et péremptoires, à moins que, dans les trente jours suivant la signification de l’avis, ou dans tel autre délai que le tribunal peut accorder, sur demande présentée dans les mêmes trente jours, le destinataire de l’avis n’interjette appel devant le tribunal, conformément aux Règles générales, de la décision du syndic. Section 121 (1) Claims provable 121

(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act. Contingent and unliquidated claims

(2) The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with

section 135. 135 … Determination of provable claims

(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation. … Determination or disallowance final and conclusive

(4) A determination under subsection (1.1) or a disallowance referred to in subsection (2) is final and conclusive unless, within a thirty day period after the service of the notice referred to in subsection (3) or such further time as the court may on application made within that period allow, the person to whom the notice was provided appeals from the trustee’s decision to the court in accordance with the General Rules. [ 79 ] Even though date of the court’s ruling is long after Determination, such an obligation is nonetheless a “provable claim” as of that day, to which compensation can apply. [ 80 ] In Daltech [16] as well, the Court reiterated that the mutual obligations at the source of the debts to be compensated must exist on the day of Determination.

In that judgment, we read: [ translation ] [58] In D.I.M.S. Construction inc. (Trustee of) v. Québec (Attorney General) , Deschamps, J. interpreted section 97(3) BIA . “… as implicitly requiring that the mutual debts come into existence before the bankruptcy”. In this case, I share the opinion of the trial judge that compensation applies because, prior to the bankruptcy, the bankrupt had a claim against the respondent, as evidenced by the right of retention set out provided in the Contract.

At the time of the bankruptcy, both parties were mutually creditor and debtor. [ 81 ] For compensation to be possible, the question is not whether there is a debt, or whether it is liquid or exigible, or related to another debt, but whether it is a provable claim duly proved or “deemed a proved claim”. [ 82 ] In my opinion, sections 21 CCAA and 97(3) BIA , which provide that the “law of set-off or compensation applies to all claims…”, thereby identify the point in time when compensation is effected, or in other words, the moment at which the claims must be established: it is on the date of Determination that temporal reciprocity is established. [ 83 ] Thus, a creditor establishes its claim as at Determination, at which time it subtracts its own debt to the debtor.

If the balance is in the creditor’s favour, it establishes its provable claim. Otherwise, if the balance is in the debtor’s favour, the latter is entitled to claim the balance, but not more.

[84] The judge also based her judgment on the principle of equality between creditors, from which compensation must not stray.

Shewrote: [translation] [102] In accordance with these preoccupations and this reasoning, the Supreme Court specifically stated in D.I.M.S. that section 97(3)BIA, which allows compensation in the context of bankruptcy, implicitly requires that the mutual debts be incurred before thebankruptcy. [55] Few commentators have shown an interest in the effects of subrogation in bankruptcy matters, and the principles of Canadianbijuralism do not permit the importation of common law rules … Section 97(3) BIA does not provide that a claim may be transferredfrom one creditor to another so as to permit compensation where it could not otherwise be set up.

Since s. 97(3) BIA is an exception tothe rule of equality between creditors, it must be interpreted narrowly. …. [85] I read D.I.M.S. in the same way.

Another passage from that judgment reads: [40] … Thus, a creditor who wishes to effect compensation must be able to prove the bankrupt was subject to a debt by reason of an obligationincurred before the bankruptcy. … [55] . . . [Section 97(3) BIA] must therefore be read in conjunction with ss. 121, 136(3) and 141 BIA as implicitly requiring that themutual debts come into existence before the bankruptcy. [86] In a similar vein, the judge added: [translation] [103] Moreover, the Court of Appeal of Québec has abided by this rule in a number of decisions.63 [104] In 2004, in accordance with that rule and in a context similar to that of the current dispute, the Court of Appeal for Ontario ruled64 that Canada Revenue Agency cannot assign refunds owing to a debtor for tax overpayments made after a proposal to the payment of adebt incurred by the debtor toward Revenue Canada for taxes unpaid before the proposal. [105] Given the strong similarity between sections 97(3) BIA and 21 CCAA, and the fact that both laws are part of an integrated body ofinsolvency law, that conclusion applies just as well to set-off in a context of restructuring.

There is no reason to differentiate between theset-off mechanism in the context of a bankruptcy or proposal and in the context of an arrangement. _________ 63 CSST c. Dolbec Transport inc., 2012 QCCA 698 at para. 37; Daltech Architectural Inc. (Syndic de), 2008 QCCA 2441, paras. 58,61; 2945-2802 Québec c. Ville de St-Léonard, J.E. 98-2341 at paras. 22, 23, 25 (C.A.). 64 Re Jones, (2004) 45 C.Q.B. (4th) 263 at para. 19. 65 Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 , [2010] 3 S.C.R. 379 at paras. 15, 22-24, 78. [87] Rulings prior to D.I.M.S. now have less weight. [88] In short, the

interpretation in the case law of

section 21 CCAA does not go in the direction that the ARQ would like. (

D) The potential failure of Kitco to submit a plan of arrangement [89] The ARQ bases this additional ground on an alternative hypothesis, depending on whether the proceeding ends with or withoutan arrangement. It writes: [translation] In the event of the approval of the plan or proposal, a new contract will bind the creditors.

This is the cut-off date after whichcompensation of a debt incurred before insolvency proceedings by a debt incurred after the proceedings must cease, unless the parties have agreed otherwise.61 If the plan or proposal is not approved, bankruptcy will take place at the proposal stage, or the stay will belifted and bankruptcy will take place at the arrangement stage, and this is when the cut-off date will be established.

Any compensationthat will have been effected at that point will be the compensation of debts incurred before the bankruptcy. ____________________ 61 Note that the compensation of debts incurred before the institution of proceedings can be effected at any time, even after approval ofthe proposal – Dolbec, supra note 21.

[ 90 ] In the footnote, the ARQ rightly recognizes that compensation can be effected even after an arrangement has been established. [ 91 ] An arrangement does not change compensation. It binds all creditors with provable claims (s. 2 BIA ) as at Determination, claims which will have already been reduced by the amount of the creditor’s own debt to the debtor, or which will be a defence against an action by the debtor, even if that action is subsequent to the arrangement agreement. This is what was established in Dolbec . [ 92 ] The possibility of a potential arrangement is not helpful in interpreting

section 21 CCAA or in determining how to apply it during the present status quo period. [ 93 ] The ARQ considers it more probable that Kitco will default. It writes: [ translation ] Note that Kitco has not filed a plan and seems not to have the intention to file one, at least not until the tax dispute is resolved. Consequently, the only purpose of the CCAA protection is to prevent the remedies of the tax authorities. [ 94 ] The hypothesis that the proceedings will fail and end with no arrangement does not help us to see clearly either.

In the following excerpt, the ARQ uses the future perfect tense, which implies retroactivity: [ translation ] All of the compensation that will have been effected at that point will be the compensation of debts incurred before the bankruptcy. [ 95 ] Of course, if the assessments are confirmed, we may anticipate that the proceedings underway pursuant to the CCAA will fail and that Kitco will go into bankruptcy in the following days. The provable claims in the bankruptcy will be established “ on the day on which the bankrupt becomes bankrupt” (s. 121(1) BIA ) .

The ARQ’s present claim, established as at June 8, will no longer be valid, and its new claim will be cut off at the date of bankruptcy. [ 96 ] At that point, compensation will again come into play (s. 97(3) BIA ), and all of the reciprocal debts up to that new date will be taken into account.

It is true that, on that future day, the ARQ will be entitled to compensate its assessments with the tax refunds owed to Kitco, including the claimed refund of $1.7 million, if it is not yet paid. [ 97 ] I do not see, however, how this new application of compensation on the occasion of hypothetical new bankruptcy proceedings would change the rules of compensation that are applicable now, during the status quo . [ 98 ] In short, the ARQ will perhaps be entitled to compensation of a post-Determination debt under the CCAA if these proceedings end without an arrangement, but the ARQ cannot invoke this future right to establish a present right to compensation. [ 99 ] This additional ground of appeal has no merit. [ 100 ] In conclusion, the Judge was right to rule that compensation between pre- and post-debts is not permitted. [ 101 ] For these reasons, I am of the opinion that the Court should dismiss these appeals, with legal costs in favour of the respondent (Kitco) and the impleaded parties (Richter LLP and Heraeus Metals New York LLC), but without costs against the intervener (QAIRP).

PAUL VÉZINA, J.A. [13] LFI, art. 66 (1) Toutes les dispositions de la présente loi, sauf la

section II de la présente

partie [Proposition de consommateur], dans la mesure où elles sont applicables, s’appliquent, compte tenu des adaptations de circonstance, aux propositions faites aux termes de la présente section. BIA , s. 66 (1) All the provisions of this Act, except Division II of this Part, in so far as they are applicable, apply …, with such modifications as the circumstances require, to proposals made under this Division.