Published in Commercial Insolvency Reporter, vol. 16, no. 4, 2004.
In Re Air Canada,1 Justice Farley of the Ontario Superior Court of Justice, Commercial List, (the "court") held that creditors are entitled to legally setoff post-filing claims against pre-filing claims in the context of a proceeding under the Companies’ Creditors Arrangement Act ("CCAA").2
Various creditors brought a motion to vary the initial order ("Initial Order") obtained by Air Canada ("AC") on April 1, 2003. Specifically, the creditors requested that the court strike out the last seven words of the first sentence of paragraph 9 and the whole second sentence of paragraph 9. Paragraph 9 of the Initial Order provided that:
9. THIS COURT ORDERS that persons may exercise only such rights of set off as are permitted under Section 18.1 of the CCAA as of the date of this order. For greater certainty, no person may set off any obligations of an Applicant to such person which arose prior to such date.
The narrow issue before Farley J. was whether, in the context of the CCAA, a creditor is entitled to legally set-off post-filing claims against pre-filing claims.
Pursuant to s. 18.1 of the CCAA, "[t]he law of set-off 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".
Counsel for AC submitted that, in the context of the CCAA, post-filing claims may be set-off against pre-filing claims where "...there is a valid claim for equitable set-off such that the relationship between the two amounts are so closely related that it would be inequitable to sever the debts from one another by a CCAA order".3 However, it was argued that, under the CCAA, a creditor may not legally set-off postfiling claims against pre-filing claims since the required mutuality is severed by the CCAA filing.4
Counsel for AC relied on the similarity between s. 73(1) of the Winding-up and Restructuring Act5 ("WURA") and s. 18.1 of the CCAA to support the argument that legal set-off is not available under the CCAA. Courts have held that, pursuant to s. 73(1) of the WURA, post-filing claims cannot be set-off against pre-filing claims in a liquidation scenario. Section 73(1) of the WURA provides that:
73. (1) The law of set-off, as administered by the courts, whether of law or equity, applies to all claims on the estate of the company, and to all proceedings for the recovery of debts due or accruing due to a company at the commencement of the winding-up of the company, in the same manner and to the same extent as if the business of the company was not being wound up under this Act.
In determining whether legal set-off applied in the context of the CCAA, Farley J. reviewed the jurisprudence, as well as the authorities provided. He noted that set-off under the WURA is determined in a liquidation scenario. While Farley J. recognized the possibility of a liquidation scenario under the CCAA, he emphasized that the proceedings in this case are aimed at a restructuring.Moreover, given the difference in wording between s. 18.1 of the CCAA and s. 73(1) of the WURA, specifically the use of the word "winding-up" in the latter, Farley J. held that the approach to set-off under the WURA should not apply in the context of the CCAA. Rather, in a restructuring, more explicit language in s. 18.1 of the CCAA would be required to import the concept of set-off under the WURA. Accordingly, Farley J. concluded that paragraph 9 of the Initial Order should be modified as requested.
[Editor’s note: Natasha De Cicco is an associate in the Corporate Department and a member of the Insolvency and Restructuring Group at Torys LLP.]
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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