Montréal v. Deloitte Restructuring Inc.

By: Dwija Bhatt

1. Case name :

Montréal v. Deloitte Restructuring Inc. 

The legal citation for the case is 2021 SCC 53

2. Facts :

The essential and relevant facts of the case revolve around the City of Montreal's attempt to withhold payments owed to SM Group for work done, pending the outcome of a legal case related to a water meter contract. The legal dispute arises from the City's claim that it is entitled to withhold the payments until a judgment is rendered in the case concerning the water meter contract. The fundamental details the court finds important in making its decision include:

• The City's obligation is to act diligently.

• The appropriateness of the order being sought.

• The impact of pre-post compensation on the progress of restructuring.

• The protection of the public interest.

Additionally, the court considers whether the City has proved the alleged fraud and whether it has relied on any of the Companies Creditors Arrangement Act's (CCAA) remedial objectives other than protecting the public interest. The court also emphasizes the need to avoid reducing the public interest to the interests of a particular creditor or group of creditors. The events leading to the legal dispute include the City's filing of an originating application in the case related to the water meter contract, its breach of diligence by waiting to indicate its intention to effect compensation, and the impact of the delays resulting from the case on the rights of third persons involved in the restructuring of SM Group.

3. Procedural Process:

The procedural posture of the case involves an initial trial in the Quebec Superior Court, where the supervising judge granted Deloitte's application for a declaratory judgment, holding that pre-post compensation could not be effected in favor of the City. The judge also concluded that the water meter contract claim was neither liquid nor exigible, which precluded compensation.

Subsequently, the case was appealed to the Quebec Court of Appeal, where the majority of the court rejected the City's argument regarding the VRP claim, affirming the decision of the supervising judge. The majority also rejected the City's argument that a claim relating to fraud falls within s. 19(2)(d) of the CCAA is an exception to the rule stated in the Kitco case. The dissenting judge, however, agreed that the VRP claim had to be presumed to fall within s. 19(2)(d) of the CCAA and that Kitco had to be distinguished on the basis that it had been rendered in a different context.

Ultimately, the appeal was dismissed by the Quebec Court of Appeal, with costs. However, Justice Brown dissented, stating that the appeal should be allowed solely for the purpose of remanding the case to the Superior Court so it can decide whether the City may effect pre-post compensation for the VRP claim and whether compensation is available in respect of the water meter claim.

4. Issue: 

The specific question or legal issue that the appellate court is tasked with answering, in this case, is whether the City of Montreal is entitled to withhold payments owed to SM Group for work done subsequent to an initial order under the Companies Creditors Arrangement Act (CCAA) with a view to affecting compensation if the City is successful in a case relating to a water meter contract. The central point of contention that needs resolution is whether the City is permitted to effect compensation, or set-off, between pre-initial order and post-initial order debts and whether the claims made by the City against SM Group qualify as exceptional circumstances under the CCAA.

5. Rule applied: 

The appellate court decides to use the legal principle of compensation, or set-off, between pre-initial order and post-initial order debts in the context of proceedings under the Companies' Creditors Arrangement Act (CCAA). The court interprets and applies this rule to the facts of the case by considering the broad discretion of the supervising judge under the CCAA to allow pre-post compensation in appropriate cases. The court also emphasizes that the instances in which a court should not have the right to effect pre-post compensation in an initial order will be rare. Additionally, the court examines the burden of proof required for a creditor to establish a claim under s. 19(2)(d) of the CCAA, and concludes that the City did not meet this burden in proving that the VRP claim resulted from fraudulent representations. Therefore, the court interprets and applies the legal rule of compensation in the context of insolvency proceedings, taking into account the specific circumstances and burden of proof in the case at hand.

6. Holdings: 

The final decision of the court in this case is to dismiss the appeal with costs. The court resolves the legal issue presented in the case by affirming that a supervising judge has discretion under the Companies Creditors Arrangement Act (CCAA) to allow a creditor to effect compensation between pre-initial order and post-initial order debts. The court finds that this discretion is not limited solely to exceptional circumstances and that a court has the discretion to allow pre-post compensation in appropriate cases. However, the court also emphasizes that instances in which a court should not have the right to effect pre-post compensation in an initial order will be rare. The court also addresses the specific legal issues related to the Voluntary Reimbursement Program Claim and the Water Meter Contract Claim, providing detailed analysis and interpretation of the relevant statutory provisions and case law. Ultimately, the court's ruling is based on a comprehensive analysis of the law and the specific facts of the case, and it emphasizes the broad discretion conferred on a supervising judge by the CCAA in making decisions related to compensation between pre-initial order and post-initial order debts.

7. Reasoning: 

The court arrives at its holding through a meticulous analysis of the relevant provisions of the Companies Creditors Arrangement Act (CCAA) and the legal principles governing the exercise of discretion by supervising judges in CCAA proceedings. The court considers the broad discretion conferred on it by sections 11 and 11.02 of the CCAA, which allows it to make orders necessary to ensure successful restructuring and the achievement of the CCAA's objectives. The court emphasizes that the primary tool for achieving the CCAA's restructuring objective is the stay of proceedings and creditors' rights, which creates a temporary respite for the debtor company to negotiate and prepare a restructuring plan.

The court also considers the remedial objectives of the CCAA, which include avoiding social and economic losses from the liquidation of an insolvent company, maximizing creditor recovery, ensuring fair treatment of claims, preserving going-concern value, protecting jobs and communities, and enhancing the credit system. These objectives guide the court's analysis of whether to allow pre-post compensation in a particular case, reassuring the audience of the court's commitment to fairness and justice.

Additionally, the court examines relevant precedents, including the decision of the Quebec Court of Appeal in Kitco, which had taken a restrictive approach to pre-post compensation under the CCAA. The court rejects the absolute prohibition proposed by the Quebec Court of Appeal. It emphasizes that a court has the discretion to allow pre-post compensation in appropriate cases, which is in line with the CCAA's remedial objectives.

Furthermore, the court considers the specific circumstances of the case before it, including the City's arguments for protecting the public interest and the diligence and good faith of the parties involved. The court evaluates whether the order being sought by the City would be appropriate, considering the impact on other parties involved in the restructuring process.

Overall, the court's thought process and legal analysis involve careful consideration of the statutory framework, remedial objectives, relevant precedents, and the specific circumstances of the case to determine whether to exercise its discretion to permit or deny pre-post compensation in the interests of achieving the CCAA's objectives and ensuring fair treatment of all parties involved in the restructuring process.

8. Result:

The court dismisses the appeal with costs, with Justice Brown dissenting. This decision implies that the lower court's decision stands, and the appellant's request for compensation between debts arising before and after an initial order is denied. The court emphasizes that the discretion to permit or deny pre-post compensation lies with the supervising judge, who must consider the appropriateness of the order being sought, due diligence, and good faith on the applicant's part. The court also clarifies that the scope of the Companies Creditors Arrangement Act (CCAA) does not prohibit pre-post compensation. However, it is subject to the discretion of the supervising judge. This decision has implications for the parties involved, as it sets a precedent for the exercise of discretion in CCAA proceedings and emphasizes the importance of considering the CCAA's remedial objectives, including protecting the public interest, in determining whether to authorize pre-post compensation.

9. Concurrences and dissents :

Brown J. expressed a separate opinion in the appellate court. Brown J. disagreed with the majority's decision and raised several points of disagreement. One point of disagreement was regarding the discretion of the supervising judge under the Companies' Creditors Arrangement Act (CCAA) to allow pre-post compensation. Brown J. found that the majority failed to give full effect to the discretion conferred on a supervising judge by the CCAA and disagreed with the majority's conclusion that pre-post compensation will never be authorized unless there are exceptional circumstances.

Another point of disagreement was regarding the interpretation of s. 19(2)(d) of the CCAA and whether a claim arising from an agreement entered into under the Voluntary Reimbursement Program (VRP) is necessarily a claim that relates to a debt resulting from fraud. Brown J. disagreed with the majority's finding and stated that the City had not shown that the VRP claim necessarily relates to a debt resulting from fraud pursuant to s. 19(2)(d) of the CCAA.

Additionally, Brown J. disagreed with the majority's conclusion that the approach proposed by the Quebec Court of Appeal in Kitco has created an asymmetry between the interpretation given to s. 21 of the CCAA by the Quebec courts and the interpretation given to it by the courts of other Canadian provinces. Brown J. emphasized the importance of staying the remedies of an insolvent company's creditors under the CCAA to allow the company to develop a plan of arrangement but noted that in this case, there has never been any question of SM Group proposing a plan of arrangement. Overall, Brown J.'s separate opinion expressed disagreement with the majority's decision on the interpretation of the CCAA and the application of pre-post compensation in the specific case.

Document with citations can be found here: https://docs.google.com/document/d/1PhVGPr7V3VnrV_c95mYBCwTTFceoI3BIjEQj5-aSHuk/edit?usp=sharing