Creditors, Monitors, and Fraud: The Element of Judicial Discretion
In Montréal (City) v Deloitte Restructuring Inc., 2021 SCC 53, the Supreme Court of Canada (“SCC”) clarified that courts with jurisdiction over Companies’ Creditors Arrangement Act, RSC 1985 c C-36 (“CCAA”) proceedings can exercise judicial discretion to stay compensation between debts arising before and after an initial order (“pre-post compensation”). The 6-1 decision created more consistency in bankruptcy and insolvency case law.
On August 24th, 2018, the Quebec Superior Court placed an initial order on SM Group (a consulting engineering firm) ordering the stay of rights and remedies of its creditors. The court subjected SM Group to CCAA proceedings. SM Group has since continued to work for Ville de Montréal (“City”) on projects such as the Samuel De Champlain Bridge and Turcot Interchange. The respondent, Deloitte Restructuring Inc. (“Deloitte”), was appointed the monitor.
The City refused to compensate SM Group for the work performed and invoked its right to change compensation on the owed amount as well as two prior claims the City had against SM Group before the initial order. The claims arose from a) a settlement agreement and b) a previous proceeding brought by the City against SM Group for their alleged participation in collusion schemes.
Deloitte applied for a declaratory judgment opposing the City’s attempt to effect compensation. The supervising judge and the Quebec Court of Appeal both agreed that the compensation could not be effected. Both courts held that claims related to fraud captured by section 19(2)(d) of the CCAA do not constitute an exception to the principle in Quebec (Agence du revenu) v Kitco Metals Inc., 2017 QCCA 268 whereby pre-post compensation is prohibited.
Writing for the majority, Wagner CJ and Côté J dismissed the claim. They underscored that the central question was whether compensation is permitted for debts between the same parties. The majority considered the Quebec National Assembly’s purpose under Bill 26 in March 2015 to respond to the existence of collusion and corruption schemes in the awarding and management of public construction contracts. The legislative framework resulting from this purpose targets enterprises to reimburse certain amounts improperly paid for a public contract if there may have been fraud or fraudulent tactics (section 3 of Bill 26).
The majority took a bifurcated approach. The majority first determined whether a claim arising from an agreement is necessarily a claim related to a debt or liability resulting from obtaining property or services through false pretenses or fraudulent misrepresentation pursuant to section 19(2)(d) of the CCAA. Then the majority held that courts could exercise discretion to stay pre-post compensation where fraud exists.
The judiciary can stay the right to pre-post compensation under sections 11 and 11.02 of the CCAA. Looking to the common law and statute, the majority determined that judges have the discretion to authorize pre-post compensation only in exceptional circumstances. Fraud is only one element of this consideration. The majority held that it was inappropriate for the City to withhold and refuse payments owed to SM Group under sections 11 and 11.02.
Considering the CCAA and the Voluntary Reimbursement Program (“VRP”) claim, the majority clarified that the claim is not related to a debt resulting from fraud pursuant to section 19(2)(d) of the CCAA. The City only mentioned the existence of the participation of SM Group in the VRP program and did not link this to an admission of fraud.
The majority referenced section 3 of Bill 26 containing the purpose of the VRP: to make possible the reimbursements for amounts improperly paid in the course of the tendering, awarding or management of a public contract in relation to which there may have been fraud or fraudulent tactics. The wording only requires the possibility, not the certainty, of fraud. Thus, SM Group’s participation in the VRP cannot substantiate the City’s claim that fraud existed according to section 19(2)(d) of the CCAA. The City did not prove the SM Group had knowingly made a false representation by participating in the VRP process.
As for the question of judicial discretion in issuing a stay of pre-post compensation, the majority noted that the stay echoes the CCAA’s purpose of restructuring. The stay creates a status quo period shielding the debtor from its creditors (Century Services Inc v Canada (Attorney General), 2010 SCC 60 at paras 19, 60). The CCAA’s breadth includes pre-post compensation.
Dissent by Brown J
Brown J disagreed that judicial discretion is limited to exceptional circumstances in effecting compensation regarding pre-post compensation. Instead, he posits that judges should have broad discretion. He would have remanded the case back to the Quebec Superior Court for re-evaluation.
Brown J’s central argument is that the supervising judge should have had the opportunity to exercise discretion and that the SCC majority should not substitute its discretion for that of the supervising judge. In this case, the Quebec Superior Court chose not to exercise discretion in considering pre-post compensation. Brown J states the majority should not exercise discretion for the first time to determine if the City can effect pre-post compensation. In other words, Brown J opines that the majority should not have deployed judicial discretion for the first time.
Perhaps the majority exercises appropriate judicial discretion in considering the interplay of the CCAA and the VPR framework. Simply because the supervising judge did not exercise discretion should not bar the SCC from taking a different analytical approach. Indeed, the SCC noted in Century Services that the CCAA and insolvency legislation have a remedial nature. This objective is best achieved by heeding to the interests of both debtors and creditors. In this case, a stay would effectively give SM Group breathing room if creditors cannot touch its assets. Brown J’s approach would potentially ignore the commentary on the remedial objectives of insolvency and bankruptcy legislation when courts supervise the restructuring of debtor companies.
Companies charting bankruptcy waters face uncertainty. The CCAA is intended to be remedial to allow debtor companies time and space to reorganize financial affairs. With this remedial objective in mind, it would seem that Brown J takes too rigid a view regarding discretion. Formalities would undermine the purpose of judicial discretion in CCAA cases.