COURT FILE NO.: CV-14-10798-00CL DATE: 20170222 SUPERIOR COURT OF JUSTICE – ONTARIO

IN THE MATTER OF THE RECEIVERSHIP OF CRATE MARINE SALES LIMITED, F.S. CRATE & SONS LIMITED, 1330732 ONTARIO LIMITED, 1328559 ONTARIO LIMITED, 1282648 ONTARIO LIMITED, 1382415 ONTARIO LTD. and 1382416 ONTARIO LTD.

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: R.B. Bissell and R.J. Drake, for the Receiver A. Farber & Partners Inc., A. Gray and J. Opolsky, for Crawmet Corp., Krates Keswick Inc. and 2450902 Ontario Limited J. McReynolds, for 2124915 Ontario Inc.

HEARD: December 2, 2016

Endorsement

[1] This motion is brought by A. Farber & Partners Inc., in its capacity as the court-appointed receiver (the “Receiver”) of Crate Marine Sales Limited, F.S. Crate & Sons Limited, 1330732 Ontario Limited, 1328559 Ontario Limited, 1282648 Ontario Limited, 1382415 Ontario Ltd. and 1382416 Ontario Ltd. (collectively, the “Companies”). The motion seeks a discharge order subject to resolution of a number of issues that remain outstanding. This endorsement principally addresses (1) the enforceability of the Indemnity Agreement (defined below) and (2) entitlement to an HST refund. I will deal with these issues in turn after first setting out the relevant factual background.

Factual Background

[2] The Receiver was appointed by an order of Newbould J. dated December 8, 2014 (the “Receivership Order”) made on the application of Crawmet Corp. (“Crawmet”), the largest secured creditor of the Companies. The Receivership Order was granted pursuant s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) as well as s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[3] The Receiver conducted a sales process with the benefit of a stalking horse credit bid of 2450902 Ontario Limited (“245”), a company under common control with Crawmet. The 245 bid was the successful bid. Pursuant to a purchase agreement dated February 8, 2015 (the “Purchase Agreement”) between 245 and the Receiver, 245 agreed to purchase all of the “assets, undertakings and properties of the [Companies], acquired for, or used in relation to the Business” (the “Sale Transaction”). The Sale Transaction closed on April 10, 2015 with 245 purchasing the real property included in the purchased assets and Krates Keswick Inc. (“KKI”), another company under common control with Crawmet, purchasing the remaining assets of the Business. In this endorsement, KKI and 245, in their capacities as purchasers under the Purchase Agreement, are referred to as the “Purchasers”.

[4] After its appointment, the Receiver went into occupation of a number of marinas operated by the Companies, including a marina referred to as the “Lagoon City Marina”. As a result, at the time of closing of the Sale Transaction, the Receiver was aware of a potential claim for occupation rent from 2124915 Ontario Inc. (“212”), the owner of the land upon which the Lagoon City Marina operates, for the period from December 8, 2014 to April 30, 2015.

[5] The Purchase Agreement provided in paragraph 2.2(b) that the purchase price payable thereunder was to include, among other things, “any and all amounts secured by the Receiver’s Charge … at Closing”. It is agreed that the contingent occupation rent claim was secured by the Receiver’s Charge at the time of closing of the Sale Transaction. This provision therefore required the Purchasers to pay an amount of cash equal to the anticipated claim for occupation rent as a component of the purchase price under the Purchase Agreement.

[6] In a schedule prepared by the Receiver setting out the components of the purchase price, the Receiver initially included the amount of $335,000 on account of this claim in the larger amount of $1,189,847.04 described as “Cash for Receiver’s Charge at Closing”. On the related worksheet, this amount of $335,000 was shown as a “contingency”. A note beside this item read “Contingency for occupation rent claim by Lagoon City landlord. Being disputed by Receiver. Rent from December 8 to April 30 at approximately $70,000 per month.”

[7] On the final version of the schedule, the amount shown for “Cash for Receiver’s Charge at Closing” was reduced by $330,295 to $859,552.04. On the related worksheet, the amount shown as a “contingency” was reduced to zero and the note beside this item read “Purchaser to provide indemnity in lieu of cash collateral.” According to an email dated April 8, 2015, this change occurred after a meeting between the Receiver and Benn Jay Spiegel (“Spiegel”), the principal of Crawmet, KKI and 245, among others.

[8] This change reflected the request of Crawmet and the Purchasers that an indemnity of these three parties (in such capacities, collectively, the “Indemnifying Parties”) be substituted for the cash payment referable to the contingent claim of 212 for occupation rent.

[9] Accordingly, prior to the closing of the Sale Transaction, the Indemnifying Parties executed an indemnity agreement dated as of April 2015 (the “Indemnity Agreement”) in favour of the Receiver and the Companies. The Indemnity Agreement expressly refers to the potential claim of 212 for occupation rent in the following recital:

G. The Receiver’s Charge secures, among other things, any occupancy rent payable by any Indemnified Party in connection with any occupation, control or possession of the leased premises at 150 Laguna Parkway, Brechin, Ontario (the “Premises”), or any part or parts thereof, from and after the Receiver’s and the Trustee’s respective appointment dates (collectively, the “Occupancy Rent”)[.]

[10] The operative provision of the Indemnity Agreement is paragraph 3, which reads as follows:

3. The [Indemnifying Parties] jointly and severally agree to indemnify and save harmless the Indemnified Parties, whether in their capacity as Court Appointed Receiver, Trustee or personally, from and against all Occupancy Rent for the Premises payable by any Indemnified Party, whether before or after the date of this Agreement (collectively, the “Claims”).

[11] The following provision of the Indemnity Agreement is also relevant for this issue:

6. The [Indemnifying Parties] shall, upon demand, make advances (“Expense Advances”) to the Indemnified Parties of any or all amounts for which the Indemnified Party seeks indemnification in accordance with Section 4 of this Agreement before the final disposition of the relevant Claim or Claims. In connection with such demand, the Indemnified Parties shall provide the [Indemnifying Parties] with sufficient particulars of the amounts to be covered by the proposed Expense Advance to enable the [Indemnifying Parties] to make an assessment of its reasonableness.

[12] After the closing of the Sale Transaction, 212 brought a motion to compel payment of occupation rent for the period from December 8, 2014 to April 30, 2015, asserting a claim of $319,016. The motion was heard on October 6, 2015 by Penny J., who dismissed the motion. The Purchasers participated at the hearing of the motion. The order of Penny J. was appealed by 212. The Court of Appeal allowed the appeal by order dated June 3, 2016 and awarded 212 occupation rent in the amount of $319,016 plus applicable interest and costs. Crawmet participated as a party on the appeal. As of October 18, 2016, the Receiver owed 212 the amount of $360,155.49 in respect of this judgment.

[13] The Indemnifying Parties have refused to advance funds under s. 6 of the Indemnity Agreement or to indemnify the Receiver in accordance with s. 3 thereof. In response, the Receiver has withheld certain accounts receivable of the Companies that the Receiver received after the closing of the Sale Transaction and that are due to KKI under the terms of the Purchase Agreement (the “KKI Receivables”).

Enforceability of the Indemnity Agreement

[14] On this motion, the Receiver seeks an order enforcing the Indemnity Agreement. I will first set out the position of the Indemnifying Parties and will then separately provide my analysis and conclusions regarding the enforceability of the Indemnity Agreement and the manner in which the arguments asserted by the Indemnifying Parties should be addressed. I will address these issues by considering the following questions in turn:

(1) Is this proceeding an appropriate forum to address the enforceability of the Indemnity Agreement? (2) If it is, is the Receiver entitled to a declaration that the Indemnity Agreement is enforceable? (3) If it is, should enforcement of the Indemnity Agreement be stayed pending a determination of KKI’s potential claim described below?

Position of the Indemnifying Parties

[15] The principal argument of the Indemnifying Parties on this motion with respect to the enforceability of the Indemnity Agreement is that a discharge hearing in these receivership proceedings is not the proper venue in which to make a determination of such issue. They say that the Receiver is asserting a claim for breach of contract and that this claim must be pursued in a separate action against the Indemnifying Parties in which they would have rights of discovery and the right to counterclaim against the Receiver for damages for its alleged gross negligence in respect of the allegation of KKI described below.

[16] In addition, the Indemnifying Parties make the following two submissions pertaining to the enforceability of the Indemnity Agreement. First, the Indemnifying Parties argue that the Indemnity Agreement is unenforceable by virtue of misrepresentations on the part of the Receiver regarding the occupation rent claim of 212. In an affidavit sworn November 18, 2016 in this proceeding by Spiegel (the “Spiegel Affidavit”), Spiegel says that the Receiver “demanded” that Crawmet and KKI sign the Indemnity Agreement at the time of closing of the Sale Transaction and that the Indemnity Agreement “was proffered by [the Receiver] in connection with the closing process but without providing KKI with sufficient information to allow it to evaluate the indemnity.”

[17] Second, KKI alleges that, through the Receiver’s mismanagement of certain life insurance policies that were included in the assets to be purchased by KKI pursuant to the Purchase Agreement, the value of these life insurance policies was lost. KKI submits that the Receiver was grossly negligent in respect of this matter entitling KKI to damages for its loss. KKI suggests that this potential claim could be asserted as a counterclaim in any action of the Receiver to enforce the Indemnity Agreement. KKI also submits that any judgment in its favour in respect of any such counterclaim would be available by way of set-off against any obligation the Indemnifying Parties might have under the Indemnity Agreement.

The Appropriate Venue for the Disposition of These Claims

[18] The BIA contemplates that all proceedings pertaining to a receivership may be conducted pursuant to the supervision of the court having carriage of the receivership. Such jurisdiction is necessary to enable an efficient and expedient determination of claims necessary to complete a restructuring under the BIA.

[19] I note in this regard that s. 183(1) of the BIA provides that this Court is “invested with such jurisdiction at law and in equity as will enable [it] to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings authorized by [the BIA]”. In other words, this Court has non-exclusive jurisdiction to address the matters raised by both the Receiver and by the Indemnifying Parties in their capacities as parties to the Indemnity Agreement.

[20] This conclusion is reinforced by s. 187(8) of the BIA, which reads as follows:

The court may direct any issue to be tried or inquiry to be made by any judge or officer of any of the courts of the province, and the decision of that judge or officer is subject to appeal to a judge in bankruptcy, unless the judge is a judge of a superior court when the appeal shall, subject to section 193, be to the Court of Appeal.

By implication, the Court therefore has the authority to hear all matters before it that it does not otherwise transfer to another court of the province pursuant to its power under this provision.

[21] On this basis, claims by a receiver against third parties on behalf of the debtor are routinely dealt with pursuant to motions for directions within receivership proceedings. Accordingly, this Court is an appropriate venue for a determination of the enforceability of the Indemnity Agreement, which was an agreement entered into by the Receiver for the benefit of the Companies. In this case, as well, the Receiver’s claim arises in respect of a document that was delivered in connection with a sale transaction that was itself the subject of court approval within these receivership proceedings. It is necessary to address this claim, and any defences of the Indemnifying Parties, in an expedient manner in order to wind up the receivership.

[22] For the same reason, there is also no necessary reason why claims against a court-appointed receiver in respect of its conduct of the receivership should not be determined within the receivership proceedings. I therefore see no reason why KKI’s assertion that it has suffered a loss as a result of the Receiver’s gross negligence should not also be determined in a proceeding within these receivership proceedings. However, the determination of the appropriate venue for such claim is premature given that KKI has not commenced any legal proceeding to assert such claim. In addition, s. 215 of the BIA requires that no action lies against a receiver with respect to any report made under, or any action taken pursuant to, the BIA without leave of the court. I will address the significance of these considerations later in this endorsement.

[23] The Indemnifying Parties are, of course, entitled to procedural fairness in any proceedings in these receivership proceedings. In this regard, s. 209(1) of the BIA provides for the enactment of General Rules for carrying into effect the objects of the BIA. Pursuant to that authority, the Bankruptcy and Insolvency General Rules, C.R.C., c. 368, have been enacted. Section 3 of the General Rules provides that in cases not provided for in the BIA or in the General Rules, this Court shall apply the ordinary procedure under the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to the extent that such procedure is not inconsistent with the BIA or the General Rules. In the present proceedings, the parties therefore have the procedural protections afforded by the Rules of Civil Procedure.

[24] Based upon the foregoing, I conclude that this discharge hearing is an appropriate forum in which to address the enforceability of the Indemnity Agreement and to consider the relevance in connection therewith of the possible defences of the Indemnifying Parties.

Is the Indemnity Agreement an Enforceable Obligation of the Indemnifying Parties?

[25] While I see no issue of jurisdiction of the Court with respect to the claims of the Indemnifying Parties, their submission does raise the issue of the standard to be applied in considering the Receiver’s request for a declaration of the enforceability of the Indemnity Agreement and the misrepresentation defence asserted by the Indemnifying Parties. For this purpose, I have approached the Receiver’s motion for a determination of the liability of the Indemnifying Parties in respect of the Indemnity Agreement as, in substance, a summary judgment motion under Rule 20 of the Rules of Civil Procedure. This follows from the fact that the Receiver has brought a motion to the effect that there is no merit to the misrepresentation defence asserted by the Indemnifying Parties. Accordingly, the standard to be applied is whether the Indemnifying Parties have raised a genuine issue requiring a trial. In particular, the issue for the Court is whether the allegations of misrepresentations on the part of the Receiver by way of a defence to the enforceability of the Indemnity Agreement raise a genuine issue requiring a trial.

[26] In my view, based on the record before the Court, the Indemnifying Parties have failed to demonstrate any genuine issue requiring a trial regarding the enforceability of the Indemnity Agreement. In this regard, I observe that the Indemnifying Parties have had more than ample time to assert any defence they wished to assert, or to conduct any cross-examinations they wished to conduct, regarding their allegation of misrepresentations by the Receiver. They have chosen to limit their evidence to the content of the Spiegel Affidavit. This evidence fails to establish a genuine issue requiring a trial for the following three reasons.

[27] First, as a factual matter, there is no evidence of any of the misrepresentations alleged by the Indemnifying Parties. The Indemnifying Parties say that the alleged non-disclosure pertained to the risk that they were bearing in executing the Indemnity Agreement. By this, they mean the risk of having to indemnify the Receiver if 212 were to succeed in a claim for occupation rent. According to the Indemnifying Parties, the relevant facts for such a claim are the nature and timing of the Receiver’s use of the premises constituting the Lagoon City Marina. However, these facts were fully disclosed in the Receiver’s reports prior to the Sale Transaction. Moreover, both the potential risk and the potential amount of any claim by 212 were fully disclosed in the schedules and worksheets described above that were prepared prior to the closing of the Sale Transaction. In fact, the estimated amount of 212’s potential claim exceeded the amount that was eventually awarded to 212. In addition, the Indemnifying Parties were represented by experienced legal counsel in respect of the Sale Transaction who received and reviewed the schedules and worksheets on behalf of the Purchasers. Further, as mentioned, there is an email that suggests that the final changes to the schedules, which included reducing the contingency of $335,000 to zero in favour of the Indemnity Agreement, was discussed at a meeting between a Receiver’s representative and Spiegel, among others.

[28] Second, as a legal matter, the Receiver did not owe any duty of disclosure to the Indemnifying Parties regarding the risk they were bearing in entering into the Indemnity Agreement. The Purchase Agreement provided that the sale was on an “as is, where is” basis. The Purchasers were required to do their own due diligence. If they were dissatisfied with their ability to conduct such an investigation, they had the opportunity to raise their concerns prior to signing the Purchase Agreement or prior to the closing of the Sale Transaction. They cannot raise the issue after closing as a basis for invalidating the Indemnity Agreement.

[29] Third, even accepting the Indemnifying Parties’ assertion that certain facts were not disclosed, the non-disclosure of the facts at issue would not actually render the Indemnity Agreement unenforceable. This is a consequence of the fact that the only facts that the Indemnifying Parties say were not disclosed are facts that pertain to the merits of the Receiver’s decision to go into occupation of the Lagoon City Marina rather than to the risk of entering into the Indemnity Agreement. Broadly, the Indemnifying Parties assert that the Receiver’s decision to go into occupation was unreasonable and they were prevented from conducting an investigation that would have demonstrated this.

[30] The Receiver, while acting as the interim receiver prior to the Receivership Order, changed the locks at the Lagoon City Marina and went into possession some time later. In the Spiegel Affidavit, Spiegel says that he is not aware of any business interest that warranted these actions. He says the Receiver took these actions “as a result of a dispute with 212 and to advance its personal business interests.” Spiegel does not describe the nature of the alleged dispute between the Receiver and 212 or the personal business interests that he alleges were advanced by the Receiver’s decision to go into occupation of the Lagoon City Marina. Spiegel also asserts that the fees paid by third-party boat owners to the Companies for winter storage at the Lagoon City Marina were modest and could not justify the expenses entailed in remaining on the property or the risk of an obligation to pay occupation rent. He says that he understands that there were no assets of the Companies that were preserved as a result of the Receiver’s occupation of the Lagoon City Marina. In summary, Crawmet submits that the Receiver’s occupation of the Lagoon City Marina was unnecessary and was the result of decisions it considers constitute negligence.

[31] The Indemnifying Parties also submit that they were unable to conduct any due diligence regarding the risk that they were running in entering into the Indemnity Agreement and that the Receiver failed to disclose the necessary information that such an investigation would have revealed. Spiegel says that the Lagoon City Marina had been closed for the winter and the relevant lease had expired, that the Receiver refused to provide a telephone number contact for the Marina, and that he had no way of investigating the status of the Marina.

[32] Whether or not correct, all of the matters in the two preceding paragraphs are all irrelevant to the question of the risk that the Indemnifying Parties were undertaking in entering into the Indemnity Agreement. The reality is that the risk of payment of an occupation rent claim of 212 did not change at all by virtue of the Purchaser’s execution of the Indemnity Agreement. This reality has two consequences.

[33] First, the facts that the Purchasers allege were withheld from them were not material to their decision to enter into the Indemnity Agreement. The Purchasers were bound by the Purchase Agreement. The Purchase Agreement required the Purchasers to pay cash in the amount of 212’s potential claim. Even if the Receiver had disclosed facts that demonstrated a potential claim of Crawmet, as a creditor, against the Receiver for negligence in going into occupation of the Lagoon City Marina, such facts would not ground a defence to the enforceability of the Indemnity Agreement. If they have any relevance at all, it would be in connection with a Crawmet claim against the Receiver in Crawmet’s capacity as a creditor. However, as a matter of law, KKI and 245, as the Purchasers, could not have raised the fact that Crawmet was asserting a potential claim in its capacity as a creditor against the Receiver to invalidate the provision of the Purchase Agreement that required payment of the amount of any potential occupation rent claim as part of the purchase price at closing. Further, and in any event, it is my understanding that Crawmet is not pursuing a separate claim, as a creditor, against the Receiver for damages resulting from the Receiver’s decision to go into occupation of the Lagoon City Marina.

[34] In addition, the Purchasers did not rely on the non-disclosure of the facts described above to their detriment in entering into the Indemnity Agreement. Even if the Receiver had disclosed such facts, I do not see how the Indemnifying Parties would have acted differently. Rather than being forced to sign the Indemnity Agreement, all of the Indemnifying Parties preferred such an agreement as it was less costly than the payment of cash.

[35] Based on the foregoing, I find that there is no genuine issue requiring a trial regarding the Receiver’s request for a declaration that the Indemnity Agreement is an enforceable obligation of the Indemnifying Parties.

Should Enforcement of the Indemnity Agreement Be Stayed?

[36] The remaining issue pertaining to the Indemnity Agreement arises from KKI’s assertion of a potential claim against the Receiver based on the Receiver’s alleged mismanagement of certain life insurance policies, as described above. KKI suggests that it should be entitled to assert such potential claim by way of a counterclaim in any action of the Receiver to enforce the Indemnity Agreement and that it should be entitled to set off any judgment in its favour in respect of such counterclaim against any judgment in favour of the Receiver in respect of the Indemnity Agreement. As the potential claim of KKI has not yet been determined, KKI is effectively arguing that enforcement of the Indemnity Agreement should be stayed pending such determination.

[37] The Court has the authority to stay enforcement of the Indemnity Agreement pursuant to s. 106 of the Courts of Justice Act. For purposes of assessing whether the Court should exercise its discretion under such provisions, I have applied the three-part test set out in RJR – MacDonald v. Canada (Attorney-General), [1994] 1 S.C.R. 311, 111 D.L.R. (4th) 385. I will address each of the three requirements of this test in turn.

Serious Issue to be Tried

[38] The first requirement for an order staying proceedings is that there be a serious question to be tried. In the instant case, this requires a consideration of two separate issues: (1) the merits of the potential claim of KKI; and (2) the operation of the principle of set-off in the event KKI were to be successful in the assertion of its potential claim.

Merits of the Potential Claim of KKI

[39] Based on the record before the Court, being principally the Spiegel Affidavit, KKI has not demonstrated a serious question to be tried with respect to its potential claim that the Receiver is liable for the value of the insurance policies of the Companies that have lapsed due to the non-payment of premiums.

[40] The facts regarding this potential claim, as set out in the Spiegel Affidavit, are as follows. In 2001, certain of the Companies took out six whole life insurance policies on the lives of the principals of the Companies. The cash surrender value of these policies at the time of the Receivership Order is not known, although it is known that a substantial amount was withdrawn by the principals of the Companies in late November 2014.

[41] All of the policies were overdue in respect of the premiums thereon by March 2015. By fax dated April 2, 2015, the Receiver obtained information from the issuer of the policies that included the respective expiry dates of the policies and the last dates for payment of the overdue premiums to avoid termination of the policies. All of the policy expiry dates had passed by April 2, 2015. Two of the policies were due to terminate on April 10, 2015, the date of the closing of the Sale Transaction, unless the premiums were paid. The four remaining policies were due to terminate in April or May 2015 in the absence of payments of the applicable premiums.

[42] Spiegel says he emailed Stuart Mitchell, a senior vice-president of the Receiver, on April 24, 2015 seeking information regarding the policies. He says he received limited information, not including the lapse dates for the policies, by email dated April 26, 2015. Spiegel says he did not learn of the lapse dates for the policies until May 2015, after the lapse dates had passed.

[43] The documentary evidence suggests, however, that Peter Crawley (“Crawley”), a senior manager of the Receiver, initiated the email exchange on April 24, 2015 with a “friendly reminder” about the policies and the premiums required to keep them in force as well as an offer of any information Spiegel required. In response to Spiegel’s request, Crawley sent some information by way of an attachment to an email of April 26, 2015. The content of that attachment is not in evidence. However, I assume for present purposes that Spiegel’s description of the content is accurate.

[44] Even assuming Spiegel’s version of the facts is correct, notwithstanding the evidence in the record, I do not think that KKI has established a serious issue to be tried in respect of this claim for the reason that it has not asserted a legal basis for the obligation of the Receiver to maintain in good standing the six life insurance policies at issue. I reach this conclusion for three reasons.

[45] First, the only legal basis asserted by KKI for its claim against the Receiver is that “[t]he life insurance policies in issue were assets of the [Companies] that [the Receiver] was appointed to preserve” and that, as a result of the Receiver’s management of the policies, “the policies lapsed and [the Receiver] thereby failed to preserve an asset of the [Companies].” However, KKI was not a creditor of the estate of the Companies and therefore the Receiver did not owe any obligation to preserve the policies to KKI in such capacity. Further, the Purchase Agreement did not impose any obligation to maintain any Purchased Assets in good standing prior to closing and, in paragraph 5.4(g), specifically excluded any adjustment in the purchase price for changes in the Purchased Assets from the date of execution of the Purchase Agreement to closing. In addition, KKI does not suggest that the Receiver assumed an obligation to KKI under the Purchase Agreement to preserve the policies up to the time of closing. As noted, the Purchase Agreement provided for a sale of the Purchased Assets on an “as is, where is” basis as of the closing date and without any representations and warranties from the Receiver. Assuming the life insurance policies to be “Assumed Contracts” under the Purchase Agreement, s. 2.10 of the Purchase Agreement provided that KKI would become liable in respect of all obligations thereunder from and after closing. Lastly, KKI does not suggest that the Receiver assumed an obligation to maintain the life insurance policies as a result of dealings outside the Purchase Agreement between KKI and the Receiver.

[46] Second, even if KKI can establish that the Receiver owed KKI a duty to maintain the life insurance policies in good standing to the extent that they had value, KKI has not established that there was any value in the life insurance policies after the withdrawals in November 2014. On this basis, the Receiver could reasonably conclude that there was no benefit to the estate of the Companies in maintaining the policies by paying the overdue premiums. For the same reason, and more importantly, there is no evidence that KKI has, in fact, suffered any loss as a result of the termination of the insurance policies.

[47] Third, in its eleventh report dated October 20, 2016 (the “Receiver’s Report”), the Receiver says that the Receiver and its legal counsel were “explicitly directed by KKI to reduce the purchase price by the amount of the life insurance premiums coming due and not to make such payments because KKI would instead address any decision to make these payments after closing of the Sale Agreement.” Spiegel did not deny this allegation in the Spiegel Affidavit, which was sworn on November 18, 2016, after the Receiver’s Report. Moreover, it is supported in the schedules described above that were prepared in connection with the closing of the Sale Transaction. A preliminary schedule included the amount of $7,295 on account of the premiums payable to Transamerica Life Canada within the amount shown as “Cash for Receiver’s Charge at Closing”, as indicated on the related worksheet. After the meeting between the Receiver and Spiegel, among others, referred to above, this amount was deleted from the final worksheet and a notation added in parentheses: “Purchaser option to pay after closing”. Accordingly, no amount was paid at closing to the Receiver for the purpose of paying these premiums. Such an approach at closing to accounts payable at that date is consistent with the absence of any obligation of the Receiver to maintain the insurance policies in good standing as discussed above.

Operation of the Law of Set-Off

[48] KKI’s submission also raises the issue of the operation of the law of set-off in the present circumstances. The potential claim of KKI is only a relevant consideration for a stay of proceedings if there is a prima facie case that the law of set-off would apply in respect of any judgment in favour of KKI on its potential claim. For this purpose, it is necessary to distinguish between the requirements of set-off at common law and the requirements of equitable set-off.

Applicable Law

[49] In Holt v. Telford, [1987] 2 S.C.R. 193, 41 D.L.R. (4th) 385, the Supreme Court addressed the requirements of both legal set-off and equitable set-off. The Court expressed the requirements of legal set-off at p. 204 as follows:

The English common law interpretation of the statutory right of set-off is neatly summarized in Halsbury’s Laws of England, 4th ed., vol. 42, para. 421:

421. Nature of the right. The right conferred by the Statutes of Set-Off was a right to set off mutual debts arising from transactions of a different nature which could be ascertained with certainty at the time of pleading. Thus, no legal set-off could exist against a claim which sounded in damages, nor could a claim which sounded in damages be set off at law against a plaintiff’s claim. The fact that a claim was framed in damages precluded the raising of a set-off at law, notwithstanding that the claim might have been differently framed in a way which would have permitted such a set-off. Where a claim for a liquidated debt was joined by a plaintiff with a claim for damages, set-off at law might only be pleaded in defence to the former claim. Set-off at law operates as a defence.

Thus, as was stated by the British Columbia Court of Appeal in C.I.B.C. v. Tuckerr Indust. Inc., [1983] 5 W.W.R. 602, at p. 604, statutory set-off (or set-off at law) “requires the fulfilment of two conditions. The first is that both obligations must be debts. The second is that both debts must be mutual cross obligations”.

[50] At p. 212, the Supreme Court also endorsed the following principles regarding the operation of the principle of equitable set-off articulated in Coba Industries Ltd. v. Millie’s Holdings (Canada) Ltd., 20 D.L.R. (4th) 689, [1985] 6 W.W.R. 14 (B.C.C.A.) (citations omitted):

1. The party relying on a set-off must show some equitable ground for being protected against his adversary’s demands.
2. The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed.
3. A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim.
4. The plaintiff’s claim and the cross-claim need not arise out of the same contract.
5. Unliquidated claims are on the same footing as liquidated claims.

The Operation of Set-Off in the Present Circumstances

[51] Based on the foregoing, the KKI claim does not satisfy the requirements of legal set-off for lack of mutual debts. While the Receiver’s claim under the Indemnity Agreement is quantified, the KKI claim is not quantified.

[52] There is, however, a more fundamental issue that, in my opinion, prevents the application of both legal set-off and equitable set-off in respect of the KKI claim. KKI asserts its claim in its individual capacity as a purchaser under the Purchase Agreement. However, the claim of the Receiver under the Indemnity Agreement is a claim against each of Crawmet, KKI and 245 jointly and severally. These circumstances are sufficient to exclude the mutuality of debts required for legal set-off.

[53] Further, I think these circumstances also render the remedy of equitable set-off unavailable. The Receiver bargained for joint and several liability of the three Indemnifying Parties. There is no reason why Crawmet and 245 should get the benefit of any right of set-off of KKI in respect of its claim pertaining to the lapsed insurance policies. To do so would effectively deprive the Receiver of the benefit of the joint and several liability of the Indemnifying Parties. KKI asserts its potential claim as a purchaser of certain assets of the Companies in respect of which neither Crawmet nor 245 has any direct interest, financial or otherwise. Moreover, there is no connection between the events giving rise to the Indemnity Agreement and the events giving rise to the claim of KKI in respect of the lapsed insurance policies. Given these circumstances, it cannot be demonstrated that the connection between the counterclaim of KKI, in its individual capacity, and the Receiver’s demand for enforcement of the Indemnity Agreement against the Indemnifying Parties, on a joint and several basis, renders it manifestly unjust to allow the Receiver to enforce the Indemnity Agreement without taking into consideration the counterclaim.

[54] Based on the foregoing, I conclude that KKI has failed to satisfy the first requirement of the test for a stay of enforcement. It has not established, on a prima facie case standard, either that there is a serious issue to be tried or that, even if KKI were successful in its action, a judgment in its favour would be set off against any judgment in favour of the Receiver in respect of the Indemnity Agreement. While it is therefore unnecessary to address the remaining requirements of the test for a stay of proceedings, I have done so in case I have erred in reaching the foregoing conclusion.

Irreparable Harm

[55] The second requirement of the test for a stay of proceedings is that KKI would suffer irreparable harm. KKI has also failed to satisfy the onus of demonstrating that it would suffer irreparable harm if a stay of proceedings were denied.

[56] KKI has not put forward the amount that it says is potentially owing to it in respect of the lapsed insurance policies, which would presumably be the aggregate cash surrender values of the policies at their respective lapse dates. Spiegel says that, due to the lack of information that the Receiver has provided to KKI, “a full appreciation of the magnitude of the loss suffered by KKI is not possible.” It is not clear, however, what information KKI requires to determine the extent, if any, of the loss arising on the termination of the insurance policies that is not available to it as the holder of the lapsed policies. In any event, on the basis of the record before the Court – including in particular the withdrawal of a significant portion of the cash surrender values of the policies by individuals associated with the Companies shortly before the Receivership Order was granted – KKI has not demonstrated that the Receiver would be unable to honour any judgment in favour of KKI if the Receiver were ultimately called upon to pay its claim.

Balance of Convenience

[57] The third requirement of the test for a stay of proceedings is demonstration that the balance of convenience favours the applicant. KKI seeks a stay of an obligation of the Indemnifying Parties in respect of which the Court has granted summary judgment. In this case, I conclude that the balance of convenience does not favour the Indemnifying Parties for the following reasons.

[58] The Receiver is currently obligated to pay 212 the amount owing in respect of occupation rent. This amount has been outstanding for approximately seven months. The Court has an interest in ensuring that the Receiver, as an agent of the court, honours its obligations to third parties in a timely fashion. The Receiver has been entitled to advancement of the funds necessary to make such payment to avoid having to fund the payment out of its own resources. A denial of the stay of proceedings will enable the Receiver to honour the judgment owing to 212 on such basis. Moreover, nothing would prevent a determination of the merits of the potential claim of KKI and, as mentioned, there is no evidence in the record that the Receiver would be unable to pay the amount of the potential claim of KKI.

[59] On the other hand, the granting of the stay would compel the Receiver to pay such moneys out of its own funds to the detriment of the integrity and proper conduct of receivership proceedings under the BIA. In addition, a stay of proceedings would effectively nullify the improper actions of the Indemnifying Parties in failing to comply with their obligations of advancement under section 6 of the Indemnity Agreement. Further, KKI has not actually commenced a legal proceeding asserting its potential claim even though it has had ample time to do so. Its request is based, at the present time, entirely on bald allegations that do not satisfy the “serious issue to be tried” standard. It is not entitled to “lie in the weeds” for a year or more until the Receiver seeks a discharge and then to assert a potential claim by way of a bald allegation as a basis for preventing enforcement of obligations freely entered into in respect of a transaction that received court approval. Moreover, KKI has not obtained leave of the court pursuant to s. 215 of the BIA in respect of its potential claim. Further, for the reasons discussed above, I do not think that KKI would be entitled to set off any judgment in its favour in respect of its potential claim against the Receiver even if it obtained any such judgment. As such, a stay of proceedings would appear to grant the Indemnifying Parties a right that they do not otherwise have.

Conclusion

[60] Based on the foregoing, I conclude that the Indemnifying Parties have failed to satisfy the requirements for a stay of enforcement of the Indemnity Agreement.

Treatment of the Potential Claim Asserted by KKI

[61] The Receiver and KKI have agreed that, regardless of whether enforcement of the Indemnity Agreement is stayed, the discharge sought by the Receiver would except a potential claim of KKI for loss arising out of the alleged gross negligence or wilful misconduct of the Receiver as a result of the lapsing of the six life insurance policies issued by Transamerica Life Canada at issue in this proceeding. However, as mentioned, KKI has not yet commenced a proceeding under s. 215 of the BIA seeking leave of the court to commence such an action against the Receiver.

[62] It is premature to address the merits of KKI’s potential claim on this discharge motion, notwithstanding the determination made above for the limited purpose of addressing the issue of a stay of proceedings. The proper forum in which to address the quality of KKI’s evidence and legal position on this issue is a motion for leave of the court to pursue this potential claim against the Receiver. In this regard, I note that s. 215 of the BIA balances two important objectives – the need for proper oversight of receivers, which takes the form of both court oversight and creditor rights to proceed against a receiver, and the need to prevent unmeritorious actions from proceeding against the court’s agent. Such objectives are best furthered by permitting KKI to put forward its potential claim in a motion for leave under that provision of the BIA.

[63] Accordingly, the discharge of the Receiver shall provide for an exception for such potential claim provided that KKI commences a motion seeking leave of the court under s. 215 of the BIA in respect of such potential claim within thirty days of the date of release of this endorsement.

The KKI Receivables

[64] In its factum, KKI asserts that it is entitled to the KKI Receivables and requests an order of the Court requiring the transfer of the KKI Receivables to it. Its entitlement to the KKI Receivables is not disputed. However, the value of the KKI Receivables is less than the amount of KKI’s liability under the Indemnity Agreement. It is my understanding that the order giving effect to this endorsement will reflect the agreement between the Receiver and KKI as to whether the KKI Receivables should be transferred to KKI or set off against KKI’s liability under the Indemnity Agreement.

HST Payment

[65] The second issue for the Court in this proceeding is the entitlement to a refund of HST in the amount of $330,006.62 that the Receiver has received from the Canada Revenue Agency (the “CRA”). The parties dispute entitlement to this refund although, as discussed below, the dispute is more factual than legal.

[66] The starting point for this issue is the Purchase Agreement. In that Agreement “Purchased Assets” is defined to include “the right, title and interest of the respective [Companies] to all accounts receivable ... and choses-in-action, now or hereafter due or owing to any of the [Companies] Related to the Business”. The critical term is therefore “Related to the Business”, which means “directly or indirectly, used in, arising from, or relating in any manner to the Business and/or the Purchased Assets”.

[67] The Receiver submits that the HST refund did not relate to the business activities of the Companies but rather to expenses of the receivership. It says the HST at issue related largely to professional fees paid to the Receiver and its counsel, as well as other receivership expenses, all of which related to the period after the Companies were placed in receivership. As such, the Receiver says the HST refund should be treated as an asset of the estate.

[68] In support of its position, the Receiver argues that the CRA would have offset the HST refund against the Companies’ pre-filing HST claim of approximately $6 million if it had considered that the HST pertained to the business, operations or assets of the Companies.

[69] KKI says that, in the absence of any evidence in the record regarding the correspondence between the Receiver and CRA, the Court should conclude that the HST refund relates to the business or the assets of the Companies.

[70] I think that it is premature to make any determination of this issue at this time. The Receiver says it is prepared to make the relevant records available for inspection by KKI and 245. I think it should do so first with a view to reducing or eliminating the amount in dispute between the parties in accordance with the standard established by the definition of “Related to the Business” in the Purchase Agreement.

[71] The parties should then schedule a 9:30 a.m. case conference to address any necessary proceedings to resolve this issue. Such a case conference will also address, to the extent necessary, any remaining issues regarding the form of the discharge order based on the determinations above in this endorsement and the other matters for which the Receiver seeks a determination of the Court to which no opposition was taken.

Wilton-Siegel J. Date: February 22, 2017