COURT FILE NO.: CV-18-590812-00CL

DATE: 2022-09-02

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CARILLION CANADA HOLDINGS INC., CARILLION CANADA INC., CARILLION CANADA FINANCE CORP., CARILLION CONSTRUCTION INC., CARILLION PACIFIC CONSTRUCTION INC., CARILLION SERVICES INC., CARILLION SERVICES (FSCC) INC., BEARHILLS FIRE INC., OUTLAND CAMPS INC., OUTLAND RESOURCES INC., ROKSTAD POWER GP INC., 0891115 B.C. LTD., GOLDEN EARS PAINTING & SANDBLASTING LTD., PLOWE POWER SYSTEMS LTD., AND CARILLION GENERAL PARTNER (B.C.) LIMITED

Applicants

BEFORE: Chief Justice G.B. Morawetz

COUNSEL: Monique Jilesen, Madison Robins and Laura Cobb, for Carillion Canada Inc.

Mark A Freake and John J. Salmas, for HSBC Canada

Carlo Di Carlo, for Ernst & Young Inc., Monitor

HEARD: May 12, 2022

ENDORSEMENT

[1] This motion was first argued before Hainey J. on July 15, 2020. His decision remained under reserve at the time of his passing and was re-argued before me.

[2] Carillion Canada Inc. (“CCI”) brings this motion for an order directing HSBC Bank Canada (“HSBC”) to return or make payment of $6,823,000 to CCI or the Monitor, and a declaration that HSBC is prohibited from exercising any rights against CCI to set-off, indemnification, damages, reimbursement or otherwise sweep or debit CCI’s bank accounts during the CCAA Stay Period.

FACTS

[3] On January 15, 2018, Carillion plc commenced liquidation proceedings in the United Kingdom. As a result of cash flow issues associated with the liquidation of its UK parent, CCI and its related companies (the “Applicants” or “Carillion Canada Group”), applied on January 25, 2018 for protection under the Companies’ Creditors Arrangement Act (“CCAA”) (the “CCAA Proceeding”).

[4] Prior to the commencement of the liquidation proceedings of Carillion plc, the Carillion Canada Group and other global Carillion entities were part of a Global Cash Concentration Arrangement with HSBC UK, whereby all cash was swept on a daily basis to a CCI bank account with HSBC UK, resulting in a zero dollar balance at the start of every day in the Canadian bank accounts of the Carillion Canada Group.

[5] The Carillion Canada Group terminated its participation in the Global Cash Concentration Arrangements immediately upon Carillion plc’s liquidation. In conjunction, HSBC cancelled the overdraft facility on which CCI relied for liquidity.

[6] The initial order (the “Initial Order”) in the CCAA Proceeding appointed Ernst & Young Inc. (“EY”) as the Monitor. The Initial Order contained a number of provisions which affected the Carillion Canada Group’s operations during the period of CCAA protection (the “Stay Period”), including:

(a) a defined Stay prohibiting any person or entity from “exercising any option, right or remedy or taking any enforcement steps under or in respect of any agreement or agreements with respect to which any of the Applicants are party, borrower, principal obligor or guarantor”;

(b) a Non-Derogation of Rights provision which required persons who “provided any kind of letter of credit” for the benefit of the Carillion Canada Group before the date of the Initial Order to “continue honouring” these assurances “in accordance with their terms”;

(c) several charges appointed over the property of the debtor: an Administration Charge with first priority up to the amount of $5 million, a Directors’ Charge with second priority up to the amount of $11 million, plus an Intercompany Charge having third priority up to a maximum amount outstanding from time to time;

(d) a restriction on the Carillion Canada Group’s use of funds during the Stay Period to on-going business operations, tax payments, and payments to critical suppliers; and

(e) an entitlement to continue to utilize the pre-existing cash management system, or, with the consent of the Monitor, replace it with a substantially similar cash management system.

[7] The Stay Period has been extended several times.

[8] At all relevant times, HSBC was aware of the CCAA Proceeding.

[9] HSBC and CCI had previously entered into a Master Indemnity and Reimbursement Agreement for the Letters of Credit (the “Master Indemnity Agreement”), which authorized HSBC “to set-off and appropriate and to apply any and all deposits” against the obligations of CCI to reimburse HSBC for letters of credit. HSBC and CCI also entered into Counter Indemnity Agreements for each of the Letters of Credit.

[10] The Indemnity Agreements expressly granted HSBC the contractual right of set-off in the event HSBC had to make any payments under any of the Letters of Credit. Paragraph 10 of the Master Indemnity Agreement provides as follows:

10. In addition to and not in limitation of any rights now or hereafter available to HSBC, whether under applicable law or arising under other agreements, HSBC is authorized at any time and from time to time, without prior written notice to the Customer, to set-off and appropriate and to apply any and all deposits (general and special) and any other indebtedness at any time held by or owing by HSBC to or for the creditor of the Customer against and on account of the obligations and liabilities of the Customer to HSBC under this Agreement without any demand being made therefore, and HSBC may (i) create an overdraft in such account or accounts if there is an insufficient credit balance to cover such debit entry; or (ii) make an advance under any existing facility between the Customer and HSBC.

[11] CCI’s bank accounts with HSBC, including the CCI Main Account, were governed by HSBC’s Commercial Account Operating Agreement (the “Account Agreement”). Section 9 of the Account Agreement provides that HSBC may “consolidate and set-off” any amounts owing by CCI against CCI’s funds or accounts held by HSBC.

[12] Immediately following the granting of the Initial Order, CCI (as the main operating company for the Carillion Canada Group) took certain steps to implement a restructuring strategy including:

(a) it began the process of downsizing employees or moving them to new employers and ceased making payments in respect of supplemental executive retirement plans (“SERPs”). CCI had previously requested, and HSBC issued four separate letters of credit in respect of the SERPs: LC 781 in the amount of $2,748,000; LC 787 and the amount of $719,000; LC 778 in the amount of $2,486,000; and LC 789 in the amount of $870,000 (collectively, the “Letters of Credit”). CCI was unable to pay severance for its laid-off employees. The SERPS were transferred to Royal Trust, which called on outstanding Letters of Credit.

(b) the Carillion Canada Group sold certain assets to Fairfax Financial Holdings Limited (the “Fairfax Transaction”). The Fairfax Transaction provided immediate liquidity in the form of a $50 million cash deposit which was made available to CCI for short-term liquidity and for other general corporate purposes (the “Fairfax Deposit”). The Fairfax Deposit initially paid to the Monitor in trust, was released to CCI’s Operating Account on February 8, 2018.

[13] CCI continued to utilize the Operating Account with HSBC as its primary general account for day-to-day business expenses. The Operating Account was controlled by CCI and overseen by the Monitor, who approved all significant disbursements.

[14] The Letters of Credit were unsecured by any cash or other collateral. CCI generally had little or no funds in its bank account because of the global cash concentration arrangements with Carillion plc. HSBC granted CCI an operating loan facility by way of an overdraft, supported by an unsecured guarantee from Carillion plc. In addition to its primary purpose of providing CCI with liquidity as needed, this facility could also be drawn on by HSBC to reimburse any payments for the Letters of Credit under the terms of the Master Indemnity Agreement. This facility was cancelled by HSBC on January 15, 2018 when the Carillion Canada Group terminated its participation in the Carillion global cash concentration arrangement.

[15] On February 8, 2018 Royal Trust called on the Letters of Credit. HSBC paid out $6.8 million for the Letters of Credit on February 15, 2018.

[16] On February 27, 2018, HSBC notified CCI that it would be taking $6.8 million from the Operating Account by “exercising the set-off right afforded to it pursuant to the Counter Indemnity Agreements, the Master Indemnity Agreement, and in law.” Without waiting for a reply from CCI, HSBC took the money.

[17] HSBC did not seek leave from the court as to whether it could debit funds from CCI’s account for the Letters of Credit, nor did it ask CCI or the Monitor for permission to debit the funds.

[18] That same day, within hours of receiving the notification from HSBC, CCI and the Monitor asked HSBC to hold-off on taking the funds for a few days so that they could consider their position, as they were not aware that HSBC had already taken the money. CCI promised it would keep the funds in the account so as not to prejudice HSBC’s rights during that time. HSBC refused.

[19] On February 27, 2018 the Operating Account held about $60.5 million, of which CCI states it had allocated all but $2,471,012 to accrued business and operating expenses and/or impressed with super priority charges. CCI contends that the $6.8 million taken by HSBC included $4.3 million of encumbered funds, which forced CCI to dip into the charged monies to continue running its day-to-day business.

[20] Immediately after HSBC’s debit of the Operating Account, CCI and the Monitor transferred all the remaining funds into the Monitor’s trust account and subsequently to an Operating Account at another banking institution.

[21] The Monitor anticipates making a distribution to creditors in the near future and the allocation to employees, professionals and trade creditors have been satisfied.

ISSUES

[22] From the standpoint of CCI, the issues are as follows:

1. HSBC was not entitled to take $6.8 million from CCI’s Operating Account on February 27, 2018 and must return the funds to CCI immediately because:

a. the terms of the Initial Order prohibit HSBC from exercising any rights of set-off or any other legal rights against the Carillion Canada Group during the Stay Period;

b. in any event, funds in CCI’s Operating Account were already allocated to specific operating expenses and/or impressed with priority charges and were not available for set-off purposes; and

c. HSBC’s exercise of a self-help remedy in order to obtain full recovery of its unsecured claim was a bad faith maneuver contrary to the purposes and policy of the CCAA. Carillion Canada Group’s other unsecured creditors are prejudiced because their own recovery has been reduced as a result of HSBC’s conduct.

[23] HSBC states the issues as follows:

a. whether HSBC had, as of February 27, 2018, a valid right of set-off as against CCI; and

b. if it did, whether HSBC’s exercise of its right of set-off contravened the CCAA or adversely affected CCI’s restructuring in a manner contrary to the CCAA.

[24] Supplementary factums were filed by both parties following the decision of the Supreme Court of Canada in Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53. In its supplemental factum, CCI augments its statement of issues as follows:

HSBC argues that unless the initial order in a CCAA proceeding expressly stays rights of set-off, creditors are free to exercise rights of set-off without giving proper notice to the insolvent company or seeking leave of the court. This position is untenable following the Supreme Court’s decision in Montréal.

[25] HSBC states as follows:

a. if the obligations and liabilities HSBC set-off against were pre-filing obligations and liabilities, whether the Initial Order temporarily stayed the exercise of such set-off rights; and

b. if such a stay did exist on a temporary basis, which is not admitted but expressly denied, whether HSBC’s set-off rights can be extinguished given the express wording of section 21 of the CCAA.

[26] For the following reasons, I conclude that HSBC is entitled to retain the $6.8 million as a valid set-off as against CCI.

LAW and ANALYSIS

[27] Paragraph 18 of the Initial Order provides:

THIS COURT ORDERS THAT during the Stay Period, all rights and remedies

are hereby stayed and suspended, except with the written consent of the Applicants and the Monitor, or leave of the Court, including, without limitation, by way of terminating, making any demand, accelerating, amending or declaring in default, sweeping any cash in any of the Applicants’ bank account (if available), exercising any option or right or remedy or taking any enforcement steps under or in respect of any agreement or agreements with respect to which any of the Applicants are a party, borrower, principal obligor as guarantor…

[28] Section 21 of the CCAA provides:

21. Law of set-off or compensation to apply – 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.

[29] In Montréal, the Supreme Court characterized the broad discretion afforded to supervising judges to grant orders to “ensure that restructuring is successful and that the CCAA objectives are achieved” as the “fundamental feature” of the CCAA and the true “engine” driving the statutory scheme. The court specifically concluded that the broad discretion under ss. 11 and 11.02, which sets out the stay power under the CCAA, allows the supervising judge to stay rights held by creditors if the exercise of those rights could jeopardize the restructuring process, including a creditor’s right to effect pre-post compensation. The scope of Section 21 of the CCAA was specifically considered in Montreal at paras. 63 – 73.

[63] In addition, we note that s. 21 of the CCAA does not grant creditors a right to pre‑post compensation that would be shielded from a supervising judge’s power to order a stay under ss. 11 and 11.02 of the CCAA. Although s. 21 of the CCAA indicates that there is a right to effect compensation in proceedings under that statute, we are of the opinion that it applies only to compensation between debts that arise before an initial order is made (in other words, “pre‑pre compensation”). The modern approach to statutory interpretation dictates this conclusion (Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, at para. 21, citing E. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87). Our interpretation of s. 21 of the CCAA is not based on an inappropriate analogy with the provisions of the BIA.

[64] Section 21 does state that it is possible to effect compensation in insolvency proceedings under the CCAA, but it does not specifically deal with pre‑post compensation. It reads as follows:

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.

Read in light of its context, its purpose and the scheme of the CCAA, s. 21 is, in our view, limited to authorizing pre‑pre compensation for the purpose of quantifying creditors’ claims on the date of commencement of proceedings. (Emphasis Added)

[65] With regard to the context, s. 21 is in a different part of the statute than the one that provides for a court’s discretion to order a stay. The power to order a stay (ss. 11 and 11.02) and most of the exceptions to it (see, e.g., ss. 11.01, 11.08 and 11.1) appear in Part II, which is entitled “Jurisdiction of Courts”. Section 21, meanwhile, is in the division of Part III entitled “Claims”, which also includes ss. 19 and 20. This indicates that Parliament probably did not considers 21 to be an exception to the stay period. If Parliament had in fact intended s. 21 to be an exception, it would have included it in Part II or expressly stated that it was an exception. (Emphasis Added)

[66] What is more, when s. 21 is considered in the broader context of the “Claims” division, it becomes clear that this provision is part of a set of rules governing the claims that may be dealt with by a compromise or arrangement and the quantification of the resulting amounts. (Emphasis Added)

[67] Section 19 specifies which claims may be dealt with by a compromise or arrangement (s. 19(1)) and those which will remain intact despite the creditors’ agreement to a compromise or arrangement and its sanction by a court (s. 19(2)). Only claims arising before the date of commencement of bankruptcy or insolvency proceedings are “claims” that fall under s. 19 and therefore give creditors a right to vote on a compromise or arrangement. As for s. 20, it contains rules for determining the amount of claims. Once that amount has been determined, it can then be used to define the relative weight of the voting rights of each creditor with a claim. (Emphasis Added)

[68] Section 21 complements ss. 19 and 20; the compensation authorized by s. 21 is intended, among other things, to determine the value of the claim that a creditor may have against the debtor on the date of commencement of proceedings. In other words, the purpose of s. 21 is to provide an accurate picture of the pecuniary interest each creditor has in the restructuring on the date of commencement of proceedings, and of the number of votes each creditor should have (see Kitco, at para. 83). This provision is not concerned with what might happen to the debtor’s business after that date, because the date of commencement of proceedings is when [translation] “the claims must be established” and therefore when the mutuality of debts must be assessed (B. Boucher, “Procédures en vertu de la Loi sur les arrangements avec les créanciers des compagnies”, in JurisClasseur Québec — Collection Droit des affaires — Faillite, insolvabilité et restructuration (loose‑leaf), by S. Rousseau, ed., fasc. 14, at No. 70; see also Kitco, at para. 34). (Emphasis Added)

[69] With all due respect for our colleague, in light of the context of s. 21, it is evident that this provision is not meant to legitimize pre‑post compensation.

[70] This contextual interpretation of s. 21, which limits its scope to pre-pre compensation, is also confirmed by the section’s purpose. It was added to the CCAA to prevent the unfair situation that would result from a creditor being required to pay its debt to the debtor company in full but receiving almost nothing from the debtor in payment of its claim under an arrangement or compromise. The effect of s. 21 is that the creditor receives payment of its claim up to the value of the debt it owes to the debtor (Anderson, Gelbman and Pullen, at p. 27; Boucher, at No. 70; McElcheran, at p. 116). (Emphasis Added)

[71] It is true that compensation “creat[es] a type of security interest in the [insolvent company’s] estate” because it “[authorizes] the party claiming set‑off [to] ‘reorde[r]’ ... his priority” by reducing the value of that party’s claim (Husky Oil Operations Ltd. v. Minister of National Revenue, 1995 CanLII 69 (SCC), [1995] 3 S.C.R. 453, at paras. 59‑60; see Kitco, at paras. 63‑68). The creditor uses its indebtedness to the debtor as a form of security for its claim, security that is equal in value to its debt to the insolvent company (Stein v. Blake, [1996] 1 A.C. 243 (H.L.), at p. 251). This portion of its claim is therefore sure to be paid in full (Husky Oil, at para. 58). The effect of compensation is thus to deviate from the principle of equality among ordinary creditors, a fundamental principle of insolvency law that applies with equal force in proceedings under the CCAA, one of the remedial objectives of which is to ensure the fair and equitable treatment of the claims made against a debtor (Callidus, at para. 40). The exception created by compensation must therefore be interpreted narrowly. As a general rule, “[o]nce a formal insolvency process commences, all unsecured creditor remedies are stayed and the creditor must stand in line behind secured and preferred creditors and share any remaining recoveries in the estate pro rata with all other unsecured creditors” (McElcheran, at p. 78). (Emphasis Added)

[72] The prejudice suffered by a creditor wishing to effect pre‑post compensation does not justify expanding the scope of s. 21. When the debt owed by the creditor arises after a stay order has been made, prejudice is merely illusory. The fact that the creditor contracted obligations toward the debtor company during the stay period does not place it in a worse situation than it would have been in had it contracted with a third party instead. If it had contracted with a third party, it would likewise have had to pay the full price of the goods or services it obtained (Tungsten (S.C.), at para. 27). A creditor that contracts with the debtor company during the status quo period knows or ought to know that it will probably receive only pennies on the dollar in payment of its pre‑order claim and that payment of its post‑order debt will benefit it and the other creditors.

[73] Because there is really prejudice only in the case of pre‑pre compensation, this exception to the principle of equality should apply to only one of the debtor’s assets on the date of commencement of insolvency proceedings, that is, the debt owed to it by the creditor (Kitco, at para. 68; Husky Oil, at para. 59). Otherwise, giving the green light to pre‑post compensation would amount to granting certain creditors an additional “type of security interest” in respect of new assets acquired by the debtor after the commencement of proceedings (for example, amounts received as interim financing). Professor Wood aptly describes the injustice that would thus befall the other ordinary creditors whose rights and remedies have been stayed:

The ability to exercise a right of set‑off in restructuring proceedings can operate to improve greatly the position of one creditor at the expense of the other creditors. This is illustrated in the following example. Suppose that the debtor company owes $1,000 to a creditor. The debtor company then initiates restructuring proceedings. While the proceedings are under way, the debtor company sells and delivers goods to the creditor for $1,000. By exercising its right of set‑off, the creditor obtains full recovery of its claim at the expense of the other unsecured creditors whose claims will be compromised or otherwise affected by the plan. [p. 400]

(Emphasis Added)

[30] CCI concedes that HSBC was entitled to exercise its right to set-off under the Master Indemnity Agreement in the ordinary course.

[31] CCI submits that while set-off rights are preserved under the CCAA, the exercise of these rights can (and, in this case, should) be stayed during the period of CCAA protection to preserve the status quo and further the objectives of the CCAA regime and that creditors should not be permitted to derail restructuring or liquidation efforts by asserting set-off rights or debts arising during the period of the CCAA protection, absent a court ordered priority status or carveouts from the stay.

[32] CCI contends that as a result of HSBC taking the money from CCI’s Operating Account, HSBC improved its position to obtain “full recovery”, while all other creditors can expect to recover only a small fraction of their claims. As a result of HSBC’s actions, CCI contends it has $6.8 million less of funds available to distribute to creditors through the claims process.

[33] In this case, CCI takes the position that,

(i) HSBC’s exercise of set-off is of pre-filing claims and post-filing claims;

(ii) the stay provision of the Initial Order applies to HSBC;

(iii) s. 21 of the CCAA does not grant HSBC Canada a right of set-off (para. 63 of Montréal).

Did HSBC’s exercise of set-off breach the Initial Order?

[34] HSBC submits that the stay provision in the Initial Order does not prohibit HSBC’s exercise of set-off as the debts arose before the Initial Order was made.

[35] However, HSBC does not challenge the jurisdiction of the court to temporally stay set-off rights in a CCAA proceeding, where the immediate exercise of such rights will put a debtor company’s restructuring efforts in jeopardy.

[36] The difficulty with this acknowledgement is that in many cases a determination has not been made at the time that CCAA proceedings are initiated as to whether the immediate exercise of set-off rights will put a debtor company’s restructuring efforts in jeopardy. In this case, HSBC exercised set-off rights shortly after the Initial Order was pronounced and at a time when CCI stated it was engaged in a restructuring. In any event, it was uncertain as to whether CCI would be engaged in a restructuring or liquidation.

[37] In addition, it is often difficult to ascertain at the time of commencement of CCAA proceedings as to whether the set-off that a party purports to exercise relates to pre-pre obligations or pre-post obligations. This is one of the issues being determined on this motion.

[38] In any event, HSBC was clearly aware of the CCAA proceeding and when the set-off was exercised, HSBC was certainly aware of the stay provisions in the Initial Order.

[39] By exercising its unilateral right of set-off, HSBC exercised a remedy and an enforcement step under agreements to which the Applicants are party, borrower, principal obligor as guarantor.

[40] In my view, a plain language reading of the stay provision leads to the conclusion that the stay provision was broad enough to cover the exercise of set-off rights. The exercise by HSBC of set-off breached paragraph 18 of the Initial Order.

[41] Further, the guidance provided by the Supreme Court in Montréal at paragraphs 65 and 66 makes it clear that the court has the discretion to order such a stay.

[42] In summary, on this issue, the following is the state of affairs that existed at the time the Initial Order was granted.

1. Paragraph 18 of the Initial Order has the effect of staying the exercise of set-off remedies.

2. No determination had been made as to whether CCI would be able to restructure or whether it was in a liquidation mode.

3. No determination had been made by the court as to whether the contractual or legal set-off rights of HSBC were with respect to pre-pre or pre-post set-off.

[43] On this issue, I conclude that if HSBC wished to exercise its right of set-off, it was required to seek leave to do so. HSBC did not seek leave and proceeded to knowingly breach the stay provision.

Were the funds in CCI’s Operating Account available for set-off purposes?

[44] The second issue to be determined is whether the funds in CCI’s Operating Account were already allocated to specific operating expenses and/or impressed with priority charges and were not available for set-off purposes.

[45] CCI submits at para. 43 of its factum that HSBC was not entitled to set-off funds from the CCI Main Account because such funds “were allocated to accrued operating expenses and/or impressed with the court ordered priority charges”, as set out in the allocation chart, such that only $2,471,012 of the $60,530,000 in the CCI Main Account on February 21, 2018 was “free cash” available to CCI.

[46] The foregoing submission is at odds with CCI’s factum, specifically at paragraphs 25 and 26:

25. HSBC did not seek instructions from the Court as to whether it could debit funds from CCI’s account for the SERP Letters of Credit. It did not ask CCI or the Monitor for permission to debit the funds. Instead, on February 27, 11:39 a.m. PST, HSBC notified CCI that it would unilaterally take $6.8 million from the Operating Account by “exercising the set-off right afforded to it pursuant to the Counter Indemnity Agreements, the Master Indemnity Agreement, and in law.” Less than two hours later, without waiting for a reply from CCI, HSBC took the money.

26. That same day, within hours of receiving the letter, CCI and the Monitor asked HSBC to hold-off on taking the funds for a few days so that they could consider their position, as they were not aware (and were not advised) that HSBC had already taken the money. CCI promised it would keep the funds in the account so as not to prejudice HSBC’s rights during that time. HSBC refused.

[47] I find it difficult to reconcile the position that CCI puts forth in paragraphs 25 and 26 with its submission that the funds in the CCI account “were allocated to accrued operating expenses and/or impressed with the court ordered priority charges”, as set out in the allocation chart attached to the affidavit of Keith Hamilton. If the funds were already allocated and/or impressed with the trust, the funds could not be available to HSBC as they had been earmarked for other purposes.

[48] The submissions of CCI on this point are premised on the argument that the funds taken by HSBC were not available to any creditors because they were allocated to accrued operating expenses and/or impressed with the court ordered priority charges. The submissions go on to note that priority charges are central to the CCAA purpose and objectives that monitors and other professionals require protection for the work they do in stabilizing, restructuring and/or liquidating an insolvent company.

[49] CCI also submits that the primary goal at the outset of the CCAA Proceeding was “preserving the going concern value of the applicant’s business and that CCI needed access to much-needed liquidity. However, I find myself in agreement with the statement of HSBC to the effect that CCI’s position has no basis in law and appears to conflate an account subject to court ordered charges with a segregated account that is impressed with a trust.

[50] HSBC has, in my view, provided a complete answer to this argument in its factum commencing at paragraph 63 and in particular at paragraphs 65 – 68 which read as follows:

65. Funds in a general operating account that are subject to court-order charges are not rendered “untouchable” pending payment of the beneficiaries of such charges. Court-ordered charges attach to the assets of a debtor company and act as a backstop in the event there is a distribution shortfall. Likewise, the “allocations” set out in the Allocation Chart was simply CCI’s accounts payable in the ordinary course and were not segregated funds.

66. Approximately $50 million of the $60 million in the CCI Main Account on February 27, 2018 came from a deposit (the “Fairfax Deposit”) advanced by Fairfax Financial Holdings Limited (“Fairfax”) in respect of a sale transaction among the applicants and Fairfax (the “Fairfax Transaction”). The Court approved the Fairfax Transaction by order dated February 8, 2018 (“the “AVO”) in the Fairfax Deposit was soon thereafter released from the Monitor’s trust account and delivered to CCI to be used for its “short-term liquidity purposes and for general corporate purposes”. The AVO includes certain restrictions in respect of the Fairfax Deposit and creates the “Deposit Charge” but does not reference rights of set-off.

67. In the Allocation Chart, CCI subtracts the amount of the Fairfax Deposit from the “free cash available to CCI”, apparently on the basis of the “Deposit Charge”, but ignores the plain language of AVO which provides that the Fairfax Deposit can be used to satisfy its “short-term liquidity purposes and for general corporate purposes”, which would include the payables set out in the Allocation Chart. Further, even if the Fairfax Deposit was impressed with trust characteristics by virtue of the Deposit Charge, which is expressly denied, such characteristics were lost one CCI deposited the Fairfax Deposit into the CCI Main Account and commingled that with other funds. Moreover, there were no such Deposit Charge conditions impressed on the other approximately $10 million in the CCI Main Account as at February 27, 2018.

68. In any event, HSBC Canada’s set-off has not prejudiced beneficiaries of the court-ordered charges or allocations. Mr. Hamilton confirmed on cross-examination that all “allocations” to employees, professionals and trade creditors in the Allocation Chart have been satisfied. The Fairfax Transaction closed and the Fairfax Deposit never became interim financing. There is also no evidence whatsoever that any of the beneficiaries of the Administration Charge or KERP Charge have not, or will not, be paid as a result of HSBC Canada’s set-off. (Emphasis Added)

[51] Further, as noted in [21] above, the underlined portion in para. 68 makes it clear that the beneficiaries of the court-ordered charges or allocations have not been prejudiced.

[52] I also question the submission at paragraph 51 of the CCI factum, specifically the concluding sentence which reads,

“Not only did HSBC breach the Initial Order by taking the funds from CCI’s account, it also upset the order of priority which governs recovery and ensures the fair and equitable treatment of all creditors.”

[53] I do not view the exercise of set-off rights as an attempt to elevate the priority position of HSBC. At all times, HSBC is an unsecured creditor. It does have preferred treatment in certain prescribed circumstances, such as that outlined in s. 21 of the CCAA.

[54] CCI’s position is also at odds with the comments of the Supreme Court in Montreal at paragraphs 70 - 73, which confirms that in cases of pre-pre set-off, there is an exception to the principle of equality.

[55] In the circumstances of this case, I conclude that the funds in the Operating Account were available if set-off was permitted under s. 21 of the CCAA.

Did HSBC’s exercise of set-off contravene s. 21 of the CCAA?

[56] The next issue to be determined is whether the set-off claim of HSBC is a pre-pre-or pre-post. This issue is addressed in the supplementary factums filed by CCI and HSBC.

[57] In Montreal, the Supreme Court concluded that s. 21 of the CCAA allows pre-pre set-off for the purpose of quantifying creditors claims on the date of commencement of proceedings.

[58] CCI submits that the majority of Montréal held that s. 21 of the CCAA “applies only to compensation between debts that arise before an Initial Order is made”. The preservation of set-off rights is an aspect of the plan of arrangement that assists in quantifying the value of the creditors claim against the insolvent company only “on the date of commencement of proceedings.”

[59] CCI submits that HSBC’s claim to set-off arose after the commencement of CCAA Proceedings when the SERP Letters of Credit were paid out. While HSBC may have a valid claim to contractual set-off, that claim is not protected by s. 21 of the CCAA and cannot be exercised during the Stay Period. It is simply an unsecured claim that should have been dealt with through the claims process, like those of all other unsecured creditors.

[60] HSBC submits that its obligations to pay out under the Letters of Credit, on the one hand, and CCI’s indemnity obligations owing to HSBC under the Indemnity Agreements, on the other hand, are both either pre-filing or post-filing obligations and liabilities, they cannot be both or a mix of the two.

[61] The claims process in this proceeding is governed by the Claims Procedure Order granted on July 6, 2018. The Claims Procedure Order defines a “prefiling claim” as follows:

“Pre-filing Claim” means any Claim of any Person in whole or in part against the Applicants that (A) is based in whole or in part on facts existing prior to the Filing Date, (B) relates to a time period prior to the Filing Date, or (C) is a right or claim of any kind that would be a claim provable in bankruptcy within the meaning of the BIA had the Applicants become bankrupt on the Filing Date and includes an Equity Claim and a Secured Claim.

[62] HSBC submits that the rights and claims of HSBC and CCI connection with the letters of credit and indemnity agreements satisfy each of (A), (B) and (C).

[63] The legal argument of HSBC is further developed commencing at paragraph 10 of the supplementary factum.

10. HSBC issued the Letters of Credit between 2002 and 2009 and CCI executed the Indemnity Agreements,… during the same time period. As such, the rights, obligations and liabilities of each of HSBC Canada and CCI arose between nine and 16 years before the Filing Date and relate to facts existing prior to the Filing Date, even if such rights, obligations and liabilities were contingent in nature.…

11. The fact that the HSBC Canada’s claims and CCI’s liabilities under the Indemnity Agreements were not quantified until after the Filing Date does not transform the claims into post-filing claims, rather it simply renders the claims contingent prefiling claims. In AbitibiBowater Inc. Re, [2012 SCC 67 (“AbitibiBowater”)] the SCC held that “[u]nlike in proceedings governed by the common law or the civil law, a claim may be asserted in insolvency proceedings even if it is contingent on an event that has not yet occurred… [and]… thus, the broad definition of ‘claim’ in the BIA includes contingent and future claims that would be unenforceable at common law or in civil law.”

12. Regarding the test for determining a contingent claim, the SCC in AbitibiBowater held that the “criterion used by courts to determine whether a contingent claim will be included in the insolvency process is whether the event that has not yet occurred is too remote or speculative”. As discussed below, far from being remote or speculative, the events leading to HSBC exercising its set-off rights were triggered by CCI’s own decision to cease funding its SPA premiums after the Filing Date.

13. Additionally, in this case, the definition of “Claims” in the Claims Procedure Order expressly captures “contingent” claims.

[64] HSBC also references s. 19(1) of the CCAA which sets out which claims may be dealt with by compromise or arrangement.

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 on the earlier of

(i) the day on which proceedings commenced under this Act, and

(ii) if the company filed a notice of intention under section 50.4 of the Bankruptcy and Insolvency Act or commenced proceedings under this Act with the consent of inspectors referred to in section 116 of the Bankruptcy and Insolvency Act, the date of the initial bankruptcy event within the meaning of section 2 of that Act; and;

(b) claims that relate to debts or liabilities, present or future, to which the company may become subject before the compromise or arrangement is sanctioned by reason of any obligation incurred by the company before the earlier of the days referred to in subparagraphs (a)(i) and (ii).

[65] HSBC goes on to submit that s. 19 does not only capture debts that crystallized prior to the Filing Date, as CCI asserts, but also any “liabilities” in relation to “any obligation incurred by the company” before the date on which the CCAA Proceedings commenced. Here, HSBC set-off was in relation to contractual indemnity obligations incurred by CCI and set-off rights granted by CCI to HSBC on consent, prior to the filing date.

[66] In AbitibiBowater, the Supreme Court determined that in order to qualify as claims subject to the CCAA process –

(1) there must be a debt;

(2) the debt, liability or obligation must be incurred before commencement of the CCAA proceedings; and

(3) it must be possible to attain a monetary value to the debt, liability or obligation.

[67] In my view, the AbitibiBowater analysis supports the position that HSBC’s claim for set-off may be asserted in these proceedings on the basis that they arose out of pre-pre-obligations. In addition, a plain reading of s. 19 supports the position put forth by HSBC, as does a plain reading of the definition of “Pre-filing Claim” in the Claims Procedure Order.

[68] In addition, the Non-Derogation of Rights provision at paragraph 23 of the Initial Order required HSBC to honour the Letters of Credit in accordance with their terms. As such, it is clear to me that CCI considered HSBC’s obligation under the Letters of Credit to have existed prior to the commencement of the CCAA Proceeding.

[69] I find that the contractual set-off claim of HSBC is a pre-pre set-off which, as the Supreme Court of Canada acknowledged in Montréal at paragraphs 63 – 64 is preserved pursuant to section 21 of the CCAA.

SUMMARY

[70] The foregoing results in the following conclusions:

1. Prior to the Initial Order, HSBC had contractual set-off rights.

2. The Initial Order temporally stayed HSBC from exercising its rights of contractual set-off.

3. The set-off rights of HSBC are pre-pre-set-off rights which are preserved pursuant to s. 21 of the CCAA.

4. The was no prohibition that would restrict the funds in CCI’s Operating Account from being available for set-off purposes.

5. Although HSBC knowingly breached the Initial Order by unilaterally exercising set-off rights, this activity did not result in prejudice to other unsecured creditors of Carillion Canada Group. The recovery of unsecured creditors is dependent upon whether HSBC’s set-off rights are preserved pursuant to s. 21 of the CCAA.

[71] I have no doubt that, prior to exercising its set-off rights, HSBC was well aware that there was a significant likelihood that a court would find that it was stayed from exercising its set-off rights unilaterally. However, the actions that HSBC took are not such that should alter the legal conclusion that HSBC is entitled to a set-off claim. There is no evidence that the exercise of the set-off had the effect of undermining CCI’s restructuring efforts. Simply put, I am not prepared, nor do I think it appropriate, to override HSBC’s set-off claim and reduce HSBC’s claim to the same priority as any other general unsecured claim in the CCAA Proceeding. Section 21 of the CCAA recognizes and preserves the pre-pre set-off claim of HSBC. HSBC set-off rights have been found to be valid and consequently are to be enforced separate and apart from any distribution to general unsecured creditors.

DISPOSITION

[72] In the result, the motion of CCI for an order directing HSBC to return or make payment in the amount of $6,820,000 CCI is dismissed. The request for a declaration that HSBC be prohibited from exercising any rights against CCI to set-off is dismissed.

[73] With respect to costs, the parties had reached an agreement that the successful party would be entitled to its costs in the amount of $50,000. Notwithstanding this agreement, the conduct of HSBC in unilaterally exercising set-off rights in the face of the stay provisions in the Initial Order, is such that, in my view, the appropriate disposition is for HSBC to pay costs in the amount of $50,000 to CCI.

Chief Justice G.B. Morawetz

Date: September 2, 2022