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 BIOSTEEL SPORTS NUTRITION INC., BIOSTEEL MANUFACTURING LLC, AND BIOSTEEL SPORTS NUTRITION USA LLC

BEFORE: CAVANAGH J.

COUNSEL: Jason Berall, Gina Azer, and Jesse Mighton, for the KSV Restructuring Inc., in its capacity as the Monitor of BioSteel Sports Nutrition Inc. Sam Babe, for ColdHaus Direct Inc. Shayne Kukulowicz, for BioSteel Sports Nutrition Inc. and Canopy Growth Corporation

HEARD: April 8, 2024

ENDORSEMENT

Introduction

[1] KSV Restructuring Inc. (“KSV”), in its capacity as court-appointed Monitor of the applicants in these proceedings (in such capacity, the “Monitor”), moves for an order declaring that ColdHaus Direct Inc. (“ColdHaus”) is liable to BioSteel Sports Nutrition Inc. (“BioSteel”), one of the applicants, in the amount of $3,973,541.40 and directing ColdHaus to pay this amount to the Monitor.

[2] The Monitor moves separately for an order (a) extending the stay granted pursuant to the Amended and Restated Initial Order from April 30, 2024 (the “ARIO”) to and including July 31, 2024; and (b) approving the activities, fees and disbursements of the Monitor, as well as the fees and disbursements of its legal counsel incurred from the commencement of this CCAA proceeding to February 29, 2024 and March 31, 2024, respectively.

[3] ColdHaus moves for an order, if necessary, lifting the stay of proceedings imposed by paragraph 18 of the ARIO to allow ColdHaus to set-off post-filing obligations of BioSteel against pre-filing amounts payable by ColdHaus to BioSteel.

[4] For the following reasons:

a. The Monitor’s motion for an order directing ColdHaus to pay the amount owing to BioSteel is allowed, in part, provided that ColdHaus is allowed to set off against the amount claimed the amounts of (i) $89,273.14 as billbacks owed to it by BioSteel under the Warehouse Agreement (as defined below), and (ii) $74,546.05 as billbacks owed to it by BioSteel under the Distribution Agreement (as defined below). b. The Monitor’s motion for a stay extension and requested approvals is granted. c. ColdHaus’ motion is dismissed.

Background Facts

[5] On September 14, 2023, BioSteel was granted protection under the Companies’ Creditors Arrangement Act (“CCAA”) pursuant to an initial order. KSV was appointed as the Monitor.

[6] On September 21, 2023, the Court issued the ARIO.

[7] All assets have now been divested pursuant to various orders by this Court. The remaining steps in the CCAA proceedings are to: (a) address the disputed amounts claimed to be owed to BioSteel by ColdHaus; (b) distribute all remaining cash to the Applicants’ ranking secured creditor, Canopy Growth Corporation (“Canopy”); and (c) wind down the remaining business.

[8] ColdHaus provided distribution services to BioSteel pursuant to a distribution agreement dated January 27, 2021, as amended (the “Distribution Agreement”). Under the Distribution Agreement, ColdHaus was appointed as a non-exclusive distributor of BioSteel products in Canada.

[9] ColdHaus and BioSteel are parties to a Warehouse and Fulfillment Agreement dated as of February 10, 2021, as amended (the “Warehouse Agreement”) under which ColdHaus provided services to BioSteel in consideration for payment of service fees and expenses reimbursement to be paid by BioSteel.

[10] When BioSteel file for CCAA protection, ColdHaus had received invoices from BioSteel for products purchased under the Distribution Agreement. These invoices were dated between January and September 2023, prior to the filing date. The invoices were subject to 60-day payment terms. By mid-November 2023, the 60-day payment period for all invoices had passed.

[11] The Monitor provided a calculation of the amounts at issue on this motion. The Monitor’s calculations are set out below. ColdHaus agrees that these amounts at issue are correctly set out, although it does not agree to the Monitor’s descriptions of these amounts.

Total uncollected amounts owed by ColdHaus to BioSteel (including pre-judgment interest)
7,494,211.05
Less amounts conceded by the Monitor:
Pre-filing Billbacks
(3,433,613.65)
Outstanding payment amounts
(87,056.00)
Net uncollected amounts owed by ColdHaus sought by the Monitor
3,973,541.40
Less amounts not conceded by the Monitor:
Post-filing Billbacks pursuant to the Warehouse Agreement
(89,273.14)
Post-filing Billbacks pursuant to the Distribution Agreement
(74,546.05)
Post-termination buy-back
(1,053,437.40)
Net uncollected amounts after deducting disputed amounts
2,756,284.81

Analysis

[12] ColdHaus submits that it is entitled to set-off against the amount owed by it to BioSteel for unpaid invoices for the supply of product (i) the buy-back amount of $1,053,437.40; (ii) the billback amount pursuant to the Warehouse Agreement of $89,273.14, and (iii) the billback amount pursuant to the Distribution Agreement of $74,546.05.

ColdHaus’ claim to set-off in respect of buy-back amount of $1,053,437.40

[13] On December 5, 2023, ColdHaus delivered an invoice to BioSteel in the amount of $1,053,437 for BioSteel product that ColdHaus sought to require BioSteel to purchase pursuant to section 6.3 of the Distribution Agreement.

[14] The Distribution Agreement provides in section 6.3 (in part):

Within five (5) business days after termination, Distributor shall have the option to sell, and BioSteel or its designee shall purchase, Distributor’s undamaged, merchantable and originally packaged inventory of non-overage Subject Beverages purchased from BioSteel at the cost paid by the Distributor for such Subject Beverages, plus all applicable Taxes paid by the Distributor for such Subject Beverages.

[15] ColdHaus’ option to sell inventory to BioSteel under s. 6.3 of the Distribution Agreement arises after termination of the Distribution Agreement.

[16] ColdHaus was contacted by the Monitor on October 26, 2023 in respect of payment of amounts owing by it to BioSteel. There were discussions about the net amount owing which continued until December 5, 2023.

[17] ColdHaus submits that when the Monitor demanded a final accounting of amounts owing under the Distribution Agreement, the Monitor effectively terminated the Distribution Agreement, thereby triggering ColdHaus’ sell-back rights. ColdHaus submits that by delivering its final accounting on December 5, 2023, which included the buy-back amount of $1,053,437, ColdHaus effectively accepted this termination. ColdHaus submits that the parties, through their conduct, demonstrated the intention to end the term of the Distribution Agreement early.

[18] ColdHaus submits that, in any event, if the Distribution Agreement had not been terminated, its term would have expired on January 27, 2024 and that the automatic renewal provision is inapplicable because the Monitor had no intention or expectation that BioSteel would perform under the Distribution Agreement. ColdHaus further submits that the substantial deprivation of all benefits to ColdHaus under the Distribution Agreement amounts to a fundamental breach by BioSteel, which entitles ColdHaus to terminate the Distribution Agreement without notice.

[19] Finally, ColdHaus submits that if the stay of proceedings imposed by paragraph 18 of the ARIO applies, the Court should lift the stay of proceedings to allow ColdHaus to terminate the Distribution Agreement, thus triggering its sell-back option and BioSteel’s obligation to pay or issue a credit memo for the buy-back amount.

[20] I first address whether the Distribution Agreement was terminated by agreement.

[21] Section 5.1 of the Distribution Agreement provides that “[t]his Agreement may be terminated at any time by mutual agreement of the Parties or by either Party without cause or penalty, upon one hundred and eighty (180) days’ prior written notice to the other Party.”

[22] There was no written notice of termination given upon 180 days’ notice. ColdHaus does not rely on termination of the Distribution Agreement under this provision.

[23] The ARIO provides, in paragraph 17:

THIS COURT ORDERS that during the Stay Period, no Person shall accelerate, suspend, discontinue, failed to honour, alter, interfere with, repudiate, rescind, terminate or cease to perform any right, renewal right, contract, agreement, lease, sublease, license, authorization or permit in favour of or held by any of the BioSteel Entities, except with the prior written consent of the Applicant and the Monitor, or leave of this Court.

[24] In order to terminate the Distribution Agreement in any way, including by notice accepting a repudiatory breach by BioSteel, ColdHaus required the written consent of the Applicant and the Monitor, or leave of the Court.

[25] The evidence does not support ColdHaus’ submission that when the Monitor sought a final accounting of the amount owing by ColdHaus, this shows that the parties intended and agreed to terminate the Distribution Agreement. ColdHaus required the prior written consent of BioSteel and the Monitor to termination of the Distribution Agreement, which it did not obtain.

[26] In its notice of motion, ColdHaus seeks an order lifting the stay of proceedings imposed by paragraph 18 of the ARIO to allow it to set off post-filing obligations of BioSteel against pre-filing amounts payable by ColdHaus. ColdHaus does not seek an order lifting the stay to allow it to terminate the Distribution Agreement. In its factum, however, ColdHaus seeks an order lifting the stay of proceedings to allow ColdHaus to terminate the Distribution Agreement, thereby triggering its sell-back option and BioSteel’s obligation to pay or issue a credit memo for the buy-back amount.

[27] I treat ColdHaus’ notice of motion, read generously, as including a request for an order lifting the stay of proceedings to allow it to terminate the Distribution Agreement, because this is needed to allow ColdHaus to apply the set-off it seeks.

[28] In support of its request that the stay be lifted to allow it to terminate the Distribution Agreement, ColdHaus notes that the Monitor reported in paragraph 7.1.2 of its Third Report that on December 6, 2023, BioSteel, with the consent of the Monitor, delivered a letter to substantially all of its contracting counterparties confirming that BioSteel would not perform its contractual obligations under the applicable agreements and advising that the counterparty was free to terminate the contract and that such counterparty would be given an opportunity to submit a proof of claim if a claims process is conducted. The Monitor reports that, in its view, the correspondence was appropriate as BioSteel has no ability to perform under the contracts and there is no anticipated recovery for unsecured creditors.

[29] ColdHaus was not sent such a letter and was not offered the right to terminate the Distribution Agreement.

[30] The Monitor submits that there is no basis for this court to grant ColdHaus’ request to lift the stay on terminating contracts.

[31] In Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53, the Supreme Court of Canada, at para. 46, confirmed that the “primary tool that allows the CCAA to achieve its restructuring objective is a stay of proceedings and of creditors’ rights”. The Court held that without a status quo period, “there would be a free-for-all in which individual creditors would fight it out to enforce their rights without regard for the company’s survival or the maximization of its liquidation value”.

[32] In Canwest Global Communications Corp., Re, 2009 ONSC 6470, the moving parties sought an order lifting the stay imposed by an initial order under the CCAA. The motion judge addressed the legal principles applicable to the granting and lifting of a CCAA stay. The motion judge, at para. 32, noted that as with the imposition of a stay, the lifting of a stay is discretionary and there are no statutory guidelines in the Act. The motion judge held that the court should consider whether there are sound reasons for lifting the stay consistent with the objectives of the CCAA, including a consideration of the balance of convenience, the relative prejudice to parties, and, where relevant, the merits of the proposed action. The judge should also consider the good faith and due diligence of the debtor company. The motion judge, at para. 33, listed a number of situations in which courts will lift a stay order. These situations include (i) where the applicant shows hardship caused by the stay itself, (ii) where the applicant would be significantly prejudiced by refusal to lift the stay and there would be no resulting prejudice to the debtor company or the positions of creditors, and (iii) where it is in the interests of justice to lift the stay.

[33] Section 5.1 of the Distribution Agreement provides that the Distribution Agreement may be terminated by either party without cause or penalty upon 180 days’ prior written notice to the other party. Section 6.3 of the Distribution Agreement provides that within 5 business days after termination, ColdHaus shall have the option to sell, and BioSteel shall purchase, ColdHaus’ undamaged and merchantable inventory.

[34] If the stay imposed by the ARIO were to be lifted, ColdHaus would not have a contractual right to terminate the Distribution Agreement with immediate effect, and thereby trigger a contractual right to require BioSteel to purchase ColdHaus’ inventory. It would have a right to terminate the Distribution Agreement on 180 days’ notice. In these circumstances, ColdHaus has not shown that it has suffered hardship caused by the stay itself or that it would be significantly prejudiced by refusal to lift the stay. I am not satisfied that it is in the interests of justice to lift the stay where ColdHaus’ objective is to assert a claim for the buy-back amount to be set-off against its intentionally unsatisfied contractual obligation to pay invoices for the supply of product under the Distribution Agreement.

[35] I decline to make an order lifting the stay imposed by the ARIO on termination by ColdHaus of the Distribution Agreement. ColdHaus’ right to issue an invoice for the buy-back amount only arises after termination of the Distribution Agreement. The Distribution Agreement has not been terminated and, therefore, ColdHaus’ invoice for the buy-back amount does not create an obligation for BioSteel.

[36] I go on, nevertheless, to address ColdHaus’ submissions that (i) it should be allowed to set-off the buy-back amount because BioSteel’s obligation therefor is a contingent pre-filing obligation falling under s. 19(1)(b) of the CCAA, and (ii) alternatively, the stay imposed by paragraph 18 of the ARIO should be lifted to allow ColdHaus to set-off the post-filing obligation of BioSteel for the buy-back amount against the pre-filing amount owing by ColdHaus to BioSteel.

[37] ColdHaus submits that the buy-back obligation in the Distribution Agreement was an implicit term of every purchase order and delivery of product under that agreement.

[38] Section 19(1) of the CCAA provides:

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 the paragraphs (a)(i) and (ii).

[39] Under the Distribution Agreement, ColdHaus was required to pay all invoiced amounts due to BioSteel within sixty calendar days of delivery of the beverages. Section 4.5 of the Distribution Agreement provides that ColdHaus shall notify BioSteel of any reasonable dispute with any invoice, “[t]he Parties shall seek to resolve all such disputes expeditiously and in good faith”, and ColdHaus “shall continue performing its obligations under this agreement during such dispute”. In the affidavit of Edwina Fung sworn on behalf of ColdHaus, she deposes that “all orders made from April 2023 onward were subject to 60-day payment terms”.

[40] I do not accept ColdHaus’ submission that the buy-back obligation was an implicit term of every purchase order and delivery of product under the Distribution Agreement. ColdHaus’ obligation under the Distribution Agreement to pay invoices for delivery of product within 60 days of delivery was separate from the BioSteel’s buy-back obligation that only arose after termination of the Distribution Agreement. ColdHaus’ obligation to honour the 60-day payment term for invoices applied regardless of a dispute with respect to such invoices.

[41] BioSteel had no obligation to purchase inventory held by ColdHaus until after the Distribution Agreement was terminated. If the Distribution Agreement had been terminated and if ColdHaus’ invoice created an obligation for BioSteel to pay ColdHaus for the buy-back amount, BioSteel’s obligation would be a post-filing obligation.

[42] I turn to whether, if ColdHaus’ invoice for the buy-back amount created a post-filing obligation for BioSteel, the stay imposed by paragraph 18 of the ARIO should be lifted to allow ColdHaus to set-off the post-filing obligation of BioSteel for the buy-back amount against the pre-filing amount owing by ColdHaus to BioSteel.

[43] The ARIO provides, in paragraph 18:

THIS COURT ORDERS that no Person shall be entitled to set off any amounts that: (a) are or may become due to the Applicant in respect of obligations arising prior to the date of the Initial Order with any amounts that are or may become due from the Applicant in respect of obligations arising on or after the date of the Initial Order; or (b) are or may become due from the Applicant in respect of obligations arising prior to the date of the Initial Order with any amounts that are or may become due to the Applicant in respect of obligations arising on or after the date of the Initial Order, each without the consent of the Applicant and the Monitor, or leave of this Court.

[44] This provision is in addition to the stay and suspension of rights and remedies of any entity against BioSteel, except with the written consent of the Applicant and the Monitor, or leave of the Court, as provided for in paragraph 16 of the ARIO.

[45] ColdHaus submits that if the buy-back amount is treated as a post-filing obligation, the stay imposed by paragraph 18 of the ARIO should be lifted to allow it to set-off the buy-back amount against the amount it owes for unpaid invoices for the supply of product under the Distribution Agreement. ColdHaus submits that the justification for the stay of set-off in paragraph 18(a) of the ARIO no longer exits, and that it would be unjust and inequitable to apply the stay to require ColdHaus to pay $1,053,437.46 more than it is contractually obligated to pay, for the benefit of Canopy, BioSteel’s secured creditor.

[46] The CCAA, at s. 21, provides that 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.

[47] In Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53, the Supreme Court of Canada, at para. 54, held that the broad discretion conferred on a court under s. 11 and 11.02 of the CCAA allows it to stay rights held by creditors, including a right to effect “pre-post filing compensation” [^1], if the exercise of those rights could jeopardize the restructuring process. The prohibition flows directly from the stay order. The Court confirmed, at para. 57, that a court has discretion to allow pre-post filing set-off in appropriate cases, although the exercise of the supervising judge’s discretion to do so must be in furtherance of the CCAA’s remedial objectives.

[48] The Court noted that the CCAA gives courts broad discretion to decide whether a stay is appropriate, to determine how long it should last, and to adjust its scope depending on what is needed to restructure the debtor company and to achieve the objects of the CCAA. The Court confirmed that if “pre-post compensation” was stayed by the CCAA order, a court may in its discretion lift the stay to allow an interested creditor to assert its rights in an appropriate case. See Montréal, at paras. 55-57.

[49] In Montréal, the Court observed, at para. 58, that “[t]he instances in which a court should not stay the right to effect pre-post compensation in an initial order will be rare, however”. The discretion not to impose a stay, or to lift a stay, must be exercised in furtherance of the CCAA’s remedial objectives. The Court noted that courts must be cautious in lifting a stay of pre-post filing set off and, at para. 74, that the very purpose of the stay period is to ensure that no creditor gains an advantage over others while the restructuring is underway, and that pre-post set-off should not allow a creditor to do indirectly what it cannot do directly.

[50] The Monitor submits that ColdHaus, by refusing to pay the amount owed by it to BioSteel for pre-filing invoices for the supply of product, has artificially created indebtedness owed by it against which it seeks to set-off the amount it claims as the buy-back amount. The Monitor contends that the only reason that there is any indebtedness owed to BioSteel is because ColdHaus intentionally and unjustifiably refused to pay millions of dollars owed to BioSteel under the Distribution Agreement.

[51] The Monitor submits that allowing ColdHaus to exercise a right of set-off in these circumstances would permit it to use its unsecured post-filing claims to reduce its pre-filing liability on a dollar-for-dollar basis, thereby turning its unsecured post-filing claims into a form of super-priority that supersedes the claims of all secured and unsecured creditors.

[52] In support of these submissions, the Monitor relies on Skydome Corp., Re. In Skydome, a preferred supplier to the Skydome failed to comply with an Order made in CCAA proceedings by not remitting payments that would otherwise have been payable under the contract between the supplier and the Skydome. The motion judge, at para. 6, held that the supplier refused to remit the payments (advertising revenues received by it on behalf of the Skydome) because it was concerned about the potential termination of the agreement under the CCAA umbrella and the supplier was not going to make the remittances until this issue was determined and as long as the supplier felt that it had claims of its own against Skydome to set-off against the advertising revenues the supplier was holding.

[53] In Skydome, the motion judge, at para. 18, rejected the argument advanced by the supplier that it was entitled to retain monies received as advertising revenues to be remitted to Skydome to be set-off against claims that were accumulating between the parties. The motion judge explained his reasoning:

If correct, it would mean that CMC could negligently, recklessly or even deliberately miss a payment, on the one hand, while at the same time succeed in frustrating the clear intent and terms of the Agreement and the Orders, on the other hand, by refusing to remit to SkyDome its own monies! [emphasis in original]

[54] The motion judge in Skydome held, at para. 19, that the unremitted advertising revenues were held by the supplier as a constructive trustee and that there is no right of set-off against trust monies for claims of a different nature being asserted by the supplier against the Skydome. The motion judge, at para. 22, wrote that he was not prepared to permit an equitable remedy of set-off to be applied against sums improperly held back following the granting of the initial CCAA order.

[55] The Monitor also relies on Strellson AG v. Strellmax Ltd., 2018 ONSC 1808. In Strellson, the motion judge addressed whether party in a receivership proceeding is entitled to set-off the amount due under a letter of credit plus legal costs against the receiver’s claim to money collected by the party asserting a right of set-off on behalf of the debtor pursuant to a collections agreement. The party had refused to remit payment of funds that belonged to the debtor and it asserted a right of set off (legal, contractual, and equitable) for its exposure on the letter of credit (that it had refused to honour) and legal costs, based on a side letter with the debtor. The receiver submitted that set-off is unavailable. The motion judge held that the claim for set-off resulted from a planned and deliberate breach of the collections agreement and the receivership order. The motion judge, at para. 32, held, citing Skydome, that the doctrine of set-off does not allow a party to unilaterally refuse to comply with a contractual obligation and a court order to create a claim for set-off.

[56] The Monitor also relies on Triton Tubular Components Corp. v. Steelcase Inc.. In that case, Triton supplied and Steelcase purchased certain products under a purchasing agreement. For a period of time, Steelcase did not pay amounts for products supplied and, over time, a substantial outstanding account receivable accumulated. After Triton made a filing under the CCAA, Steelcase sought to set-off its claims for costs incurred and damages suffered by reason of Triton’s fundamental breaches of the purchasing agreement. The claims officer denied Steelcase’s claim for set-off, finding that Steelcase deliberately ran up substantial accounts receivable and was improperly looking to those accounts receivable as a basis for setting off the costs of the termination of its relationship with Triton. The motion judge, at para. 36, held that it was reasonable for the claims officer to hold that no equitable basis was established for setting off any damages suffered by Steelcase.

[57] ColdHaus submits that these cases are distinguishable because legal set-off was not available to the party claiming set-off where there were no mutual debts. ColdHaus submits that its claim for payment of the buy-back invoice is a claim for a liquidated amount that is a mutual obligation with the claim made against it for unpaid invoices. ColdHaus disputes the Monitor’s assertion that it does not come to court with clean hands and argues that, nevertheless, where it asserts a legal set-off, not an equitable set-off, equitable considerations that arise when equitable set-off is claimed, including the absence of “clean hands” of the person asserting the right of set-off, as asserted by the Monitor against ColdHaus, are not applicable.

[58] Because ColdHaus seeks an order lifting the stay under the ARIO to allow it to set-off a post-filing obligation of BioSteel against its pre-filing obligation to BioSteel, I must exercise discretion in accordance with the principles set out in Montréal. In doing so, I take into account the conduct of the parties, including in relation to the circumstances surrounding the obligations which give rise to the asserted set-off.

[59] As I have noted, under the Distribution Agreement, ColdHaus was required to pay all invoiced amounts due to BioSteel within sixty calendar days of delivery of the beverages. It did not make the payments. By December 5, 2023, when ColdHaus took the position that the Distribution Agreement was terminated, issued the invoice for the buy-back amount, and asserted a right of set-off, all of BioSteel’s invoices were past 60 days and unpaid.

[60] The ARIO, in paragraph 17, provides that during the stay period, no person shall fail to honour or cease to perform any contract except with the prior written consent of the applicant and the Monitor or with leave of this Court. By failing to pay invoices when due, ColdHaus also failed to comply with the ARIO.

[61] By failing to pay invoices from BioSteel when they became due, ColdHaus artificially created indebtedness that it seeks to use by way of set-off to secure payment of the amount it claims for the buy-back invoice by reducing the amount it owes in payment of invoices for product delivered under the Distribution Agreement.

[62] In this CCAA proceeding, the only party with an economic interest in the estate of BioSteel is Canopy, a secured creditor. It is not contemplated that there will be any recoveries for unsecured creditors.

[63] To allow ColdHaus to artificially create indebtedness to be used by way of set-off by failing to comply with the payment terms in the Distribution Agreement and paragraph 17 of the ARIO, and to assert a right of set-off in these circumstances, would not be in furtherance of the remedial objectives of the CCAA, as described in Montréal, at paras. 44-51. Allowing ColdHaus to terminate the Distribution Agreement and to lift the stay to permit ColdHaus to set-off the amount of its invoice for the buy-back amount against the amount it owes for invoices under the Distribution Agreement would serve to give priority to ColdHaus over Canopy (and other unsecured creditors) and will have no general benefit to the administration of the estate. The considerations that arose in Skydome, Strellson, and Triton, where the courts did not permit a party to withhold payments that were contractually payable to artificially create indebtedness to be used as a set-off, arise here.

[64] If I had held that ColdHaus is entitled to treat the Distribution Agreement as having been terminated and that its invoice for the buy-back amount created an obligation on the part of BioSteel, I would exercise my discretion to decline to grant leave under paragraph 18 of the ARIO to lift the stay under the ARIO and allow ColdHaus to assert a right of set-off of the post-filing obligation of BioSteel for the buy-back amount against pre-filing amounts owing by ColdHaus for unpaid invoices from BioSteel in respect of product supplied under the Distribution Agreement.

[65] As a result of this decision, it is not necessary for me to decide whether, as the Monitor asserts, certain portions of the inventory that ColdHaus is selling back are not merchantable.

Set-off in respect of BioSteel’s obligations for bill-back amounts for transportation and logistics charges under the Warehouse Agreement?

[66] ColdHaus seeks to set-off the amount of $89,273.14 as billbacks owed to it by BioSteel in respect of warehousing and logistics services under the Warehouse Agreement. Under the Warehouse Agreement, ColdHaus contracted to provide storage, warehousing, and logistics services and to manage freight movement of products supplied by BioSteel in exchange for payment by BioSteel of service fees and expense reimbursements.

[67] The Monitor accepts that where services were provided pre-filing, ColdHaus is entitled to assert a set-off. The Monitor does not accept that ColdHaus is entitled to set off post-filing obligations of BioSteel for warehousing and logistics services. The Monitor relies on BioSteel documents showing the “Shipment Date”. Where the Shipment Date is post-filing, the Monitor treated the obligation as a post-filing obligation.

[68] ColdHaus submits that the timing of its invoices to BioSteel were a function of the timing of ColdHaus’ receipt of invoices from its third-party freight and logistics providers, which invoices were all provided to BioSteel as a backup to BioSteel’s invoices. ColdHaus submits that BioSteel’s obligation to pay invoices for these charges is a pre-filing obligation to which paragraph 18(a) of the ARIO does not apply, and in respect of which it is entitled to assert a right of set-off.

[69] The Monitor responds that the evidence on this motion does not establish that the billbacks under the Warehouse Agreement were in relation to pre-filing contractual arrangements made with third parties. The Monitor relies only on the information in the BioSteel records in the column identified as “Shipping Date”.

[70] In the affidavit filed Edwina Fung, the Chief Financial Officer of ColdHaus, she describes the amount of $638,730.22 as owing by BioSteel “for services provided prior to the filing date”. The amount calculated by the Monitor as a post-filing obligation is part of this amount (the balance was accepted by the Monitor as a pre-filing obligation for which set-off is available). Ms. Fung was not cross-examined on her affidavit. In the absence of cross-examination on this evidence, I accept that ColdHaus has shown that the billbacks under the Warehouse Agreement arise from pre-filing contractual arrangements for services, even if deliveries were made post-filing.

[71] In Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, the Supreme Court of Canada, at para. 26, held that there are three requirements that must be satisfied for a debt or obligation to be a pre-filing obligation. First, there must be a debt, a liability or obligation to a creditor. Second, the debt, liability or obligation must be incurred before the commencement of CCAA proceedings. Third, it must be possible to attach a monetary value to the debt, liability or obligation. The Court, at para. 34, held that a claim may be asserted in insolvency proceedings even if it is contingent on an event that has not yet occurred. The Court, at para. 36, 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.

[72] In support of ColdHaus’ submission, it relies on Carillion Canada Inc., 2022 ONSC 4617. In Carillion, a bank issued letters of credit at the request of its customer. The bank and its customer had entered into an indemnity agreement which authorized the bank to set-off all deposits against obligations of the customer to reimburse the bank for letters of credit. The customer filed for protection under the CCAA. The initial order included a stay prohibiting persons from exercising any right or remedy or taking enforcement steps under any agreement made by the applicant. After the initial order, the letters of credit were called on and the bank paid out amounts under the letters of credit. Then, the bank notified its customer that it would be taking money from the customer’s operating account by exercising the set-off afforded it under the indemnity agreement. The court was called on to determine whether the bank was entitled to retain the amount taken from the customer’s operating account as a valid set-off.

[73] In Carillion, the bank’s customer took the position that the bank’s claim to set-off arose after the initial order under the CCAA, and that the CCAA does not grant creditors a right to exercise post-filing set-off without leave of the court. The customer asserted that the bank’s claim under the indemnity agreement was an unsecured claim. The bank contended that its set-off was in relation to contractual indemnity obligations incurred by the customer and set-off rights granted by the customer to the bank prior to the filing date. The motion judge, at paras. 65-67, accepted the bank’s position that its claim for set-off was in relation to contractual indemnity obligations incurred by the customer and set-off rights granted by the customer to the bank before the initial CCAA order. The motion judge allowed the bank to retain the amount taken by way of set-off. In so deciding, the motion judge concluded that the AbitibiBowater analysis supported the position of the bank.

[74] I have accepted that ColdHaus has shown that the billbacks under the Warehouse Agreement arise from pre-filing contractual arrangements for services, even if deliveries were made post-filing.

[75] In my view, the approach taken by the motion judge in Carillion also applies in these circumstances. The billback amount under the Warehouse Agreement qualifies as a pre-filing obligation of BioSteel.

[76] I conclude that ColdHaus is allowed to set-off the contingent pre-filing obligation of BioSteel in respect of the billback amount owing under the Warehouse Agreement against the pre-filing amount owed by it to BioSteel.

Set-off in respect of BioSteel’s obligations for bill-back amounts for rebates under the Distribution Agreement

[77] The third category of set-off arises from amounts claimed by ColdHaus for rebates, or billbacks, under the Distribution Agreement.

[78] Under the Distribution Agreement, ColdHaus would be invoiced the full retail value of goods purchased from BioSteel. ColdHaus’ evidence is that for each order it was entitled to rebates to be billed by ColdHaus to BioSteel on a monthly basis. The rebates included deductions made by certain national retail chains from their payments to ColdHaus on account of discounts given to such customers directly by BioSteel. These amounts could not be calculated until ColdHaus sold the applicable BioSteel inventory.

[79] The Monitor in its factum treats the billback amounts under the Distribution Agreement in the same way as the billback amounts under the Warehouse Agreement. It accepts ColdHaus’ right to assert a set-off in respect of pre-filing obligations by BioSteel for such billbacks, but not for post-filing obligations.

[80] The Monitor used a document provided by BioSteel to calculate the amount of pre-filing billbacks and the amount of post-filing billbacks under the Distribution Agreement. The BioSteel document is a list of invoices and due dates, with a column described as “Memo” which is the description on the invoices given to BioSteel. The Monitor used this information showing dates of shipments of product for which ColdHaus was seeking rebates. The Monitor calculated the amount of post-filing billbacks (where delivery dates according to BioSteel’s records were post-filing) for rebates under the Distribution Agreement to be $74,546.05.

[81] ColdHaus submits that the relevant purchases in relation to the disputed billbacks were made prior to the filing date, and part of the consideration was BioSteel’s promise to issue credit memos for billbacks in reduction of ColdHaus’ obligation to pay the full retail price for products. ColdHaus submits, on the authority of Carillion, that the disputed amount of billbacks under the Distribution Agreement should be treated as a contingent pre-filing obligation of BioSteel, in the same way that billbacks under the Warehouse Agreement should be treated.

[82] In her affidavit, Ms. Fung deposed that although the billbacks under the Distribution Agreement would be bundled and invoiced weekly, each billback relates to a particular BioSteel invoice and, she deposed, the billback is a different part of a single transaction. This contractual regime in the Distribution Agreement for billbacks as part of a single transaction is unlike the contractual regime for the buy-back amount, which does not apply as a part of each sale transaction, but only on termination of the Distribution Agreement.

[83] The billbacks under the Distribution Agreement are made pursuant to a contractual obligation in respect of each sale transaction. The contractual obligation for BioSteel to honour rebates under the Distribution Agreement arose pre-filing. It is possible to attach a monetary value to BioSteel’s obligation in this regard. Although the rebate would not become due until delivery to the customer, the occurrence of this event is not too remote or speculative for BioSteel’s obligation to be considered a pre-filing contingent obligation, in the same way that the customer’s obligation in Carillion was treated as a pre-filing obligation.

[84] I conclude that ColdHaus is allowed to set-off BioSteel’s pre-filing obligation for billbacks under the Distribution Agreement in the amount of $74,546.05 against its pre-filing obligation to pay invoices for the supply of products.

Monitor’s motion to extend stay period and approval of its activities and reports and its fees and disbursements and those of its legal counsel

[85] The Monitor moves for an order (a) extending the Stay Period (as defined in the motion materials) from April 30, 2024 to and including July 31, 2024; and (b) approving the activities, fees and disbursements of the Monitor, as well as the fees and disbursements of its legal counsel incurred from the commencement of the CCAA proceeding to February 29, 2024 and March 31, 2024, respectively.

[86] ColdHaus submits that if it is held that any obligations owed to it by BioSteel are post-filing obligations for which it is not permitted to assert a set-off, I should decline to extend the stay period unless ColdHaus is not paid for the post-filing obligation owed to it. I have held that BioSteel did not incur an obligation to pay ColdHaus’ invoice for the buy-back amount. I have allowed ColdHaus to assert a set-off for the two categories of billback amounts.

[87] In the Second Supplement to the Fifth Report of the Monitor, the Monitor reports that the requested stay extension is necessary and appropriate for the following reasons:

a. BioSteel has been acting, and continues to act, in good faith and with due diligence; b. the Monitor does not believe that any creditor will be prejudiced by the extension being sought and, in fact, the extension is in the best interests of all stakeholders as the likely result of a failure to extend the Stay Period would be an immediate assignment of BioSteel into bankruptcy; c. the proposed extension will allow BioSteel to maintain the status quo to give it the opportunity to resolve the remaining issues and complete an orderly wind-down of the business; d. the Monitor is of the view that BioSteel will have sufficient liquidity until July 31, 2024.

[88] I accept the Monitor’s recommendation and extend the Stay Period to July 31, 2024.

[89] I am satisfied that the Monitor’s reports and its activities should be approved.

[90] I approve the fees and disbursements of the Monitor and its legal counsel.

Disposition

[91] For these reasons:

a. The Monitor’s motion for an order declaring the amount of indebtedness for which ColdHaus is liable to BioSteel and requiring ColdHaus to pay $3,973,541.40 to BioSteel within five business days of the order is allowed, in part, provided that ColdHaus is allowed to set off against this amount the amounts of (i) $89,273.14 as billbacks owed to it by BioSteel under the Warehouse Agreement, and (ii) $74,546.05 as billbacks owed to it by BioSteel under the Distribution Agreement. b. The Monitor’s motion for an order extending the stay period, approving its activities, reports, and its fees and disbursements and those of its counsel is granted. On this motion, Order to issue in from of Order signed by me today. c. ColdHaus’ motion for an Order lifting the stay of proceedings imposed by paragraph 18 of the ARIO to allow ColdHaus to set off post-filing obligations of BioSteel against pre-filing amounts payable by ColdHaus is dismissed.

[92] With respect to the Monitor’s motion in respect of the indebtedness owed by ColdHaus and ColdHaus’ motion, I ask counsel to provide me with an approved form of order to ensure that the calculation of the amount to be paid in accordance with this endorsement is correct.

[93] If costs are not resolved, counsel may make written submissions in accordance with a timetable to be agreed upon by counsel and approved by me (with page limits of three pages, excluding costs outlines; one page for reply).

Cavanagh J. Date: April 26, 2024

[^1]: In their reasons, the majority of the Supreme Court of Canada used the civil law term “compensation” which means set-off in a common law setting. The Court used the term “pre-post compensation” to refer generally to compensation, or set-off, between debts arising before and after an initial order under the CCAA. See Montréal, at para. 1.