Pre-post set-off in CCCAs – Not generally appropriate (but not completely prohibited)

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Under s. 21 of the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (“CCAA”) the law of set-off applies to all claims made against a debtor company. Set-off allows a creditor to deduct any amount that the debtor owes to that creditor from amounts the creditor owes to the debtor, with restrictions. This right of set-off has generally been understood in the courts to only apply to debts incurred before the initial order under the CCAA. Therefore, if a creditor is owed money by the debtor before the CCAA proceeding is commenced, it cannot then employ the debtor company and decline to pay the debtor company for that work by setting off the amount the debtor company owes to it. This would, among other things, lead to inequality amongst the creditors of the same ranking and could greatly interfere with the debtor’s ability to refinance and restructure its affairs.

In Montréal (City) v Deloitte Restructuring Inc., 2021 SCC 53, the Supreme Court of Canada affirmed that in general, the right of set-off of claims between the debtor and the creditor relates to amounts that were owing to each of them before the initial order in the CCAA. The Court held, however, that s. 21 does not prevent a creditor from setting off pre-initial order debts and post-initial order compensation due to the debtor company, in appropriate situations. Accordingly, it left the door open for a court to hold that the situation was appropriate at some point. In the present matter before it, however the Court held that the City was not entitled to set-off the amounts that it owed the debtor for work it performed for the City after the initial order against amounts owed by the debtor to the creditor prior to the initial order.

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