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Insolvency (BIA) - Set-off [BIA s.97(3)]. Scott v. Golden Oaks Enterprises Inc.
In Scott v. Golden Oaks Enterprises Inc. (SCC, 2024) the Supreme Court of Canada dismissed a civil litigation appeal, here where the main question was "how the common law doctrine of corporate attribution should be applied to a “one-person” corporation controlled by its sole officer, shareholder, and directing mind".
The court considers the statutory 'set-off' provision [s.97(3)] of the BIA:(1) General Principles of Set-Off in Bankruptcy
[86] The law of set-off in the common law provinces or compensation under Quebec civil law allows “parties with reciprocal claims to ‘net out’ amounts owed to each other” (J. D. Honsberger and V. W. DaRe, Honsberger’s Bankruptcy in Canada (5th ed. 2017), at p. 332; D.I.M.S. Construction inc. (Trustee of) v. Quebec (Attorney General), 2005 SCC 52, [2005] 2 S.C.R. 564, at para. 34).
[87] Section 97(3) of the BIA governs claims of set-off or compensation in bankruptcy:(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences. [88] Section 97(3) of the BIA incorporates the relevant provincial law of set-off or, in Quebec, the law of compensation, into proceedings the trustee institutes, “in the same manner and to the same extent” as that law would ordinarily apply in non-bankruptcy proceedings between the bankrupt and the creditor, subject to statutory exceptions relating to fraud and fraudulent preferences (see K. R. Palmer, The Law of Set-Off in Canada (1993), at pp. 176-77 and 192-93; L. W. Houlden, G. B. Morawetz and J. Sarra, Bankruptcy and Insolvency Law of Canada (4th ed. rev. (loose-leaf)), at p. 5-1,086; Honsberger and DaRe, at pp. 332-33, 449 and 452-53; K. P. McElcheran, Commercial Insolvency in Canada (4th ed. 2019), at pp. 43-45; R. J. Wood, Bankruptcy and Insolvency Law (2nd ed. 2015), at pp. 99-102). None of the statutory exceptions is at issue here.
[89] Allowing set-off in bankruptcy avoids the injustice of “making a person who in the balance is not a debtor to the estate pay in full the sum due to the estate and receive only a dividend on the sums due from the estate” (Lister v. Hooson, [1908] 1 K.B. 174 (C.A.), at p. 178, per Fletcher Moulton L.J., cited in Husky Oil, at para. 56; see also Palmer, at pp. 205-6; Honsberger and DaRe, at pp. 450-51). . Chandos Construction Ltd. v. Deloitte Restructuring Inc.
In Chandos Construction Ltd. v. Deloitte Restructuring Inc. (SCC, 2020) the Supreme Court of Canada notes that the principle of set-off is imported into bankruptcy law:[42] This brings us to Chandos’ final argument concerning the effect of set-off on the application of the anti-deprivation rule in this case. Set-off is given statutory approval in s. 97(3) of the BIA:(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences. As this Court described in Husky Oil, at para. 3, s. 97(3) incorporates the provincial law of set-off (and the related civil law concept of compensation) into the federal bankruptcy regime. Set-off is a defence to the payment of a debt. The effect of set-off is to allow a creditor who happens to be also a debtor to recover ahead of their priority.
[43] The BIA’s affirmation of set-off and the anti-deprivation rule are not incompatible. While set-off reduces the value of assets that are transferred to the Trustee for redistribution, it is applicable only to enforceable debts or claims (see, e.g., Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, at pp. 204-6). The anti-deprivation rule makes deprivations triggered by insolvency unenforceable. The combination means that set-off applies to debts owed by the bankrupt that were not triggered by the bankruptcy. . Golden Oaks Enterprises Inc. v. Scott
In Golden Oaks Enterprises Inc. v. Scott (Ont CA, 2022) the Court of Appeal considered the operation of equitable set-off in a bankruptcy context:(b) The trial judge did not err in law in applying the test for set-off under s. 97(3) of the BIA.
[62] The appellants argue that the amounts they have been ordered to repay in interest payments should be set off against the principal amounts of their outstanding loans to Golden Oaks. The appellants base their argument on the doctrine of equitable set-off.
[63] According to the appellants, the trial judge erred because she did not permit the appellants to have the amounts they invested as principal in Golden Oaks set off against the interest to be repaid by virtue of the unjust enrichment claim. The appellants do not appeal the trial judge’s finding that legal set-off was unavailable to them and base their arguments on appeal instead on the trial judge’s finding that equitable set-off did not apply either.
[64] I am not persuaded by these submissions.
[65] The trial judge’s conclusion rejecting these arguments at trial, correctly in my view, was set out in two brief paragraphs, 549 and 550:Equitable set-off arises “where there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit a set-off”: King Insurance, at para. 15.
In my view, the defendants’ argument for equitable set-off is simply a repackaging of their net loser argument and their argument for notional severance. In King Insurance, Cumming J. observed that “because the effect of set-off is to prefer one creditor over the general body of creditors (inasmuch as the effect is to give the setting‑off creditor a full recovery of the amount set-off), the permissible set-off [under s. 97(3)] is confined within narrow limits”: King Insurance, at para. 21. I agree. I have already considered the defendants’ submissions on the equities in the context of the juristic reason analysis.
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