Rarotonga, 2010

Simon Shields, LLB

Online Lawyer (Ontario)

Most Popular
Contracts / Torts / Evidence / Limitations / Tenant Plus / welfare (ontario works) / odsp / human rights / employment / consumer / E-Access

home / about / Little Friends Lefkada (Greece) / testimonials / Conditions of Use

Associated Site
Canadian Animal Law

Insolvency - BIA II

. Marchant Realty Partners Inc. v. 2407553 Ontario Inc.

In Marchant Realty Partners Inc. v. 2407553 Ontario Inc. (Ont CA, 2021) the Court of Appeal cited the approach to leave for appeal under s.193(e) of the BIA:
The Test for Leave to Appeal Under s. 193(e) of the BIA

[11] The moving parties seek leave to appeal from the motion judge’s orders under s. 193(e) of the BIA. This provision provides that, unless an appeal lies as of right or as otherwise expressly provided, an appeal lies to the Court of Appeal “from any order or decision of a judge of the court … by leave of a judge of the Court of Appeal”.

[12] In deciding whether to grant leave under s. 193(e) of the BIA, this court considers the following principles:

• Granting leave is “discretionary and must be exercised in a flexible and contextual way”: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 29.

• In exercising its discretion, the court should examine whether the proposed appeal: (1) raises an issue of general importance to bankruptcy/insolvency practice or the administration of justice, and is one this court should address; (2) is prima facie meritorious; and (3) would not unduly hinder the progress of the bankruptcy/insolvency proceedings: Pine Tree Resorts, at para. 29; McEwen (Re), 2020 ONCA 511, 452 D.L.R. (4th) 248, at para. 76.
. Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc.

In Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc. (Ont CA, 2021) the Court of Appeal considered an extension for time to file an appeal. The order exempted the action from a bankruptcy stay [under BIA 69(1)] on the grounds of fraud [BIA 178(1)(e)], but the order exempting the stay was made in the regular action, not any BIA proceedings - and this led to jurisdictional confusion which the court addressed:
(1) The governing appeal route

[13] If the motion judge’s order was made under the BIA, the appeal route would be governed by s. 193 of the BIA, which provides for appeals as of right in some cases and requires leave to appeal in others. Section 193 provides as follows:
193 Unless otherwise expressly provided, an appeal lies to the Court of Appeal from any order or decision of a judge of the court in the following cases:

(a) If the point at issue involves future rights;

(b) If the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings;

(c) If the property involved in the appeal exceeds in value ten thousand dollars;

(d) From the grant of or refusal to grant a discharge if the aggregate unpaid claims of creditors exceed five hundred dollars; and

(e) In any other case by leave of a judge of the Court of Appeal.
[14] The proper appeal route is under s. 193 where the order sought to be appealed is granted in reliance on jurisdiction under the BIA: Business Development Bank of Canada v. Astoria Organic Matters Ltd., 2019 ONCA 269, 69 C.B.R. (6th) 13, at para. 21. If the motion judge’s order was not made in reliance on jurisdiction under the BIA, it would be appealable to this court under s. 6(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[15] The question of jurisdiction arises in this case because the motion judge’s order has two components: the declaration under s. 178(1)(e) of the BIA and the lift-stay order. The lift-stay order could only be made under s. 69.4 of the BIA. By contrast, declaratory orders under s. 178(1) do not engage the exercise of a power under the BIA. They are made in the exercise of the court’s general jurisdiction: see e.g. Water Matrix Inc. v. Carnevale, 2018 ONSC 6436, 65 C.B.R. (6th) 109, at para. 22; Beneficial Finance Co. v. Durward (1961), 2 C.B.R. (N.S.) 173 (Ont. Co. Ct.), at para. 14; and Graves v. Hughes, 2001 NSSC 68, 25 C.B.R. (4th) 255, at paras. 3-12. As such, orders declaring that a debt or liability survives a bankruptcy discharge typically are appealed directly to the Court of Appeal, without leave under the BIA: see e.g. Gray (Re), 2014 ONCA 236, 119 O.R. (3d) 710; Korea Data Systems (USA), Inc. v. Aamazing Tehnologies Inc., 2015 ONCA 465, 126 O.R. (3d) 81; H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256, 25 C.B.R. (6th) 221; and Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171, 139 O.R. (3d) 641, leave to appeal refused, [2018] S.C.C.A. No. 128.

[16] The determination of whether a debt survives bankruptcy can also be made in bankruptcy proceedings and not in a separate civil action, particularly where the moving party also seeks leave to commence or continue an action against the bankrupt: see Re McKee (1997), 1997 CanLII 14966 (AB QB), 47 C.B.R. (3d) 70 (Alta. Bankruptcy Registrar), where such a declaration was made while bankruptcy proceedings were pending, but prior to the discharge hearing. See also Re Mariyanayagam (1998), 10 C.B.R. (4th) 105 (Ont. Gen. Div.), at para. 4; Re Bissonette, 2006 CarswellOnt 7023 (Bankruptcy Registrar), at para. 3; Re Di Paola (2006), 2006 CanLII 37117 (ON CA), 84 O.R. (3d) 554 (C.A., In Chambers), at para. 5; Re Berger, 2010 ONSC 4376, 70 C.B.R. (5th) 225, (Bankruptcy Registrar), at para. 2.

[17] This court has previously considered the question of jurisdiction where the order under appeal was made only partly in reliance on jurisdiction under the BIA. In Dal Bianco v. Deem Management Services Limited, 2020 ONCA 585, 82 C.B.R. (6th) 161, part of the order under appeal (indeed the substantive issue on the appeal) would have been appealable directly to this court under the Construction Act, R.S.O. 1990, c. C.30, but the order was made in an application for directions in a receivership. This court held that the substance of the order was in proceedings authorized by the BIA: “it responded to a motion for the court’s directions brought under s. 249 of the [BIA] to help the receiver distribute the remaining funds in the receivership”. Because the BIA was a source of jurisdiction for the court’s order, the appeal route was under s. 193: at para. 12. See also Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, 70 C.B.R. (6th) 181, at para. 129 (where jurisdiction for an appeal from an order approving a receiver’s sale of assets, of which a vesting order was a component, was under the BIA).

[18] Applying these authorities, I conclude that the appeal route for the motion judge’s order is under s. 193 of the BIA. The order was made on a motion during the currency of Knecht’s bankruptcy, and, as part of the order the motion judge lifted the stay under s. 69(1) of the BIA to permit the Action to continue against the bankrupt.
. Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc.

In Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc. (Ont CA, 2021) the Court of Appeal considered an extension for time to file an appeal. The order exempted the action from a bankruptcy stay [under BIA 69(1)] on the grounds of fraud [BIA 178(1)(e)] (the order exempting the stay was made in the regular action). The issue arose of whether leave was required under BIA 193:
(2) Does a right to appeal lie under s. 193?

[20] Knecht submits that he has a right to appeal the motion judge’s order under ss. 193(a), (b) and (c). I agree that the order is appealable under s. 193(c). While it is unnecessary to consider other provisions of s. 193, I suggest that the order is also appealable under s. 193(a).

[21] Section 193(c) provides for a right of appeal “if the property involved in the appeal exceeds in value ten thousand dollars”. I recognize that the scope of that provision is a matter of debate among appellate courts. In 2403177 Ontario Inc. v. Bending Lake Iron Group Ltd., 2016 ONCA 225, 35 C.B.R. (6th) 102 (In Chambers), Brown J.A. construed s. 193(c) narrowly, and held that it would not provide a right of appeal from orders that (i) are procedural in nature; (ii) do not bring into play the value of the debtor’s property; or (iii) do not result in a gain or loss (in the sense of involving some element of a final determination of the economic interests of a claimant in the debtor): at paras. 53, 61. This approach has been followed by a number of decisions of this court, but has been called into question in the decisions of some other appellate courts: see e.g., MNP Ltd. v. Wilkes, 2020 SKCA 66, 80 C.B.R. (6th) 1, interpreting s. 193(c) as applying when, on the evidence, there is at least $10,000 “at stake” in the appeal: at para. 63.

[22] I am satisfied that, irrespective of the approach taken, the motion judge’s order falls within s. 193(c). In the circumstances of this case, I would follow the approach taken by Nordheimer J.A. in Royal Bank of Canada v. Bodanis, 2020 ONCA 185, 78 C.B.R. (6th) 165 (In Chambers). He distinguished cases like Bending Lake that involved proposed appeals of orders made in receivership proceedings, and he determined that an appeal of bankruptcy orders in two proceedings where the debts relied on exceeded $10,000 fell under s. 193(c). Nordheimer J.A. explained that s. 193(c) “clearly applies… where the appellant’s entire property ha[s] been taken out of their control and placed into the hands of a Trustee in Bankruptcy, who has the right to dispose of that property and distribute it among the creditors, without further court intervention”: at para. 9.

[23] Similarly, the debts and liabilities that will survive Knecht’s discharge under the motion judge’s order exceed $10,000. And the effect of the order under appeal is that Knecht’s property exceeding $10,000 in value will be subject to Shaver-Kudell’s enforcement of its judgment in the Action, including the costs order already made, following his discharge from bankruptcy.

[24] In short, the property involved in the appeal of the motion judge’s declaration under s. 178 exceeds in value $10,000. Since the lift-stay provision is part of the motion judge’s order and dependent on that declaration, the entire order is subject to appeal as of right under s. 193(c).

[25] The conclusion that s. 193(c) applies can also be reached by applying the approach in Bending Lake. The motion judge’s order is not procedural in nature, it brings into play the value of Knecht’s property that will or will not be available to satisfy Shaver-Kudell’s claims as his creditor, and it makes a final determination of Shaver-Kudell’s economic interests, resulting in a gain to that party in excess of $10,000.

[26] I am also of the view that the order under appeal falls within the scope of s. 193(a) of the BIA. Section 193(a) provides for a right of appeal “if the point at issue involves future rights”. Future rights have been described as “rights which could not at the present time be asserted but which will come into existence at a future time”: Elias v. Hutchison, 1981 ABCA 31, 121 D.L.R. (3d) 95, at para. 28, cited with approval in Ravelston Corp., Re (2005), 2005 CanLII 63802 (ON CA), 24 C.B.R. (5th) 256, (Ont. C.A.), at para. 19. The pertinent question is whether the rights engaged in the appeal are future rights or presently existing rights that are exercisable in the future: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617 (In Chambers), at para. 16.

[27] Shaver-Kudell submits that its rights arose as soon as R. Smith J. determined the liability issues in the Action. All of the circumstances were present such that s. 178, by operation of law, would ensure that the debts and liabilities arising therefrom would survive Knecht’s bankruptcy discharge. This is a question of present rights that can be exercised in the future.

[28] I disagree. While s. 178 operates as a matter of law, it is necessary for a creditor to obtain a court declaration that a debt survives bankruptcy: Canada (Attorney General) v. Bourassa (Trustee of), 2002 ABCA 205, 312 A.R. 19, at para. 5. Shaver-Kudell did not obtain the s. 178 declaration until December 2020.

[29] In my view, the motion judge’s order involves the future rights of both parties: Knecht’s right to be discharged from the debts and liabilities arising out of the judgments in the Action and Shaver-Kudell’s right, as a creditor of the bankrupt, to enforce the judgments following his discharge from bankruptcy.

[30] While Shaver-Kudell is able to continue proceedings against Knecht, it does not have a present right to enforce the judgment of R. Smith J. against Knecht. This right is suspended by the bankruptcy and will be eliminated by the discharge, absent the order declaring its survival. In light of the motion judge’s order, this right will arise in the future, upon Knecht’s discharge. As lower courts have noted, “[a] creditor’s right of action for a debt not released by the debtor’s discharge arises upon the discharge of the debtor”: Lang v. Soyatt (1988), 68 C.B.R. (N.S.) 201, (Ont. Sup. Ct.), at para. 13; Re Wilson (1930), 11 C.B.R. 425 (Ont. Sup. Ct.). See also Re Cameron, 2002 ABCA 183, 37 C.B.R. (4th) 78 (In Chambers), at paras. 5-6.
. Rusinek & Associates Inc. v. Arachchilage

In Rusinek & Associates Inc. v. Arachchilage (Ont CA, 2021) the Court of Appeal considered the vesting, as opposed to the distribution, stages of a bankruptcy:
[47] As explained by Gonthier J. in Royal Bank of Canada v. North American Life Assurance Co., 1996 CanLII 219 (SCC), [1996] 1 S.C.R. 325, at paras. 44-49, the Supreme Court of Canada recognized two distinct stages in a bankruptcy: the property-vesting stage, or the “property-passing stage”; and the estate-administration stage. At the time of the assignment in bankruptcy, by operation of s. 71 of the BIA, the trustee in bankruptcy is obligated to take possession of the bankrupt’s assets, and the bankrupt’s property passes to and vests in the trustee in bankruptcy. Once the bankrupt’s property has passed into the possession of the trustee in bankruptcy, the BIA provides the trustee in bankruptcy with the power to administer the estate. In Royal Bank of Canada, at para. 47, the Supreme Court gave the example of assets that are made exempt from execution or seizure under provincial laws, specifically citing life insurance annuities under ss. 2(kk)(vii) and 158(2) of The Saskatchewan Insurance Act, R.S.S. 1978, c. S-26, as repealed by The Insurance Act, S.S. 2015, c. I-9.11, s. 11-1. Such assets vest in the trustee at the time of bankruptcy at the property-vesting stage. However, the exemption under s. 67(1)(b) of the BIA then operates at the estate-administration stage to bar the trustee from distributing exempt items to the creditors. Section 40(1) of the BIA then requires the trustee in bankruptcy to return unrealizable property to the bankrupt prior to the trustee in bankruptcy’s application for discharge.
. Chandos Construction Ltd. v. Deloitte Restructuring Inc.

In Chandos Construction Ltd. v. Deloitte Restructuring Inc. (SCC, 2020) the Supreme Court of Canada re-affirmed the bankruptcy anti-deprivation rule, which voids any effort to diminish the value of an insolvent's estate available to the creditors:
IV. The Existence of the Common Law Anti-Deprivation Rule

[25] As to the existence of the anti-deprivation rule, I see no error in Rowbotham J.A.’s consideration of this issue, in that the rule has existed in Canadian common law and has not been eliminated by either this Court or Parliament.

[26] Justice Rowbotham correctly found that there has been support for the anti-deprivation rule in the decisions to which she referred; I would add Watson v. Mason (1876), 22 Gr. 574 (U.C. Ch.) and Hobbs v. The Ontario Loan and Debenture Company (1890), 1890 CanLII 10 (SCC), 18 S.C.R. 483, at p. 502 (per Strong J.), even if Hobbs is from a period in Canadian history where no federal bankruptcy legislation existed (R. J. Wood, Bankruptcy and Insolvency Law (2nd ed. 2015), at pp. 33-35).

[27] No decision of this Court has eliminated the anti-deprivation rule. Coopérants, as Rowbotham J.A. stated, was not an anti-deprivation case as there was no deprivation (Coopérants, at paras. 43-44).

[28] Nor has Parliament eliminated the anti-deprivation rule. As Rowbotham J.A. observed, Parliament did not implement ss. 65.1, 66.34, or 84.2 of the BIA so as to eliminate the anti-deprivation rule: the anti-deprivation rule protects third party creditors, whereas Parliament’s changes were directed toward protecting debtors (see Bill C-22: Clause by clause Analysis, cl. 87, s. 65.1 and cl. 89, s. 66.34, reproduced in the Attorney General of Canada’s book of authorities, at Tab 4; Standing Senate Committee on Banking, Trade and Commerce, Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (2003), at pp. 74-75). This goal of protecting the debtor is relevant only where the debtor persists after the proceedings conclude. It is common for the debtor to persist after a restructuring or after the bankruptcy of a natural person. It is uncommon for the debtor to persist after a corporate bankruptcy as, typically, no assets remain for the corporation after all creditors are paid.

[29] Moreover, as the intervenor Attorney General of Canada submitted, Parliament’s actions are better understood as gradually codifying limited parts of the common law rather than seeking to oust all related common law. As this Court has repeatedly observed, Parliament is presumed to intend not to change the existing common law unless it does so clearly and unambiguously (Parry Sound (District) Social Services Administration Board v. O.P.S.E.U., Local 324, 2003 SCC 42, [2003] 2 S.C.R. 157, at para. 39; Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at paras. 29-30).

[30] Indeed, the most relevant statutory provision in the BIA is not s. 65.1, s. 66.34, or s. 84.2, but rather s. 71. As this Court recognized in Royal Bank of Canada v. North American Life Assurance Co., 1996 CanLII 219 (SCC), [1996] 1 S.C.R. 325, s. 71 provides that the property of a bankrupt to “passes to and vests in the trustee” (para. 44). This helps maximize the “global recovery for all creditors” in accordance with the priorities set out in the BIA (Alberta (Attorney General) v. Moloney, 2015 SCC 51, [2015] 3 S.C.R. 327, at para. 33; see also Husky Oil Operations Ltd. v. Minister of National Revenue, 1995 CanLII 69 (SCC), [1995] 3 S.C.R. 453, at paras. 7-9). The anti-deprivation rule renders void contractual provisions that would prevent property from passing to the trustee and thus frustrate s. 71 and the scheme of the BIA. This maximizes the assets that are available for the trustee to pass to creditors.

V. The Content of the Anti-Deprivation Rule

[31] As Bramalea described, the anti-deprivation rule renders void contractual provisions that, upon insolvency, remove value that would otherwise have been available to an insolvent person’s creditors from their reach. This test has two parts: first, the relevant clause must be triggered by an event of insolvency or bankruptcy; and second, the effect of the clause must be to remove value from the insolvent’s estate. This has been rightly called an effects-based test.

[32] Chandos submits that this Court should change the anti-deprivation rule to follow Belmont and adopt a purpose-based test. As noted above, Belmont held that the English anti-deprivation rule does not invalidate provisions of “bona fide commercial transactions which do not have as their predominant purpose, or one of their main purposes, the deprivation of the property of one of the parties on bankruptcy”. Chandos says we should follow this reasoning because upholding bona fide commercial agreements would strike the best balance of public policy considerations and contribute to commercial certainty. It also submits that the side-effects of such a rule would not be so deleterious, as unsecured creditors tend to receive little in bankruptcy; as well, courts would be able to tell who had inserted provisions that remove value from the debtor’s estate for bona fide commercial reasons. None of these reasons holds water.

[33] The goal of public policy, in this instance, is not decided by the common law; rather, that policy has been established in the legislation. What is left to the common law is the choice of means that best gives effect to the statutory scheme adopted by Parliament. Thus, once a court ascertains that Parliament intended, by virtue of s. 71, that all of the bankrupt’s property is to be collected in the trustee, it is not for the court to substitute a competing goal that would give rise to a different result. In this, I agree with Professor Worthington that “[a]ny avoidance, whether intentional or inevitable, is surely a fraud on the statute” (“Good Faith, Flawed Assets and the Emasculation of the UK Anti-Deprivation Rule” (2012), 75 M.L.R. 112, at p. 121).

[34] In addition, I would disagree that adopting a purpose-based test would create commercial certainty. To the contrary, applying such a test would require courts to determine the intention of contracting parties long after the fact and it would detract from the efficient administration of corporate bankruptcies. Parties cannot know at the time of contracting whether a court, possibly years later, will find their contract had been entered into for bona fide commercial reasons. This will give rise to uncertainty at the time of contracting.

[35] The effects-based rule, as it stands, is clear. Courts (and commercial parties) do not need to look to anything other than the trigger for the clause and its effect. The effect of a clause can be far more readily determined in the event of bankruptcy than the intention of contracting parties. An effects-based approach also provides parties with the confidence that contractual agreements, absent a provision providing for the withdrawal of assets upon bankruptcy or insolvency, will generally be upheld. Maintaining an effects-based test is also consistent with the existing effects-based test recognized in Gingras, at p. 487, for the pari passu rule founded on s. 141 of the BIA (previously s. 112 of the Bankruptcy Act, R.S.C. 1970, c. B-3), as well as the effects-based test set out in ss. 65.1, 66.34 and 84.2 of the BIA. These tests should remain consistent to prevent duplicative proceedings and avoid arcane disputes over whether the pari passu rule or the anti-deprivation rule is engaged by a particular provision. Although it is often easy to tell that a provision would affect the amount a creditor will receive, determining whether this is because it deprives the estate of value (thus violating the anti-deprivation rule) or because it reallocates the estate among creditors (thus violating the pari passu rule) depends on the precise machinery of law, disputes over such intricacies can be avoided if both rules apply an effects-based test.

[36] Moreover, an intention-based test would encourage parties who can plausibly pretend to have bona fide intentions to create a preference over other creditors by inserting such clauses. Parties will often be able to state some commercial rationale for provisions altering contractual rights in the event of a counterparty’s insolvency, such as guarding against the risk of the counterparty’s non-performance. An intention-based test would render the rule ineffectual, save in the most flagrant cases of deliberate circumvention of insolvency law. This would threaten to undermine the statutory scheme of the BIA.

[37] Reliance on general principles of contractual freedom to support an intention-based test is no less misplaced. As noted in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 70, the common law of contract “generally places great weight on the freedom of contracting parties to pursue their individual self-interest” but, by definition, an assignment in bankruptcy strips the insolvent party of their interest. As Rowbotham J.A. observed, a party who might become insolvent has no incentive to resist a clause that deprives their estate of value upon bankruptcy. Parties do not negotiate with a view to protecting the interests of their creditors in the event of their bankruptcy. The costs of accepting the clause are borne solely by the unsecured creditors of the insolvent company (who are without a seat at the bargaining table) while the benefits are enjoyed only by the company while it is solvent.

[38] Finally, while it may be true that unsecured creditors tend to receive relatively little now, the effect of a purpose-based rule is that they would receive less.

[39] Overall, Chandos has not shown us good reason to adopt a purpose-based test. In my view, adopting the purpose-based test would create “new and greater difficulties” of the sort cautioned against in Watkins v. Olafson, 1989 CanLII 36 (SCC), [1989] 2 S.C.R. 750, at p. 762. As recognized in Bhasin, at para. 40, although a change to the Canadian common law may be appropriate when it creates greater certainty and coherence, it is not when the change would foster uncertainty and incoherence.

[40] All that said, we should recognize that there are nuances with the anti-deprivation rule as it stands. For example, contractual provisions that eliminate property from the estate, but do not eliminate value, may not offend the anti-deprivation rule (see Belmont, at para. 160, per Lord Mance; Borland’s Trustee v. Steel Brothers & Co. Limited, [1901] 1 Ch. 279; see also Coopérants). Nor do provisions whose effect is triggered by an event other than insolvency or bankruptcy. Moreover, the anti-deprivation rule is not offended when commercial parties protect themselves against a contracting counterparty’s insolvency by taking security, acquiring insurance, or requiring a third-party guarantee.

[41] In sum, the Court of Appeal was correct to consider whether the effect of the contractual provision was to deprive the estate of assets upon bankruptcy rather than whether the intention of the contracting parties was commercially reasonable.
. 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.


The author has waived all copyright and related or neighboring rights to this Isthatlegal.ca webpage.