“In August 2018, the Superior Court made an initial order by which SM Group, a consulting engineering firm, became subject to proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The order stayed the rights and remedies of creditors, among other things, and appointed a monitor. Following that order, SM Group continued to perform work for Ville de Montréal (“City”). However, the City refused to pay for that work and invoked its right to effect compensation between what it owed SM Group and two claims it allegedly had against SM Group that arose before the initial order. Those claims are related to the application of the Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts (“Bill 26”) and, according to the City, result from fraud on SM Group’s part. The first claim arises from a settlement agreement entered into under the Voluntary Reimbursement Program (“VRP”) that resulted from Bill 26 (“VRP claim”). The second claim is based on a proceeding brought by the City against SM Group, in which it claimed money from SM Group for allegedly having participated in collusion in relation to a call for tenders for a water meter contract.
In response to the City’s refusal to pay for the work done by SM Group after the initial order, the monitor applied for a declaratory judgment stating that compensation could not be effected with respect to the amounts owed by the City to SM Group. The supervising judge granted the application. The Court of Appeal reached the same conclusion as the supervising judge: that the compensation invoked by the City could not be effected. It found that a claim relating to fraud falling within s. 19(2)(d) of the CCAA is not an exception to the rule stated in Quebec (Agence du revenu) v. Kitco Metals Inc., 2017 QCCA 268, whereby compensation between debts arising before and after an initial order (“pre‑post compensation”) is prohibited. It was also of the view that the City had not proved that s. 19(2)(d) applied to its claims. Finally, with regard to the water meter contract claim, the Court of Appeal agreed with the supervising judge that the conditions for judicial compensation were not met, since the certainty, liquidity and exigibility of that claim had to be determined later in a proceeding other than that of the restructuring case.”
The SCC (6:1) dismissed the appeal.
The Chief Justice and Justice Côté wrote as follows (at paras. 1-4):
“This appeal raises an issue relating to compensation, or set‑off in a common law setting, between two debts in the context of proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36 (“CCAA”). The question is whether compensation is permitted for debts between the same parties: on the one hand, a debt resulting from the Act to ensure mainly the recovery of amounts improperly paid as a result of fraud or fraudulent tactics in connection with public contracts, CQLR, c. R‑184.108.40.206.3 (“Bill 26”), that predates an initial order made under the CCAA and, on the other hand, a debt between the same parties that postdates that order. In these reasons, we will use the expression “pre‑post compensation” to refer generally to compensation between debts arising before and after an initial order.
This question thus affords the Court an occasion to interpret, for the first time, certain provisions of Bill 26 as well as the regulation made under it, the Voluntary Reimbursement Program, CQLR, c. R‑220.127.116.11.3, r. 1 (“VRP Regulation”). In doing so, we will clarify for public bodies the burden of proof that rests on them in seeking to establish that a claim arising from an agreement entered into under the Voluntary Reimbursement Program (“VRP”) is fraudulent.
Bill 26 was passed by the Quebec National Assembly in March 2015 in response to a commission of inquiry that had brought to light the existence of schemes involving collusion and corruption in the awarding and management of public contracts in the construction industry (“Charbonneau Commission”), and the VRP Regulation was made a few months later. The program resulting from this legislation, which was in effect for two years, allowed enterprises to “reimburse certain amounts improperly paid in the course of the tendering, awarding or management of a public contract in relation to which there may have been fraud or fraudulent tactics” (s. 3 of Bill 26). To answer the question with respect to compensation in the context of this appeal, the Court must first determine whether a claim arising from an agreement entered into under the VRP is necessarily a “claim that relates to” a “debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation” pursuant to s. 19(2)(d) of the CCAA. We would answer this question in the negative. It cannot be presumed that a claim arising from the VRP falls within that provision where no evidence to this effect has been tendered. We also conclude that a court should generally exercise its discretion to stay pre‑post compensation, although it may, in rare cases, refuse such a stay. As well, the court may later lift the stay of the right to pre‑post compensation in appropriate cases. In the case at bar, however, we conclude that the initial order stayed the right of the appellant, Ville de Montréal (“City”), to pre‑post compensation and that it would not be appropriate to lift the stay in relation to the claims in issue.”