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7 Canada

Ruth I Wahl

From: Set-Off Law and Practice: An International Handbook (3rd Edition)

Edited By: William Johnston, Thomas Werlen, Frederick Link

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Guarantees and security — Contractual set-off — Insolvency set-off — Judicial set-off

(p. 101) Canada

A.  Introduction

7.01  This chapter provides an overview of the law of set-off in Canada both outside and within insolvency proceedings. It also considers issues that arise when the law of set-off is applied in a cross-border context, including in cross-border insolvency proceedings.

7.02  Canada has a federal system of government, with a national federal government and ten provinces.1 Under Canadian constitutional law, legislative authority is divided between federal and provincial governments.

7.03  Property and civil rights, including contract law, are matters within provincial jurisdiction. For the most part, therefore, the law of set-off is a matter of provincial law. Depending on the context in which the claim is asserted, federal law also may apply. For example, banking and insolvency are matters within the exclusive jurisdiction of the federal government.

(p. 102) 7.04  The legal system in nine of Canada’s ten provinces is based on English common law. The law relating to set-off is similar throughout these common law jurisdictions. The one Canadian province that does not have a legal system based on English common law is Quebec, a civil law jurisdiction. This chapter will focus on the law of set-off in the common law provinces and thus will apply in most Canadian jurisdictions.2

B.  Set-off between Solvent Parties

7.05  Set-off is a monetary cross-claim raised as a defence to a monetary claim that, to the extent of the cross-claim, reduces or eliminates the amount payable on the claim.3 The courts in Canadian common law jurisdictions recognize four types of set-off: (i) legal, (ii) equitable, (iii) statutory, and (iv) contractual.4

1.  Legal set-off

7.06  In Canada, the availability of legal set-off originates in statute.5 Today, the relevant provisions are found in civil procedure legislation and Rules of Court.6 In Ontario, for example, section 111 of the Courts of Justice Act provides:

(p. 103)

  1. (1)  In an action for payment of a debt, the defendant may, by way of defence, claim the right to set off against the plaintiff’s claim a debt owed by the plaintiff to the defendant.

  2. (2)  Mutual debts may be set off against each other, even if they are of a different nature.

  3. (3)  Where, on a defence of set-off, a larger sum is found to be due from the plaintiff to the defendant than is found to be due from the defendant to the plaintiff, the defendant is entitled to judgment for the balance.

7.07  For legal set-off to apply, two conditions must be met: (i) the cross-claims must be debts and (ii) both debts must be mutual.7

The cross-claims must be debts

The debts must be mutual

7.09  To meet the second condition of mutuality, the cross-obligations must arise between the same parties acting in the same right. Assignment destroys mutuality and precludes legal set-off.10 Canadian courts also have held that the following cross-claims lack mutuality, as the parties are not acting ‘in the same right’:

  • •  a person owes a debt in an individual capacity and is owed a debt in a different capacity (eg as a trustee or in another fiduciary role on behalf of others);

  • •  a person owes a debt to a special-purpose account and is owed a debt by a different (or no) special-purpose account;

  • (p. 104) •  joint debtors owe a debt jointly to a person and the person owes a debt to only one of the joint debtors.11

7.10  There is no requirement in legal set-off that the debts themselves be connected or related in any manner. In many cases the cross-obligations will arise from separate transactions.

2.  Equitable set-off

7.11  In its leading decision on equitable set-off, Telford,12 the Supreme Court of Canada held that the following five principles apply in determining whether the conditions for equitable set-off have been met:13

  1. (1)  The party relying on the set-off must show some equitable ground for being protected against the adversary’s demands.14

  2. (2)  The equitable ground demonstrated by the defendant to impeach or reduce the plaintiff’s demand must go to the very root of the plaintiff’s claim before set-off will be allowed.15

  3. (3)  A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim.16

  4. (4)  The plaintiff’s claim and the cross-claim need not arise out of the same contract.17

  5. (p. 105) (5)  Unliquidated claims are on the same footing as liquidated claims. Equitable set-off (unlike legal set-off) is available where there is a claim for a money sum whether that sum is liquidated or unliquidated.18

7.12  In most cases concerning equitable set-off, the key issue is whether there is such a close relationship between the claims of the parties that it would be unconscionable or inequitable not to permit set-off.19 In order to determine whether equitable set-off is permitted on this ground, courts first look at the connection between the claims involved. If the claims are closely connected, the next step is to consider the equities between the parties.20

7.13  In Cam-Net Communications v Vancouver Telephone Co.,21 for example, the British Columbia Court of Appeal upheld a creditor’s right to set off a liquidated debt owed to a company against damages owed to the creditor for failure to provide services of a sufficient quality (as required by the contract under which the liquidated debt was incurred). The Court held that the obligations were so closely connected that it would be inequitable to permit the company to collect its debt while preventing the creditor from setting off amounts owed to the creditor for breach of contract.

7.14  Equitable set-off relaxes both of the requirements of legal set-off. It can apply not only where the cross-obligations are not debts, but also where mutuality is lost (for example, by assignment) or never existed.22 Where mutuality never existed, however, the lack of original mutuality may be a relevant factor in the court’s assessment of whether there is a sufficiently ‘close connection’ between claims for purposes of equitable set-off.23

(p. 106) 3.  Statutory set-off

7.15  Statutory set-off refers to set-off rights enacted by legislation. Both federal and provincial governments are often the beneficiaries of this type of set-off. The federal government and some provincial governments have enacted broad provisions that may permit set-off that may not otherwise be available. For instance, the Province of Saskatchewan enacted section 42 of the Financial Administration Act 1993,24 which reads:

42(1) Notwithstanding The Enforcement of Money Judgements Act or any other Act or law, the Crown and every public agency have the right to retain as a set-off, out of moneys due or payable to a person by the Crown or a public agency:

    1. (a)  any amount the person owes to the Crown or a public agency;

    2. (b)  any overpayment that has been made by the Crown or a public agency; or

    3. (c)  any advance made to the person under section 41 that has not been repaid or accounted for.

  1. (2)  The rights in this section are in addition to and not in derogation of any right of set-off that the Crown or a public agency may have at law.

  2. (3)  The board may make any orders and issue any directives with respect to the exercise of the Crown or a public agency of its rights pursuant to this section.

7.16  Few courts have discussed the issue of statutory set-off. Fewer still have considered the provisions of the Saskatchewan Financial Administration Act 1993 and similar legislative provisions that provide the government with a broad power of set-off.25

4.  Contractual set-off

7.17  Contractual set-off arises from contract terms that grant the parties express set-off rights. The Federal Court has approved the following commentary about contractual set-off:

Contractual set-off is, not surprisingly, more a matter of contract law than a separate application of set-off. Consequently, the normal rules of set-off regarding mutuality, liquid debts and connected debts do not apply: within the bounds of legality and public policy, parties are free to contract whatever result they (p. 107) wish. Accordingly, agreements to set-off, which would, aside from the agreement, not be granted relief due to the absence of the requirements of set-off, will be upheld.26

7.18  In general, therefore, parties to a contract can dictate their terms of set-off without concern for meeting the technical conditions for legal and equitable set-off. However, the necessary elements required by contract law (ie offer, acceptance, consideration, intention to create legal relations, and capacity) must all be present to give rise to valid contractual set-off.27

7.19  Historically, Canadian courts have not characterized a bank’s right to combine a customer’s current accounts as a form of contractual set-off. Instead, they have characterized the bank–customer relationship as creating a single debt, represented in the bank’s records by separate book entries. When the bank exercises its current-account combination right, and ‘moves’ funds between accounts, Canadian courts have held that, at law, no transfer is taking place. The bank is merely moving ‘its own money’.28 This single-debt approach to a bank’s combination rights may be evolving. Recent academic commentary has suggested that account combination is ‘a form of implied contractual set-off’ with ‘a self-help component’.29 As discussed further below, the Supreme Court of Canada has held that set-off provisions in a contract between a financial institution and its customer, together with the creation of a ‘flawed-asset’ deposit account, created a security interest in the customer’s deposit account.30

5.  Set-off in relation to subsidiaries

7.20  As discussed above, legal set-off requires mutuality. The cross-claims must be between the same parties in the same right. Under Canadian law, incorporated subsidiaries exist separately from their parent corporations, regardless of the extent of the parent’s ownership interest.31 Thus, the mutuality required for legal set-off is absent in the context of ‘triangular set-off’ amongst a corporation, the corporation’s affiliate, and a third party, and of ‘square set-off’ amongst two corporations and their respective affiliates. Absent rare circumstances that would (p. 108) warrant piercing the corporate veil,32 each parent corporation and affiliate will be treated as a separate legal entity for purposes of set-off. Mutuality will not exist, for example, if a debt is owed by a parent corporation and a separate debt is owed to its affiliate.

7.21  In considering mutuality in this context, the Alberta Court of Queen’s Bench in Compton Petroleum Corp. v Alberta Power Ltd 33 held that cross-claims must be between the same parties to satisfy the mutuality requirement for legal set-off. Justice Paperny rejected Alberta Power’s argument that it was entitled to set off amounts owed by NESI Energy Marketing Inc. (NESI) to Alberta Power’s affiliate (CUGL) with amounts owed by Alberta Power to NESI, stating:

Alberta Power might suggest that because CUGL is its affiliate, the debt owed by NESI was owed to the same corporate entity. This is a tenuous argument because of the established principle that individually incorporated companies exist separately from their parents, subsidiaries, associated or affiliated companies: Salomon v Salomon . . . As noted by Palmer at pages 245–246 of The Law of Set-off in Canada, supra

While the court may, on occasion, lift the corporate veil to determine the availability of set-off . . . or determine that set-off is available as the subsidiary is an agent of the parent, the general rule is that in the absence of an agreement, cross-claims owed between a company and its subsidiary to a third party will not be mutual.34

7.22  The Vancouver County Court of British Columbia rejected a similar argument in Royal Bank of Canada v Wallace Investments Limited.35 The defendant had submitted

that the defendant company is entitled to set-off against its own debt, any debts due to its associated company, Wallace Neon Ltd., by reason that the shares of such latter company were wholly owed by the defendant, and that Wallace Neon Ltd. was just one of many subsidiary companies owned by the defendant, and that the entire group of such companies embracing the parent company and its subsidiary should be regarded as one enterprise entity so as to entitle the parent company to have the right to set off any debt owing by a person to one of its subsidiaries against the debt owing by the parent company to the said person.36

The Court in Royal Bank found that unless the Court of Appeal or other judicial authority overturned the decision in Salomon v Salomon & Co.,37 the arguments of the defendant would be rejected.

(p. 109) 7.23  Unlike legal set-off, equitable set-off does not require mutuality and, in theory, may give effect to triangular or square set-off. However, such a claim will face significant hurdles on its facts. The lack of original mutuality between the parties will be a relevant factor tending to indicate that the cross-claims are not sufficiently closely connected to qualify for equitable set-off.38

7.24  Triangular and square set-off may, however, be available by contract. The Court alluded to this possibility in the above quote from Compton Petroleum when it noted that, absent an agreement, ‘cross-claims owed between a company and its subsidiary to a third party will not be mutual’. Accordingly, agreements providing for set-off between a corporation, the corporation’s affiliate, and a third party (and, in the case of square set-off, the third party’s affiliate), which otherwise would not provide grounds for legal or equitable set-off, may be upheld under contractual principles. In Re McMurtry & Co. Ltd, ex parte MA James & Sons,39 for example, the Court upheld an agreement permitting set-off in the absence of mutuality. The Court found that it was unnecessary to consider the doctrine of mutual dealings and the right of set-off as there was a bona fide agreement between the parties providing that payment could be made by way of offset of third-party obligations. The Court reasoned that the contract did not create a set-off in the ‘true’ sense of the term (ie legal or equitable), but created an agreed means of payment by contract, and therefore was enforceable. Thus, where parties have agreed to certain set-off arrangements by contract, the court need not consider the traditional elements of set-off in deciding whether to uphold the agreement.

7.25  Complications arise if an affiliate seeks to enforce its own set-off rights, or a party seeks to enforce set-off rights against the affiliate, and the affiliate is not a party to the contract. Under the common law doctrine of privity, a contract only binds its parties. Canadian courts have relaxed the importance of privity in recent years, and third parties may take the benefit of a contract in certain circumstances.40 However, third parties continue to face hurdles when seeking to enforce contracts and, in any event, cannot be forced to assume the burdens of the contract (including payment of a debt).41

(p. 110) 6.  Security interests and the right of set-off

7.26  The right of legal, equitable, and statutory set-off is not considered a security interest for the purposes of provincial personal property security (PPSA) legislation.42 Accordingly, it is not subject to the requirements a creditor must satisfy in order to obtain, maintain, and enforce a security interest in personal property. The PPSA statute enacted in each province that provides for the attachment and perfection (by registration) of security interests is irrelevant to the validity and enforceability of a right of legal, equitable, and statutory set-off.

7.27  The issue is less certain, however, in the case of contractual set-off. Personal property security legislation applies to any transaction, regardless of form, that in substance creates a security interest in any type of personal property. For example, under Ontario’s PPSA,43 a ‘security agreement’ means an agreement that creates or provides for a security interest. A ‘security interest’ means an interest in personal property that secures payment or performance of an obligation.44 An agreement, such as a general security agreement, may expressly create or grant a security interest in a debtor’s collateral. An agreement also may create a security interest in substance, even if the document does not purport to do so expressly or disclaims such an intention. If a set-off agreement is construed as creating a security interest in personal property, the agreement will be subject to the requirements under the applicable provincial PPSA legislation that a creditor must satisfy in order to obtain, maintain, and enforce a security interest in personal property. This would include, for example, registration requirements under applicable legislation.

7.28  Whether a set-off agreement is characterized as a security agreement will depend upon a fact-specific determination. In its recent decision in Caisse populaire Desjardins de l’Est de Drummond v Canada,45 the Supreme Court of Canada held that a contract providing for contractual ‘compensation’ (analogous to contractual set-off in Quebec) in the context of a flawed asset arrangement had created a security interest for purposes of section 224(1.3) of the Canadian Income Tax Act. That provision defined security interest as ‘any interest in property that secures payment or performance of an obligation and includes an interest created (p. 111) by or arising out of … a[n] … encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for’. On the facts of that case, a customer obtained a line of credit from the financial institution. The customer made a five-year fixed-term deposit in a certain amount which was neither negotiable nor transferable, which the financial institution was entitled to retain for the duration of the customer’s indebtedness. The customer agreed that, if it defaulted, there would be ‘compensation’ between the credit agreement and the term deposit. The Court determined that, in substance, the parties intended to create an interest in property to secure a debt. The five-year term of the deposit, the financial institution’s maintenance and retention of the deposit, the customer’s agreement not to transfer or negotiate the deposit, and the limited use of the deposit to ‘secure’ the line of credit, created the security interest. The Court stated at paras 23–5:

[23] I do not think it is correct to make a blanket determination that a contractual right to compensation or a contractual right to set-off can never be associated with a ‘security interest’ or that they are always associated with a ‘security interest’. Whether a contract providing for a right to compensation or a right to set-off also gives rise to a ‘security interest’ within the meaning of s. 224(1.3) ITA requires that the terms of the contract be carefully considered to determine whether the parties intended to confer on one party or the other ‘any interest in property [of the other party] that secures payment or performance of an obligation’.

[24]  In The Law of Set-Off (3rd ed. 2003), Professor S. R. Derham argues, I think persuasively, that some contracts including a right of set-off (or, in this case, contracts including a right of compensation) should be said also to involve security. As an example of a set-off agreement that also contains a security interest, Professor Derham describes a situation very similar to the one before this Court in the following words, at para. 16.82:

… bank as a condition to the grant of a facility requires that a deposit be made with it which the depositor is not permitted to access until all indebtedness under the facility has been paid, and the parties agree that the bank may appropriate the deposit in discharge of the debt in the event of default in payment. The essence of the arrangement is that the depositor’s property, in the form of the account in credit, is to function as a security. Indeed, in the case of a charge-back in which express words of charge are used, a contractual set-off is the very remedy that would be contemplated … [Emphasis added by the Supreme Court of Canada]

[25]  The essence of contractual compensation or set-off is that the terms of the contract reflect the mutual intention of the parties: see Derham, at para. 16.86. If their mutual intention is to create a security interest to ensure that the right of compensation or set-off will be an effective remedy, there is no reason to think that a security interest does not exist simply because the parties have chosen one mechanism for realizing on the security, rather than another. What must be considered is the substance of the agreement. If the substance of the agreement demonstrates that the parties intended an interest in property to secure an indebtedness, then a security interest exists within the meaning of s. 224(1.3) ITA.

7.29  Although Drummond was decided under a tax statute, its reasoning may well apply in the context of creating security interests as defined by the provincial (p. 112) PPSAs. In the immediate aftermath of Drummond, industry representatives expressed concern about its implications for a bank’s priority over competing secured creditors under PPSA legislation. This question has not yet been tested in court. However, the prevailing view is that a properly drafted contract can create set-off rights between a bank and its customers that operate independently of any security interest and that supersede most interveners, including competing security interests.46

C.  Set-off against Insolvent Parties

7.30  Under Canadian constitutional law, insolvency is an area within the exclusive jurisdiction of the federal government. Canada’s Bankruptcy and Insolvency Act (BIA)47 and Companies Creditors’ Arrangement Act (CCAA)48 are federal statutes that apply across Canada. Both these statutes expressly preserve set-off rights. The law of set-off is also a matter within the exclusive jurisdiction of each province over property and civil rights within the province. Accordingly, the law of the province where the insolvency proceedings take place applies in determining whether a claim for set-off is available, valid, and enforceable.49

7.31  Insolvency proceedings in Canada may take a variety of forms. The assets of a business may be liquidated by a trustee in bankruptcy appointed in bankruptcy proceedings under the BIA; a receiver appointed privately or by a court; the exercise of other private remedies of a secured creditor under its security; or, most commonly, a combination of these procedures. Alternatively, the business may be rehabilitated by a restructuring or reorganization of the corporation and its debts under one or more corporate reorganization statutes, such as the CCAA.

7.32  Few issues are as important in insolvency as creditors’ access to set-off rights against insolvent corporations. Set-off may, for example, permit a creditor with an unsecured claim to effectively satisfy that claim on a dollar-for-dollar basis out of amounts the creditor owes to an insolvent company at the expense of other unsecured creditors.

(p. 113) 7.33  The policy considerations regarding set-off in an insolvency context were described by the Ontario Superior Court (General Division) in Citibank Canada v Confederation Life Insurance Co. (Liquidator of), as follows:

In insolvency situations, set-off provides a creditor with an advantage which other creditors, ranking pari passu except for the set-off, do not have. It puts the advantaged creditor in what is tantamount to a secured position, something which was not part of the bargain with the insolvent company in the first place. On the other hand, there is an inherent unfairness where a debtor/creditor is required to pay the liquidator everything that is legitimately owed to the insolvent company but is only able to collect a fraction of what is equally legitimately owing by the insolvent company, if anything.50

7.34  Despite these competing concerns, the BIA and the CCAA expressly preserve the general law of set-off in proceedings under those respective statutes. Section 97(3) of the BIA states:

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 is affected by the provisions of this Act respecting frauds or fraudulent preferences.

7.35  Similarly, section 21 of the CCAA states:

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.

7.36  The discussion in this section will be limited to set-off in three scenarios: (i) bankruptcy proceedings under the BIA, (ii) receiverships, and (iii) reorganization proceedings under the CCAA. In general, the same principles of set-off apply within an insolvency proceeding as those that apply outside insolvency.51 This approach differs from that of other jurisdictions where the principles of set-off applied in insolvency can be quite different from those applied in solvent situations.52

1.  Bankruptcy proceedings under the BIA

7.37  BIA proceedings for the liquidation of a debtor’s assets may be brought in Canada against any person (including a corporation, partnership, or individual) who resides, has an office or assets, or carries on business in Canada, (p. 114) except banks, insurance companies, trust or loan companies, and railway companies.53

7.38  Upon bankruptcy proceedings under the BIA, the assets of the insolvent debtor (including debts owed to the insolvent) are assigned to a trustee in bankruptcy. Pursuant to section 97(3) of the BIA, cross-claims that have accrued between a party and the insolvent prior to the bankruptcy, for which set-off would be available absent bankruptcy, may be set off in bankruptcy.54 Accordingly, the bankrupt’s estate includes only the net amount of a debt owing to the bankrupt after proper allowance for the recognized right of set-off.55

7.39  In order to assert a claim for set-off against the bankrupt estate, the rights of set-off must exist at the date of bankruptcy.56 The set-off referred to in section 97(3) of the BIA includes legal, equitable,57 and contractual58 set-off.

7.40  The assignment of the insolvent debtor’s assets to the trustee in bankruptcy may affect the availability of legal set-off in certain circumstances. This was described by the Ontario Superior Court of Justice (Commercial List) as follows:

In a bankruptcy, the trustee is inserted into the proceedings. Post-bankruptcy dealings of a creditor with the trustee in bankruptcy do not involve the same party, namely the debtor, before the condition of bankruptcy. When a bankruptcy occurs, there is a new estate created: there is the estate of the debtor under the direction and control of the debtor before bankruptcy which is a different estate than the one post-bankruptcy where there is an estate of the bankrupt under the direction and control of the trustee in bankruptcy. Thus, creditors who incur post-bankruptcy obligations to trustees in bankruptcy cannot claim legal set-off to avoid paying such obligations by setting-off such obligation against their proven (pre-bankruptcy) claims against the bankrupt. The same parties are not involved so there cannot be mutual cross-obligations.59

(p. 115) Accordingly, a party cannot assert rights of legal set-off against a trustee in bankruptcy where the party wishes to set off obligations incurred post-bankruptcy against proven pre-bankruptcy claims.

7.41  As alluded to above, the object of set-off in bankruptcy is to avoid the perceived injustice to a party which has had mutual dealings with a bankrupt of having to pay in full what it owes to the bankrupt while having to rest content with a dividend on the amount owed to it by the bankrupt.60 At the same time, however, the effect of the set-off is to prefer one creditor over the general body of creditors. Accordingly, the set-off right is limited by the provisions in the BIA and provincial legislation dealing with fraudulent preferences.61

Fraudulent preferences under the BIA

7.42  To successfully attack a transaction as a fraudulent preference under the BIA, the following three elements must exist: (i) the debtor must have been insolvent at the time of the transfer, (ii) the debtor must have intended to give the creditor a preference, and (iii) the transaction must have taken place within a ‘review period’ of three months (or twelve if to a ‘related person’)62 of the date of the initial bankruptcy event. The date of the ‘initial bankruptcy event’63 is essentially the date proceedings commenced under the BIA, ie the earliest of the date of an assignment in bankruptcy,64 the filing of a bankruptcy petition,65 the filing of a proposal, or the filing of a notice of intention to make a proposal.66 Once the trustee in bankruptcy has established that the debtor was insolvent at the time of the transaction, that the transaction occurred during the review period, and that it had the effect of preferring one creditor over another, a presumption arises that the transaction was made with the intent of giving that creditor a preference. The onus is then shifted to the creditor to rebut the presumption.

7.43  Whether a fraudulent preference exists is a very fact-specific determination. Although set-off creates a preference ‘in fact’, the issue of whether or not it creates (p. 116) a preference ‘in law’ rendering it ineffective depends upon the purpose for and circumstances in which the offsetting transactions were entered into. If the transactions were entered into in the ordinary course of business for legitimate business reasons, the transactions will generally not be fraudulent preferences and the set-off rights will survive the bankruptcy event.67

7.44  If money is owing to a bank and, at the date of bankruptcy, the bank has money on deposit to the credit of the bankrupt in another account, subject to certain exceptions, the credit balance can be applied against the debit balance without creating a fraudulent preference for the purposes of the provisions in the BIA, as such transfer is merely a bookkeeping entry disposition by the bank of its own money.68 Exceptions to this, however, include circumstances where (i) the bank and bankrupt have made an actual agreement to prefer the bank above other creditors in the knowledge of the impending insolvency, and (ii) the bank has received funds from the bankrupt and applied the funds with actual knowledge, or knowledge sufficient to put the bank on notice, of the bankrupt’s insolvency.69

Fraudulent preferences under provincial legislation

7.45  In addition to attacking a transaction as a fraudulent preference under the BIA, a transaction may also be challenged as a fraudulent preference under provincial legislation dealing with fraudulent preferences.70 Although the elements required for attacking a transaction as a fraudulent preference under provincial legislation are very similar to those under the BIA, there are important differences. For the purposes of provincial legislation in the common law jurisdictions, the trustee in bankruptcy or challenging creditor must prove that both the debtor and creditor intended to make a preference. In addition, unlike the BIA, there is no review period under provincial legislation. Because of the higher onus of proof, proceedings under provincial legislation are typically commenced when the impugned transaction occurred outside the review period. The defences available to persons in response to an attack under provincial legislation are similar to those under the BIA.

(p. 117) 2.  Receiverships

7.46  The appointment of a receiver and manager (commonly referred to as a ‘receiver’) is a remedy frequently used by a secured creditor that holds comprehensive security over the assets of the debtor created by a general security agreement.71 This remedy is commonly used where the continued operation of the debtor’s business after the enforcement of security is desired, for example so that the business can be marketed as a going concern. Another variation which has been used in a number of recent cases is the appointment of an ‘interim receiver’. While the title suggests a temporary role, interim receivers are often given a mandate similar to that of an ordinary receiver. Interim receivers are most commonly applied for in cases where the debtor has assets in several provinces or where the debtor has operations in Quebec.72

7.47  As in bankruptcy proceedings under the BIA, in a receivership, the rights of legal, equitable, and contractual set-off continue to be available.73 Like proceedings under the BIA, the main issue in the case of legal set-off will be the issue of timing. In a receivership, an equitable assignment of the insolvent’s property occurs upon the appointment of a receiver. Mutuality will be lost for obligations incurred after the equitable assignment. Thus, whether legal set-off rights accrued before or after the appointment of a receiver will determine whether legal set-off is available in the circumstances.74 If legal set-off rights accrued before the appointment, mutuality should not be an issue in determining whether legal set-off is available.75 If legal set-off rights accrued after the appointment, mutuality has been destroyed with the result that legal set-off is not available against pre-appointment debts.76 The presence of an equitable assignment will be irrelevant, however, for purposes of determining whether a claim for equitable or contractual set-off can be supported.

7.48  The immediate availability of set-off in a receivership may be limited by courts’ common practice of including a stay provision in receivership orders which prohibits a party from exercising set-off rights without leave of the court. It is debatable whether such provisions ought properly to be included in such orders, and (p. 118) the issue has yet to be determined. In any case, if and to the extent leave is required, it should be given where a valid and enforceable claim to set-off exists.

3.  Reorganization proceedings under the CCAA

7.49  In Canada, the CCAA is the principal statute for reorganization of insolvent corporations and the closest Canadian equivalent to Chapter 11 of the United States Bankruptcy Code. An insolvent corporation can reorganize under the CCAA where the total of the claims against the debtor or affiliated debtor corporations included in the proceeding exceeds CDN$5 million and where the debtor is incorporated in Canada or has assets in Canada.77 As under the BIA, banks, insurance companies, trust companies, and railway companies are excluded from the CCAA.78

7.50  Pursuant to section 21 of the CCAA, legal and equitable set-off rights are recognized and preserved in CCAA proceedings.79 Although the case law is very limited in this regard, contractual set-off likely is also available.80 The CCAA’s impact on set-off rights differs from that under the BIA and a receivership in that there is no statutory or equitable assignment that destroys mutuality upon filing an application under the CCAA. Thus, the impact of an assignment on legal set-off in bankruptcy and receivership proceedings (discussed above) has been held not to occur in CCAA cases. However, the Quebec Court of Appeal, in the context of civil law ‘compensation’, recently found that the CCAA and BIA regimes should be integrated and pre-filing claims should not be capable of being set off against post-filing claims because (i) the CCAA imports the definition of a ‘provable claim’ under the BIA, (ii) allowing set-off in such circumstances can jeopardize the successful reorganization of an insolvent corporation, and (iii) the availability of set-off should be narrowly construed because it is contrary to the well-established principle in insolvency law of treating unsecured creditors equally. It remains to be seen whether this reasoning is adopted in insolvency proceedings in the other provincial jurisdictions of Canada.81

(p. 119) 7.51  It is common to include, in the initial CCAA order, a stay of proceedings against the exercise of set-off rights without leave of the court. The court will exercise its discretion to maintain the stay in the face of objections if the court concludes that (i) it is necessary to preserve the status quo to effect the restructuring and/or (ii) the stay is necessary to balance the relative prejudice to the creditor asserting the set-off right and the debtor’s other stakeholders.82 One factor that will cause a court to be particularly cautious about lifting the discretionary stay is when an existing creditor obtains post-filing services or supplies from the debtor, or otherwise incurs post-filing debt, and seeks to avoid paying the debt by invoking its pre-filing set-off rights. In such a situation, G B Butler J of the BC Supreme Court exercised his discretion to continue a stay of set-off rights for the following stated reasons:

  1. 1.  In order to preserve the status quo to effect a restructuring, a stay of the set-off is, and was, absolutely essential.

  2. 2.  The amended initial order and the extension order were based on a detailed program. I need not highlight all of the aspects of it, but these included a reduction in the underground mining, cost cutting, disposal of equipment, and an orderly closure and maintenance of the Cantung Mine, all of which was predicated on cash flow. The cash flow was based on the continuation of the two supply agreements. Obviously, that would be thrown into disarray if the stay was not continued.

  3. 3.  GTP had notice of all steps which had been taken along the way and was indeed actively consulted. It never raised any issue about set-off for 45 days following the initial order. Indeed, its only position was that assets should be put up for sale. It said nothing about exercising its right of set-off with respect to pre-filing debt.

  4. 4.  Great prejudice to the other stakeholders would flow if GTP was now permitted to exercise its set-off. The status quo would be significantly altered and the restructuring would effectively be at an end. I accept that Callidus would very likely not extend any further credit at this point.

When I consider all of those factors, as well as my view that there is no prejudice to GTP, it is appropriate to continue the temporal stay of GTP’s set-off rights for so long as the stay granted by the amended intial order continues, which is to October 31, 2015.83

7.52  The BC Court of Appeal unanimously dismissed GTP’s application for leave to appeal, noting that the application lacked merit and that the exercise of set-off rights would have a devastating effect on the company’s restructuring.

7.53  The stay of set-off rights in the case law has been criticized because, despite purporting to be ‘temporal’, the stay often does, effectively, eliminate the rights. (p. 120) Depending upon how these cases are applied in future cases, it is uncertain whether they will only be applied in egregious factual circumstances of a creditor abusing or manipulating the insolvency proceeding to gain a priority over other creditors, or whether they will be applied more broadly and, in the interests of preserving companies’ ability to restructure and equality between unsecured creditors, render the statutory preservation of set-off rights under the CCAA effectively moot.84

7.54  As in many other jurisdictions, in Canada both the BIA and the CCAA provide safe harbours from the stay of termination rights and other remedies under derivatives contracts (ie enumerated ‘eligible financial contracts’) including netting, set-off, determination of net termination value, replacing contracts upon the insolvency of a party, and enforcing against the collateral.85 Parliament has also legislated a safe harbour for netting agreements between financial institutions, whether domestic or foreign, which applies notwithstanding any bankruptcy or insolvency law.86

D.  Cross-border Issues

1.  Outside insolvency

7.55  Canadian courts have jurisdiction to hear proceedings, including set-off claims, that involve cross-border parties and/or events. A court in a common law province has jurisdiction over a dispute if (i) the defendant is present in the province, (ii) the defendant consented to the jurisdiction of the courts in the province, or (iii) the subject matter of the proceeding has a ‘real and substantial connection’ with the province.87

7.56  The ‘real and substantial connection’ test is a fact-specific inquiry determined on a case-by-case basis.88 In a debt action, for example, factors demonstrating a ‘real and substantial connection’ include the domicile of the parties, the parties’ choice of the law governing the interpretation and enforcement of the contract, the place where the contractual obligations were incurred and/or performed, and the place where the parties carry on business.

(p. 121) 7.57  If the parties, by their contract, have chosen an exclusive forum for the adjudication of their disputes, Canadian courts will respect the choice of forum absent extraordinary circumstances constituting ‘strong cause’ for ignoring it.89

7.58  If a Canadian court accepts jurisdiction over a dispute, it normally should have jurisdiction to also hear set-off claims asserted as defences or counterclaims to the main action. Indeed, there is a risk in not asserting a set-off claim in an action over which a Canadian court has taken jurisdiction. Failure to do so could result in the set-off claim being estopped or found to be res judicata if it arises out of, or is so closely connected to, the main action that it creates an equitable set-off.90

7.59  Under Canadian conflict-of-laws principles, matters that are considered ‘procedural’ are governed by the domestic law of the local forum, while matters that are considered ‘substantive’ are governed by the law applicable to the dispute.

7.60  Questions of set-off are considered to be procedural, rather than substantive, and thus are determined according to the law of the Canadian province in which the set-off claim is asserted. The law of the local forum will apply in determining whether set-off is available in that proceeding and, if so, the criteria for establishing whether a party has made out a case for legal, equitable, contractual, or statutory set-off.91

7.61  The law, whether domestic or foreign, that applies to the debt underlying each cross-claim is considered substantive and will be applied to determine whether the debt exists and whether it is capable of being reduced or extinguished by set-off.92 The substantive law that applies to the creation and enforceability of a debt or the interpretation of the contract giving rise to the debt will be either the law chosen by the parties in the applicable agreement or, in the absence of a choice-of-law clause, the law that has the ‘closest connection’ to the contract or circumstances that created the debt.

7.62  Where substantive issues, including issues underlying a set-off claim, are to be determined by foreign law, the law must be proved as a fact through sworn expert testimony in the Canadian proceedings. If the foreign law is not properly proved, the court is entitled to assume that the foreign law is the same as the domestic law and to decide the case as though domestic law applied.93

(p. 122) 7.63  Subject to narrow defences,94 foreign judgments can be recognized and enforced in Canada without the need to establish a real and substantial connection with Canada or to engage in a reconsideration of the merits.95 Attempts to raise a set-off claim in Canada as a defence to the recognition and enforcement of a foreign judgment have been largely unsuccessful. If the claim arises out of, or is so closely connected to, the foreign action that, if successful, it would warrant an equitable set-off, and if the claim could have been raised in the foreign proceedings, it will be estopped in Canada under res judicata principles. If there is an argument that the claim is not so closely connected to the foreign action, the Canadian court will proceed with the recognition and enforcement of the foreign judgment without prejudice to the defendant’s right to commence a fresh action in Canada on the claim.96

2.  Within insolvency

7.64  In 1997, both the BIA and the CCAA were amended to enact provisions for the coordination of Canadian and foreign insolvency proceedings. They gave authority and discretion to Canadian courts to grant relief in Canada to facilitate or provide assistance to foreign proceedings ‘on such terms and conditions as the Court considers appropriate’.97

7.65  Effective 18 September 2009, further amendments to Canada’s insolvency regimes came into force that more formally recognize and facilitate the conduct of cross-border insolvency proceedings based on (but not identical to) the UNCITRAL Model Law on Cross-border Insolvency.98 The provisions set out rules for recognizing foreign proceedings, classifying them as either ‘foreign main proceedings’ or ‘foreign non-main proceedings’ (based on the debtor’s centre of main interests or ‘COMI’) and providing appropriate relief and cooperation to facilitate the administration of cross-border insolvencies.

7.66  The foreign representative may apply to the Canadian court for recognition of the foreign proceeding. If the foreign proceeding is ‘main’, a Canadian stay must be ordered, subject to such terms and conditions as the court thinks appropriate, that precludes the debtor from disposing of its assets. If it is ‘non-main’, the stay is in the discretion of the court, as necessary to protect the debtor’s property (p. 123) and the interests of creditors.99 If the court grants an order recognizing a foreign proceeding, the foreign representative may commence and continue proceedings in Canada as a creditor or as the debtor (depending on its authority) and the Canadian court must cooperate to the maximum extent possible with the foreign representative and the foreign court.

7.67  There is little case law or guidance to date on how the new cross-border insolvency regimes will affect creditors’ set-off rights. In the context of the BIA, Houlden and Morawetz, Canada’s leading commentators on insolvency law, suggest that if a corporation is subject to bankruptcy proceedings in Canada that are ancillary to insolvency proceedings in the country of incorporation, and if the law of set-off is different in the foreign jurisdiction from that of Canada, a Canadian court should apply Canadian laws of set-off first to the claims of Canadian creditors before remitting the realization of Canadian assets to the foreign trustee.100 Canadian courts have not yet ruled on whether this approach could be challenged under the current cross-border regime applicable to a foreign main proceeding.

7.68  Case law under the CCAA to date suggests a different approach to set-off where a debtor is engaged in international proceedings to restructure its operations and continue its business. In Tucker,101 one of the first cases under the current cross-border regime in Canada, two insolvent companies that provided procurement and inventory management services in the aerospace industry were placed under administration in the UK under the Insolvency Act 1986. The UK administrators sought an order in Canada under the CCAA to recognize the foreign proceedings as foreign main proceedings. The CCAA court gave the order sought, holding that the companies’ COMI was in the UK and that the UK administration orders were foreign main proceedings.

7.69  The UK debtors provided inventory and procurement services to two Canadian customers, one of which kept approximately nine months’ worth of the debtors’ inventory at its own premises. That customer provided services to the debtors under a management agreement and had set-off rights against the companies arising from the relationship. The UK administrators applied to the Canadian court requesting that the customer’s set-off rights be stayed. The Canadian court considered the provision of the CCAA that preserved set-off rights (section 21) and the provisions that gave broad powers (sections 49(1) and 50) to make any order considered appropriate in the circumstances. The court stayed the exercise of set-off rights in Canada, accepting that it could temporarily stay the right of set-off (p. 124) protected under section 21 of the CCAA. The court noted the following relevant factors in the evidence:

  • •  The financial position of the debtors was ‘extremely distressed’ with the threat of creditor enforcement action in key countries.

  • •  The supply of airline parts was ‘time-critical’ and had to continue uninterrupted.

  • •  There was a risk that if the stock was not secured quickly, it would disappear and become very difficult to access.

  • •  Creditors would not be unreasonably prejudiced by the proposed set-off relief. It would operate only to prevent fresh inventory of the foreign debtors from being appropriated by third parties without payment. The relief would not affect the position of the parties on the date of the recognition order, but would ensure that no further prejudice would be caused to the foreign debtors’ estate.

  • •  If the foreign debtors’ inventory were in their possession, rather than in the possession of the Canadian customer, they could control and minimize potential prejudice by obtaining assurance of payment before providing new supplies.

  • •  Any refusal to supply inventory by the Canadian customer that had physical control of the inventory could ground several aeroplanes, thereby causing prejudice to the foreign debtors’ customers.

The Canadian court concluded that having regard to the circumstances of that case and the need to cooperate with the foreign court to maximize the value of the debtor’s property, the stay of set-off rights should be granted to protect the inventory and enable the foreign debtors to attempt to continue as a going concern.

E.  Summary

7.70  In general, legal set-off is mechanical in nature, and may be defeated by formalities such as lack of strict mutuality or liquidated status of the cross-debts. While equitable set-off is more flexible, its application is uncertain because it depends on a judicial finding that the cross-claims are sufficiently closely connected to merit equitable set-off. To avoid these drawbacks, market participants are well advised to use foresight and draft the terms of their set-off arrangements with those parties with whom they contract. Generally speaking, rights of set-off are preserved in insolvency, with certain exceptions relating to the loss of mutuality for purposes of legal set-off in bankruptcy proceedings under the BIA and receiverships, the limitations relating to fraudulent preferences, and the discretionary temporary stay that may be imposed in CCAA proceedings. In the context of cross-border insolvencies, set-off rights against a debtor’s Canadian assets also may be affected by a discretionary temporary stay.


1  The federal Parliament is also responsible for three territories. Federal law allows territories to elect councils with powers similar to those of the provincial legislatures.

2  Quebec has a civil law system based on the Civil Code of Quebec (CCQ). The rules of compensation set out in arts 1672 and 1673 of the CCQ codify a regime that is similar but not identical to set-off in the common law jurisdictions. Equitable set-off does not apply in Quebec. As held by the Supreme Court of Canada in D.I.M.S. Construction Inc. (Trustee of ) v Quebec (Attorney General), [2005] 2 SCR 564:

The applicability of equitable set-off was questionable even before the Federal Law–Civil Law Harmonization Act, No 1 . . . Since that Act came into force, however, it has been clear that s 97(3) BIA [Bankruptcy and Insolvency Act] must be applied in Quebec on the basis of civil law and not common law rules. Equitable set-off cannot make up for the non-application of civil law compensation and cannot be introduced into Quebec law by s 97(3) BIA. In Quebec, the suppletive law is Quebec civil law and, more specifically in this case, the rules governing compensation under the CCQ.

3  For a more complex definition of set-off in Canada see Palmer, The Law of Set-off in Canada (Canada Law Book Inc. 1993) 1–5.

4  The leading decision regarding legal and equitable set-off is the Supreme Court of Canada decision in Telford et al v Holt et al (1987), 41 DLR (4th) 385 (‘Telford’).

5  As described in Telford (n 4 above) 392, the availability of legal set-off originally arose from two statutes: the Insolvent Debtors Relief Act 1728 (UK), 2 Geo 2, c 22, and the Set-off Act 1734 (UK), 8 Geo 2, c 24. These statutes were repealed but their effect was preserved in Rule 199.3 of the Supreme Court of Judicature Act 1873 (UK), c 66, which formed the basis of the relevant set-off provisions found today in the provincial Rules of Court.

6  British Columbia, Supreme Court Rules (under Court Rules Act), B.C. Reg. 221/90, rule 19(13); Alberta, Alberta Rules of Court (under the Court of Appeal Act, Court of Queen’s Bench Act, Civil Enforcement Act and Family Law Act), AR 390/68, s 93(2); Saskatchewan, Queen’s Bench Rules (under the Queen’s Bench Act), R. 104A; Manitoba, Court of Queen’s Bench Act, C.C.S.M. c C280, s 65 and Court of Queen’s Bench Rules, R. 27; Ontario, Courts of Justice Act, R.S.O. 1990, c. c 43, s 111; Newfoundland and Labrador, Rules of the Supreme Court, 1986 (under the Judicature Act), Cover, S.N.L. 1986, c 42, Sch. D, R. 14.19; New Brunswick, Rules of Court (under the Judicature Act), N.B. Reg. 82–73, R. 28 (Counterclaim); Nova Scotia, Judicature Act, R.S., c 240, s 41; Prince Edward Island, Judicature Act, R.S.P.E.I. 1988, c J-2.1, s 2.

7  Telford (n 4 above) 393, adopting Canadian Imperial Bank of Commerce v Tuckerr Industries Inc. (1983), 149 DLR (3rd) 172 at p. 174 (B.C.C.A.) (‘Tuckerr’).

8  Canadian Airlines Corp. (Re) [2001] A.J. No 226 at paras 19–21 (Alta. Q.B.) (‘Canadian Airlines’); and see definition of ‘debt’ in Diewold v Diewold [1941] 1 DLR 561 at 564 (S.C.C.), referenced in Palmer (n3 above) 22; Re North American Tungsten Corp., 2015 BCSC 1382 at paras 10–11.

9  For example, courts will consider a claim to be ‘liquidated’ if it can be determined by calculation or by reference to a scale of fixed charges or other positive data: J. Crooke (Concrete Blocks) Ltd v Campbell [1947] OWN 713.

10  Telford (n 4 above) 394; and see Re Polywheels Inc., [2009] OJ 2086 (Ont. S.C.J.) para 25, where an assignment contained in a guarantee was found to have destroyed mutuality and precluded legal set-off.

11  See, for example, Re SemCanada Crude Company, 2009 ABQB 397 at paras 30–1 (Alberta Q.B.) (‘Trilogy’), leave to appeal refused with reasons 2009 ABCA 275 (Alberta C.A.), referencing McMahon v Canada Permanent Trust Co. (1979), 32 C.B.R. (N.S.) 258 (B.C.C.A.); and National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd, [1972] 2 W.L.R. 455 at 466 (H.L.).

12  See n 4 above.

13  In Coba Industries Ltd v Millie’s Holdings (Canada) Ltd et al (1985), 20 DLR (4th) 689 (B.C.C.A.) (‘Coba’), the British Columbia Court of Appeal drew these principles from the English authority Rawson et al v Samuel (1841), 41 ER 451. The Supreme Court of Canada accepted them as the applicable principles for equitable set-off in Telford (n 4 above) at 398–9.

14  This principle was drawn from the English authority, Rawson et al v Samuel (1841), 41 ER 451.

15  This principle was drawn from the English authority, British Anzani (Felixstowe Ltd) v International Marine Management (UK) Ltd [1979] 2 All ER 1063 (‘British Anzani’), in which the Court provided that in order to rely on the doctrine of equitable set-off the defendants had to show, amongst other things, that their counterclaim was so directly connected with the plaintiffs’ claim as to go to the foundation of that claim. A simple connection between a claim and cross-claim is insufficient to qualify for equitable set-off. Rather, the cross-claim must flow out of and be inseparably connected with the dealings and transactions that give rise to the claim.

16  This principle was drawn from the English authority, Federal Commerce & Navigation Ltd v Molena Alpha Inc et al [1978] 3 All ER 1066.

17  This principle was drawn from the English authority, Bankes v Jarvis [1903] 1 KB 549 (‘Bankes’) and British Anzani (n 15 above).

18  This principle was drawn from the English authority of Bankes (n 17 above) in which the Court provided that unliquidated claims (ie a claim for unliquidated damages) may be set off against liquidated claims (ie a claim for debt). Also see Government of Newfoundland v Newfoundland R. Co. et al (1888), 13 App. Cas. 199 (P.C.).

19  Houlden and Morawetz, The 2017 Annotated Bankruptcy and Insolvency Act (Toronto 2017) F§237 (9).

20  Houlden and Morawetz (n 19 above) F§237 (9).

21  [1999] BCJ No 2855 (B.C.C.A) (‘Cam-Net’). For additional examples where equitable set-off was permitted, see Coba (n 13 above); Telford (n 4 above); Blue Range Resource Corp (Re) [2000] AJ No 830 (C.A.) (‘Blue Range’); Canadian Airlines (n 8 above); Algoma Steel Inc. v Union Gas Limited (2003) OJ No 71 (C.A.)(‘Algoma’); Provident Bank v Wells Fargo Bank Northwest, [2006] OJ No 1060 (C.A.) (‘Provident Bank’), affirming [2005] OJ No 3081 (S.C.J.).

22  Mutuality among the parties is not strictly required for equitable set-off, so that an assignment or change in capacity will not remove the right, so long as the cross-obligations are so closely connected that it would be unjust to permit one party to enforce its obligation without permitting a set-off to the other. See, for example, Tuckerr (n 7 above); Telford (n 4 above), and Algoma (n 21 above).

23  See, for example, Re SemCanada Crude Company, 2009 ABQB 252 at para. 10 (‘SemCAMS’); Re SemCanada Crude Company, 2009 ABQB 397 at para 46 (‘Trilogy’), leave to appeal refused with reasons 2009 ABCA 275; Armenia Rugs—Tapis Ltd v Axor Construction Canada Inc, [2006] OJ No. 1036 at para 40 (S.C.J.).

24  S.S., c F-13.4, as amended.

25  Financial Administration Act s 95 (now s 155), R.S.C. 1985, c F-11, the federal equivalent, was commented on briefly by the Federal Court of Appeal in Aero Trade (Western) Ltd (Receiver of) v Canada [1988] FCJ No 1110 (F.C.A.). The wording of the federal equivalent is less broad than that of the Saskatchewan version and the Court concluded that the federal equivalent did little to alter the common law. See also Canadian Airlines (n 8 above) para 46 for brief consideration of the province of British Columbia equivalent. Other statutes that include set-off provisions in favour of the government include the federal Income Tax Act, R.S.C. 1985, c 1 (5th Supp.) (s 224.1) and the federal Excise Tax Act, R.S. 1985, c E-15 (s 85). In Mintzer v Canada, [1996] 2 FC 146 (C.A.), the Federal Court of Appeal held that the Crown’s statutory set-off rights entitled it to set off unpaid income taxes against retirement benefits payable to the appellant, and that such set-off did not constitute execution or seizure of retirement benefits contrary to applicable legislation.

26  Palmer (n 3 above) 263, cited with approval in Pioneer Grain Co v Goy, [2005] 4 FCR 687 (F.C.) para 19.

27  Palmer (n 3 above). Also, see Daydream Development Corp v John’s Sandblasting & Painting Ltd [1996] AJ No 1204 (Alta Q.B.), where before considering enforcement of a contractual right of set-off, the Court first determined whether there existed a valid and enforceable contract.

28  In Re Sutcliffe & Sons Ltd, Ex p. Royal Bank, [1933] 2 OR 120 (C.A.); Ross v Royal Bank of Canada, [1966] 1 OR 90 (H.C.); and see discussion in Palmer (n 3 above) 200–2.

29  Bangsund, Set-off and Security Interests, (2017) 50 UBC L Rev 1–35.

30  See discussion of Caisse populaire Desjardins de l’Est de Drummond v Canada, 2009 SCC 29, in the discussion below about set-off and security interests.

31  Palmer (n 3 above) 245.

32  See, for example, Transamerica Life Assurance Co. of Canada v Canada Life Insurance Co. (1996), 28 O.R. (3d) 423, affirmed (1997) OJ No 3754 (Ont. C.A.); see discussion of corporate veil concepts in the SemCanada Crude Company cases (n 23 above).

33  [1999] AJ No 218 (Alta Q.B.) (‘Compton Petroleum’).

34  Compton Petroleum (n 33 above) para 29.

35  (1961), 30 DLR (2nd) 280 (‘Royal Bank’).

36  Royal Bank (n35 above) 287.

37  [1987] AC 22.

38  See, for example, n 22 above.

39  [1924] 1 DLR 737 (Ont. S.C. [Bankruptcy]) (‘McMurtry’).

40  The Supreme Court of Canada has recognized a ‘principled exception’ to the privity doctrine, to be determined on a case-by-case basis, which applies when the parties are found to have intended to confer a benefit on the third party and the third party seeks the benefit in the circumstances intended to give rise to that benefit: London Drugs Ltd v Kuehne & Nagel International Ltd, [1992] SCJ 84; and Fraser River Pile & Dredge Ltd v Can-Dive Service Ltd, [1999] SCJ 48. While the third party may rely on the principled exception as a shield to defend a claim against it, it remains unclear whether the principled exception may be used by the third party as a ‘sword’ to enforce a contract.

41  See Re SemCanada Crude Company, 2009 ABQB 715 at paras 4–5, 17 (‘Husky’); and see commentary on Husky by Anderson, Gelbman, and Pullen, ‘Recent Developments in the Law of Set-Off’, Ann Rev Insolv (2009) vol 1, 1–38.

42  In all provinces other than Quebec, security in personal property is governed by the applicable provincial Personal Property Security Act (PPSA). In Quebec, the CCQ governs the granting of security over personal (or ‘movable’) property. While there are variations in the detail of the PPSA legislation in effect in the different common law provinces, in each province the PPSA system follows the same general framework. The PPSA sets out the requirements a creditor must satisfy in order to obtain, maintain, and enforce a security interest in personal property, and includes a detailed code of priorities of secured claims.

43  R.S.O. 1990, c P.10.

44  Under the Ontario PPSA (n 43 above) ‘personal property’ means chattel paper, documents of title, goods, instruments, intangibles, money, and securities, and includes fixtures but does not include building materials that have been affixed to real property.

45  2009 SCC 29 ‘Drummond’.

46  See Bangsund, Set-off and Security Interests, (2017) 50 UBC L Rev 1–35 and commentary cited in footnotes. See also s 40 (1.1) of the Ontario PPSA, which provides that an account debtor (a person obligated on an account or a chattel paper) may set up against an assignee (a) all defences available to the account debtor against the assignor arising out of the terms of the contract or a related contract, including equitable set-off, and (b) the right to set off any debt to the account debtor by the assignor that was payable to the account debtor before the account debtor received notice of the assignment.

47  R.S.C. 1985, c B-3.

48  R.S.C. 1985, c C-36.

49  Houlden and Morawetz (n 19 above) F§237(8).

50  [1996] OJ 3409 (Ont. Gen. Div.) at para 30.

51  Palmer (n 3 above) 158.

52  Palmer (n 3 above) 158.

53  The liquidation of insolvent banks, insurance companies, trust or loan companies, and railway companies is subject to the Winding-up and Restructuring Act R.S.C. 1985, c W-11 (WURA). Proceedings under this statute are rare and are usually only brought at the instance of a regulatory authority to liquidate an insolvent financial institution. Section 73 of the WURA also preserves set-off rights.

54  Husky Oil Operations Ltd v Canada (1995), 128 DLR (4th) 1 (S.C.C.) (‘Husky Oil’).

55  Houlden and Morawetz (n 19 above) F§237 (1).

56  Houlden and Morawetz (n 19 above) F§237 (1).

57  Husky (n 41 above).

58  McMurtry (n 39 above). Also see Re Berman (1979), 105 DLR (3rd) 380 (Ont. C.A.); Clarkson v Smith & Goldberg [1926] 1 DLR 509 (Ont. C.A.); and Re Brunswick Chrysler Plymouth Ltd v DaimlerChrysler Canada Ltd (2005), 11 CBR (5th) 10 (N.B.Q.B.). And see Canada (Attorney General) v Reliance Insurance Co., [2008] OJ No 795 (S.C.J.) where the Court held that the analogous section of the WURA preserves contractual set-off rights. For commentary, see Houlden and Morawetz (n 19 above) F§109(1) and Palmer (n 9 above) at 264.

59  Re Air Canada (2003), 45 CBR (4th) 13 (Ont. S.C.J. [Commercial List]) (‘Air Canada’) para 14.

60  Houlden and Morawetz (n 19 above) F§237 (1).

61  The limitation relating to fraudulent preferences, which is provided in s 97(3) of the BIA, is a means of carrying into effect the principle of the BIA that all ordinary creditors shall rank equally: Hudson v Benallack (1975), 21 CBR (N.S.) 111 at 117 (S.C.C.), as referenced in Houlden and Morawetz (n 19 above) F§237 (1).

62  The term ‘related person’ is defined in 4(2) of the BIA, but generally refers to family members and corporations under common control.

63  The term ‘initial bankruptcy event’ is defined in 2(1) and s 101.1 of the BIA.

64  In the event that a debtor makes a voluntary assignment in bankruptcy.

65  In the event that one or more of a debtor’s unsecured creditors commences bankruptcy proceedings by filing a petition for a receiving order with the court and the debtor is declared bankrupt.

66  In the event that a debtor attempts to reorganize under the BIA by filing a notice of intention to make a proposal or by filing an actual proposal and the proposal is rejected by creditors or by the court, at which time the debtor is deemed bankrupt as of the date the notice of intention to make a proposal or proposal was filed.

67  D.W. McIntosh Ltd (Trustee of) v Royal Bank of Canada [1940] OJ No 105 (Ont. H.C.J.).

68  Re T.C. Marines Ltd (1973), 18 CBR (N.S.) (Ont. H.C.J), as referenced in Houlden and Morawetz (n 19 above) F§91(c). Also see Re Sutcliffe & Sons Ltd, ex p Royal Bank (1933), 14 CBR 266 (Ont. C.A.) (‘Sutcliffe’); and Ross v Royal Bank of Canada (1966), 8 CBR (N.S) 303 (Ont. H.C.J.) (‘Ross’).

69  Palmer (n 3 above) 196–7.

70  British Columbia, Fraudulent Preference Act, R.S.B.C. 1996, c 164; Alberta, Fraudulent Preferences Act, R.S.A. 2000, c F-24; Saskatchewan, Fraudulent Preferences Act, R.S.S. 1978, c F-21; Manitoba, Fraudulent Conveyances Act, C.C.S.M. c F160; Ontario, Assignments and Preferences Act, R.S.O. 1990, c A.33; Newfoundland, Fraudulent Conveyances Act, R.S.N.L. c F-24; New Brunswick, Assignments and Preferences Act, R.S.N.B. 2011, c 115; Nova Scotia, Assignments and Preferences Act, R.S.N.S. 1989, c 25.

71  A receiver may be appointed privately by a secured creditor pursuant to the terms of a security agreement or by the court under the rules of civil procedure of the province where the debtor’s business is based.

72  An interim receiver is appointed by the court. The court’s authority to appoint an interim receiver arises under the BIA, which is effective across Canada.

73  For cases concerning contractual set-off see Ching v Jeffrey (1885), 12 OAR 432 (C.A.); Toronto-Dominion Bank v Block Bros. Contractors Ltd (1980), 118 DLR (3rd) 311 (Alta Q.B.). For equitable set-off, see Re Associated Investors of Canada Ltd (1989), 62 DLR (4th) 269.

74  Palmer (n 3 above) 160.

75  Palmer (n 3 above) 160.

76  Palmer (n 3 above) 160. This destruction of mutuality is demonstrated in the decision United Steel Corporation Ltd v Turnbull Elevator of Canada Ltd (1973) 34 DLR (3rd) 492 (Ont. C.A.). Also see Tuckerr (n 7 above).

77  An insolvent debtor of any size may institute reorganization proceedings called a ‘proposal’ under the BIA, but this process is used primarily for smaller debtors.

78  As referenced in n 53 above, these entities are subject to the WURA. The WURA contains a few provisions which contemplate the possibility of a restructuring, but because of the inherent difficulties of a restructuring of a financial institution in a public court-supervised process, these provisions are rarely, if ever, used.

79  Air Canada (n 59 above); Blue Range (n 21 above); Cam-Net (n 21 above); Canadian Airlines (n 8 above); Algoma (n 21 above); Provident Bank (n 21 above).

80  In Husky (n 41 above), a claim for contractual set-off was denied based on the Court’s interpretation of the contract. The Court concluded that the set-off right had not been triggered in the circumstances. In analysing whether contractual set-off applied in the circumstances, the Alberta Court of Queen’s Bench implicitly accepted that the set-off rights preserved by the CCAA include contractual set-off.

81  Arrangement relatif à Métaux Kitco inc., 2017 QCCA 268 at para 20.

82  See, for example, Air Canada (n 59 above); Tucker v Aero Inventory (UK) Limited, [2009] OJ 4797 (S.C.J.), leave to appeal and leave to vary the leave to appeal order denied 2015 BCCA 426; Re North American Tungsten Corp., 2015 BCSC 1382, leave to appeal denied 2015 BCCA 390; Re Quintette Coal (1990), 51 BCLR (2d) 105.

83  Tungsten (n 82 above) paras 32–3.

84  Grant, Tickle, and Williams, ‘Is That My Receivable?’, Ann Rev Insolv (2016) 8.

85  See s 84.2 of the BIA and the Eligible Financial Contract General Rules under the BIA, and ss 11.3, 32, and 34 of the CCAA and the Eligible Financial Contract Regulations under the CCAA.

86  Payment Clearing and Settlement Act, S.C. 1996, c 6, Sch., s 13.

87  Club Resorts Ltd v Van Breda, 2012 SCC 17 (‘Van Breda’).

88  Van Breda (n86 above).

89  Z.I. Pompey Industrie v ECU-Line N.V., [2003] 1 S.C.R. 450.

90  See comments in Lion Creek Properties Ltd, LLP v Sorobey, 2015 ABQB 382; and discussion of estoppel and res judicata applying to set-off claims in Zaidenberg v Hamouth, 2005 BCCA 356 (‘Zaidenberg’).

91  Castel and Walker, Canadian Conflict of Laws, 6th edn (LexisNexis 2005), Ch. 6, para 6.3.

92  Castel and Walker (n 90 above).

93  See, for example, Canada (Attorney General) v Reliance Insurance Co., [2008] OJ 795 (SCJ), in which Pepall J of the Ontario Superior Court of Justice rejected an unsworn letter on Pennsylvania law, holding that it did not qualify as proof of foreign law, and instead interpreted set-off clauses in reinsurance contracts in accordance with Ontario law.

94  Narrow defences to a recognition and enforcement action include the foreign court lacking jurisdiction over the action, fraud, breach of public policy, or breach of the rules of natural justice, or the existence of new facts potentially material to the outcome of the foreign proceedings that were not known or could not be raised in the prior foreign proceedings.

95  Chevron Corp. v Yaiguaje, 2015 SCC 42.

96  See discussion of the case law in Zaidenberg (n 89 above).

97  S.C. 1997, c12, s 118; S.C. 1997, c 12, s 125.

98  BIA, Part XIII, ss 267–84; CCAA, Part IV, ss 44–61.

99  See Sarra, ‘Northern Lights: Canada’s Version of the UNCITRAL Model Law on Cross-border Insolvency’ 16 Int Insolv Rev (2007), 19–61; Grieve, ‘The New Canadian Cross-border Insolvency Regime: Reflections on the First Year’, 9 Ann Rev Insolv (2010).

100  See commentary in Houlden and Morawetz (n 19 above) F237, citing Re Bank of Credit and Commerce International S.A. (No. 10) [1997], 2 WLR 172 (Ch. D.).

101  See n 82 above.