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7.03 At the conclusion of each phase of the Campaign, and having retired all invoices issued by the Consultant in respect of that phase of the Campaign in accordance with Paragraph 7.02, the Client shall be entitled to appropriate to its own use, absolutely, all funds then remaining in the Bank Account opened for that phase of the Campaign.

3 In early August 1998 the Respondent sued the bankrupt in Calgary, Q.B. 9801-09570. On August 6, 1998 it got a prejudgment attachment order which did two things. First, it garnisheed the Defendant's banker. That is for the bank account set up in accordance with the contract. Second, it directed that all money collected by the Plaintiff would be deposited in a different account with a different financial institution and then paid into Court. That obviously is only for money not already deposited in the bank account being garnisheed.

4 The banker's reply to the garnishee summons was that the bankrupt was indebted to the bank so the account was being closed. The garnishee process did not catch any money.

5 The attachment order was then varied to provide this:

2. Counsel for the Plaintiff, Bennett Jones Verchere, will deposit all cash, cheques and other instruments of payment made out to the National Foundation For Hepatitis C, or instruments drawn in a similar fashion, that were received by the Plaintiff as a result of the Plaintiffs fund raising efforts on behalf of the Defendants, into Bennett Jones Verchere's trust account for the National Foundation for Hepatitis C, without further endorsement.

3. Bennett Jones Verchere shall hold all of the cash, cheques and other instruments of payment deposited in trust for the National Foundation for Hepatitis C in trust until the instrument have cleared following which it shall pay the proceeds of those deposits into Courts pending final determination of this matter or further Order of this Court. The funds shall not be used for any other purpose.

6 A substantial amount of money is now held by the Respondent's law firm pursuant to the order.

7 On October 22, 1988 the Respondent got a summary judgment against the bankrupt, in the Calgary lawsuit. The formal judgment does not indicate the amount that judgment is for. The following day the bankrupt assigned itself into bankruptcy.

8 As I understand it, the law firm still holds the money in trust. As I understand it the Trustee and the law firm agreed that the law firm need not pay the money into Court.

Issues

One

9 Mr. Cranston submits that the law of set-off applies in bankruptcies. No one can dispute that as a matter of law given the plain language of s. 97(3) B.I.A. It says:

(3) The law of set-off applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of

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debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the ease may be, except in so far as any claim for set-off is affected by the provisions of the Act respecting frauds or fraudulent preferences.

10 Here the attachment order is unusual, or at least different than the usual kind of attachment order, because it attaches what the Respondent holds that belongs to the bankrupt. In other words, the order is also operative against the Respondent.

11 Section 97(3) B.I.A. preserves legal set-off and equitable set-off where two persons are both debtors and creditors of each other: Workers' Compensation Board v. Husky Oil Operations Ltd., [1995] 3 S,C,R. 453, The law on these two defences, because that is what they are, is set out in Aboussafy v. Abacus Cities Ltd. (1981) 29 A.R. 607 (C.A.), applied in Royal Bank of Canada v. Brattberg, (1987) 79 A.R. 166, (C.A.) leave to appeal refused (1988) 82 A.R. 392, and in Telford v. Holt, [1987] 2 S.C.R. 193.

12 The attachment order cannot give the Respondent a right of set-off, If the bankruptcy had not intervened the law firm would have paid the money into Court and it would have then been dealt with in accordance with the Civil Enforcement Act. An attachment order does not make the attaching creditor a debtor of his debtor even where, as here, the attachment order attaches money in the hands of the attaching creditor.

13 The Civil Enforcement Act does not, and probably cannot, make the attaching creditor a debtor of his debtor to make the law of set-off apply, at least in situations where the debtor goes into bankruptcy. Section 70(1) B,I.A. cannot be trumped by provincial legislation. Section 70(1) says:

70(1) Every receiving order and every assignment made in pursuance of this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, judgments operating as hypothecs, executions or other process against the property of a bankrupt, except those that have been completely executed by payment of the creditor or his agent, and except the rights of a secured creditor.

14 Money caught by an attachment order goes to the trustee of the bankrupt debtor "except those that have been completely executed by payment to the creditor or his agent": The Canadian Credit Men's Trust Association Limited v. Beaver Trucking Limited, [1959] S.C.R. 311.

15 It is not suggested that there has been a "complete execution by payment" to the Respondent because its law firm has the money. That position would be untenable, But for the bankruptcy the law firm would have paid the money into Court. The law firm did not receive the money as payment to the Respondent on its debt claim.

16 In addition to s. 70(1), there is the firm law that provincial legislation cannot be used in a bankruptcy to let an unsecured creditor jump the queue created by ss. 136 - 147 B.I.A. That law is discussed in Workers' Compensation Board,

17 There is a different basis for a claim of set-off, being legal set-off or equitable set-off as discussed in Aboussafy and Telford.

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18 The Respondent was collecting money from donors which the donors were giving to the bankrupt as donee. The money collected is specific amounts and once collected by the Respondent belongs to the bankrupt. The contract says that the Respondent is to:

1.00(2) Manage the marketing, collection, accounting for and deposit of all funds raised on behalf of the Client, all in accordance with the terms of this Agreement;

(emphasis mine)

19 Without more, the Respondent would be able to deduct its fees from the money collected and then give the bankrupt the net amount. It is not necessary to debate the distinction between legal set-off and equitable set-off given the facts before me. Abacus Cities Ltd. says that legal set-off applies to "liquidated claims, although those claims may be unrelated": p. 618. The money collected by the Respondent on behalf of the bankrupt would certainly be a liquidated claim by the bankrupt if the Respondent did not pay it to the bankrupt as required by the contract, that is, pay it into the bankrupt's bank account. The liability of the bankrupt to the Respondent for its fees and disbursements would also be a liquidated claim in the hands of the Respondent.

20 An apt description of a "liquidated claim" can be found in the first definition of 'liquidated demand" in Rule 5(1)(i). I realize that the Rules are irrelevant to the issue before me but the first definition in the Rule matches nicely what a "liquidated claim" means at common law. The definition in the Rule is not a coincidence. It is matched to the thrust of Rules 142(1)(a) and 148(1).

21 The Respondent's claim probably qualifies as an equitable set-off as discussed in Telford even if legal set-off was not available.

22 In Re/Max Metro-City Realty v. Baker (Trustee of), 16 C.B.R. (3d) 308 (Ont. Gen. Div.), cited by Mr. Cranston, the court says, p. 312:

With respect to Campbell L.J.S.C. I do not agree that the facts as outlined by him in Coopers & Lybrand Ltd. v. Lumberland Building Materials Ltd. justified either statutory or equitable set-off where the effects of the set-off would give to the creditor a preference over other creditors in the bankruptcy.

(emphasis mine)

That is plainly wrong in principle. The consequences of a result does not dictate what the result should be. The facts and the law dictate the result.

23 It is correct that if a person who is both a creditor and a debtor of a bankrupt has a right of set-off he may be in a better position in the bankruptcy than he would be absent set-off. But that is a consequence of set-off. Parliament has explicitly recognized the right of set-off in s. 97(3). Re/Max Metro-City Realty Ltd., sterilizes s. 97(3) except in a case where all creditors will be paid in full regardless. That is not sound law.

24 Workers' Compensation Board recognizes that a person who has a right of set-off against a bankrupt does get a leg up over other unsecured creditors, paras. 57-61. After discussing the opposing legal debates about whether this should be so the Court says, para. 60:

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While this academic debate is undoubtedly interesting, the fact remains that our Parliament has recognized in s. 97(3) of the Bankruptcy Act that the "law of set-off applies to all claims made against the estate of the bankrupt". As a result, in the bankruptcy context, the law of set-off allows a debtor of a bankrupt who is also a creditor of the bankrupt to refrain from paying the full debt owing to the estate, since it may be that the estate will only fulfil a portion, if that, of the bankrupt's debt. Consequently, in this limited sense the party claiming set-off has Parliament's blessing for the "reordering" of his priority in bankruptcy by virtue of the operation of the law of set-off.

25 A person who has a right of set-off can contract away that right: Abacus Cities Ltd., para. 30; Mayfair Termis Courts Ltd. v. Nautilus Fitness & Racquet Centre Inc., 48 C.P.C. (3d) 249 (Ont. Gen. Div.); Metro-Can Construction (H.S.) Ltd. v. Noel Developments Ltd., 26 B.C.L.R. (3d) 26 (C.A.); Re Northland Bank, 25 C.B.R. (3d) 166 (Man. Q.B.).

26 In my view, it matters not whether the set-off be legal set-off or equitable set-off. Set-off is "something in the way of a defence; where claim and cross-claim are merged and the lesser is thereby extinguished."; Abacus Cities Ltd., para. 36. The right that a person has to diminish the claim against him can be replaced by the terms of the contract: First City Development Corp. Ltd. v. Stevenson Construction Co. Ltd., 48 B.C.L.R. 242 (C.A.). There is no principled reason why a distinction should be made between legal set-off and equitable set-off when it comes to the parties contracting away that right. That merely leaves the party who cannot raise a defence of legal setoff free to pursue his claim as a separate claim.

27 Although the contract does not expressly say that the Respondent cannot have a right of set-off paragraph 5,00 necessarily prevents set-off. Again, it says:

5.00 All monies (the "Gross Receipts") collected by the Consultant pursuant to this Agreement will be directly deposited into a series of separate chequing accounts to be opened in the name of the Client in a Canadian chartered bank selected jointly by the Consultant and the Client. There shall be one separate account opened for each phase of the Campaign, namely the Acquisition Phase, the First Retention Phase and the Second Retention Phase. The said accounts are hereinafter referred to collectively as the "Bank Accounts".

Every last cent collected by the Respondent has to be deposited to the bankrupt's credit. Added to that is the express agreement that the respondent would weekly invoice the bankrupt for its services and the bankrupt is to pay the Respondent twice a month: para. 7.02. Those two paragraphs negate the Respondent's right to set-off legal or equitable.

28 The attachment order cannot, and does not, cancel the Respondent's giving up its right to set-off. It requires the Respondent to pay all that it collects to its law firm which is then required to pay all of it into Court. That which is required to be done is deemed to be done.

29 I find that the Respondent does not have a right of set-off, having contracted it away.

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Two

30 Mr. Cranston's alternative argument is that there is a trust in favour of the Respondent,

31 Generally, a trustee has only the same rights that the bankrupt has. There are situations where a trustee gets a leg up over a creditor of a bankrupt (a stronger right than the bankrupt has against the creditor), but those are situations where the &LA. or other operative legislation, such as the Personal Property Security Act, give a trustee a better position than the bankrupt has as against a creditor,

32 Section 67(1)(a) B.I.A. expressly exempts from distribution among a bankrupt's creditors property the bankrupt holds in trust for any other person.

33 Here, the facts are simplified for two reasons. First, the contest is solely between the bankrupt and the Respondent, This is not a three party dispute. Second, the matter falls to be determined by the contract,

34 It is not necessary to get into a general analysis of the circumstances in which an implied trust or a constructive trust can arise.

35 The existence of a debtor creditor relationship between two people does not as a matter of legal principle preclude a trust if the test for a trust is otherwise met: Barclays Bank Ltd. v. Quistclose Investments Ltd., (1970) A.C. 567 (H,L.). Lord Wilberforce, giving the judgment of the Court, says pp, 581-82:

The second, and main argument for the appellant was of a more sophisticated character. The transaction, it was said, between the respondents and Rolls Razor Ltd., was one of loan, giving rise to a legal action of debt. This necessarily excluded the implication of any trust, enforceable in equity, in the respondents' favour: a transaction may attract one action or the other, it could not admit of both.

My Lords, I must say that I find this argument unattractive. Let us see what it involves, It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower's creditors for whom he has not the slightest desire to provide.

I should be surprised if an argument of this kind - so conceptualist in character - had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers, 8

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Morr. 243 where both Lindley L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose camiot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.

36 I recognize that in the application before me the Respondent was not making a loan to the bankrupt. However, that does not detract from the basic principle that the parties are free to contract as they like. It is not offensive in law for a person to create a trust of his own property with a creditor being the beneficiary of the trust. (Preferential or fraudulent transactions by a bankrupt do not play a part in this application.)

37 The contract is sufficient to bring the money collected by the Respondent subject to a trust for the Respondent's charges. The basic test discussed in Principal Savings & Trust Co. (Liquidator of) v. British Columbia, 20 Alta. L.R. (3d) 388 (Q.B.) para. 34, is met. See also Re McKay Simmons Schwartz Realty (1984) Ltd. (1992) 128 A.R. 11 (Q.B.). The property subject to the trust is specifically identified, paras. 5.00, 7.02 and 7.03. It is the money collected by the Respondent. Second, the beneficiary of the trust is clearly identified. It is the Respondent. Third, the object of the trust is certain. It is the payment of the Respondent's charges. Fourth, the bankrupt is not free to use the money collected for itself or its general body of creditors except for any money left after the Respondent has been paid: para. 7.03. That fits within Barclays Bank Ltd.

38 What the Trustee wants is for all the money to go to the estate for the general body of creditors notwithstanding the contract. The Trustee cannot occupy a better position than the bankrupt occupies under the contract.

39 I find that the money collected by the Respondent is subject to a trust in its favour for its charges.

Three

40 I do not propose to deal with the amount of the Respondent's claim. The summary judgment is silent as to amount. If the Trustee and Mr. Cranston cannot agree on the amount they must go back to he who gave the judgment.

Decision

41 I find:

The Respondent is not entitled to a defence of set-off, legal or equitable;

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2. The money collected by the Respondent is subject to a trust in favour of the Respondent as beneficiary for its proper charges.

3. The Respondent will have costs against the estate which I set at $750.00.

MASTER FUNDUK

cp/s/dr1c/DRS/cilgxc

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TAB 6

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Indexed as: Quintette Coal Ltd. v. Nippon Steel Corp. (B.C.C.A.)

IN THE MATTER of The Companies' Creditors Act R.S.C. 1985, c. C -36

AND IN THE MATTER of The Company Act, R.S.B.C. 1979, c. 59 AND IN THE MATTER of Quintette Coal Limited

Between Quintette Coal Limited, Petitioner, (Respondent), and

Nippon Steel Corporation, NKK Corporation, Kawasaki Steel Corporation, Sumitomo Metal Industries, Ltd., Mitsubishi

Chemical Industries Ltd., Nakayama Steel Works, Ltd., Godo Steel, Ltd., Mitsui Mining Co. Ltd., Respondents, (Appellant)

[1990] B.C.J. No. 2497

51 B.C.L.R. (2d) 105

2 C.B.R. (3d) 303

24 A.C.W.S. (3d) 172

Vancouver Registry: CA12636

British Columbia Court of Appeal

Legg, Wood and Gibbs ILA.

Heard: October 30, 1990 Judgment: November 16, 1990

Corporations -- Company creditors arrangement -- Creditors rights -- Right to set-off Prohibi-tion.

An arbitrator set a schedule of prices to be paid for coal deliveries made by the respondent Q. Ltd. to the appellant for a four year period commencing April 1, 1987. The appellant had paid the re-spondent higher prices than those eventually set in the arbitration, and as a result, the respondent owed $45,745,220.22 in overpayment. The respondent continued to supply coal to the appellant. The appellant made several demands for the debt owing in overpayment. When the respondent failed to pay, the appellant withheld funds otherwise payable as the purchase price of the ongoing

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coal deliveries, The respondent soon became a debtor company and obtained an order pursuant to section 11 of the Companies Creditors Arrangement Act, prohibiting any creditor from exercising a right of set-off against any debts owed to it. The order specifically cited the appellant. The appel-lant's application to set aside the order was dismissed and it appealed.

HELD: Appeal dismissed. The purpose of section 11 of the Companies Creditors Arrangement Act is to confer on the court the power to permit a company to continue as a going concern while at the same time attempting a reorganization.

STATUTES, REGULATIONS AND RULES CITED:

Bankruptcy Act, R.S.C. 1970, c. B-3, s. 49. Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, s. 2, 11, 11(b), 11 (c), Company Act, R.S,B,C. 1979, c. 59. Interpretation Act, R.S.C. 1985, c. 1-21, s. 12.

Counsel for the Appellant: J.D. McAlpine, Q.C., P.A. Hildebrand and P.R. Bennett. Counsel for the Respondent: Jack Giles, Q.C. and W.D.S. Wade.

GIBBS J.A. (for the Court, dismissing the appeal):-- This is an appeal from a judgment of Thackray, J. (reported at (1990) 47 B.C.L.R. (2d) 191) dismissing an application by the appellant Japanese companies for an order setting aside part of an order made by him on June 13, 1990 under the Companies' Creditors Arrangement Act, R.S.C. 1985, Chap. C-36 (the "C.C.A.A."). The prima-ry ground of appeal is stated in the factum of the Japanese companies to be that:

" The Learned Chambers Judge erred in holding that the power to stay any 'suit, action or other proceeding ... against the company', in s. 11 of the CCAA con-ferred jurisdiction upon the Court to restrain the JSI from exercising their right to set-off the Overpayments in paying for future coal deliveries."

The "right to set-off the Overpayments in paying for future coal deliveries" as asserted by the Japanese companies arose upon the delivery of an arbitral award made under the International Commercial Arbitration Act, S.B,C. 1986, Chap. 14 on May 28, 1990. The background to the arbi-tral award and the details of the award were discussed at some length in the judgment of Esson, C.J.S.C. in Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 47 B.C.L.R. (2d) 201, and in the judgments of a division of this Court on the appeal from Esson, C.J.S.C. handed down on October 24, 1990 under Vancouver Registry No. CA012743, It is sufficient for purposes of this appeal to note that the award set a schedule of prices to be paid for coal deliveries made by Quintette for a four year period commencing April 1, 1987, The Japanese companies had paid higher prices for coal deliveries during the arbitration process than those set in the award. As a consequence, upon delivery of the award, the respondent Quintette owed the Japanese companies $45,745,220.22 rep-resenting the total amount of the overpayment.

Quintette continued to make coal deliveries, as it was required to do by contract, and also as it had to do if it wished to survive as a going concern, The Japanese companies collectively are the

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sole customer for Quintette coal. They are obliged by contract to pay for coal delivered at the rates set by the arbitral award. However, not surprisingly, they also want the overpayment debt to be paid. On May 31, 1990 they demanded payment. Quintette did not pay. Thereupon the Japanese companies commenced to retire the debt by withholding funds otherwise payable as the purchase price of the ongoing coal deliveries. By June 13, 1990, the date of the C.C.A.A. order, the debt had been reduced by the withholding process to $36,180,876.22.

At some time prior to June 12, 1990, Quintette became a debtor company as defined in s. 2 of the C.C.A.A. On that day Quintette applied ex parte, by way of a petition, for various C.C.A.A. orders so as to facilitate the making of a formal plan of compromise or arrangement with its creditors, The then total of secured and unsecured debt, according to the petition, was of the order of $772 million. On the following day Thackray, J. made a comprehensive order which includes this paragraph which is at the root of this appeal:

" AND THIS COURT FURTHER ORDERS that no creditor of the Petitioner may exercise any right of set-off against any debts owed to the Petitioner includ-ing, without limitation, monies owed in respect of the sale of the Petitioner's coal to the Japanese Coal Purchasers or any member thereof and monies on deposit with any bank or other accounts of the Petitioner;"

On June 14, 1990, the Japanese companies applied for an order setting aside the prohibition in this paragraph so that they could continue the pattern of withholding funds payable for current coal deliveries. Thackray, J. heard the application on June 15, 1990 and dismissed it with written reasons on June 18, 1990, reported, as noted above, at (1990) 47 B.C.L.R. (2d) 191. Now, on this appeal, the Japanese companies request the following relief:

"The JSI respectfully request an Order setting aside:

(a) The Order of Mr. Justice Thackray made June 18, 1990, dismissing the JSI application made June 15, 1990; and

(b) That portion on the Ex Parte Order precluding the JSI from exercising their right to set-off in respect to the Overpayments."

The principal issue on the appeal is whether the prohibition in the impugned paragraph is or is not within the powers vested in the court by s. 11 of the C.C.A.A.:

11. Notwithstanding anything in the Bankruptcy Act or the Winding-up Act, • whenever an application has been made under this Act in respect of any compa-ny, the court, on the application of any person interested in the matter, may, on notice to any other person or without notice as it may see fit,

(a) make an order staying, until such time as the court may prescribe or until any further order, all proceedings taken or that might be taken in respect of the company under the Bankruptcy Act or the Winding-up Act or either of them;

(b) restrain further proceedings in any action, suit or proceeding against the company on such terms as the court sees fit; and

Page 4

(c) make an order that no suit, action or other proceeding shall be proceeded with or commenced against the company except with the leave of the court and subject to such terms as the court imposes."

However, the issue is not to be resolved by construing the language of s. 11 in isolation, Maxwell on Interpretation of Statues, 12th Ed., 1969, states the basic rule at p. 47;

" It was resolved in the Case of Lincoln College that the good expositor of an Act of Parliament should 'make construction on all the parts together, and not of one part only by itself.' Every clause of a statute is to 'be construed with reference to the context and other clauses of the Act, so as, as far as possible, to make a con-sistent enactment of the whole statute."

And at page 58 reference is made to "an elementary rule" of construction:

" Passing from the external aspects of the statute to its contents, it is an elemen-tary rule that construction is to be made of all the parts together, and not of one part only by itself"

The starting point in the construction exercise is an understanding of the historical setting of the C.C.A.A. to the end that s. 11 is read in such a manner as to achieve the object of parliament. Max-well speaks of the historical setting as an aid to construction at pp. 47 and 48:

"'The Court,' said Sir George Jessel M.R., 'is not to be obvious of the history of law and legislation. Although the Court is not at liberty to construe an Act of Parliament by the motives which influenced the Legislature, yet when the history of law and legislation tells the Court, and prior judgments tell this present Court, what the object Of the Legislature was, the Court is to see whether the terms of the section are such as fairly to carry out that object and no other, and to read the section with a view to finding out what it means, and not with a view to extend-ing it to something that was not intended.' In the interpretation of statutes, the in-terpreter may call to his aid all those external or historical facts which are neces-sary for comprehension of the subject-matter, and may also consider whether a statute was intended to alter the law or to leave it exactly where it stood before. But although 'we can have in mind the circumstances when the Act was passed and the mischief which then existed so far as these are common knowledge...we can only use these matters as an aid to the construction of the words which Par-liament has used. We cannot encroach on its legislative function by reading in some limitation which we may think was probably intended but which cannot be inferred from the words of the Act.'

In Chef Ready Foods Ltd. v. Hongkong Bank of Canada, Vancouver Registry No. CA12944, judgment handed down on October 29, 1990, another division of this Court reviewed the historic background of the C.C.A.A. saying, at pp. 10 and 11;

"... The C.C.A.A. was enacted by Parliament in 1933 when the nation and the world were in the grip of an economic depression. When a company became in-solvent liquidation followed because that was the consequence of the only insol-

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vency legislation which then existed - the Bankruptcy Act and the Winding-up Act. Almost inevitably liquidation destroyed the shareholders' investment, yield-ed little by way of recovery to the creditors, and exacerbated the social evil of devastating levels of unemployment, The government of the day sought, through the C.C.A.A. to create a regime whereby the principals of the company and the creditors could be brought together under the supervision of the court to attempt a reorganization or compromise or arrangement under which the company could continue in business,"

The court then quoted excerpts from an article by Stanley E. Edwards at p. 587 of 1947, Vol. 25 of the Canadian. Bar Review entitled "Reorganizations Under the Companies' Creditors Arrange-ment Act" which, it said, "explain very well the historic and continuing purposes of the Act":

" It is important in applying the C.C.A.A. to keep in mind its purpose and several fundamental principles which may serve to accomplish that purpose. Its object, as one Ontario judge has stated in a number of cases, is to keep a company going despite insolvency. Hon. C.H. Callan when he introduced the bill into the House of Commons indicated that it was designed to permit a corporation, through re-organization, to continue its business, and thereby to prevent its organization be-ing disrupted and its goodwill lost. It may be that the main value of the assets of a company is derived from their being fitted together into one system and that in-dividually they are worth little The trade connections associated with the system and held by the management may also be valuable. In the case of a large compa-ny it is probable that no buyer can be found who would be able and willing to buy the enterprise as a whole and pay its going concern value. The alternative to reorganization then is often a sale of the property piecemeal for an amount which would yield little satisfaction to the creditors and none at all to the shareholders." (p. 592)

" There are a number of conditions and tendencies in this country which under-line the importance of this statute. There has been over the last few years a rapid and continuous growth of industry, primarily manufacturing. The tendency here, as in other expanding private enterprise countries, is for the average size of cor-porations to increase faster than the number of them, and for much of the new wealth to be concentrated in the hands of existing companies or their successors. The results of permitting dissolutions of companies without giving the parties an adequate opportunity to reorganize them would therefore likely be more serious in the future than they have been in the past.

Because of the country's relatively small population, however, Canadian in-dustry is and will probably continue to be very much dependent on world mar-kets and consequently vulnerable to world depressions. If there should be such a depression it will become particularly important that an adequate reorganization procedure should be in existence, so that the Canadian economy will not be per-manently injured by discontinuance of its industries, so that whatever going con-cern value the insolvent companies have will not be lost through dismemberment

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and sale of their assets, so that their employees will not be thrown out of work, and so that large numbers of investors will not be deprived of their claims and their opportunity to share in the fruits of the future activities of the corporations. While we hope that this dismal prospect will not materialize, it is nevertheless a possibility which must be recognized. But whether it does or not, the growing importance of large companies in Canada will make it important that adequate provision be made for reorganization of insolvent corporations," (p. 590)

It is evident from the above that, providing no violence is done to the words used by parliament, s. 11 is to be construed so as to confer on the court the power to pennit Quintette to continue as a going concern while the attempt at compromise or arrangement or reorganization is being actively pursued. Here Thackray, J, gave Quintette six months from June 13, 1990, or such longer period as may be ordered, to reach an accommodation with its creditors. As the court pointed out at p. 7 of Chef Ready:

"... if the attempt at compromise or arrangement is to have any prospect of suc-cess there must be a means of holding the creditors at bay, hence the powers vested in the court under s. 11."

Narrowing the focus of the enquiry somewhat, it is apparent that, with the possible exception of s. 11, the operative provisions of the C.C.A.A. apply precisely to the fortunes of Quintette, and to the circumstances which obtain as between Quintette and the Japanese companies. Quintette is a debtor company; the Japanese companies, collectively, are a creditor. Quintette as debtor is proposing a compromise or arrangement with its creditors, including the Japanese companies. The court may sanction and make binding on all creditors, including the Japanese companies, a compromise or ar-rangement agreed upon by a "majority in numbers representing three-fourths in value of the credi-tors, or class of creditors, as the case may be..."(s. 6). With respect to value, the $36 million June 13, 1990 debt owed to the Japanese companies represents approximately 4 1/2% of the total of se-cured and unsecured debt. It would be anomalous indeed if, by denying or restricting cash flow, a 4 1/2% creditor could frustrate the compromise or arrangement because s, 11 did not apply, whereas ifs. 11 did apply so that a stay could be ordered a creditor or creditors of up to 254 could ultimately be forced to defer to the compromise or arrangement agreed upon by the 754. If the language of s. 11 so confines the court that that result flows the anomalous consequence must be accepted. On the other hand, if there is a reasonable construction which more nearly reflects the intention of the leg-islators, and avoids the anomaly, it is to be preferred.

The other aid to construction which is appropriate here is the view other courts have taken of s, 11. Maxwell at p. 47 (see above) quotes Sir George Jessel, M.R. as saying, inter alia, "when ... prior judgments tell this present Court, what the object of the Legislature was, the Court is to see whether the terms of the section are such as fairly to carry out that object and no other and to read the section with a view to finding out what it means, and not with a view to extending it to something that was not intended."

Considering that the C.C.A.A. was enacted some 57 years ago there are relatively few reported cases interpreting its provisions. That may be a reflection of the general level of prosperity, with some short term reverses, which has been the Canadian experience for the past 50-plus years. In any event, and whatever the reason, the reported cases indicate that the courts have tended to avoid mi-croscopic parsing of the words and phrases of s. 11 in favour of a broader "purposes" perspective

Page 7

thereby reaching conclusions held to further the objectives of parliament. Without so stating they have given full effect to the direction in s. 12 of the Interpretation Act, R.S.C., 1985, Chap, 1-21:

"12. Every enactment is deemed remedial and shall be given such fair, large and lib-eral construction and interpretation as best ensures the attainment of its objects."

The following cases are illustrative of the kind of conduct the courts have found to be within their power to restrain under s. 11: Re Feifer and Frame Manufacturing Corporation (1947), 28 C.B.R. 124 (Que. C.A.); Wynden Canada Inc. v, Gaz Metropolitaine (1982), 44 C.B.R. 285 (Que. S.C.); Noreen Energy Resources v. Oakwood Petroleums (1988), 72 C.B.R. 2 (Alta. Q.B.). The judgments also contain helpful and persuasive observations about the intent and purpose of the Act, as do the following judgments: Meridian Developments Inc, v. Toronto Dominion Bank (1984), 52 C.B.R. 109 (Alta. Q.B.), Re Ursel Investments Ltd. (1990), unreported (Sask. Q.B.) and Northland Proper-ties Limited v. Excelsior Life Insurance Company (1989), 34 B.C.L.R. (2d) 122 (B.C.C.A.), And in his judgment in this case Thackray, J. adopted the approach followed in Meridian and Noreen. There is a perceptive observation about the attitude of the courts at the end of the case comment following the C.B.R. report of Noreen:

"The Noreen decision is one of the strongest examples to date of the willingness of the courts to permit the C.C.A.A. to be used as a practical and effective way of restructuring corporate indebtedness."

By way of brief summary, the subject matter of each of the judgments which has a direct bearing on the scope of s. 11 is as follows: in Feifer and Frame, a notice of eviction by a landlord; in Wynden Canada, cessation of utility services; in Meridian, a letter of credit; in Noreen, a replace-ment of the operator under an oil and gas operating agreement.

To the extent that a general principle can be extracted from the few cases directly on point, and the others in which there is persuasive obiter, it would appear to be that the courts have concluded that under s. 11 there is a discretionary power to restrain judicial or extra judicial conduct against the debtor company the effect of which is, or would be, seriously to impair the ability of the debtor company to continue in business during the compromise or arrangement negotiating period. The power is discretionary and therefore to be exercised judicially. It would be a reasonable expectation that it would be extremely unlikely that the power would be exercised where the result would be to enforce the continued supply of goods and services to the debtor company without payment for current deliveries, whereas it would not be unlikely when the result would be to enforce payment for goods thereafter taken from or services thereafter received from the debtor company, as is the case here. In cases not involving the supply or receipt of goods or services, no doubt judicial exer-cise of the discretion would produce a result appropriate to the circumstances.

The order made by Mr. Justice Thackray was in accord with his understanding of the "overall in-tention of the Act" and consistent with the reported cases. It falls well within the "general principle" distilled from those cases. At p. 199, after considering the submissions of counsel for the Japanese companies, he said:

" 1 must look to the overall intention of the Act, and, as has been put before me by Quintette, what is required within an order to allow Quintette the time to re- organize and make a proposal. Unless there is a sound legal principle for doing

Page 8

so, I must not carve out one portion of the order and give an advantage to one creditor over another. I have not acceded to the arguments of counsel for J.S.I. and consequently I cannot find the legal basis for compromising the effect of the ex parte order."

The one remaining question is whether, to return to an expression used earlier, the order does vi-olence to the words used by parliament. The critical words in s. 11(b) are "restrain further proceed-ings in any action, suit or proceeding against the company"; and in s. 11(c) "make an order that no suit, action or other proceeding shall be proceeded with or commenced against the company". Either subsection might apply dependant upon the view taken of the withholding conduct by the Japanese companies. But whichever applies the question remains the same and that is whether "proceeding" is to be understood as a legal proceeding only. In Meridian Wachowich, J. held that it was not to be so narrowly construed, as did Forsyth, J. in Noreen. As well, there is higher court support for a broad construction which would include extra-judicial conduct within the meaning of "proceeding" in this statute. In Vachon v. Canada Employment and Immigration Commission (1985), 57 C.B.R. 113 (S.C.C.), Beetz, J,, for the court, held that withholding payment of unemployment insurance benefits, even though authorized by statute, was contrary to the provisions of s. 49 of the Bankrupt-cy Act, R.S.C., 1970, Chap. B-3. At p. 121 he said:

"The Bankruptcy Act governs bankruptcy in all its aspects. It is therefore under-standable that the legislator wished to suspend all proceedings. administrative or judicial, so that all the objectives of the Act would be attained."

(Emphasis added.)

With the exception of the first sentence, what Beetz, J. said in this paragraph reflects precisely the attitude the courts have taken in respect of the C.C.A.A. it must be recognized that s. 49 of the Bankruptcy Act is worded differently and includes the word "remedy". However, it should also be noted that the paragraph quoted above appears at the end of a section of the judgment entitled "General Nature of Stay of Proceedings Imposed by s. 49(1) of the Bankruptcy Act" in which no fine distinction is drawn between "remedy" and "proceeding". The emphasis is on the intention of parliament and the objectives of the statute. And earlier on p. 21 Beetz, J., again in language that applies equally to the C.C.A.A, I said:

in my opinion the courts were right to give, expressly or by implication, a broad meaning to the stay of proceedings imposed by s. 49(1) of the Bankruptcy Act.

There is no rational ground for treating withholding by an arm of government, an "administra-tive" proceeding, differently than withholding by a private person. Accordingly, the withholding by the Japanese companies is as much a proceeding which can be restrained under s. 11 of the C.C.A.A. as was the withholding by the unemployment insurance authorities which was prohibited, except with leave, under s. 49 of the Bankruptcy Act.

The word "withholding" has been used throughout these reasons so as to distinguish from the concept of "set-off'. The Japanese companies put their case forward on appeal primarily on the ground that what they were engaged in was set- off and that set-off was not a proceeding. With re-spect, the argument failed to recognize the difference between setoff in the colloquial sense and

Page 9

set-off in teens of the legal lexicon. Set-off in law is only available as a defence. it has been de-scribed as "a shield and not a sword". In respect of the payments due for ongoing coal deliveries Quintette has not sued for the amounts withheld. The Japanese companies have not therefore been put into a position where they could raise the set-off shield. On the contrary, they have had, and wish to continue to have, recourse to set-off, in the colloquial sense, as a sword to achieve a species of extra judicial execution. The sword is being, and is intended to be, wielded "against the compa-ny". As it is a proceeding against the company it is within the power of the court to restrain under s. 11 of the C.C.A.A.

As Thaekray, J. has not been shown to have erred, either in his reasoning or in his disposition of the application before him, he will be upheld on the first ground of the appeal.

The second ground of appeal focuses on the exercise of the discretion vested by s. 11. The Japa-nese companies say that:

" Ifs. 11 does confer jurisdiction on the Court to restrain the JSI's right of set-off; the Learned Chambers Judge erred in all the circumstances of this ease in exer-cising his discretion under s. 11 to dismiss the application of the JSI that they be permitted to exercise their right of set-off."

There is not much substance to this ground. Mr. Justice Thackray was called upon to weigh the equities, or balance the relative degrees of prejudice, which would flow from granting or refusing the application to vary the stay order. On the one hand he had the $36 million debt owing to a single creditor, the Japanese companies; on the other hand he had what the court referred to at p. 13 of Chef Ready as "a broad constituency of investors, creditors and employees". The Quintette constit-uency comprises approximately $3 billion of public and private investment, the other 95.5% in val-ue of the secured and unsecured debt, and 1,500 persons directly employed in the enterprise, plus their dependants. It would not require much reflection on the part of a trial judge to conclude that the equities fell on the side of postponement of steps to be taken to realize the $36 million debt.

There was no error in the exercise of the discretion here.

For all of the foregoing reasons I would uphold the judgment of Mr. Justice Thackray. It follows that I would dismiss the appeal.

GIBBS J.A. LEGG J.A.:-- I agree. WOOD J.A.:-- I agree.

---- End of Request ---- Download Request: Current Document: 1 Time Of Request: Tuesday, June 24, 2014 10:28:01

TAB 7

Indexed as: Blue Range Resource Corp. (Re)

IN THE MATTER OF the Companies' Creditors Arrangement Act, R.S.C. 1985, e. C-36, as amended

AND IN THE MATTER OF a plan of compromise or arrangement of Blue Range Resource Corporation

Between Engage Energy Canada, L.P., appellant (applicant), and

Blue Range Resource Corporation, respondent

[2000] AI N°. 830

2000 ABCA 200

[2000] 11 W.W.R. 117

84 Alta. L.R. (3d) 65

261 A.R. 162

98 A.C.W.S. (3d) 513

Dockets: 99-18395 and 99-18397

Alberta Court of Appeal

McFadyen and Sulatycky JJ.A. and Rawlins J. (ad hoc)

Heard: April 13, 2000. Judgment: filed July 12, 2000.

(21 paras.)

Appeal from the order of LoVecehlo J. dated the 18th day of June, 1999.

Counsel:

L.B. Robinson, Engage Energy Canada, L.P. H.A. Gorman, Duke Energy Marketing Limited Partnership.

Page

Page 2

K.M. Horner, PricewaterhouseCoopers Inc. C.D. Simard.

MEMORANDUM OF JUDGMENT

1 THE COURT:-- This appeal arises from a Queen's Bench order dismissing an application by the appellants Duke Energy Marketing Limited Partnership ("Duke") and Engage Energy Canada L.P. ("Engage"). Duke and Engage sought an order lifting a stay granted under the Companies' Creditor Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA") with respect to all proceedings against the respondents Blue Range Resources Corp. ("Blue Range") and Humble Petroleum Marketing Ltd. ("Humble"). In particular, Duke and Engage sought to set-off anticipated damages they would incur under certain natural gas marketing contracts against payments owed under these contracts for the delivery of natural gas.

2 Leave to appeal was granted by Fruman J.A. on the issue of whether equitable set-off was warranted in this case.

3 We have the benefit of more recent jurisprudence on this issue than was before the chambers judge. It supports the application of equitable set off in the circumstances of this case and therefore we allow the appeal.

FACTS

4 Duke and Humble entered into a long term contract for the supply of natural gas on. June 25, 1996. Engage entered into a similar long term contracts with Blue Range. In accordance with indus-try practice both sets of contracts provided that any gas delivered within a given month would be paid for on the 25th day of the following month,

5 Due to financial difficulties in early 1999 Blue Range and Humble, a wholly owned subsidi- ary of Blue Range, applied, ex parte, to the Court of Queen's Bench for an arrangement order pur-suant to the CCAA. As part of the arrangement Blue Range and Humble requested and obtained a stay of all proceedings against them by order of March 2, 1999. Provisions 3(b) of the order is rele-vant to this appeal and states:

3(b) all Persons having arrangements or agreements, written or oral, with Blue Range for the supply of goods and/or services by or to Blue Range ,„ are hereby restrained from accelerating, terminating, suspending, modifying or cancelling any such agreements, arrangements or supply of goods and services, and are also hereby restrained from exercising any right of distress, recision, set-off or con-solidation of accounts in relation to any indebtedness or obligation in favour of Blue Range without prior written consent of Blue Range or leave of this Honourable Court.

6 The day the order was granted, Duke received a phone call from James Surbey, the senior Vice President of Humble and Blue Range, indicating that deliveries under their agreements would cease prior to the natural termination date of the contracts, October 31, 2008. On March 22, 1999 Mr. Surbey notified Duke, by telephone, that the contract would terminate as of March 31st and this

Page 4

ply coal to Nippon and Nippon set off what it owed for the coal deliveries against the arbitration award. The B.C. Supreme Court found that this was not an appropriate case for set-off, Specifically the trial judge said:

Nor do I accept the proposition that the order forces an overpayment by J.S.I. (Nippon) for future coal deliveries, They are obliged to pay, and Quintette is obliged to accept a price set pursuant to the arbitration award or any variation thereof pursuant to any appeal of that award, The award has created a debt owed by Quintette to J,S,I. and I see that as completely distinguishable from the debts incurred by J.S.I. for future coal deliveries (at 295-296),

10 Following the reasoning in Quintette the chambers judge determined that the anticipated damages, owed to Duke and Engage, for the replacement costs of the natural gas arose after the ob-ligation to pay for the February and March deliveries, He found that the future damages for non-delivery were sufficiently independent that it was not unjust to require Duke and Engage to pay for the natural gas they have already received (para 76).

11 The chambers judge noted that Quintette was decided prior to the enactment of s. 18,1 of the CCAA which provides:

18,1, The law of set-off 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 defend-ant, as the case may be.

This section was added to the CCAA in 1997 and the chambers judge recognized that even if the application of set-off had the result of preferring one creditor over others, parliament, by enacting s. 18.1, made the decision that the general law of set-off is to apply in CCAA proceedings. It is ap-parent that the chambers judge had difficulty with this concept and was clearly of the view that al-lowing set-off was contrary to the purposes of insolvency legislation. He did, however, appear to instruct himself that this consideration should not carry any weight due to the addition of s. 18.1, Specifically he said at paragraph 56:

[56] Parliament has specifically mandated that, notwithstanding the well know purpose of the Act as a whole, namely to share amongst all of the creditors the asset shortfall, the general law of set-off is to apply to debts owed or claimed by the debtor company.

12 While the chambers judge recognized that set-off was available in principle, in the end pol- icy considerations regarding the priority of creditors appear to have influenced his decision. He says at paragraphs 82 and 83:

[82] The anticipated damages arise after the completion of the deliveries, They arise after the stay order. They become an unsecured claim of any other unse-cured creditor of Blue Range and lack the necessary relatedness to the deliveries and the consequent unfairness to take them out of this category.

Page 3

was confirmed by letters dated March 29th. Engage received similar letters dated March 29th, Blue Range and Humble supplied natural gas under the contracts for the months of February and March, 1999 but on March 31, 1999 officially terminated the contracts. Under the contracts both Engage and Duke owe Blue Range and Humble the cost of the gas delivered in February and March, Spe-cifically, the payments for the February deliveries were due March 25th, and payments for the March deliveries were due April 25th. Duke has paid this money into court while Engage has with-held payment pending the outcome of this appeal,

7 Duke and Engage claim they will suffer significant losses as a result of the early termination of the natural gas supply contracts. According to Duke and Engage, and this is not disputed, the contracts were made at a time when the price of natural gas was significantly lower than it was at the time the contracts were terminated. In other words, the cost to the appellants to replace the gas is higher than the cost they were paying under the contracts. As a result, Duke and Engage assert that these unliquidated damages should be set off against the money they owe as a result of the February and March gas deliveries.

CHAMBERS DECISION

8 Counsel and the court appeared to agree that the following principles from the Supreme Court of Canada decision in Telford v. Holt (1987), 41 D,L.R. (4th) 385 at 398 (S.C.C.) apply when deal-ing with equitable set-off:

1. The party relying on a set-off must show some equitable ground for being pro-tected against his adversary's demands;

2. The equitable ground must go to the very root of the plaintiffs claim before a set-off will be allowed;

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;

4. The plaintiffs claim and the cross-claim need not arise out of the same contract; and

5. Unliquidated claims are on the same footing as liquidated claims.

In light of these considerations, the chambers judge found that the most contentious issue in the case was "whether the anticipated damages are so closely connected to the payments for the February and March natural gas that it would be manifestly unjust to require Duke and Engage to pay Blue Range for the natural gas without permitting Duke and Engage to set-off their claims for unliqui-dated damages" (para 72).

9 Assessing whether or not the transactions were closely connected, the chambers judge relied on the decision of the B.C. Supreme Court in Quintette Coal Ltd. v. Nippon Steel Corporation (1990), 2 C.B.R. (3d) 291 (B,C,S,C,) affirmed on appeal (1990), 2 C.B.R. (3d) 303 (B.C.C.A.). In Quintette the petitioner, a coal mining company, obtained an order under the CCAA allowing a re-organization between itself and its creditors. The order provided that no set-off was permitted. The respondent, Nippon Steel Corporation, was a major creditor of Quintette. In 1981, Nippon entered into contracts for the ongoing purchase of all of Quintette's coal production. The contracts provided for a price review every 4 years. In 1985, the parties were unable to agree on pricing and the matter was sent to arbitration. As a result of the arbitration it was determined that Quintette had over-charged Nippon and now owed Nippon, by way of refund, $46 million. Quintette continued to sup-

Page 5

[83] Quite to the contrary, the applicants should share with the other unsecured creditors the burden of the reorganization and to hold otherwise would be poten-tially unfair to the other creditors.

ANALYSIS

13 With respect, we find that the chambers judge erred in his application of the law of equitable set-off in a CCAA context. It appears to us that even though he recognized that concerns about the priority of creditors should be irrelevant in the face of s.18,1, his conclusion in paragraph 83 sug-gests he did not act on that recognition. Under s. 18.1 set off was available to Duke and Engage and the chambers judge erred in taking into account potential prejudice to other creditors.

14 We have also concluded that the chambers judge erred in his application of equitable set-off in a general context. While we agree that the only contentious aspect of the equitable set-off test, as articulated in Telford v. Holt, is the "close connection" test, we are of the opinion that the test was not correctly applied. We are influenced in this conclusion by a recent decision not available to the chambers judge, Cam-Net Communications v. Vancouver Telephone Co. [1999] B.C.J. No. 2855 (C.A.). In this case, the B.C. Court of Appeal was faced with the application of equitable set-off in a CCAA context even though the creditor, Vancouver Telephone, decided not to partake in the CCAA proceedings.

15 In 1995 Cam-Net Communications ("Cam-Net") entered into an agreement with Vancouver Telephone Co. ("VT") to provide long-distance telephone service to VT's customers. In November 1996 Cam-Net commenced an action against VT claiming amounts owing over $500,000. In Janu-ary 1997 Cam-Net filed for protection under the CCAA and the B.C. Supreme Court issued an order staying present or future action against Cam-Net. The order also prevented any creditors from exer-cising rights of set-off.

16 VT claimed a right to set-off alleging that Cam-Net had breached the contract by failing to provide services of a sufficient quality, unilaterally terminating the contractual services without ad-equate notice and failing to give proper notice of price increases to VT, As a result of these breaches VT alleged that they had to enter into other contractual relationships at higher rates in order to con-tinue in business.

17 The B.C. Supreme Court determined that this was not an appropriate case for equitable set-off but the B.C. Court of Appeal overturned that decision. In reaching their decision, the Court drew a distinction between abatement and equitable set-off as follows:

The law recognizes a distinction between what may be termed abatement and eq-uitable set-off. The former, a product of the common law, applies to cases in which a defendant can show that as a result of the plaintiff s breach, the goods, services, or work provided by the plaintiff are diminished in value. The latter, a product of equity, refers to cases in which a defendant raises a cross-claim which goes directly to impeach the plaintiffs demands, i.e. which is so closely con-nected with the plaintiffs claim that it would be unjust to allow the plaintiff to enforce payment without taking into account the cross-claim, The latter involves damages other than a diminution of the value of the goods or services provided (para 33).

Page 6

The court here also relied on the words of Lord Denning in Henriksen Rederi A/S v. T.H.Z. Ro-hn-Tex ("The Brede"), [1974] 1 Q.B. 233 at 248 (C.A.) where he said:

When the contractor sues for the contract price, the employer can say to him: "You are not entitled to that sum because you have yourself broken the very con-tract on which you sue, and you cannot fairly claim that sum unless you take into account the loss you have occasioned to me".

On this basis, the B.C. Court of Appeal found that this was an appropriate case for equitable set-off as VT's claim directly impeached Cam-Net's demand for payment.

18 The fundamental facts in Cam-Net are very similar to those in this appeal. In essence both cases involved a debt incurred during the course of a contract that is then negated when the contract itself is broken, In addition, the distinction pointed out in Cam-Net between equitable set-off and abatement is highly instructive. In his comment at paragraph 74 that there was nothing wrong with the gas delivered by Blue Range in February and March, the chambers judge appears to be requiring a defect in the goods in order to apply equitable set-off. With respect, such a defect would perhaps lead to a situation of abatement but is not directly relevant in the application of equitable set-off.

19 The important point for invoking equitable set-off is the close connection of the transactions. Would it be manifestly unjust to require Duke and Engage to pay the cost of the February and March deliveries in view of the fact that they will suffer significant losses due to the early termina-tion of the same contract that called for the delivery of gas in February and March? In our view, such a requirement would be unjust. The contracts in question are not a series of discreet monthly contracts. Rather, they are long term contracts for the supply of natural gas which call for payments to be made in installments settled monthly. These contracts are intended to be relied upon as a whole, Through the contracts, Blue Range and Humble are able to rely on a consistent purchaser of their natural gas over an extended period of time allowing a steady long term income, Similarly, Duke and Engage are able to trade on the natural gas market knowing that they have a long term supply of natural gas at a set price. The fact that the damages owed to Duke and Engage arise after the stay order is not relevant when the obligations arise out of the same contracts. To hold, as did the chambers judge, that there were no damages owed by Blue Range and Humble at the time of the February and March deliveries ignores the overall effect and long term nature of these contracts.

20 We find, therefore, that all of the relevant transactions arose out of the same contracts and equitable set-off is available in these circumstances.

21 The appeal is allowed.

McFADYEN J.A. SULATYCKY J.A. RAWLINS .1.

ep/i/q1jpn

TAB 8

Page 1

Indexed as: Blue Range Resource Corp. (Re)

IN THE MATTER OF The Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

AND IN THE MATTER OF a plan of compromise or arrangement of Blue Range Resource Corporation

[1999] A.J. No. 788

1 . 999 ABQB 1038

245 A.R. 154

89 A.C.W.S. (3d) 428

Action No. 9901-04070

Alberta Court of Queen's Bench Judicial District of Calgary

LoVecchio J.

Judgment: filed June 18, 1999.

(25 pp.)

REASONS FOR JUDGMENT

LoVECCHIO J.:—

INTRODUCTION

1 This decision relates to the applications for advice and directions brought by three gas mar- keting companies regarding their dealings with Blue Range Resource Corporation. Blue Range is subject to an Order dated March 2, 1999, under the Companies Creditors Arrangements Act'.

BACKGROUND

Page 2

2 Blue Range is a producer of natural gas. It holds leases for natural gas producing properties and over the years entered into a number of long term natural gas supply agreements with various gas marketing companies. Among these companies are Engage Energy Canada, L,P., Duke Energy Marketing Limited Partnership and CanWest Gas Supply Inc.

3 On March 2, 1999, Blue Range petitioned the Court and was granted an order staying pro- ceedings against it pursuant to section 11 of the CCAA. PricewaterhouseCoopers was named the Monitor for Blue Range under the Order. Certain provisions of that Order are germane to this ap-plication. They are:

3. b. all Persons having arrangements or agreements, written or oral, with Blue Range for the supply of goods and/or services by or to Blue Range are hereby restrained from accelerating, terminating, suspending, modifying or cancelling any such agreements, arrangements or supply of goods and services, and are also hereby restrained from exercising any right of distress, recission, set-off or con-solidation of accounts in relation to any indebtedness or obligation in favour of Blue Range .., without the prior written consent of Blue Range ... or leave of this Honourable Court.

c. notwithstanding subparagraph 3 (b) hereof, this Order shall not prohibit any party to an "eligible financial contract" (as defined in section 11. 1(1) of the CCAA), which contract was entered into before the date of this Order, from terminating, amending or claiming an accelerated payment under such eligible financial con-tract and setting off the obligations between Blue Range and such other party in accordance with its provisions, provided that if the "net termination value" (as defined in section 11. 1(1) of the CCAA) determined in accordance with the eli-gible financial contract is owed by Blue Range to another party to the eligible fi-nancial contract, the other party shall be deemed to be a creditor of Blue Range with a claim in respect of that net termination value;

16. Blue Range shall have the right to:

d. proceed with an orderly liquidation of such of its Property as Blue Range deems appropriate.., provided that any sale of any real or personal property outside the ordinary course of business,.. shall require... the approval of the Court;

e. terminate such of its arrangements or agreements of any nature whatsoev-er, including without limitation contracts for the purchase or sale of com-modities, marketing agreements, transportation agreements, and service agreements, whether oral or written, as Blue Range deems appropriate and to make provision for any consequences thereof in the Plan (as hereinafter defined),

all of the foregoing to permit Blue Range to proceed with an orderly restructuring of its business, property and affairs (the "Restructuring").

Page 3

17. In order to facilitate the Restructuring, Blue Range shall be permitted to carry on its business in the manner and to the extent determined by it, to dispose of any or all of its inventory and other assets, all subject to paragraph 16(d) hereof, wher-ever situate, and, for greater certainty, Blue Range shall have the right to realize upon its assets in such manner as Blue Range deems suitable or desirable for the purpose of maximizing the proceeds and recovery therefrom.

4 As part of a restructuring plan, Blue Range may sell certain of its petroleum leases the lands and reserves under which were "dedicated" to the supply of natural gas under the aforementioned long term natural gas supply agreements.

5 Some of the agreements provide for the sale of natural gas at prices below today's spot prices for natural gas. As such, the leases might command a higher price if they were sold after the exist-ing contractual supply obligations had been terminated and Blue Range called for bids for the leases based on that assumption.

6 After supplying natural gas in accordance with the terms of the existing contractual supply obligations for both February and March, on March 31, 1999, Blue Range terminated some of its natural gas supply contracts as permitted by paragraph 16.e of the Order including those with En-gage, Duke and CanWest.

7 While the precise terms of the various contracts may differ slightly, it is generally the case that the payment for a month's supply of natural gas becomes payable on the 25th day of the fol-lowing month. Thus the payment for the February supply of natural gas was due on March 25th and the payment for the March supply of natural gas was due on April 25th.

8 At the time of the hearing, Duke and Engage had not paid Blue Range for February or March. Duke has, however, reserving its right to argue set-off, paid the amount owing for its February de-livery to the Monitor. Engage, while permitted to pay on the same basis, did not. No indication was given at the hearing how Duke or Engage would deal with the payment for March deliveries. The principles of this decision would however be applicable to that payment as well.

9 Payment to the Monitor on this basis had been authorized by the Court pursuant to an order dated March 25th, 1999. The purpose for permitting this mode of payment was two fold. It was to prevent Blue Range from arguing that the creditor was in default for non-payment of natural gas which had been delivered thereby giving termination rights due to that fact and, at the same time, to protect the funds paid by the creditor while the issue of set-off was being decided by the Court.

10 All of the companies may suffer substantial losses as a result of the termination of the exist- ing natural gas supply contracts as, prior to the termination of the agreements, they had the right to purchase natural gas below the current spot market price for natural gas and that natural gas will have to be replaced by purchases of natural gas at prices that at present are higher.

THE APPLICATIONS

11 The different companies have made a number of applications with respect to the March 2nd Order. These applications were all made before Blue Range terminated the agreements.

12 Engage and CanWest have each applied for a declaration that, if any of the leases which are dedicated to their respective supply contracts are sold, the terminations of the contracts are to be declared ineffective with the corresponding result that the leases will remain subject to the pricing provisions and the "dedication" contained in the agreements.

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13 In the alternative, Engage and CanWest, joined by Duke, seek a variation of the stay order such that Blue Range would be able to terminate the contracts only on certain conditions. The con-ditions sought being that Blue Range could only terminate if it was incapable of performing them or that termination is essential to the success of the restructuring,

14 Duke and Engage have also each applied for an order permitting them to set-off the damages that they anticipate suffering, as a result of Blue Range terminating the supply contracts, against the payments due to Blue Range for the February and March deliveries of natural gas.

15 Lastly, Engage and Duke seek to have their respective agreements declared "eligible finan- cial contracts" as defined in the CCAA. This last issue, however, has been adjourned with the agreement of all of the interested parties. This decision is predicated on the assumption that the contracts in question will not be considered "eligible financial contracts".

ISSUES

16 The relief sought by the various applicants gives rise to three main issues.

(1) Should the "dedication" of the natural gas reserves contained in the pre-existing natural gas supply contracts be found to be an interest running with the land thereby giving rise to an encumbrance on the leases which Blue Range listed for sale?

(2) Have CanWest, Engage and Duke satisfied the Court that it is appropriate to vary the Order such that Blue Range should only be permitted to terminate the con-tracts if Blue Range is found to be incapable of performing them or that termina-tion is essential to the success of the restructuring?

(3) Should Engage and/or Duke be entitled to set-off their anticipated damages for non-delivery against the payments that they owe for the natural gas deliveries of February and March?

DECISION - ISSUE (1)

17 For the reasons which follow, the "dedication" of the natural gas reserves contained in the pre-existing natural gas supply contracts does not, in the circumstances of this case, constitute an interest running with the land thereby giving rise to an encumbrance on the leases which Blue Range listed for sale.

DISCUSSION

18 Counsel for CanWest conceded in argument that the natural gas supply contracts in question do not contain the type of words which would normally be associated with either the creation of a security interest or the creation of an interest in land with the result that the entire foundation for their argument is based on the legal interpretation to be given to the word "dedicate" in the con-tracts. Counsel also candidly agreed that there are at present no authorities in support of the legal position they postulate,

19 The word "dedicate" appears in a slightly different way in the various agreements filed in these proceedings. CanWest provided the various relevant provisions in Exhibit A to the Affidavit of Janet Vellutini.

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In certain of the contracts, the following appears:

"Seller herein agrees to dedicate Seller's share of the Remaining Recovera-ble Reserves to Buyer and Buyer herein agrees to accept such reserve ded-ication from Seller".

In seven of the nine contracts, the following appears:

5 3. The Assignee [Blue Range] covenants and agrees with CanWest that it now owns and possesses a right, title, interest and estate in the lands and leases formerly owned by the Assignor and dedicated to the Contract(s) as set out in the attached Schedule "A"."

In one of the contracts, the following appears:

"Seller shall dedicate sufficient lands and gas reserves in the Silver area attached hereto as Schedule "A"

20 The ordinary meaning of the word dedicate, according to the Canadian Oxford Dictionary (1 998, Oxford University Press, Toronto) includes:

b. commit, contribute, or set apart resources etc, for a particular cause or effort.

20a This word does not connote a transfer or assignment of an interest. Use of a word which connotes these elements would be more indicative of an intention to create an interest in land. In my view, the word "dedicate" alone, without more, should not be seen as creating anything other than a contractual covenant in favour of the other party to the contract. [The Court did not number this paragraph. QL, has

assigned the 'lumber 20a,]

21 This word connotes to me only an intention by Blue Range to give an assurance of its ability to perform, By dedicating or setting apart reserves, Blue Range provides comfort to CanWest and the others that it has sufficient reserves so that it will be in a position to perform several years into the future.

22 The necessity for and the value of a covenant of this nature would depend on the particular circumstances. If CanWest were dealing with a company that had very significant volumes of proven and probable reserves and the contracted volumes of CanWest were very small relative to those reserves, then the necessity for such a covenant might be diminished. On the other hand, if CanWest were dealing with a producer whose volumes of proven and probable reserves were not as significant and the contracted volumes represented a significant portion of those reserves then the value of or comfort gained by such a covenant might be increased.

23 I make this observation as, in my view, there is nothing in our law which would prevent the parties if they so desired from using words which would manifest an intention to create an encum-brance in appropriate circumstances thereby giving more than mere comfort from the assurance,

24 This situation is not unlike that in Scurry-Rainbow Oil Ltd. et al. v. Galloway Estate' in which Hunt J., as she then was, decided that certain royalty interests could amount to interests in land but that it depended on the specific language used. The case was appealed' and the Court de-scribed her analysis at page 69 as follows:

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... Firstly, having concluded that the retention of the right of reversion in a give P, & N.G. lease could amount to an interest in land, she held that she then had to look at each of the subject leases to see if in fact that had been done;

...We find no reversible error in the learned trial judge's analysis...

25 Moreover, according to Paragraph 15 of the Affidavit of Janet Vellutini of CanWest, eight of the nine CanWest contracts contain a restriction on assignment identical or similar to the follow-ing provision.

Each party undertakes to the other party that it shall not assign this Agreement or any of its rights hereunder without the consent in writing of such other party, which consent shall not be withheld, if the proposed assignee undertakes in form satisfactory to such other party that each of its rights acquired by such assign-ment is subject to the rights, title and interest of such other party herein set forth.

Paragraph 16 of that same Affidavit says that six of the contracts contain a specific restriction on Blue Range disposing of its interest in the petroleum and natural gas leases covered by the Con-tracts identical or similar to the following provision:

Seller's undertaking to sell Raw Gas (as set forth in Article VI hereof) is subject to the following reservations:

e. the right to dispose of Said Lands, or any part thereof, provided that such disposition is made subject to this agreement...

Only one of the nine contracts does not have such a provision. It apparently provides that Blue Range "can assign with consent if all lands [are] acquired'''. CanWest argues that these provisions are consistent with an intention to create an interest in land.

26 In my view, these provisions do not assist their argument. Really, the contrary is true. If the word dedicate were found to constitute a legal encumbrance running with the land, there would be no need to have such covenants restricting assignment without consent or requiring a purchaser to honour the covenant. The later requirement, which is contractual in nature ; indicates to me that the parties understood such a purchaser would not be so bound without specifically agreeing to be bound.

27 As I said, I would not view the use of the word "dedicate" alone as manifesting such an in- tention but I see no reason why such an interest could not be created in appropriate circumstances by the use of appropriate language.

28 Counsel referred me to the case of Bank of Montreal v. Dynex Petroleum Ltd.', where Rooke J. decided that royalty and net profit interest holders, whose rights were granted by a petro-leum lessee, did not have interests in land. At page 70 he concluded that:

the requirement for an interest in land, as held by a number of authorities and jurists in this jurisdiction and the Supreme Court of Canada, is, in simple lan-guage, that, as a matter of law, a lessee of an oil and gas lease (which is a profit

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a prendre), which is in itself an interest in land, obtained from a lessor (whether the Crown or freehold), cannot in law pass on an interest in land to a third party. [emphasis added]

29 Applying that logic to this situation, the interest which the applicants want me to conclude that the parties intended to create could not have been created. As I have decided that, regardless of the principles in the above passage, the language of the instrument was insufficient to establish an intention to create an interest in land, I need not consider the application of the Dynex case to this case, That argument will be left for another day,

DECISION - ISSUE (2)

30 For the reasons which follow, CanWest, Engage and Duke have not satisfied the Court that it is appropriate to vary the Order such that Blue Range should only be permitted to terminate the contracts if Blue Range is found to be incapable of performing them or that termination is essential to the success of the restructuring.

DISCUSSION

31 CanWest and Engage have applied in the alternative, and they are joined in this argument by Duke, for an order either deleting entirely or amending accordingly clause 16.e of the March 2nd Order such that Blue Range would be prevented from terminating any of the applicable contracts without satisfying the Court that certain conditions have been satisfied.

32 In view of my decision on the first issue, this second issue must be addressed in the context of the contracts being ordinary contractual arrangements between the marketing companies and Blue Range.

33 The Applicants submit that it is unfair for Blue Range to be permitted to terminate its con- tracts pursuant to the March 2nd Order, when Blue Range has the natural gas to deliver and is capa-ble of performing the contracts. The only rationale for allowing Blue Range to terminate the con-tracts, they say, is because they are below market and, as a result, Blue Range could increase its cash flow by selling natural gas under new contracts at today's higher rates.

34 CanWest also submits that section 11 of the CCAA does not allow the Court to permit a debtor company to terminate contracts as part of a stay order,

35 On the other hand, Blue Range's position, and it is shared by the Banks, is that the termina- tion of the contracts should not be prevented as it is crucial to the reorganization of Blue Range.

36 The purpose of the CCAA proceedings generally and the stay in particular is to permit a company time to reorganize its affairs. This reorganization may take many forms and they need not be listed in this decision. A common denominator in all of them is frequently the variation of exist-ing contractual relationships. Blue Range might, as any person might, breach a contract to which they are a party. They must however bear the consequences. This is essentially what has happened here.

37 A unilateral termination, as in any case of breach, may or may not give rise to a legitimate claim in damages. Although the Order contemplates and to a certain extent permits unilateral ter-mination, nothing in section I6,e or in any other part of the Order would suggest that Blue Range is to be relieved of this consequence; indeed Blue Range's liability for damages seems to have been assumed by Duke and Engage in their set-off argument. The application amounts to a request for an

Page

order of specific performance or an injunction which ought not to be available indirectly. In my view, an order authorizing the termination of contracts is appropriate in a restructuring, particularly given that it does not affect the creditors' rights to claim for damages.

38 The Applicants are needless to say not happy about having to look to a frail and struggling company for a potentially significant damages claim. They will be relegated to the ranks of unse-cured judgment creditors and may not, indeed likely will not, have their judgments satisfied in full, While I sympathise with the Applicants' positions, they ought not to, in the name of equity, the guide in CCAA proceedings, be able to elevate their claim for damages above the claims of all the other unsecured creditors through this route.

39 As I said, one of the objectives of the CCAA is to provide relief to a beleaguered company from its obligations to individual creditors and to allow the detrimental repercussions of that relief to be dealt with as equitably as possible under a court approved plan.

40 I will now turn briefly to CanWest's suggestion that the Court has no jurisdiction to counte- nance the termination by a debtor of its contracts. This is not the first time that such a provision has been included in a section 11 stay order.

41 In Re Dylex Limited' Farley J. upheld an order which authorised the debtor to break a num- ber of retail leases in shopping malls under which it was the tenant. Farley I. considered the equities of the situation and had regard to the relative commercial stamina of the parties before saying at p. 110:

I am therefore of the view that in weighing the balancing of interests in a CCAA context, the nod should continue to be given to Dylex which is in a pre-carious position as opposed to Cambridge which is in a sound financial condi-tion...

It is clear that s. 11 of the CCAA gives the power to the court to sanction a plan which includes the termination of leases as part of a debtor's plan of ar-rangement... In the interim between the filing and the approval of a plan, the court has the inherent jurisdiction to fill in gaps in legislation so as to give effect to the objects of the CCAA, including the survival program of a debtor until it can present a plan.

42 The termination of these contracts by Blue Range, as an adjunct to the disposition of the leases on favourable economic terms, is necessary to the company's survival program and I am sat-isfied that the Court has the necessary jurisdiction to permit termination. As to the broad discretion of the Courts under section 11 of the CCAA, reference should also-be made to the discussion under Issue (3).

43 I will now consider the set-off arguments.

DECISION - ISSUE (3)

44 For the reasons which follow, Engage and/or Duke are not entitled to set-off their anticipat- ed damages for non-delivery against the payments that they owe for the natural gas deliveries of February and March.

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DISCUSSION

45 Engage and Duke seek to vary the March 2nd Order to allow them to set-off the payments that they owe for February and March, 1999, against anticipated damages arising from Blue Range's future non-performance.

46 Factually the cases of the two companies vary slightly because Duke paid the amounts ow- ing into court on the understanding that it would preserve its right to argue set-off and Engage did not.

47 Further, the Duke contracts provided for the setting-off of anticipated damages from supply replacement against delivery payments upon receiving notice of the anticipated supply failures. The relevant clause of that contract is 6. 1(g) which reads:

(g) Any Alternate Gas Supply Damages payable hereunder shall be paid by Seller to Buyer on the 25th day of each month following the month in which they were incurred. The amount of Alternate Gas Supply Damages properly payable by Seller to Buyer hereunder may be offset by Buyer against amounts payable by Buyer hereunder as contemplated in Section 11.3....

48 Additionally, the Engage contracts provided for a period of delay after non-payment for supply before the expiration of which Blue Range could not terminate the agreements for non-payment.

49 Section 18.1 of the CCAA provides that the law of set-off applies to claims by and against the debtor company. It reads:

18.1. The law of set-off 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 defend-ant, as the case may be.

50 This section was added in 1997 by An Act to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tar Act'. It is clear from the wording of this passage that it neither prohibits nor requires the setting-off of obligations by a Court but merely states that the law of set-off, with its usual implications, applies to debtor companies. It is necessary then, to look to the principles of set-off in general.

51 Quintette Coal Limited v. Nippon Steel Corporation' is one of the most helpful cases dealing with set-off in a CCAA context. In that case, the debtor company owned a coal mine which sold coal to a Japanese steel conglomerate. The conglomerate was the sole purchaser of the coal gener-ated by the mine which would otherwise not have been an economic facility. Following a demand for payment of a debt to the conglomerate, the debtor company received CCAA protection with a stay order that, amongst other things, specifically prevented the Japanese conglomerate from exer-cising rights of set-off,

52 The conglomerate was owed approximately $46 million as a result of favourable decision on a retroactive pricing arbitration and sought to set-off this amount against payments for coal deliver-ies, some already received and some yet to be received.

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53 On an application to vary the specific prohibition and thus allow set-off, Thackray J. of the British Columbia Supreme Court stated:

Nor do I accept the proposition that the order forces an overpayment by J.S.I. for future coal deliveries. They are obliged to pay, and Quintette is obliged to accept, a price set pursuant to the arbitration award or any variation thereof pursuant to any appeal of that award the damages owed by the debtor col. The award has created a debt owed by Quintette to J.S.I. and I see that as completely distinguishable from the debts incurred by J.S.I. for future coal deliveries.

Mr. G. Muench, in his short but able presentation, said that he could not see why J.S.I. should be treated any differently than any other creditor of Quin-tette. In spite of the able arguments of Mr. McAlpine, neither can I.'.

The reasoning underlying this decision also emerges from the following passage:

Unless there is a sound legal principle for doing so, I must not carve out one por-tion of the order and give an advantage to one creditor over anotheriG,

54 The British Columbia Court of Appeal" affirmed the decision of Thackray J. One of the is- sues on the appeal was whether the power to stay set-off rights was granted to a Court by section 11 of the CCAA, The Court held that it was and relied upon the wide discretion conferred upon the Courts to achieve the CCAA's purpose of holding creditors at bay to assist a debtor company in sur-viving as a going concern.

55 Counsel for Duke and Engage argued that section 18.1 came into being after the Quintette decision and that it therefore brings the continued usefulness of the decision into question. While I am inclined to agree with Thackray J. in the B.C.S.C. decision that allowing set-off runs contrary to the purpose of the CCAA by unfairly subordinating the rights of other creditors, I do not, in view of section 18.1, consider that reason as a ground for this decision.

56 Parliament has specifically mandated that, notwithstanding the well known purpose of the Act as a whole, namely to share amongst all of the creditors the asset shortfall, the general law of set-off is to apply to debts owed or claimed by the debtor company.

57 That this is the appropriate way to approach the problem is supported by the analysis of the Ontario Court of Appeal in Re Citibank Canada and Confederation Life Insurance Company in Liq-uidation et In that case, a company sought to set-off against amounts owed by it to a debtor company in liquidation under the Winding Up Act" part of the debtor's liability to it arising from the termination of certain swap agreements.

58 While the Winding Up Act provided for set-off, it is clear that the Court had the same res- ervations as are expressed here about effectively granting priority to one creditor over the other creditors.

The Court stated:

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"Citibank seeks a set-off to have the moneys owing to it paid in full and, in the process, reduce its indebtedness. Citibank would thereby gain a distinct advantage over the other creditors who must stand behind the policy hold-ers and wait to recover part passu in accordance with the priorities estab-lished under the Act. There would be little, if any recovery for the other creditors.

Section 73 of the Winding Up Act preserves the right of set-off on a wind-ing up. It provides as follows:

73. The law of set-off, as administered by the Courts, whether of law or equity, applies to all claims on the estate of a company, and to all proceedings for the recovery of debts due or accruing due to a company at the commence-ment of the winding-up of the company, in the same manner and to the same extent as if the business of the company was not being wound up under this Act.

A right of set-off can arise by agreement, at law or in equity There is no question of an agreement to set-off in this case. Further, Citibank concedes on this appeal that it cannot meet the test for equitable set-off... Therefore, the ques-tion is whether there can be set-off at law"'4,

59 The Court of Appeal held that there could be no legal set-off as the claims were not suffi- ciently certain to be liquidated claims. What is important to note is that, notwithstanding the same policy concerns as to priority, where the legislation had mandated the applicability of the law of set-off, the Court proceeded to consider whether the claim for set-off should be allowed in the cir-cumstances of the case.

60 Blair J. who heard the application in first instance' also discussed the effect of set-off on priorities. After quoting section 73 of the Winding Up Act, Blair J. said at paragraph 29:

"This provision - along with a similar (although not identical) provision in sec-tion 97(3) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended - preserves the law of set -off as administered by the courts, in such in-solvency situations. In this fashion set-off becomes the policy mechanism whereby the competing 'equities" emerging from the dilemma outlined at the be-ginning of these reasons are balanced.

In insolvency situations, set-off provides a creditor with an advantage which oth-er creditors, ranking part passu except for the set-off, do not have. It puts the ad-vantaged creditor in what is tantamount to a secured position, something which was not a 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".

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61 The Court concluded that the legislature had resolved this issue in favour of the application of the general law of set-off and proceeded to apply the law. With the advent of section 18.1 of the CCAA, the same answer holds in this case and I am bound to consider the question of set-off with-out reference to the policy concern of potentially creating priorities between various creditors.

62 Counsel on all sides rely upon the same authorities and there appears not to be any disa- greement as to the principles upon which determinations of set-off are made. It is not contended that legal set-off is available in this case as the claims to be set-off are unliquidated.

63 Conversely, "equitable set-off is available where there is a claim for a money sum whether liquidated or unliquidated" With respect to equitable set-off, Counsel refer to the Supreme Court of Canada's application of the law of equitable set-off as found in Telford v. Holt". In that case, two parties exchanged two parcels of land and granted each other mortgages with the difference to be set-off and netted-out. However, before closing, one party assigned its mortgage to a third party who subsequently foreclosed on the property and sought to enforce the entire amount of the mort-gage.

64 The Supreme Court found that equitable, but not legal, set-off applied to the claim. I note that that case and the authorities discussed therein are concerned primarily with the application of equitable set-off to situations in which one of the two parties to a contract (usually a mortgage) has assigned its rights under that contract to a third party,

65 Counsel for both the Banks and for Duke refer to five enumerated principles found at page 398 of that case as standing for the state of the law of equitable set-off.

1. The party relying on a set-off must show some equitable ground for being pro-tected against his adversary's demands: Rawson et al. v. Samuel (1841), Cr. & Ph. 161, 41 E.R. 451.

2. The equitable ground must go to the very root of the plaintiffs claim before a set-off will be allowed: [Br. Anzani (Felixstowe) Ltd, v. Intl Marine Mgmt (U.K.) Ltd., [1980] Q.B. 137, [1979] 3 W.L.R. 451, [1979] 2 All E.R. 1063]

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: [Federal Commerce & Navigation Ltd. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066].

4. The plaintiffs claim and the cross-claim need not arise out of the same contract: Bankes v. Jarvis, [1903] 1 K.B. 549 (Div.Ct.); Br. Anzani.

5. Unliquidated claims are on the same footing as liquidated claims: [Nfld. v. Nfld. Ry. Co. (1888), 13 App.Cas. 199 (P.C.)].

66 I should point out that those principles appeared in the Court's discussion of prior cases as part of a quote from the British Columbia Court of Appeal's decision in Coba Industries Ltd. v. Mil-lie's Holdings (Canada) Ltd.'".

67 Nevertheless, both counsel contend that it is a correct statement of the law to be applied to the issues at hand and I concur. The Court decided that the debts should be set-off since they arose out of the same contract or closely interrelated contracts such that it would be unfair to enforce only one side of the land exchange agreement".

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68 It is clear that the overriding concern for a court faced with an application for equitable set-off is fairness whether it be formulated as "manifestly unfair"", l'unfair2'", "unjust and unreason-able"", 'unconscionable"", or as any of the other descriptions that have been invoiced in support of the doctrine's application.

69 Counsel for Duke favours the formulation found in British Anzani (Felixstowe) Ltd. v. Int's marine Management (U.K.) Ltd," in which Forbes J. stated at p. 1076 that:

"It would in my view be manifestly unjust to allow the landlord to recover his rent without taking into account the damages which it is alleged the tenant has suffered through failure by the landlord to perform his part of the agreement".

Spry, The Principles of Equitable Remedies fifth ed. (1997, Carswell, Agincourt) at p. 173 intro-duces the topic of equitable set-off with the following words at page 173:

To decide that there is an equitable set-off is to decide that, on grounds that are set out hereunder, it would be unjust to order the specific enforcement of a par-ticular obligation without lessening or reducing it by reference to a related obli-gation of the plaintiff to the defendant or making specific enforcement condition-al on performance of that related obligation.

70 A passage from the fourth edition is quoted by the Alberta Court of Appeal in 420093 B.C.Ltd. v. Bank of Montreal".

71 The case was predominantly concerned with the operation of the doctrine of res judicata and the Court decided that if the claims could have been raised as matters of equitable set-off, the claims were res judicata. The Court, did, however, at page 500 make the following comments by way of obiter dicta:

The nature of equitable set-off is explained in I.C.U. Spry, The Principles of Equitable Remedies, 4th ed. (Toronto: Carswell, 1990), After observing that it is not sufficient to assert an unrelated cross-claim or even to plead a claim which arises out of the same transaction as the plaintiffs claim, the author states at p. 174:

What must be established is a relationship between the respective claims of the parties which is such that the claim of the defendant has been brought about by, or has been contributed to by, or is otherwise closely bound up with, the rights that are relied on by the plaintiff and which is also such that it would be unconscionable that he should proceed without permitting a set-off, Thus if conduct of the plaintiff is such as to induce the defendant to incur an obligation in favour of the plaintiff, and the conduct itself is fraudulent, negligent or otherwise wrongful so as to give a cause of action to the defendant, the plaintiff is not ordinarily permitted to proceed until he has made good the material claims of the defendant.

In other cases also it will, where appropriate, be held that an equitable set off lies, provided that it appears that the claim of the defendant does in

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truth impeach that of the plaintiff, for the application of the principles that are here in question should not be arbitrarily restricted. Thus the better view is that this category of equitable set-offs extends to cases where a relevant claim is, not for a sum of money, but for the possession of prop-erty or some other non-pecuniary item.

In Bank of Boston Connecticut v. European Grain and Shipping Ltd. [1989] 2 W.L.R. 440, the House of Lords held at p. 452 that the test is to determine whether the cross-claim in question is one "flowing out of and being inseparably connected with the transaction'', that is, the transaction giving rise to the plaintiffs claim. Spry says that this apparently new and more generous test is merely an instance of the traditional one which requires the defendant's claim to be "so closely connected with his [the plaintiffs] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross claim (p. 176). [emphasis added]

72 Therefore, I conclude that the question to be asked is whether the anticipated damages are so closely connected to the payments for February and March natural gas that it would be manifestly unjust or unfair to require Duke and Engage to pay Blue Range for the natural gas without permit-ting Duke and Engage to set-off their claims for unliquidated damages.

73 The obligation to pay for the gas delivered in February and March arose upon its delivery. At the point in time of each of the deliveries, there were no damages. Thus, Engage and Duke had a contractual obligation to pay for the natural gas at a point in time when they had suffered no dam-ages albeit there was trouble on the horizon.

74 The anticipated damages for the higher cost of replacement natural gas only arise later and the cause of them is the prospective termination of the contract with the resulting failure of the de-livery of natural gas from April onwards. They do not arise from a problem with the February and March deliveries.

75 Fundamentally, Engage and Duke contracted to buy natural gas from Blue Range. They contracted to pay for it on a month to month basis. They were delivered natural gas. They accepted the natural gas delivered and have sold or otherwise utilized the natural gas received,

76 Now, when payment is due they do not want to pay for it. The reason they give is that Blue Range's suspension of future deliveries will make them incur future damages. In my view, the future damages from the non-deliveries are sufficiently independent that it is not manifestly unjust to re-quire Engage and Duke to pay for the natural gas that they have received.

77 Counsel for Duke, in argument, cited the Duke contract which provided for the setting-off of replacement cost damages against delivery payments. There was, however, notwithstanding this clause, no serious attempt to argue contractual set-off. This, I presume, is because the provision al-lowed for damages for a given month to be set-off only against payments for the same month.

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78 If anything, this provision serves to reinforce the view that damages for future non-deliveries are not so closely connected to past deliveries that fairness demands their being set-off against payments for previous deliveries.

79 While Counsel for Engage and Duke have endeavoured valiantly to distinguish the Quintette case, they have not succeeded on one part of the decision. It is to be remembered that the purchas-ing company wanted to set off past debts of the insolvent company (from the retroactive price re-view) against their future obligation to pay the insolvent company for ongoing coal deliveries. This was the exact inverse of the situation at bar where the companies wish to set off future damages owed them against their past payment obligations.

80 In my view, while the chronology is reversed, the principle is the same. The situation in that case led the Supreme Court to say, at p. 296;

The award has created a debt owed by Quintette to and I see that as com- pletely distinguishable from the debts incurred by J.S.I. for future coal deliveries,

81 This observation is not affected by the change in the CCAA provisions to allow set-off. The legislature has spoken, In this case, the principles of set-off are to be applied. The issue for the Court is whether through the application of those principles a set-off should be permitted in the cir-cumstances of this case,

82 The anticipated damages arise after the completion of the deliveries. They arise after the stay order. They become an unsecured claim just like the claim of any other unsecured creditor of Blue Range and lack the necessary relatedness to the deliveries and the consequent unfairness to take them out of this category.

83 Quite to the contrary, the applicants should share with the other unsecured creditors the burden of the reorganization and to hold otherwise would be potentially unfair to the other creditors,

84 In any event, although this was not argued before me with much emphasis (other than indi- rectly at paragraph 4.c. of the Blue Range Brief), as regards the March deliveries (which for all but one day occurred after the order was issued), it seems to me that it ought to have been well known to both Engage and Duke that trade taking place with a debtor company in CCAA protection after the implementation of a stay order is generally conducted on a cash basis.

85 Indeed paragraph 34 of the March 2nd Order stipulates that post-petition creditors supplying goods or services to Blue Range after the order are entitled to be paid in accordance with their terms of credit. It further provides that, where the supply spans tune before and after the order, they are a post-petition creditor only for the portion of the supply made after the order. In short, trade is to be conducted on a cash basis.

86 Since Blue Range is not purely a consumer of goods and supplies it is implicit in this para- graph of the order that sales by Blue Range will be conducted on the same cash basis as sales to Blue Range. This would require Engage and Duke to pay their post-order delivery debts as they be-came due, notwithstanding any potential damage claims.

CONCLUSION

87 The applications made by CanWest, Engage and Duke are denied.

COSTS

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88 While Blue Range has been put to the expense of contesting these applications, Blue Range will benefit significantly from the result in that it will be entitled to receive significant payments for the February and March deliveries. On the other hand, Duke and Engage have raised significant is-sues of more general import and will potentially suffer significant costs in finding replacement nat-ural gas. This being so, it is not my intention to award any costs in these applications to any of the parties who appeared and made representations.

LoVECCHIO J.

cp/i/kjrn/q1gxc

1 R.S.C. 1985, c. C-36.

2 (1993) 138 A.R. 121 (Q.B.)

3 This decision is reported at (1994) 157 A.R. 65 (C.A.).

4 Page 2 to Exhibit B of the Vellutini Affidavit.

5 (1995) 39 Alta.L.R. (3d) 66.

6 (1995) 31 C.B.R. (3d) 106 (Ont.Ct.Just, Gen.Div).

7 S.C. 1997 c. 12, s, 125.

8 (1990), 2 C.B.R. (3d) 291 (B.C.S.C.) and 51 B.C.L.R. (2d) 104, 2 C.B.R. (3d) 303 (C.A.).

9 Ibid at page 296.

10 Ibid at page 297.

11 This decision is reported at (1990) 2 C.B.R. (3d) 303.

12 [1998] O.J. No. 114, 37 O.R. (3d) 226, (C.A.).

13 R.S.C. 1985, c. W-11.

14 At page 2 of the Quicklaw text.

15 [1996] O.J. No. 3409, (Ont. Ct. Justice, Gen.).

16 Telford v. Holt infra, at p. 394.

17 (1987) 41 D.L.R. (4th) 385 at 398.

TAB 9

Page 1

Indexed as •

Canadian Airlines Corp. (Re)

IN THE MATTER OF the Companies Creditors Arrangement Act, R.S.C. 1985, C.C.-36, as amended

AND IN THE MATTER OF the Business Corporations Act (Alberta), S.A. 1981, C.B.-15, as amended, Section

185 AND IN THE MATTER OF Canadian Airlines Corporation

and Canadian Airlines International Ltd.

[2001] A.J. No. 226

2001 ABQB 146

[2001] 7 W.W.R. 383

92 Alta. L.R. (3d) 140

294 A.R. 253

14 B.L.R. (3d) 258

103 A,C.W.S. (3d) 504

2001 CarswellAlta 240

Action No. 0001-05071

Alberta Court of Queen's Bench Judicial District of Calgary

Paperny J.

Heard: December 11, 2000. Judgment: filed February 21, 2001.

(72 paras.)

Counsel:

Page 2

Larry Robinson, for the B.C. Government. Chris Simard, for Canadian Airlines Corporation and Canadian Airlines International Ltd.

IQuicklaw note: An Erratum was filed by the Court February 28, 2001. The correction has been made to the text and the Erratum is append-ed to this document.]

REASONS FOR JUDGMENT

PAPERNY J.:—

INTRODUCTION

1 On March 24, 2000, the initial order in these proceedings was made by Moore C.J., providing for, inter alia, a stay of proceedings under the Companies' Creditors Arrangement Act ("CCAA").

2 On June 2, 2000, Her Majesty the Queen in Right of the Province of British Columbia ("B.C. Government") filed a Voting/Distribution Dispute Notice with Canadian Airlines Corporation and Canadian Airlines International Ltd. (collectively, "Canadian"), claiming tax liabilities owed to it by Canadian. Canadian rejected that notice as it was presented past the Claims Bar Date of May 5, 2000 established under the amended plan of arrangement ("Plan".). By my order dated June 28, 2000, the B.C. Government received an extension to June 30, 2000 to file the notice.

3 On June 29, 2000 the B.C. Government filed a Voting/Distribution Dispute Notice ("Dispute Notice") with Canadian in the amount of $1,859,777.53.

4 The Dispute Notice also identified tax refunds owing to Canadian by the B.C. Government. The amount of the refunds owing at June 29, 2000 was $1,732,268.47.

5 The B.C. Government asserted a right to set-off any refunds owed to Canadian against the tax liabilities owed by Canadian pursuant to section 18.1 of the CCAA, which states:

The law of set-off 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.

6 The Alberta Court of Appeal recently considered this section in Blue Range Resource Corp. (Re), [2000] A.J. No, 830, 2000 ABCA 200, and confirmed that notwithstanding the application of the section may have the result of preferring one creditor over others, Parliament, by enacting s. 18.1, made the decision that the general law of set-off is to apply in CCAA proceedings.

7 Canadian denied the entitlement to set-off and the matter was brought before the Claims Of- ficer appointed in these proceedings. The Claims Officer determined that only a portion of Canadi-an's tax liabilities were capable of being set-off against tax refunds owing to it by the B.C. Govern-ment. The B.C. Government appeals from this decision.

BACKGROUND FACTS

8 The Dispute Notice claims the following tax liabilities owed to the B.C. Government by Ca- nadian:

Page 3

a. $1,673,299.42 under the Social Services Tax Act , R.S.B.C,, 1996, c.431 (tax re-lating to the sale of consumables, capital additions, liquor and uniform), includ-ing penalties and interest; and

b. $187,478.11 under the Motor Fuel Tax Act, R.S.B.C. 1996, c. 317(tax relating to unauthorized use of coloured fuel) including interest.

9 The Dispute Notice also identified tax refunds owing to Canadian. At March 24, 2000, the refunds totalled $645,320.92. As noted, as at June 29, 2000, the date of the Dispute Notice, the re-funds totalled $1,732,268.47. The refunds all arise under the Motor Fuel Tax Act and represent a rebate of a three-cent/litre tax embedded in the purchase price ofj et fuel, payable on the basis that the fuel was used on international flights.

10 The B.C, Government claimed that it is entitled to set-off the Motor Fuel Tax Act refunds against both the Motor Fuel Tax Act and the Social Services Tax Act liabilities, based on legal, eq-uitable or statutory set-off, It argued that the Claims Officer's decision was wrong and that the court is entitled to substitute its discretion for his as this is a de novo application.

11 Canadian asserted that the Claims Officer's decision is to be afforded a high degree of def- erence. It went on to argue that the B.C. Government's rights to set-off are restricted to those con-tained in the very specific provisions of the Social Services Tax Act, the Motor Fuel Tax Act and the Motor Fuel Tax Act Regulation and that the B.C. Government is not entitled to set-off under those provisions. Alternatively, Canadian argued that if legal and equitable set-off are available, the B.C. Government failed to meet the respective tests.

III. ISSUES

1. What is the standard of review of the decision of the Claims Officer? 2. Is the B.C. Government entitled to legal set-off? 3. Is the B.C. Government entitled to equitable set-off? 4. Is the B.C. Government entitled to statutory set-off? 5. If set-off is available, what tax liabilities in which period of time are subject to be

set-off against what refunds?

IV. ANALYSIS

1. Standard of Review

12 The B.C. Government relies on two decisions to support its argument that this hearing is de novo: Westminer Canada Holdings Ltd. v. Coughlan (1990), 73 D.L,R. (4th) 584 (Ont. C.A.) and Olympia and York Developments Ltd. (Re), [1994] O.J. No. 1335 (Gen. Div.).

13 Westminer, supra is not a CCAA case. It simply applies Stoicevski v. Casement (1983), 43 O.R. (2d) 436, in which the Ontario Court of Appeal held that while ordinarily interlocutory orders made by the exercise of judicial discretion will not be interfered with unless they are clearly wrong, if the interlocutory order relates to a "vital" issue, the appellate court can substitute its own discre-tion for that of the court below. In Olympia and York Developments Ltd. supra, which was a CCAA case, Farley J. also applied Stoicevski. He described the decision of the claims officer in determin-ing the quantum of a claim which could have ultimately defeated the plan in question, as "knife

Page 4

edge vital". He also commented on the short time available to the claims officer to make the deter-mination as strengthening his decision to substitute his own discretion for that of the claims officer.

14 The law in Alberta relating to appeals of interlocutory orders differs from the law in Ontario, at least vis-à-vis appeals from a Master. In Alberta, such appeals are de novo: Wright v. Disposal Services Ltd. and Marsh (1978), 4 Alta. L.R. (2d) 173 (Q.B.) at. 177-78. The court in that case found that the discretionary jurisdiction possessed by a superior court trial judge by virtue of his federal appointment cannot be fettered in any way by a previous decision of a Master, who is ap-pointed by the provincial Crown.

15 An appointment by a Queen's Bench justice of a claims officer to handle disputes in the CCAA claims process and thereby save time and expense, cannot include a grant of the sort of def-erence that is impeded by the Constitution when it comes to decisions of Masters of this court, as described in Wright, supra. Canadian argued that if the appeal is de novo, then what is the point of having a claims officer? On that logic, one might also question the utility of Masters. Just as Mas-ters fulfill a critical role in the Court of Queen's Bench, so do claims officers in CCAA proceedings. It does not follow from this, however, that the appeal from the claims officer will be a true appeal and not de novo. Unlike a specialized tribunal with unique knowledge to which the court may defer, the Claims Officer in these proceedings was appointed for the purpose of expediting a process which by necessity must be summary. This summary nature is not to operate so as to fetter the court's discretion.

16 While Canadian's counsel did argue that the decision of the Claims Officer ought to be af- forded significant deference, he acknowledged that Canadian's filing of a further affidavit in addi-tion to that before the Claims Officer weakened its position that the appeal before me was not de novo.

17 In my view, the ruling of the Claims Officer certainly deserves the court's respect. However, the court is free to substitute its own discretion.

18 I now turn to the three bases upon which the B.C. Government claims an entitlement to set-off.

2. Legal set-off

19 The test for legal set-off has been variously described by courts across the country. In its simplest form, legal set-off requires "the fulfilment of two conditions. The first is that both obliga-tions must be debts. The second is that both debts must be mutual cross-obligations": Telford v. Holt (1987), 41 D.L.R. (4th) 385 (S.C.C.) at 393, adopting Canadian Imperial Bank of Commerce v. Tuckerr Industries Inc. (1983), 149 D.L.R. (3d) 172 at p. 174 (B.C.C.A.). However, as stated by K. Palmer in The Law of Set-Off in Canada (Aurora: Canada Law Book, 1993) at 21, each of these elements has its own problems and parts. Mr. Palmer goes on to provide a neat summary of the var-ious expressions of the test that reflects these:

1. The cross claims must be enforceable in debt, which entails setting up a claim which is liquidated, enforceable and mature.

2. The mutual claims for any rights to set-off must have accrued to the original creditor and debtor prior to any assignment to the existing plaintiff or defendant, (p. 21)

Page 5

I will consider each of these elements in turn.

a. enforceable in debt

20 Canadian has objected to a small portion of one assessment relating to the taxation of Cana- dian's use of aircraft fluids in the amount of $133, 938.34 and to its liability for any penalties on all of the assessments. As a result, Canadian argued that the validity and quantum of the tax liabilities have been placed into question and therefore are not liquidated. This dispute will be adjudicated by consent under the normal statutory and legislative processes in place in British Columbia and until that is completed, Canadian argued, it cannot be said that there is a specified sum that is payable by Canadian to the B.C. Government. Canadian essentially suggested that due to its objection to the claim by the B.C. Government, the tax liabilities are not liquidated until a court confirms the liabili-ties are "debts" and rules on the amount for which Canadian is liable to pay.

21 I cannot agree that the tax liabilities are not "debts". There are many definitions of debt con- tained in Canadian jurisprudence and academic commentary, such as:

..."mutual debts" mean practically debts due from either party to the other for liquidated sums, or money demands which can be ascertained with certainty at the time of pleading": Telford v. Holt, supra at p. 393-394, citing Royal Trust v. Holden (1915), 22 D.L.R. 660 (Ont. C.A.) at 662-663;

"a sum payable in respect of a liquidated money demand, recoverable by action": Diewold v. Diewold, [1941] 1 D.L.R. 561 (S.C.C.) at 564;

"in substance there is a liquidated demand in money": National Bank fur Deutschland v. Blucher, [1927] S.C.R. 420 at 426;

"What is a debt but merely a duty, an obligation to pay?": Love v. Bell Piano (Furniture) Co. (1909), 10 W.L.R. 657 at 659 (Alta. T.D.);

"the word "debt" is not today a term of art with a clear, never-changing denota-tion. Instead of trying to define a core meaning, it would seem better to agree with the editors of the Corpus Juris Secundum that "[the word] takes shades of meaning from the occasion of its use, and color from accompanying use, and it is used in different statutes and constitutions in senses varying from a very restrict-ed to a very general one". One can say that the most common use of the word "debt" is to describe an obligation to pay a sum certain or a sum readily reducible to a certainty... but to this writer the essence of the term is that, if there is an ob-ligation to pay a certain or ascertainable sum, the courts should tend not to con-cern themselves with the precise nature of the cause of action": C.R.B. Dunlop, Creditor-Debtor Law in Canada, 2nd ed. (Toronto: Carswell, 1995) at 16.

22 The amounts contained in the Dispute Notice are plain; it is clear that a liquidated sum has been claimed as owing by the B.C. Government. On any of these definitions, the B.C. Government's claim is in debt as distinct from damages or a property claim, both of which are excluded from legal set-off under this first requirement.

Page 6

23 The governing legislation similarly makes it plain that the assessments issued by the B.C. Government represent obligations that must be paid notwithstanding any appeals. Section 115 of the Social Services Tax Act provides for the issuing of an assessment for tax that is payable and s. 120 provides that any liability for payment under the Act, including an assessment, is not delayed by virtue of the appeal process, Sections 43 and 52 of the Motor Fuel Tax Act are similarly phrased. In other words, simply because Canadian disagrees that it is liable for a portion of the assessments and has embarked on an appeal process, it is still required to pay the amounts set out in the assessments. Section 120(2) of the Social Services Tax Act and s. 52(2) of the Motor Fuel Tax Act provide a remedy to the taxpayer who succeeds on appeal after being made to pay what the government has said is owing under the statute; a refund will be made of the excess amount of tax paid plus any in-terest or penalties imposed. The obligation to pay is not removed or suspended until the appeal pro-cess has been exhausted.

24 As noted, Canadian does not object to the entirety of the tax liabilities. It has consented to have its liability for payment of the disputed portion adjudicated in British Columbia according to the procedure set out in the governing legislation. Simply because Canadian has taken the position that it is not liable to pay a portion of the tax liabilities, however, does not change the nature of the B.C. Govenunent's claim. It is still a debt that according to the relevant legislation is payable now despite Canadian's objection. It cannot be right that simply by challenging an assessment, an insol-vent taxpayer can erect an effectively permanent roadblock to the government's right to set-off While there are many examples in the case law of legal set-off failing because the debt in question had not matured or was subject to an unfulfilled condition precedent at the material time, Canadian provided no authority suggesting that a challenged debt under a statutory regime such as that con-tained in the Social Services Tax Act and Motor Fuel Tax Act is not a liquidated debt for the pur-poses of legal set-off. Even if such authority had been provided, however, it would have been en-tirely appropriate in the circumstances of this case to carve out the disputed portion of the tax liabil-ities and leave the unchallenged balance available for set-off,

25 Canadian next argued that the B.C. Government did not issue an assessment for the tax lia- bility under the Motor Fuel Tax Act and seemed to suggest that this prevented the liability under that statute from being liquidated. While the amount claimed under the Motor Fuel Tax Act is as specific and plain as the amount claimed under the Social Services Tax Act, s. 43 of the Motor Fuel Tax Act appears to require an assessment. Without it, a question is raised about the enforceability of the tax liabilities under the Motor Fuel Tax Act. Counsel for the B.C. Government did not respond to Canadian's argument in this regard and I am not satisfied that the claim for tax liabilities under the Motor Fuel Tax Act meets the first requirement of legal set-off.

26 Counsel agreed that the refunds arose from an embedded tax contained in the price of fuel purchased by Canadian. There is no issue between the parties that the refunds represented a liqui-dated debt.

27 I find that the tax liabilities under the Social Services Tax Act and the refunds under the Motor Fuel Tax Act satisfy the first requirement of legal set-off.

b, mutuality

28 Canadian conceded that the cross - obligations in issue existed between the same parties - Canadian and the B.C. Government.

Page 7

29 However, Canadian suggested that the distinct statutory regimes and factual bases under which the bulk of the tax liabilities and the entirety of the refunds arose prevented the obligations from being "in the same right", a necessary element of mutuality based on the following expression of this second requirement of legal set-off contained in Citibank Canada v, Confederation Life In-surance Co. (1996), 42 C.B.R. (3d) 288 (Ont. Gen. Div.) at p. 298, affd (1998), 37 O.R. (3d) 226 (C.A.):

For set-off at law to occur, the following circumstances must arise:

1. The obligations existing between the two parties must be debts, and they must be debts which are for liquidated sums or money demands which can be ascertained with certainty; and

2. Both debts must be mutual cross-obligations, i.e, cross-claims between the same parties and in the same right. (emphasis added)

30 As the discussion later in these reasons illustrates, there is indeed a close connection be- tween the cross-obligations. However, with respect, Canadian's interpretation of "in the same right" is incorrect. To accept it would be to import a connection requirement into legal set-off. It is im-portant to remember that the connection requirement appears to have developed as a basis upon which it would be fair to allow set-off in the absence of liquidated claims and/or existing mutuality between the parties. K. Palmer states at p. 21 of The Law of Set-Off in Canada, supra, as follows:

There is no requirement in legal set-off that the debts be connected in any man-ner. This is probably the most important difference remaining between equitable and legal set-off which allows a claim in legal set-off to have any effect.

31 The Alberta Court of Appeal recognized this in Aboussafy v. Abacus Cities Ltd. (1981), 39 C.B.R. (NS) 1 at 10:

There was no set-off at common law. It was introduced into the law of England by statute...and made to apply only as between liquidated claims, although these claims may be unrelated. This is what he [sic] might call legal set-off. (emphasis added)

32 1 accept the explanation of "in the same right"contained at pp. 46-47 of The Law of Set-off in Canada, as follows:

Whether debts exist in the same right refers to whether the debtor and creditor are liable solely to each other or to each other jointly with third parties. Again, this is simply a question of mutuality: if a debt is held jointly, rather than jointly and severally, it is not immediately clear how responsibility for the debt may be fairly divided when a set-off is claimed by a debtor who has not dealt with all the joint parties. What burden or benefit must the joint debtholders bear or receive due to the actions of one of their group? The presence of any such uncertainty generally will disallow set-off for the debts not being in the same right.

33 Accordingly, I find that the second requirement of legal set-off is also met in this case and that Canadian is entitled at law to set off the refunds against the Social Services Tax Act liabilities.

P age 8

3. Equitable set-off

34 If I am incorrect that legal set-off is available, I find that the B.C. Government would be en- titled to exercise equitable set-off in any case.

35 The parties agreed with the principles of equitable set-off expressed in Coba Industries Ltd. v. Millie's Holdings (Canada) Ltd. (1985), 20 D.L.R. (4th) 689 (B.C.C.A.), approved in Telford v. Holt, supra at pp. 398-399:

1. The party relying on set-off must show some equitable ground for being protect- ed against his adversary's demands: Rawson et al. v. Samuel (1841)., Cr. & Ph. 161, 41 E.R. 451.

2. The equitable ground must go to the very root of the plaintiffs claim before a set-off will be allowed: [Br. Anzani (Felixstowe) Ltd. v. Int'l Marine Mgmt (U.K.) Ltd., [1980] Q.B. 137, [1979] 3 U.K.W.L.R. 451, [1979] 2 All E.R. 1063].

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: [Federal Commerce & Navigation Ltd. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 U.K.W.L.R. 309, [1978] 3 All E.R. 1066].

4. The plaintiffs claim and the cross-claim need not arise out of the same contract: Bankes v. Jarvis, [1903] 1 K.B. 549 (Div. Ct.); Br. Anzani

5. Unliquidated claims are on the same footing as liquidated claims: [Nfld v. Nfld. Ry. Co. (1888), 13 App. Cas. 199 (P.C.)].

36 Just as was the case before the Alberta Court of Appeal in Blue Range, supra, the only con- tentious aspect of the assertion of equitable set-off in this case is the "close connection" between the cross-obligations. As stated in Blue Range, that is the "important point for invoking equitable set-off' (para. 19).

37 Canadian emphasized that the bulk of the tax liabilities and all of the refunds respectively arose under distinct statutory taxation regimes governing different types of taxes and embodying different policy motives. Canadian noted that the refunds represent payments due to Canadian by way of a rebate of an embedded tax on jet fuel, pursuant to the Motor Fuel Tax Act and Motor Fuel Tax. Regulation, while the majority of the tax liabilities represent an assessed underpayment by Ca-nadian with respect to previous purchases of goods or services, such as liquor and uniforms, pursu-ant to the Social Services Tax Act. Canadian therefore argued that the cross-obligations were not sufficiently connected. The Claims Officer was persuaded by this argument and found that "while the two pieces of legislation do not establish complete codes of the rights as between the parties, it is clear that the two statutes establish different regimes for the payment of tax".

38 I do not find those arguments persuasive. To the extent that the Social Services Tax Act and the Motor Fuel Tax Act create distinct taxation regimes, I would expect no less as otherwise man-agement of the various taxes they address would become impossible. Canadian also emphasized that distinct branches of the B.C. Government administered the Social Services Tax Act and the Motor Fuel Tax Act liabilities in support of its argument that there was an insufficient connection to support equitable set-off. Canadian conceded, however, in the context of its submissions on the ap-plication of legal set-off, that government departments are not separately incorporated and therefore

Page 9

are not distinct legal entities, An action taken against a particular department of the government is still considered an action against the Crown (see for example, Glaxo Canada v. Canada (1987), 11 F.T.R. 121 (T.D.), citing Perepelytz v. Department of Highways for Ontario (1958), 12 D.L.R. (2d) 81 (S,C.C.)) and therefore it is reasonable to treat the Crown as one entity for the purposes of set-off

39 In short, the taxes may arise under separate acts and be administered separately by different departments, but these are artificial bases on which to sever the fundamental connection of the tax-payer-tax collector relationship in this case that is also reflected in the connection between the cross-obligations themselves. The obligation owed by Canadian is for tax and the obligation owed by the B.C. Government is for refunds of tax and these cross-obligations arise out of the same rela-tionship between these two parties. As well, the funds flow in and out of the same source - the cof-fers of the B.C. Government as taxing authority - and in effect, Canadian is seeking to make a with-drawal from that fund without paying in full what it owes to that fund,

40 A similar approach was taken by the Saskatchewan Court of Queen's Bench in National Bank of Canada v. Saskatchewan Property Management Corp., [1993] 7 W.W.R. 636. In that case, the bankrupt GeoData owed Education and Health tax to the Saskatchewan government but was al-so owed money by the Saskatchewan Property Management Corp., a Crown agency entirely funded with tax revenues. The court held at page 640:

Through various taxation statutes, including The Education and Health Tax Act, R.S.S. 1978, c.E-3, as amended, the Crown is able to generate revenue. Revenue that is used by various provincial departments of government and by Crown cor-porations. The basis of S.P.M.C,'s funding is tax revenue. GeoData's liability is more than a simple liability for the payment of a debt. It is a liability for the payment of taxes. In the particular circumstances I consider the connection be-tween the claims to be close enough to warrant the application of equitable set-off.

It is not fair to allow National (GeoData's assignee) to obtain payment, from funds generated by tax revenue, of a GeoData receivable, without ensuring that GeoData's tax liability is paid.

41 The relationship between the parties and the cross-obligations in this case is more direct than that in National Bank. In that case there was no mutuality but the court found the requisite connec-tion in the fact that the money that the Crown agency was using to pay the debtor was generated by tax revenue. Here, we are dealing solely with the B.C. Government and the same relationship - that of taxpayer-tax collector - is the basis of both cross-obligations.

42 Canadian also argued that section 11(3) of the Crown Proceedings Act, R.S.B.C. 1996, c.89, which prohibits taxpayers from raising set-off against taxes owing, destroys any connection that otherwise might exist between taxes and refunds. The flaw in that argument is that it is not the tax-payer seeking to set-off, but the tax collector, in the CCAA context. Just because the Crown Pro-ceedings Act precludes set-off by the taxpayer does not similarly preclude the B.C. Government from setting-off refunds owing to Canadian.

Page 10

43 In Cam-Net Communications v. Vancouver Telephone Co., [1999] B.C.J. No. 2855, 1999 BCCA 751, the British Columbia Court of Appeal recognized equitable set-off in the CCAA con-text and found that it would be unjust to separate the cross-claims in issue there.

44 Similarly, I find in this case that it would be manifestly unfair for a taxpayer not to pay taxes under one statute, while collecting a refund of tax under another statute, each involving the same tax collector.

45 For these reasons, I find that the B.C. Government would be entitled in equity to set-off the refunds against the tax liabilities.

4. Statutory Set-off

46 The B.C. Government submitted that if the court found that legal and equitable set-off were not available, then s. 38 of the Financial Administration Act, R.S.B.C. 1996, c. 138 creates an addi-tional, statutory right of set-off Section 38 provides that:

38 The Treasury Board may, by directive, authorize the Comptroller General to retain money by way of set-off, out of any money due or payable to a person by the government or out of a trust fund, if

(a) that person owes money to the government, (b) an overpayment has been made by the government to that person, or (c) an advance made to that person under section 36 has not been repaid or

accounted for.

47 This section on its face appears to describe a broad right of set-off. Arguably the directive does not create the right, but the authority of the Comptroller General to set-off funds. However, in either case, the invoking of this section on August 5, 2000, well after the Effective Date of the Plan and the compromise of claims was effected, is inappropriate. The directive cannot be utilized retro-spectively to effectively negate (in the absence of set-off on other grounds) the terms of the sanc-tioning order insofar as the B.C. Government is concerned.

48 It is also necessary in the context of statutory set-off to consider the impact of the Social Services Tax Act, Motor Fuel Tax Act and the Motor Fuel Tax Act Regulation on the B.C. Gov-ernment's general rights of set-off.

49 Canadian's primary argument in this application was that since the provisions in this legisla- tion are so specific and detailed in their delineation of when set-off may occur, that the B.C. Gov-ernment is limited to asserting set-off only in those delineated situations. In other words, Canadian argued that the machinery in the legislation replaces the ordinary law of set-off.

50 Canadian relied on the following passage from Re White Motor Corporation of Canada Ltd. (1981, Ont. S.C.) to support its argument in this regard:

Moreover, if it should occur that the minister reassesses the debtor's tax for the 1979 tax year and an overpayment is determined, the minister has by s. 164(2) of the Income Tax Act a discretion to apply the overpayment against other liability of the debtor under that Act. The statute therefore gives him this specific right in settling the accounting between the Crown and the taxpayer. As a matter of law

Page 11

between them the ordinary law of set-off is not available to the taxpayer but is replaced by the machinery in s. 164 of the Income Tax Act. In my opinion this is not set aside by the Bankruptcy Act. (emphasis added)

51 However appealing this statement may be in suggesting that the B.C. Government is stuck with the regime it set up regarding set-off, a careful review shows that the court in Re White was limiting the taxpayer to the statutory machinery; the court did not say the Crown was similarly lim-ited. K. Palmer, in The Law of Set-off in Canada comments on this difference at p. 255:

For those who consider themselves students of Canadian governments (or just those who are affected by their actions) it should come as no great surprise that the government powers with respect to taxation and set-off are rather one-sided. The right to set-off is widely available to the Crown and wholly unavailable to the taxpayer. The thrust of the statutory powers granted in this area are similar to those described above in the Financial Administration Act, where a broad power of set-off is granted,„ .

Amounts owing for taxation can therefore be withheld by the Crown from any payment due from the Crown to the taxpayer.

The situation, unfortunately, does not work in the reverse. A taxpayer cannot withhold from taxes due an amount which the Crown owes to the taxpayer. This was considered in R. v. Lamothe, 119 C.C.C. 330, where the defendant as an employer failed to remit deductions from wages for income tax, claiming that he had set these off against a tax refund owed to him personally. The set-off was not allowed by the court, which noted that the Income Tax Act created a statutory duty to pay taxes, against which set-off was not available as a defence:

That duty is not qualified in any way, and the mere fact that the Receiv-er-General may owe the person paying money does not, it seems to me quite apart from any question of set-off, afford a defence to an information alleging a failure to observe an obligation imposed by statute.

The same conclusion was reached in Re White Motor Corp. of Canada Ltd., which noted that this statutory duty replaced the ordinary rules of set-off which would otherwise apply to the Crown. (emphasis added)

52 While White does not stand for the proposition suggested by Canadian, it is appropriate to review the legislation in question and determine whether it modifies the legal and equitable rights of set-off and if so, to the extent that the B.C. Government is not able to access those general rights.

53 The Social Services Tax Act does speak very specifically to credits and refunds in cases of particular scenarios (for example, it provides for a refund of tax involved in the sale of a horse), but counsel did not refer the court to any provision that addresses the situation at bar. Similarly, counsel did not rely on any section of the Motor Fuel Tax Act that would apply to the particular set-off be-ing claimed by the B.C. Government. The statutes provide variously for refunds, credits and appli-cations of payments from taxpayers, using a mixture of imperative and pet missive language. It might be argued that the legislation modifies to some extent the B.C. Government's existing rights

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of legal and equitable set-off in particular scenarios, but it does not follow in this context that the failure to refer to a particular scenario in the legislation means that there are absolutely no set-off rights with respect to that scenario. Quite simply, because these circumstances are not included in the statutes, the set-off rights have not been modified by the statutes.

54 Canadian argued that there is no provision in either the Social Services Tax Act or the Motor Fuel Tax Act authorizing the B.C. Government to set-off refunds owing to taxpayers under other enactments as against liabilities arising thereunder and that therefore such a set-off is not permitted. I disagree that statutory permission is required.

55 The B.C. Government conceded that the refunds in question fall under sections 4.2 (3) and 4.3 (4) of the Motor Fuel Tax Act Regulation. These subsections respectively provide that where tax is paid on jet fuel, the director:

"shall, on application, refund from the consolidated revenue fund to the person who paid the tax a refund of 3 [CENTS] for every litre of fuel for which tax was paid under section 7(1)(a) of the Act."(s. 4.2 (3))

"shall, on application, provide from the consolidated revenue fund to the person who paid the tax a refund calculated in accordance with the following formu-la...". (s. 4.3 (4))

56 Canadian did apply for the refunds on a monthly basis from February - June, 2000, the very months for which the B.C. Government is arguing it is entitled to set-off the refunds.

57 The word "shall" in the Motor Fuel Tax Act Regulation is to be construed as imperative: In- terpretation Act R.S.B.C. 1996, c. 238, s. 29. The plain meaning of these provisions is therefore that the B.C. Government is obliged to provide a refund to the taxpayer. While the provisions do not ex-pressly rule out setting-off the refunds, I cannot consider them in a vacuum. As referenced above, the Motor Fuel Tax Act, the statute under which the Motor Fuel Tax Act Regulation was enacted, contains both imperative and permissive language in its treatment of the provision of refunds. However, counsel did not refer the court to any provision of the Motor Fuel Tax Act which ad-dressed the application or crediting of refunds by the B.C. Government; its ability to set-off is not expressly addressed. Were this not the case, I might have been more inclined to find that the ab-sence of references to set-off in the Motor Fuel Tax Act Regulation reflected the deliberate intention on the part of the B.C. legislature to exclude any ability of the B.C. Government to use refunds to set-off tax liability. However, simple use of the imperative "shall" instead of "may' in this context does not rule out the possibility of set-off. Further, allowing the exercise of set-off in these circum-stances does not violate either the letter or the spirit of the Motor Fuel Tax Act Regulation. The set-off recognizes the refund rather than disregarding it.

58 In addition, interpreting the Motor Fuel Tax Act Regulation in the way Canadian suggests would entirely remove the B.C. Government's common law right of legal set-off as well as its equi-table right in this regard. I am unable to read the statutory language as disclosing an intention by Parliament to effect such a fundamental change in the B.C. Government's legal rights when the presumption, at least vis-à-vis the common law, is that legislation is not meant to interfere with common law rights, nor, generally, to change the common law. In Goodyear Tire & Rubber Co. of Canada v. T. Eaton Co., [1956] S.C.R. 610 at 614, Fauteux J. held that:

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...a Legislature is not presumed to depart from the general system of the law without expressing its intentions to do so with irresistible clearness, failing which the law remains undisturbed.

59 More recently this principle was affirmed by the Supreme Court of Canada in R. v. T., [1992] 1 S.C.R. 749 at 763-764, where L'Heureux-Dube J. adopted the following statement in P.B. Maxwell, Maxwell on the Interpretation of Statutes, 12th ed. (London: Sweet & Maxwell, 1969) at page 116:

It is presumed that the legislature does not intend to make any change in the ex-isting law beyond that which is expressly stated in, or follows by necessary im-plication from, the language of the statute in question.

60 L'Heureux-Dube J. went on to find that while it was open to Parliament, subject to constitu- tional restraints, to change the law as it likes, the legislation that makes the alterations must be drafted such that its intention is "in no way in doubt" (p. 764).

61 In my view, the wording contained in the Motor Fuel Tax Act Regulation does not expressly or impliedly rule out the B.C. Government raising a set-off in response to an application for a re-fund, as it has here.

62 Canadian also asserted that the Motor Fuel Tax Act Regulation creates an absolute and im- mutable right to payment without set-off It referred to the discussion in R. v. Lamothe (1957), 119 C.C.C. 330 (Ont. H.C.) of the statutory duty of a taxpayer to pay taxes (p. 336) and suggested that the mandatory language of the refund provisions in the Motor Fuel Tax Act Regulation created a similar duty to pay refunds which replaces the ordinary rules of set-off available to the B.C. Gov-ernment. I note that the legislation in R. v. Lamothe went beyond a direction to pay the taxes and created an offence for failure to do so. Obviously there is no associated offence with respect to fail-ure of the B.C. Government to provide a refund to a taxpayer. Canadian was not able to provide any authority supporting the creation of such a duty and without more, on my interpretation of the leg-islation, I am not prepared in these particular circumstances to elevate the obligation of the B.C, Govermnent to provide a refund to the level of a duty which prohibits set-off, As noted above, the set-off rights of government relating to unpaid taxes are frequently one-sided and while various taxing statutes expressly remove the taxpayer's right to set-off, such provisions do not exist here with respect to the B.C. Government's ability to set-off tax liabilities against the refunds in question.

5. Timing of Set-Off

63 Canadian asserted that if set-off applied in this case, the B.C. Government should be re- stricted to setting off the tax liabilities against the refunds of tax that were in existence at the time the initial stay order was granted. It argued that the March 24, 2000 order restricted set-off to cross-obligations in existence as at that date.

64 The distinction Canadian seeks to make between pre- and post- petition refunds cannot be maintained in this particular ease, for two reasons: first, all of the refunds arose before the Effective Date under the Plan, and second, the connection between the obligations is such that the issuance of the initial order on March 24, 2000 is insufficient to sever it.

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65 The Plan approved by the requisite number of creditors and sanctioned by this court on June 27, 2000 contemplated that all amounts due and owing up to and including the Effective Date of July 5, 2000 would be included in the Plan, as reflected in the Plan definitions of "Tax"/"Taxes" and "Tax Claims" and the releases contained in s. 6.2 of the Plan, as follows:

"Tax" or "Taxes" shall mean any and all federal, provincial, municipal, local and foreign taxes, assessments, reassessments and other governmental charges, du-ties, impositions and liabilities...

"Tax Claims" means any and all claims for Taxes by any federal, provincial, ter-ritorial, municipal, local or foreign authority, agency or government...in respect of any taxation year or period ending on or before the Effective Date including, without limitation, any Taxes arising out of or attributable to any transaction to be completed in accordance with this Plan and, in the case where a current taxa-tion year does not end on the Effective Date, any Taxes due in respect of or at-tributable to that portion of the period commencing at the beginning of such cur-rent taxation year up to and including the Effective Date; (emphasis added)

6.2(1) As of the Effective Date, the Applicants will be deemed to forever release, waive and discharge all claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action and liabilities (other than the rights of the Appli-cants to enforce the Plan and the contracts, instruments, releases and other agreements and documents delivered thereunder) whether liquidated or unliqui-dated, fixed or contingent, matured or =matured, known or unknown, forseen or unforseen, then existing or thereafter arising, in law, equity or otherwise that are based in whole or in part on any act, omission, transaction, event or other occur-rence taking place on or prior to the Effective Date in any way relating to the Applicants or the Subsidiaries, the parties released pursuant to this Section 6.2(1), the CCAA Proceedings or the Plan, and that could have been asserted by or on behalf of the Applicants against former directors, officers and employees of the Applicants in each case, as of the Date of Filing or that have become officers and/or directors thereafter but prior to the Effective Date (other than for indebt-edness owed by any such directors, officers, or employees to any of the Appli-cants) and the Applicants' agents and professionals (including, for greater cer-tainty, the Monitor). (emphasis added)

6.2(2) As of the Effective Date, each of the Affected Creditors will be deemed to forever release, waive and discharge all claims, obligations, suits, judgments, damages, demands, debts, rights, causes of action and liabilities (other than the rights to enforce the Applicants' obligations under the Plan and the securities, contracts, instruments, releases and other agreements and documents delivered thereunder), whether liquidated or =liquidated, fixed or contingent, matured or =matured, known or unknown, forseen or unforseen, then existing or thereafter arising, in law, equity or otherwise that are based in whole or in part on any act, omission, transaction, event or other occurrence taking place on or prior to the Effective Date ...(emphasis added)

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66 But for set-off, the tax liabilities owing to the B.C. Government up to and including the Ef- fective Date would be compromised at that date. All of the refunds had arisen prior to that time. Clearly the Effective Date was pinpointed by Canadian as the settlement date for its liabilities. The result that the B.C. Govenunent can ultimately set-off tax liabilities against all of the refunds is therefore not inconsistent with the Plan nor with the prospective nature of paragraph 5(e) of Moore C.J.'s March 24, 2000 order in these proceedings:

Until the Stay Termination Date or further order of this Court and subject to oth-er provisions of this Orden...Subject to Section 18.1 of the CCAA, no person shall exercise any right of set-off with respect to any accounts of the petitioners, or any combination of accounts in relation to amounts due or accruing due in re-spect of or arising from any indebtedness or obligation of the petition-ers...(emphasis added).

67 The Alberta Court of Appeal in Blue Range, supra was faced with a decision of a chambers judge that was based in part upon the distinction between pre-petition and post-petition obligations. The court did not approve of this distinction in that case and expressly found that the "connection" between the pre- and post- petition obligations was sufficient to support equitable set-off, regardless of the fact that one of the obligations arose after the stay instituted by the initial CCAA order. The Court of Appeal stated at paragraph 19 that "[the fact that the damages owed to Duke and Engage arise after the stay order is not relevant when the obligations arise out of the same contracts".

68 In this case, the cross- obligations do not arise contractually, but from a single tax payer- tax collector relationship. As described earlier in these reasons, this relationship between the B.C. Gov-ernment and Canadian that is reflected in the taxes and refunds of taxes owed supports the close connection that is a hallmark of equitable set-off. To disregard this relationship would be to disre-gard the law of set-off which Parliament has legislated is to continue to apply in the CCAA context.

69 While the distinction between pre- and post-petition claims may have significance in deter- mining whether a close connection exists in certain circumstances, it is not significant here given the terms of the Plan and the close connection that exists between the cross-claims in issue.

70 Although Blue Range suggests that it is inappropriate to consider prejudice to other creditors in prohibiting set-off, the court did not go so far as to say that a court in determining a close con-nection is prohibited from considering whether the intention of the CCAA will be entirely defeated. Allowing set-off in this case will not have such an effect, insofar as the refund which will be applied against Canadian's tax liabilities does not form any part of the fund established by Air Canada to pay dividends to creditors. Further, there is also no evidence before me, nor was any submission made by counsel that would suggest that allowing the set-off in this case would defeat the intention of the CCAA to permit debtor companies to continue in business for the currency of the proceed-ings and afterward, where possible.

71 In this case I have found that the cross-obligations in question are capable of legal or alter- natively equitable set-off. The wording of the Plan, the March 24, 2000 order and s, 18.1 of the CCAA support this result.

V. CONCLUSION

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72 The B.C. Government is entitled to set-off the refunds owing to Canadian against Social Services Tax Act liabilities owed by Canadian, as those amounts stand as at July 5, 2000, the Effec-tive Date under the Plan. Canadian has challenged its liability to pay a portion of the tax liabilities and has consented to have that issue resolved by the B.C. court. To the extent that Canadian is suc-cessful to any degree in that regard, further accounting may have to take place. If there is any disa-greement between the parties at that point, they may see me.

PAPERNY J.

ERRATUM

Filed; February 28, 2001

The first line of paragraph 17 has been revised to read:

"In my view, the ruling of the Claims Officer certainly deserves the court's re-spect." and on the last page of the above judgment, the following sentence has also been revised to read:

DATED at Calgary, Alberta this 21st day of February, 2001.

Please replace these pages in your copy of the judgment.

cp/i/q1jpn/q1cas/q1hjk

TAB 10

Page 1

Indexed as:

NESI Energy Marketing Canada Ltd. (Trustee of) v. NGL Supply (Gas) Co.

IN THE MATTER OF the bankruptcy of NESI Energy Marketing Canada Ltd.

Between Trustee in bankruptcy of NESI Energy Marketing

Canada Ltd., applicant (respondent), and NGL Supply (Gas) Co. Ltd. and. Direct Energy

Marketing Ltd., respondents (appellants)

[2001] A.J. No. 822

2001 MICA 168

201 D.L.R. (4th) 419

[2001] 8 W.W.R. 607

94 Alta. L.R. (3d) 216

281 A.R. 229

15 B.L.R. (3d) 55

27 C.B.R. (4th) 131

107 A.C.W.S. (3d) 12

2001 CarswellAlta 866

Docket: 99-18180

Alberta Court of Appeal Calgary, Alberta

Conrad, O'Leary and Picard ILA.

Heard: September 11, 2000.

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Judgment: filed June 27, 2001,

(79 paras.)

On appeal from the judgment of Fraser J. Made February 12, 1999.

Counsel:

D.W. Mann, for the appellants, NGL Supply (Gas) Co. Ltd. and Direct Energy Marketing Ltd. LG. Hanley, for the Trustee in bankruptcy for NESI Energy Marketing Canada Ltd,

REASONS FOR JUDGMENT RESERVED

CONRAD J,A.:--

INTRODUCTION

1 The appellants NGL Supply (Gas) Co. Ltd. ("NGL") and Direct Energy Marketing Ltd. ("Di- rect"), as well as the respondent NESI Energy Marketing Canada Ltd. ("NESI"), arc all natural gas brokers in the business of buying and selling natural gas for future delivery. NGL and Direct each entered into a master agreement with NEST, which set the general terms that would form part of subsequent contracts between them. Direct and NGL concluded a number of these separate con-tracts with NESI under the master agreements, some for the purchase and some for the sale of gas.

2 In late 1996, NEST experienced financial difficulties and became unable to honour its com- mitments under several of the purchase and sale contracts. After NESI was petitioned into bank-ruptcy, the appellants filed proofs of claim for losses arising from NESI's failure to sell gas to them at the agreed prices. As a result of that failure they were forced to buy gas on the open market at higher prices, resulting in losses. Those losses fanned the bases of the proofs of claim. There were no losses associated with NESI's failure to purchase gas from Direct and NGL, however, as market prices had gone up and no claims were filed with respect to those contracts. In fact, the appellants were able to sell the natural gas originally destined for sale to NEST on the open market at the high-er price. NESI's Trustee in Bankruptcy took the position that the appellants' claims for losses relat-ing to NESI's failure to sell gas should be reduced by the amount of gains arising from NESI's breach of its obligation to buy gas.

3 The Chambers Judge agreed with the Trustee and ordered a netting out of all contracts, com- pelling the appellants to reduce their claims for losses resulting from NESI's default in its sale obli-gations by the amount of their gains from NESI's failure to buy from them. The appellants argue that the Chambers Judge misinterpreted the master agreements and erred in his application of miti-gation principles.

ISSUES AND DISPOSITION

4 The grounds of appeal may be divided into four issues involving the Chambers Judge's inter- pretation of the master agreements and the common law mitigation principles:

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Issue 1: Were the purchase and sale transactions under the master agreements dis- tinct and independent contracts?

5 Yes. The buy and sell side contracts are distinct' Each transaction under the master agree- ments constituted a distinct contract. Mere agreement on the standard terms to be used in the parties' ongoing business relationships for commercial ease does not alter the individual nature of the con-tracts governing each purchase and sale transaction.

Issue 2:

Do the master agreements between NEST and the appellants contemplate a netting of the parties' respective positions upon NESI's default caused by bankruptcy?

6 No. The parties could have provided for netting in these circumstances, but they did not.

Issue 3: Do the common law rules of avoided loss, indemnity, or collateral loss en- title the Trustee to reduce the appellants' claims?

7 No. These common-law rules are not applicable to the appellants' claims, as the rules involve mitigation of damages resulting from the breach of a single contract. They do not operate to dimin-ish losses resulting from the breach of one contract by deducting gains resulting from the breach of another contract. The advantages gained by NGL and Direct from NESI's failure to buy do not flow from their mitigation efforts associated with NEST'S failure to sell. NESI is not entitled to benefits arising from its breach of other distinct contracts.

8 The mere fact of bankruptcy does not expand the application of mitigation principles so that a netting out of all gains and losses between the parties is required, in the absence of an agreement between the parties. There was no such agreement here. The bankruptcy is merely the reason that several different contracts were breached; it does not otherwise link the distinct transactions for the purpose of calculating damages.

Issue 4: Is this an appropriate case for set-off?

9 No. For set-off to apply, cross-claims must exist. As NEST has not advanced any claim against the appellants, there is no right to set-off This is not a case where a trustee refuses to per-form disadvantageous contracts with one party and, at the same time, tries to enforce advantageous contracts with the same party (who then refuses to perform). In such a case, there will be cross-claims. Here NEST refused to perform all contracts.

BACKGROUND

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10 The master agreements contained many of the general terms upon which the parties agreed to do business in the future. As contemplated by the master agreements, NESI entered into a num-ber of individual contracts with Direct and NGL, some for the purchase and some for the sale of natural gas, at stipulated prices on specified dates.

11 NEST experienced financial difficulties. Prior to the performance date of the contracts, it was petitioned into bankruptcy. NESI did not perform its outstanding buy side and sell side contracts with the appellants, At the time of default, the market price for natural gas was rising and exceeded the price specified in the contracts, This market fluctuation enabled Direct and NGL to receive un-expected returns (or sell gains) on the breaches of the sell side contracts, as they were able to sell gas on the rising open market that they would have otherwise been obligated to sell to NESI at a lower price. When NESI failed to sell, however, both NGL and Direct incurred buy losses on the gas they were compelled to purchase on the rising open market, in order to honour their ongoing contracts with third parties.

12 After the bankruptcy, the appellants filed proofs of claim for losses incurred on the buy side contracts, No proofs of claim were filed with respect to the sell side contracts as no losses were in-curred. The Trustee reviewed the appellants' claims and requested that they set off their gains and losses, The appellants declined and the Trustee applied for advice and direction pursuant to s. 34(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA"). Chambers Decision

13 The Chambers Judge concluded that the Trustee was entitled to net the appellants' sell gains against their buy losses, because the rule as to avoided loss precluded excess recovery by the appel-lants. He also concluded that the master agreements incorporated the rule as to avoided loss such that a netting of gains and losses was required in the event of an insolvency default by NEST. 14 Regarding the rule as to avoided loss, the Chambers Judge emphasized that the gains and losses both resulted directly from NESI's bankruptcy. Although he found that the buy and sell side transactions were separate contracts, he applied the rule as to avoided loss to the totality of the con-tracts because the gains and losses were caused by the bankruptcy. He held that it would be unfair and overly formalistic not to apply the rule as to avoided loss in these circumstances.

15 The appellants concede that the Chambers Judge accurately stated the law regarding mitiga- tion. They question his application of mitigation principles in these circumstances. It is not disputed that NESI breached its contractual buy and sell obligations. The amounts of the losses and gains flowing from the breaches are agreed. This appeal concerns only the interpretation of the master agreements and associated schedules and the proper scope and application of common law mitiga-tion principles.

Position of the Appellants

16 The appellants assert that the Chambers Judge erred in reducing their claims as the various buy and sell side contracts were separate and independent. The appellants maintain that principles of mitigation only permit benefits flowing from the same breach to be taken into account in reduc-tion of damages. A party in breach of one contract cannot reduce damages flowing directly from its breach of one contract by the gains resulting from steps taken by the innocent party to mitigate a further breach of another distinct contract. To do otherwise effectively vests in NEST a claim for damages arising from its own breach. Thus, sell gains resulting from NEST's breach of the sell side

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contracts cannot reduce the damages arising from NESI's breaches of the buy side contracts, be-cause the benefits derived from the former do not flow from the breach of the latter.

Position of the Respondent

17 The Trustee argues that the appellants' losses and gains are attributable to a common cause: its bankruptcy. Further, it argues that the Chambers Judge erred when he found that the various in-dividual transactions under the master agreements were separate contracts. The Trustee submits that the buy and sell side contracts are governed by a single master agreement, and thus all consequenc-es flowed from the breach of that agreement. In short, losses and gains under various transactions were closely intertwined under the master agreements and therefore properly netted one against the other.

18 In addition, the Trustee defends the Chambers Judge's application of common law mitiga- tion rules. The Trustee asserts that the appellants' proposed application of mitigation principles is overly narrow. It takes the position that the appellants' interpretation of the relevant mitigation prin-ciples ignores the intent of the law and, moreover, defies common sense on the facts of this case. ANALYSIS

Issue 1: Were the purchase and sale transactions under the master agreements dis- tinct and independent contracts?

19 The characterization of the buy and sell transactions as independent or related is pivotal to this decision. In my view, the Chambers Judge was correct in characterizing each purchase and sale transaction as a separate contract.

20 Both master agreements specifically state that each schedule formed thereunder constitutes a separate transaction. Section 2.1 of the NGL Master agreement states:

At any time during the term of this Agreement there may be one or more Trans-actions in effect and from time to time, there may not be any Transactions in ef-fect. Each Transaction shall constitute a separate purchase and sale transaction between the parties hereto on the terms specified in the applicable confirmation and on the general terms and conditions contained in this Agreement, and at any time there may be more than one Transaction outstanding,

(Emphasis added.)

The Direct master agreement similarly provides in s. 1(a) that: "Each Schedule 'A' shall constitute a separate purchase and sale transaction between the parties hereto..." These descriptions imply that the transactions constitute distinct and separate contracts.

21 Moreover, basic contractual principles support the conclusion that the schedules executed under the master agreements constitute separate contracts. Although the title "master agreement" suggests a contract, the master agreements do not contain any obligation to purchase or sell. The

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master agreements merely provide a framework for future contractual relations. They do not specify what quantities of gas are to be bought or sold, the price, or the due dates of any obligations. Lack-ing the essential components of a contract, they merely anticipate the formation of future contracts. At most, the master agreements are agreements to enter into future contracts, elaborating some of the terms and conditions to be incorporated into these future contracts. The master agreements pro-vided a mechanism whereby the appellants and NESI could contract, from time to time, without re-negotiating and revisiting basic terms already addressed in the master agreements.

22 That the master agreements, by themselves, created no contractual obligations is illustrated by their tei nunation provisions, which included the ability to terminate the agreements on short no-tice. The NGL master agreement states in s. 13.1:

This Agreement shall be effective as of the date hereof and continue for a period of one year from the date hereof and thereafter shall remain in effect unless ter-minated by either party upon no less than 30 days prior written notice to the other party. [...j If, at the time of termination as aforesaid one or more Transactions are in effect, termination shall not be effective for any such Transaction until the ex-piration of the effective period of such Transaction,

The Direct master agreement similarly provides in s. 9:

This Agreement shall be effective as of the date first above written and shall re-main in effect unless terminated by either party upon no less than 7 days prior written notice to the other party. The termination of this Agreement shall not re-lieve Buyer nor Seller from any obligation which may have arisen prior to the date of such teimination. In any event, this Agreement shall not terminate until the expiry of the term of every outstanding Schedule 'A' hereunder.

23 Those passages confirm that the parties intended that only the individual transactions created contractual obligations. Although the master agreements could be terminated, a termination could neither cancel nor affect existing individual contracts. While the buy and sell "transactions" were in the form of schedules to the master agreements, the contracts were stand alone agreements, incor-porating terms and conditions referenced in the master agreements and continuing in force after the termination of the master agreements.

24 By way of analogy, the master agreements might be viewed as a list of terms and conditions provided by a machine repair shop to one of its repeat customers. From time to time, the repeat customer brings machines to the repair shop and, on the terms previously specified, contracts for repair services. The list of terms and conditions might set out payment deadlines, interest, liability assumed by the parties and the consequences of delays. This list, however, imposes no independent obligations on the parties without the founation of a specific agreement for the repair of a particular machine. While the repeat customer may return on many occasions to use the shop's services on the same terms and conditions stipulated earlier, each repair transaction constitutes a separate and dis-tinct contract.

25 To continue the analogy, suppose, for example, that due to the unavailability of matching parts, a repair was done for the repeat customer with superior parts resulting in a much improved machine. Then, a month later, a different machine was brought in for repair and the repairs were faulty. There would be no justification for reducing the losses caused by the faulty repair by the