Gehlen Dabbs Lawyers
Call Us
T: 604 757 9380
Call Us : 604 757 9380
Main navigation

CCAA stays - Putting the freeze on creditors

When a court protects a company from its creditors under the Creditors Arrangement Act (CCAA), it's telling creditors, "Nobody move, you're frozen."

It sounds like a kids' game, but dozens or hundreds of jobs and millions of dollars can hang in the balance. From the moment the 'stay' is ordered, creditors are barred from taking any action to collect debts while the insolvent company seeks to restructure its obligations and resume normal operations. The only consolation for creditors is that their relative positions at the time of the CCAA filing is also frozen. No creditor can collect at the expense of others.

The date of the CCAA filing, and the stay order, is thus central to the entire business of restructuring. But two recent cases dealing with offsetting debts have sought to challenge this system.

In Kitco, the Agence du Revenue du Quebec (ARQ) and Canada Revenue Agency (CRA) sought to collect sales taxes (GST/QST) assessed prior to Kitco's insolvency by offsetting them against $1.7 million of sales tax refunds owed to Kitco from ongoing operations after the CCAA filing, during the time Kitco sought to restructure.

An aggravating factor was that the pre-filing assessment by the two governments arose out of an allegation of tax fraud against Kitco. Nevertheless, the Quebec Court of Appeal (QCCA) ruled that the two governments must pay Kitco the $1.7 million in refunds accrued after the insolvency filing, and await the outcome of restructuring to learn the fate of their claim for assessments based on a charge of fraud against the company.

The QCCA dismissed the tax departments' argument that section 21 of the CCAA does not explicitly limit offsets to debts arising before insolvency and thus freed them to offset the $1.7-million refund accrued after insolvency. The court said that interpretation would doom the restructuring to failure and would defeat the primary purpose of the CCAA. It said ARQ was seeking to assign itself a priority position, to the detriment of other Kitco creditors.

In North American Tungsten Corp., NATC was a mining company selling tungsten to Global Tungsten and Powder (GTP). GTP loaned NATC $4.4 million and when the mining company defaulted the entire loan came due, forcing NATC into CCAA protection.

NATC filed a restructuring plan based on continued tungsten sales to GTP generating a substantial part of projected cash flow. But GTP said it would offset its post-insolvency tungsten purchases against the defaulted pre-insolvency loan, taking tungsten deliveries without payment during the restructuring.

The BC Court of Appeal (BCCA) disallowed the offset. It said CCAA s 21, allowing offsets, is trumped by s 11, which gives the CCAA court jurisdiction to "make any order it considers appropriate in the circumstances."

"If an attempt at compromise ... is to have any prospect of success, there must be a means of holding creditors at bay," the court said. "GTP is attempting to do precisely what the CCAA is designed to prevent." The court also noted that "a creditor using (offsets) realizes his claim on a dollar-for-dollar basis, while other claims ... are subject to compromise."

While the prospect of offsets is invariably enticing to creditors facing the insolvency of a debtor, complexities abound and legal counsel should be consulted before pursuing this option. It appears clear from jurisprudence that courts will be disinclined to allow any offset that disturbs the post-filing status quo.

No Comments

Leave a comment
Comment Information

contact us today

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish a lawyer-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy