Set-off is a powerful and often under-appreciated insolvency remedy in Canada. A recent decision of the Alberta Court of Queen’s Bench highlighted the importance of the doctrine and examined the requirements for a claim of equitable set-off in the context of a corporate group.
The right to assert valid set-off claims is expressly preserved in Canadian insolvency legislation. The remedy applies such that creditors may set-off (or net-out) amounts owing to them by an insolvent party, against amounts otherwise payable by them to the insolvent party.
Generally, there are two types of set-off. Legal set-off requires that the claims be liquidated and mutual. Equitable set-off does not require liquidated or mutual claims but instead looks at the connection between the claims in respect of which set-off is asserted. If the connection between the claims is sufficiently close that it would be unfair or inequitable to permit one party to recover its claim without permitting the other party to set-off what is owed to it, the courts will generally permit the claims to be netted out.
In the CCAA case of SemCanada Crude Co. (“SemCanada”) the fact situation was particularly interesting. This is because the set-off claimant, Nexen Marketing, attempted to set-off amounts owing to it under contracts with SemCanada against amounts owing by it not to SemCanada, but to other related corporations within the “SemGroup” conglomerate. The claims at issue accordingly did not arise out of the same contract, and were not mutual in the sense that they were not between the same two corporations.
In approaching the SemCanada fact situation, the Court first commented on the powerful nature of set-off as a remedy. A party claiming set-off realizes on its claim on a dollar-for-dollar basis, while other creditors, who participate in an insolvency re-organization, generally have their claims substantially reduced. Recognizing this, the Court observed that the requirements for set-off are not relaxed in the insolvency context and that judges should remain “vigilant to claims of set-off in the re-organization context.”
Turning to the case at hand, the Court then examined the issue of the sufficient connection between the contracts at issue. On the relevance of the operation of a corporate group, the Court held that the fact that related companies may function as an integrated economic unit does not mean that for legal purposes the separate legal entities will be ignored. Set-off is an issue of law and equity, not economics. Legally speaking, the fact that the parties to the contract are separate entities implies a lesser degree of connection among the contracts and the transactions. A finding was also made that the contracts under which the alleged set-off amounts arose were negotiated and signed during different time periods, and made for different purposes.
In the end, the court concluded that there was no persuasive evidence of close connection amongst the contracts or transactions arising from the facts such that it would be “manifestly unjust” to enforce Nexen’s payment obligations without right of set-off.
The SemCanada case provides an excellent overview of the application of the law of set-off and the principles applicable to set-off in an insolvency context and within a corporate group. Recognizing the powerful nature of set off as a remedy, SemCanada is an interesting example of a case where a party attempts to push the boundaries of the doctrine, albeit unsuccessfully.