Can an exercise of set-off rights be contrary to the CCAA?
The Applicant, Carillion, applied for protection under the Companies’ Creditors Arrangement Act following the liquidation proceedings of its parent company in the United Kingdom. The Initial order contained a number of provisions which affected Carillion’s operations during the period of CCAA protection, including:
- a defined stay prohibiting any person or entity from exercising any option, right or remedy or taking any enforcement steps against Carillion;
- a Non-Derogation of Rights provision which required persons who “provided any kind of letter of credit” for the benefit of Carillion before the date of the Initial Order to “continue honouring” these assurances “in accordance with their terms”; and
- a restriction on Carillion’s use of funds during the stay period to on-going business operations, tax payments, and payments to critical suppliers.
HSBC had previously issued to Carillion four separate letters of credit totalling $6,823,000 in respect of supplemental executive retirement plans (the “Letters of Credit”). Carillion and HSBC had entered into a Master Indemnity and Reimbursement Agreement for the Letters of Credit, which authorized HSBC “to set-off and appropriate and to apply any and all deposits” against the obligations of Carillion to reimburse HSBC for the Letters of Credit. HSBC and Carillion also entered into Counter Indemnity Agreements for each of the Letters of Credit, which expressly granted HSBC the contractual right of set-off in the event that HSBC had to make any payments under any of the Letters of Credit. The Commercial Account Operating Agreement between HSBC and Carillion also provided that HSBC may “consolidate and set-off” any amounts owing by Carillion against Carillion’s funds or accounts held by HSBC.
Following the granting of the Initial Order, Carillion continued to utilize the operating account with HSBC as its primary general account for day-to-day business expenses. This account was controlled by Carillion and overseen by the Monitor, who approved all significant disbursements. Carillion also began the process of downsizing employees and ceased making payments in respect of the supplemental executive retirement plans. The retirement plans were transferred to Royal Trust, which called on the Letters of Credit. HSBC paid out $6.8 million for the Letters of Credit on February 15, 2018. On February 27, 2018, HSBC notified Carillion that it would be taking $6.8 million from the operating account by “exercising the set-off right afforded to it pursuant to the Counter Indemnity Agreements, the Master Indemnity Agreement, and in law.” Without waiting for a reply from Carillion, HSBC took the money.
On February 27, 2018, the operating account held about $60.5 million, of which Carillion argued it had allocated all but $2,471,012 to accrued business and operating expenses and/or impressed with super priority charges. Carillion stated that the $6.8 million taken by HSBC included $4.3 million of encumbered funds, which forced Carillion to dip into the charged monies to continue running its day-to-day business. Carillion brought this motion for an order directing HSBC to return or make payment of $6,823,000 to Carillion or the Monitor, and a declaration that HSBC was prohibited from exercising any rights to set-off, indemnification, damages, reimbursement or otherwise sweep or debit Carillion’s bank accounts during the CCAA stay period.
Carillion argued that HSBC was not entitled to take $6.8 million from its operating account because (a) the Initial Order prohibited HSBC from exercising any rights of set-off or any other legal rights against the Carillion during the stay period; (b) in any event, funds in the operating account were already allocated to specific operating expenses and/or impressed with priority charges and were not available for set-off purposes; and (c) HSBC’s exercise of a self-help remedy in order to obtain full recovery of its unsecured claim was a bad faith maneuver contrary to the purposes and policy of the CCAA. HSBC improved its position to obtain “full recovery”, while all other creditors could expect to recover only a small fraction of their claims.
HSBC countered that the stay provision in the Initial Order did not prohibit its exercise of set-off as the debts arose before the Initial Order was made. However, it did not challenge the jurisdiction of the court to temporally stay set-off rights in a CCAA proceeding, where the immediate exercise of such rights will put a debtor company’s restructuring efforts in jeopardy. The Court noted that in many cases, a determination has not been made at the time that CCAA proceedings are initiated as to whether the immediate exercise of set-off rights will put a debtor company’s restructuring efforts in jeopardy. In addition, it is often difficult to ascertain at the time of commencement of CCAA proceedings as to whether the set-off that a party purports to exercise relates to pre-pre obligations or pre-post obligations.
The Court found that HSBC was clearly aware of the CCAA proceeding and when the set-off was exercised, HSBC was aware of the stay provisions in the Initial Order. A plain language reading of the stay provision revealed that the stay provision was broad enough to cover (i.e. stay) the exercise of set-off rights. No determination had been made as to whether Carillion would be able to restructure or whether it was in a liquidation mode. No determination had been made by the court as to whether the contractual or legal set-off rights of HSBC were with respect to pre-pre or pre-post set-off. If HSBC wished to exercise its right of set-off, it was required to seek leave to do so. HSBC did not seek leave and, consequently, proceeded to knowingly breach the stay provision.
The Court went on to consider whether the set-off claim of HSBC was a pre-pre or pre-post set-off. Section 21 of the CCAA allows pre-pre set-off for the purpose of quantifying creditors’ claims on the date of commencement of proceedings. Carillion argued that HSBC’s claim to set-off arose after the commencement of CCAA proceedings, when the Letters of Credit were paid out. HSBC countered that its obligations to pay out under the Letters of Credit and Carillion’s indemnity obligations owing to HSBC under the Indemnity Agreements were either pre-filing or post-filing obligations and liabilities, but could not be both or a mix of the two. The Court concluded that the HSBC set-off was in relation to contractual indemnity obligations incurred by Carillion and set-off rights granted by Carillion to HSBC on consent, prior to the filing date. Accordingly, the contractual set-off claim was preserved pursuant to section 21 of the CCAA.
Prior to exercising its set-off rights, HSBC was well aware that there was a significant likelihood that a court would find that it was stayed from exercising its set-off rights unilaterally. However, HSBC was entitled to a set-off claim, and the exercise of the set-off did not undermine Carillion’s restructuring efforts. Section 21 of the CCAA recognizes and preserves the pre-pre set-off claim of HSBC. HSBC set-off rights were valid and could be enforced separate and apart from any distribution to general unsecured creditors. Accordingly, Carillion’s motion for an order directing HSBC to return the $6,820,000, and the request for a declaration that HSBC be prohibited from exercising any rights against Carillion to set-off were dismissed.
Judge: Chief Justice G.B. Morawetz
Counsel: Monique Jilesen, Madison Robins and Laura Cobb of Lenczner Slaght for Carillion; Mark Freake and John Salmas of Dentons for HSBC Canada; and Carlo Di Carlo of Stockwoods for EY as Monitor
By Matilda Lici