



COURT OF APPEAL FOR ONTARIO

CITATION: 1732427 Ontario Inc. v. 1787930
    Ontario Inc., 2019 ONCA 947

DATE: 20191203

DOCKET: C66803, C66871

Rouleau, Roberts and Harvison
    Young JJ.A.

In the
    Matter of Notices of Intention to make a proposal of 1732427 Ontario Inc. and 1787930
    Ontario Inc. both of the City of St. Thomas,  
    in the Province of Ontario

Sherry Kettle, for the appellant, Transit Petroleum Inc.

Paul Neil Feldman and Oscar
    Strawczynski, for the respondent,  
    1787930 Ontario Inc.

Heard:  November 15, 2019

On appeal from the order of Justice Russell
    M. Raikes of the Superior Court of Justice, dated January 28, 2019, with reasons
    reported at 2019 ONSC 716, and 2019 ONSC 1623.

REASONS FOR DECISION

[1]

The appellant appeals from the motion judges order
    requiring it to pay to the respondent the sum of $35,299.75, plus pre-judgment
    interest, and costs in the sum of $31,767.52.

[2]

The motion judge allowed in part the respondents
    motion to recover monies paid to the appellant after it had filed a notice of
    intention to file a proposal in bankruptcy (NOI) on July 2, 2018. The motion
    judge found that the pre-authorized debit payment in the amount of $83,734.05 (the
    PAD) made to the appellant post-NOI, under a payment plan concluded pre-NOI,
    related to pre-NOI debts. As a result, contrary to s. 69(1)(a) of the
Bankruptcy
    and Insolvency Act
, R.S.C. 1985, c. B-3 (
BIA
), the PAD represented
    a prohibited remedy against the insolvent person or the insolvent persons property.
    The motion judge concluded that the appellant should return the PAD to the
    respondent, net of the $48,434.30 owing to the appellant for post-NOI fuel
    purchases. The appellants entitlement to the latter is not disputed on appeal.

[3]

The appellant submits that the motion judge erred
    in characterizing the payment as the prohibited exercise of a creditors remedy
    when it represented a
bona fide
agreement concluded on July 5, 2018 to satisfy
    past debts in order to continue a vital fuel supply to assist in the respondents
    restructuring.

[4]

The respondent argues that the motion judge
    correctly determined that the July 5th PAD was a prohibited self-help creditors
    remedy because it was payment for past fuel purchases. Moreover, once he
    determined that the PAD was a prohibited remedy, the motion judge was not
    required to consider any alleged agreements because the parties could not
    ratify what was otherwise prohibited. In any event, the respondent maintains
    that the appellant did not raise an alleged July 5th agreement before the motion
    judge but confined its argument to the impact of a pre-NOI agreement.

[5]

In our view, the motion judge erred by failing
    to consider whether the parties had entered into a legitimate agreement to pay
    past debts in order to secure the future supply of fuel. As a result, the
    matter should be remitted to him for a new hearing.

[6]

In determining whether the July 5th PAD was a
    remedy, the motion judge was required to consider all the relevant surrounding circumstances
    in which it occurred. Accordingly, it is useful to set out a brief synopsis of
    the relevant context leading up to and concerning the July 5th PAD and the alleged
    agreement between the parties.

[7]

Up until July 11, 2018, the appellant supplied
    fuel to the respondent, a trucking company. The respondent was experiencing serious
    financial difficulties and had fallen into arrears in payments to the appellant
    for fuel supplied. In June 2018, the parties entered into negotiations to
    conclude an agreement governing payment of past and future fuel purchases.

[8]

While the motion judge declined to determine whether
    the parties had reached an agreement prior to the filing of the NOI on July 2nd,
    the appellant submits that pursuant to the agreement that it says was reached
    on June 28th, on notice to and without objection from the respondent, it submitted
    the PAD for payment on July 3
rd
, which was processed and paid to the
    appellant on July 5th.

[9]

The appellant did not learn of the NOI until its
    meeting with the respondent on July 5, 2018. As noted at para. 21 of the motion
    judges reasons, at that meeting, the respondents owner, Louise Vonk, accompanied
    by its general manager, Blaine Skirtschak, informed the appellants
    representatives, Monique Paul and Trevor Chambers, that the respondent had filed
    a NOI on July 2, 2018 to restrict further action by CRA and to give [the
    respondent] some time to reorganize financially to carry on business.

[10]

In para. 22 of his reasons, the motion judge
    summarized the appellants evidence concerning the respondents representations
    which the appellant says formed the July 5th agreement between the parties:

During the July 5 meeting, Vonk indicated that
    [the respondent] needed [the appellants] support to keep operating and she was
    willing to do whatever was necessary to keep [the appellant] as its fuel supplier.
    She did not request return of the monies received by [the appellant] from the July
    5 PAD.  According to Paul and Chambers, Vonk advised that she allowed the PAD
    to go through because Transit was a vital vendor necessary for [the respondent]
    to remain in business.

[11]

The appellant insists that the issue of a July 5th
    agreement was raised before the motion judge. Paragraph 30 of the motion judges
    reasons provide some support for the appellants submission that it had
    advanced the argument that it was a key supplier who, subsequent to the NOI,
    was permitted to keep the July 5 PAD for past debts in furtherance of an
    agreement to maintain supply to the respondent as it restructured its business.
    Similarly, the appellant points to para. 31 of the affidavit of Trevor Chambers
    in which he deposes that:

Transit specifically relied on the representations
    of [the respondent], including Louise, Blaine and Nathan, that all purchases would
    be paid for by [the respondent] and that the Agreed Payment had been allowed to
    go through so that
[the respondent]
could continue in
    business. Transit continued to supply fuel to [the respondent] post-NOI at [the
    respondents] request and continued to do business with [the respondent] in
    good faith and based on [the respondents] representations.

[12]

To be fair to the motion judge, it is not
    entirely clear to what extent in argument on the motion the appellant characterized
    the July 5th exchanges as constituting an agreement. However, it seems common
    ground that the motion judge did not squarely consider whether, in context, that
    exchange represented a
bona fide
agreement with a key supplier to pay
    past debts in order to secure a vital future supply of fuel for the respondents
    continued operations.

[13]

We do not agree with the respondents submissions
    that the parties could not enter into an agreement for the payment of past
    debts in order to secure future fuel supplies. This would undermine the first stage
    of the
BIA
process that serves to encourage a debtors successful reorganization
    as a going concern.  Creditors and debtors alike benefit from the latters
    continued operation. The goal of the stay and preference provisions under ss.
    69, 95, 96 and 97 of the
BIA
is to give the debtor some breathing room
    to reorganize. Legitimate agreements with key suppliers also form a vital part
    of that process.

[14]

Apposite is the commentary of E. Patrick Shea, Dealing
    with Suppliers in a Reorganization (2008) 37 C.B.R. (5th) 161 who writes:

There is, however, no specific prohibition in
    the
BIA
on the debtor effecting payment of claims provable in the
    proposal proceedings. Instead, the BIA provides the trustee in the proposal (or
    the bankruptcy trustee in the event the proposal fails) with remedies against any
    creditor who receives such a payment on the basis that the payment is a preference. 
    Payments to critical suppliers in the context of proposal proceedings are best
    analyzed on the basis that they are a preference.  In the context of
    proposals, section 97 [of the BIA]
[1]
arguably clarifies that
payments to suppliers made in good faith after the
    date the proposal proceedings are commenced (even payments of pre-filing
    claims) are intended to be valid
. [Emphasis added.]

[15]

It is our view whether the parties concluded a
bona
    fide
agreement on July 5th for the payment of past fuel supplies in consideration
    for continued fuel supply was a key issue to be determined on the respondents
    motion. The determination of the issue of the July 5th PAD and alleged agreement
    could affect the motion judges characterization of the PAD as a prohibited remedy
    under s. 69(1) of the
BIA
.  As the motion judge made no factual findings
    respecting this issue, it is not possible nor desirable for this court to come
    to any determination. Given our reasons, the fairest route, as the parties agree,
    is to remit the matter to the motion judge for a new hearing.

[16]

We leave to the motion judges discretion how best
    to manage the re-adjudication of this matter. With respect to the pre-NOI
    agreement, the motion judge concluded that, if he were inclined to do so, conflicts
    in the evidentiary record precluded him from making any findings concerning that
    agreement and he would order that the issue proceed to trial. It may be that is
    the case in relation to the alleged July 5th agreement. It will be up to the motion
    judge to decide whether he can make the necessary findings on the motion or
    whether the resolution of all these issues requires a trial.

[17]

Accordingly, we set aside the motion judges
    order and remit the matter to the motion judge for a new hearing on all issues
    except for the appellants entitlement to the payment of $48,434.30 for
    post-NOI fuel purchases.

[18]

The appellant is entitled to its partial
    indemnity costs of the appeal in the agreed upon amount of $15,000, inclusive
    of disbursements and applicable taxes. The disposition of the costs of the
    motion below is reserved to the motion judge.

Paul
    Rouleau J.A.

L.B.
    Roberts J.A.

A.
    Harvison Young J.A.





[1]

Section
    97(1) of the
BIA
provides as follows:  No payment, contract, dealing or
    transaction to, by or with a bankrupt made between the date of the initial bankruptcy
    event and the date of the bankruptcy is valid, except the following, which are
    valid if made in good faith, subject to the provisions of this Act with respect
    to the effect of bankruptcy on an execution, attachment or other process
    against property, and subject to the provisions of this Act respecting
    preferences and transfers at undervalue:

(a) a payment by the bankruptcy to any of the bankrupts
    creditors;

(b) a payment or delivery to the bankrupt;

(c) a transfer by the bankrupt for adequate valuable
    consideration; and

(d) a contract, dealing or transaction, including any giving
    of security, by or with the bankrupt for adequate valuable consideration.


