A recent decision of the Ontario Superior Court of Justice will likely embolden creditors and trigger more aggressive litigation over set-off claims in insolvency files.
In February of 2018, HSBC removed $6.8 million from the operating account of Carillion Canada Inc., despite an initial order under the Companies’ Creditors Arrangement Act staying enforcement steps against the Carillion parties. While a minor monetary fine was imposed against HSBC for their conduct, Chief Justice Morawetz held in Carillion Canada Inc., Re, 2022 ONSC 4617 that HSBC did not need to return the money. This novel decision has wide-spread consequences for set-off claimants in insolvency proceedings, and raises a pressing question: when should creditors jump the line?
Carillion continued to use the HSBC account as its operating account over the course of its CCAA proceedings. At one point, Carillion entered into an asset sale, which released $50 million to the HSBC account. According to Carillion, all but approximately $2.5 million of the funds held in the HSBC account had been allocated to business expenses and/or impressed with super-priority charges. Post-sale, certain letters of credit were called on, which caused HSBC to pay out $6.8M.
The HSBC account was subject to an account agreement which provided that HSBC could “consolidate and set-off” amounts owing by Carillion. HSBC and Carillion had also previously entered into other agreements which expressly granted HSBC the contractual right of set-off. Accordingly, 12 days post-pay out, HSBC advised Carillion that it would take $6.8 million from the operating account for itself, in an exercise of its contractual and legal set-off rights. HSBC did not seek leave of the Court to do so, and unilaterally took the money, despite Carillion’s claim that $4.3 million of the $6.8 million were encumbered funds.