This article has been contributed by Martin Desrosiers and Julien Morissette, respectively partner and associate in the Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP.

Against the backdrop of the railway disaster in Lac-Mégantic, a recent judgment of the Superior Court of Québec shows that insolvency legislation remains a work in progress. Despite its wide scope, the Companies’ Creditors Arrangement Act (CCAA) does not cover certain fields of activity. On the face of the CCAA, railway companies are excluded. When the company whose train derailed sought protection under the CCAA, the Court was faced with novel questions. In the absence of a comprehensive insolvency regime, could the CCAA be applied to avoid chaos? Could the stay of proceedings extend to an exposed liability insurer?

Early on the morning of July 6, 2013, a train operated by the Montreal, Maine & Atlantic Railway (MMA) derailed in the centre of the town of Lac-Mégantic, Québec. The train carried crude oil. The derailment was the deadliest railway accident in Canada in nearly 150 years and caused huge explosions and an ensuing fire, resulting in 47 probable deaths. Property damage was also extensive, with over 30 buildings burned to the ground.

A flood of claims against MMA and various other parties followed in rapid succession. In early August, MMA filed for court protection under the CCAA. The Court was faced with two key questions:

  • Can the CCAA apply to a railway company?
  • Can the Court order a stay of proceedings against an exposed liability insurer, as a non-filing third party?

The first question was particularly novel. The CCAA applies to an insolvent “company” that section 2 of the Act defines as follows:

company means any company, corporation or legal person incorporated by or under an Act of Parliament or of the legislature of a province, any incorporated company having assets or doing business in Canada, wherever incorporated, … but does not include … railway or telegraph companies… [Emphasis added.]

Canada’s other key insolvency statute, the Bankruptcy and Insolvency Act, contains a similar exclusion in the definition of “corporation.”

The Court was confronted with a plain reading of the CCAA to the effect that railway companies cannot avail themselves of the statute’s flexible protection or, in fact, of any comprehensive insolvency regime. In his judgment (Montréal, Maine & Atlantique Canada Co. (Arrangement relatif à), 2013 QCCS 4039, in French), Justice Castonguay referred to this situation as an anachronistic legal vacuum. Historically, federal and provincial legislation relating to railways provided for cases of insolvency. However, the Canada Transportation Act (CTA), which is one of the main federal statutes regulating railways today, contains only barebones provisions (sections 106 to 110) applying to insolvent railway companies.

The CTA’s framework is limited to a highly simplified arrangement scheme based on shareholder and secured creditor consent. This scheme is untested and suffers from several shortcomings. First, it provides for the proceedings to be filed in Federal Court, which normally has no jurisdiction on insolvency matters and, accordingly, little expertise. Second, the approval threshold for a CTA arrangement is significantly higher than under the CCAA, which is obviously problematic for a debtor considering this possibility. Third, it is not entirely clear whether the CTA could even apply to MMA. Fourth, and most important, it does not provide in any way for the rights of unsecured creditors – whose claims were clearly the driver of MMA’s insolvency.

Faced with a potentially dire situation, Justice Castonguay invoked principles of equity and held that the Court needed to exercise its inherent jurisdiction to grant an Initial Order under the CCAA:

Applying the Act blindly and denying MMA the right to avail itself [of the CCAA] would amount to a flagrant injustice for unsecured creditors’ rights, including the Lac-Mégantic disaster victims, which is completely unacceptable in a society based on the rule of law.

Furthermore, in attempting to manage an insolvency situation by applying one statute to certain creditors and another statute to others, one runs the risk of producing inconsistent, if not unjust, results. [At par. 24-25, our translation.]

The Court thus issued an Initial Order, in the apparent absence of any contestation. Should another railway company find itself insolvent, it remains to be seen what would happen if a CCAA court’s jurisdiction were contested. The best case scenario, but not the most likely, would be for Parliament to intervene to clarify the situation. Given the CCAA’s flexibility and the substantial body of law that has developed around it, the easiest solution would probably be to extend its coverage to railway companies and eliminate the incomplete CTA provisions.

When it filed for relief, MMA made another somewhat unusual request: extension of the stay of proceedings to its liability insurer, a non-filing (and presumably solvent) third party. As appears from a recent judgment of the Ontario Superior Court of Justice (Re: Tamerlane Ventures Inc. and Pine Point Holding Corp., 2013 ONSC 5461), it is generally accepted that a CCAA court may extend a stay of proceedings to third parties if important to the process and otherwise reasonable. However, the third parties have generally been related companies, such as foreign subsidiaries. The new angle here was the suggestion that this protection could be extended to an arm’s-length liability insurer.

Referring to this body of law, Justice Castonguay found that extending the stay to the liability insurer was appropriate to ward off ‘judicial chaos’ and a run to the courts by all claimants who may have rights against the insurer.

This request was supported by the municipality of Lac-Mégantic; the insurer had announced that it would tender the amount it covered. It was likely appropriate for the Court to order a cooling-off period. However, the judgment does not contemplate the difficulties that might arise later in the process. The Court suggested that a plan of arrangement could provide for distribution of insurance recovery to disaster victims. It is currently unclear how a plan could be structured to accomplish this goal, especially given the presence of substantial unliquidated claims. However, the CCAA’s flexibility and the creativity of the insolvency bar may be up to the challenge.

Understandably given their backdrop, these proceedings have generated substantial media coverage thus far. Railway and insurance industry stakeholders should stay tuned.

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