Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Andrea Lockhart, an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP.

The Quebec CCAA proceedings of Bock Inc. have raised a novel issue within the Canadian insolvency community – to what extent can a CCAA court reengineer a debtor’s contractual relationships? In this case, notwithstanding a pre-insolvency notice of termination by the debtor’s counterparty, the supervising CCAA court reinstated the agreement and ordered specific performance of the agreement during the pendency of the initial CCAA order (the “Initial Order”), subject to further order of the court. The counterparty brought a motion for leave to appeal the Initial Order before the Quebec Court of Appeal (the “Court”), who refused leave to appeal based on the facts of this case. Accordingly, insolvency practitioners are left pondering the issue and whether it may be decided another day. 

The agreement in question was a distribution agreement with no definite term. The contract permitted the counterparty to terminate the contract immediately in the event that, among other things, the debtor failed to comply with the terms of the contract. As the debtor failed to meet its market-share targets under the agreement, the counterparty sent notices of default to the debtor stating that the agreement would be terminated on or before February 28, 2013. During this period, the debtor was engaged in a marketing process to sell its business and/or its assets, the most important of which was the distribution agreement.  One of the two offers that the debtor received pursuant to such process would have allowed the debtor to pay all or most of its creditors and also partially reimburse its shareholders. However, the counterparty refused to accept the potential purchaser and would not consent to the assignment of the distribution agreement. Shortly thereafter, the counterparty sent a notice of the immediate termination of the distribution agreement to the debtor on March 28, 2013 (the “Notice of Termination”).

In response, the debtor filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act, followed a week later by the filing of a motion to continue proceedings under the CCAA. Pursuant to the Initial Order made on April 19, 2013, the supervising CCAA court, among other things: (i) issued a stay of proceedings against the debtor until May 17, 2013; (ii) suspended the Notice of Termination until further order; and (iii) ordered the counterparty to respect each of its obligations under the distribution agreement until further order ((ii) and (iii), the “Safeguard Provisions”). Subsequently, the counterparty brought a motion before the Court on May 1, 2013 for leave to appeal the Initial Order, submitting that the supervising CCAA court erred in fact and in law in granting the Safeguard Provisions that had revived the distribution agreement.

In its May 10, 2013 judgment (2013 QCCA 851), the Court confirmed existing jurisprudence holding that four cumulative conditions must be met before leave to appeal from a CCAA order will be granted: (i) whether the point on appeal is of significance to the practice; (ii) whether the point raised is of significance to the action itself; (iii) whether the appeal is prima facie meritorious, or, on the other hand, whether it is frivolous; and (iv) whether the appeal will unduly hinder the progress of the action. Such jurisprudence also holds that the burden of proof on such an application is a heavy one, and that such applications will only be granted sparingly.

The Court held that the first and third conditions for leave to appeal had been satisfied. The question of whether a CCAA court could cancel a notice of termination and order specific performance of an agreement, even as a safeguard measure, was a novel one that had never been addressed by any Canadian appellate court.

However, on the facts of this case, the Court held that granting leave to appeal would most likely jeopardize the course of the CCAA proceedings and cause irreparable harm to the debtor and its stakeholders. Further, the debtor and the CCAA-appointed Monitor were actively engaged in a court-approved sales process pursuant to which preliminary offers were to be delivered on May 14, 2013. There was the possibility that an offer may be forthcoming from a purchaser that would be suitable to the counterparty and the matter would be resolved amicably, rendering the appeal moot. In any event, the CCAA stay of proceedings was set to expire on May 17, 2013 and would have to be renewed at that time. Given indications from the debtor, the Monitor and the debtor’s financier that bankruptcy was the most probable outcome in the absence of a potential purchaser, it was likely that the Initial Order would not be extended or would be extended for a short period of time to facilitate the debtor’s transition into bankruptcy. Moreover, the Court noted that in the worst case scenario if the Initial Order were extended and the counterparty were required to accept a forced assignment of the distribution agreement to a third party, the counterparty could bring a fresh motion before the Court for leave to appeal under section 13 of the CCAA. In addition to the foregoing, the Court noted that the Initial Order was in the nature of a safeguard order and that it was reluctant to grant leave to appeal of such orders which are temporary, can be easily modified and are not res judicada. Accordingly, the counterparty’s motion was dismissed.

The supervising CCAA court has extended the Initial Order twice since the date of the above-discussed judgment. Interestingly, the most recent extension order rendered on July 2, 2013 extended all of the provisions of Initial Order until August 16, 2013 other than the Safeguard Provisions, which were terminated effective on such date without admissions by the parties.

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