Restructuring and Insolvency

The tariffs imposed by the United States on certain Canadian products disrupt more than just trade. They also have tangible consequences for several Quebec businesses, affecting margins, competitiveness, continuity of operations, financing and sometimes solvency. The impact of U.S. tariffs varies from company to company. Some businesses are able to absorb them to some extent, particularly if the exchange rate is in their favour or if competition allows them some leeway to pass on a portion of the cost to their U.S.-based customers. Meanwhile, other companies are seeing their U.S. market access suddenly compromised, forcing them to reconsider their business model. Ultimately, there is no one-size-fits-all solution here. In order to carry out a thorough analysis of the situation, businesses must consider their position from contractual, commercial, financial and strategic standpoints simultaneously. Contracts, prices and U.S. market dependence Since the first tariffs were implemented, certain strategies have proven useful in curbing exposure. From a contractual standpoint, key actions include: Analyzing supply, distribution and sales contracts to determine who actually bears the tariff risk Reviewing Incoterms, pricing clauses, adjustment mechanisms, termination rights and force majeure clauses Realistically assessing the ability to pass a cost increase on to customers Assessing the extent to which the business depends on the U.S. market for both its sales and its inputs There is, however, one legal caveat: the imposition of tariffs does not, in and of itself, grant the right to invoke force majeure or to terminate a contract simply because it has become less profitable. It all depends on the precise wording of the clause, the factual context and how predictable the risk of tariff imposition was at the time the contract was concluded. Margins, prices and supply chains In many sectors, businesses first feel the effect of tariffs through price fluctuations. Some companies have enough leeway to pass on the tariff burden to their U.S.-based customers by raising their prices accordingly. In other sectors, particularly where margins are already slim or where a Canadian manufacturer’s product is becoming less competitive, the impact is more severe: loss of market share, declining sales volumes and almost immediate liquidity problems. It is often at this stage that executives must consider more substantive solutions, such as diversifying sales into alternative markets, reconfiguring supply chains, partially relocating manufacturing operations or establishing production capacity within the United States. Businesses may also need to consider renegotiating certain financing sources or commercial terms. While these options may be worth considering, they require time, liquidity and an execution capability, which not all companies possess. Cash flow, financing and warning signs of financial strain When a company is heavily dependent on its U.S. sales, tariffs can exacerbate existing issues. Bankers look out for certain warning signs such as: An excessive concentration of revenue originating from the United States A persistent decline in volume or margins Extended payment terms Pressure on working capital Contracts that have become inherently unprofitable A weakened refinancing capacity The lack of a short-term commercial alternative should also be taken seriously. In this type of scenario, delaying action could mean missing out on solutions that were still available just a few weeks or months prior. Restructuring and insolvency When commercial and operational adjustments are no longer enough, the restructuring mechanisms provided for under bankruptcy and insolvency laws can offer temporary relief and facilitate restructuring. Depending on the circumstances, this approach can be used to stabilize the situation in the short term, negotiate with creditors, revise certain commitments that have become unsustainable, preserve part of the company’s value or prepare for a turnaround based on a business model that is less dependent on the U.S. market. However, resorting to such restructuring options is not just a formality.They entail costs, constraints and risks that can sometimes pose a serious threat to a business’s very survival. Before considering them, it’s important to clarify core objectives, identify must-protect assets and lock down critical contracts. Mapping out how the restructuring will ripple through to shareholders, lenders, suppliers and customers is equally vital. While these mechanisms are often a last resort, considering them only after all other doors have closed severely limits businesses’ room to maneuver. Competition law and collaborations Faced with tariff pressure, some companies may be tempted to partner with other players in their market to pool resources or reorganize their supply chains. The idea may be economically sound, but it must be handled with caution from a legal standpoint. Competition law risks may arise as soon as competitors exchange sensitive information or adjust their business conduct jointly. For this reason, any such collaboration should be carefully structured, and it is highly recommended that the parties consult a legal expert who is familiar with the applicable competition law provisions before venturing into this territory. Mergers & Acquisitions and company valuations Tariffs also affect company valuations and transaction dynamics. For sellers whose products are subject to the new tariffs, the higher the tariff exposure, the more likely it is that their company’s valuation will be affected or that they will defer a divestiture or acquisition in anticipation of more favourable conditions. For buyers, the tariff issue has become a key consideration in the due diligence process. They must determine: What proportion of the target company’s revenue comes from its U.S. sales Whether the target company is actually able to absorb or pass on the additional costs resulting from the tariffs that it now has to pay Viable workarounds The time and capital needed to implement them In practice, the higher the tariff exposure and the cloudier the mitigation strategy, the more likely it is that the buyer will ask for a price reduction or demand contractual protections. Acting before problems take root U.S. tariffs do not pose the same risks for every company, but they present many with the same challenge: the need to act early. For some businesses, the answer mainly lies in the contracts they have concluded. For others, it will be a matter of taking commercial, operational or transactional measures. For the most vulnerable companies, the priority will be to preserve value and swiftly consider the available restructuring options. Rather than simply assessing the immediate tariff impact, the key is determining whether businesses have enough time, flexibility and liquidity to adapt before problems take root.

Executing a judgment in Quebec In Quebec, a bailiff can proceed with the forced execution1 of a judgment rendered by a civil court, such as the Court of Québec or the Superior Court,2 as soon as it becomes final,3 in accordance with article 656 of the Code of Civil Procedure (C.C.P.). Execution process The execution process begins when the creditor (the party having won the case) sends their instructions to a bailiff, who transcribes them into a notice of execution. The notice is then filed in the Court record and can be consulted free of charge at the court office or on SOQUIJ, for a fee. Prescription and renewal of debt A debtor who has been ordered by judgment to pay a sum of money should know that the debt can be recovered for 10 years, and that if the creditor executes the judgment in those 10 years but the debt goes unpaid, a new 10-year prescription period will start to run and the debt will remain owing. Article 2924 of the Civil Code of Québec (C.C.Q.) states that “[a] right resulting from a judgment is prescribed by [is extinguished after] 10 years if it is not exercised.” A creditor who has been unable to execute their judgment within the 10-year prescription period has the possibility of interrupting prescription by filing a notice of execution and making sure to serve it on the debtor, in accordance with article 2892 para. 2 C.C.Q. Clearly, a well-informed creditor will be able to indefinitely renew the prescription period to execute their judgment, until the debt has been paid in full. To constitute a valid interruption, the notice of execution must absolutely be filed with the court and be served on the debtor, but the subsequent seizure need not be conclusive. Jurisprudential confirmation Mohawk Council of Kanesatake v. Sylvestre This method of interrupting the extinctive prescription of rights resulting from a judgment has just been confirmed in Mohawk Council of Kanesatake v. Sylvestre, 2025 SCC 30: [62] ... The filing and service of the notice, itself part of the judicial application for seizure, interrupted prescription in 2016 pursuant to art. 2892 C.C.Q. Here is an excerpt of the Honourable Court’s summary: ... [F]iling and serving a notice of execution counts as a judicial application that interrupts the 10-year prescription period... It did not matter that the bailiff later found nothing to be taken and suspended the seizure. It also did not matter that the bailiff did not notify the debtor that the seizure had been suspended.  ... [T]he 10-year period exists to ensure people act on time and to bring stability to debtor-creditor relations, but it should not punish creditors who take the right steps before the deadline. With this decision, the Court gave clarity and certainty to both creditors and debtors about how judgment debts can be enforced and what types of events can interrupt prescription. Additional points Prescription is interrupted when a notice of execution is filed with the Court and served on a debtor by bailiff. The notice of execution may include several seizure options, and the bailiff may attempt more than one, depending on the case. An unsuccessful seizure does not result in the “judicial application” being dismissed. If this is the case, the notice of execution remains valid and has the effect of interrupting prescription, such that a new 10-year period starts to run. There is no requirement for the bailiff to draw up minutes of a nulla bona if no property is seized. The bailiff can prepare minutes to certify that no property was seized, but there is no such requirement under the C.C.P., and the debtor suffers no prejudice if this is not done. The 10-year prescription period is not interrupted if the debtor opposes the execution and the Court allows such opposition. Conclusion This ruling by the Supreme Court of Canada confirms that the filling and service of a notice of execution maintains the validity of a judgment for a renewable period of 10 years. The term “execution” means that a party having succeeded in a judgment may choose one or more ways to compel the other party (the debtor) to pay what is owed to them by seizing immovable property, movable property, bank accounts, wages, and so on. Article 656 para. 2 C.C.P. states that “[e]xecution may be forced if the debtor refuses to comply voluntarily and the judgment has become final.” Article 566 C.C.P., which deals with the recovery of small claims, states that a “judgment creditor may themselves draw up the notice of execution if the only execution measure is seizure of the debtor’s income in the hands of a third person”, and section 13.1 of the Tax Administration Act states, among other things, that the Agence du revenu du Québec may prepare and file a notice of execution and then seize a sum of money or income in the hands of a third person, but that it must hire a bailiff in other cases. The term “final” in this article means that the case is over, that the judgment can no longer be appealed and that the creditor can force a debtor to comply with the judgment’s orders.

The current crisis caused by the COVID-19 pandemic has already caused, and will continue to cause, significant liquidity problems for some businesses. Companies whose financial difficulties threaten their very existence will have to restructure in order to avoid bankruptcy, either by availing themselves of the protection of the Companies' Creditors Arrangement Act1 (the "CCAA") or by using the proposal mechanism of the Bankruptcy and Insolvency Act2 (the "BIA").  Tax considerations related to an arrangement or a proposal accepted by creditors  Making use of the provisions of the CCAA or the BIA entails tax considerations for the debtor corporation that directors and owner-operators need to consider. Some of these tax considerations are discussed below.  In the context of the restructuring of a debtor company, creditors may accept a partial settlement of their claim or a conversion of their claim into shares in the debtor company. If a corporation is not bankrupt within the meaning of the Bankruptcy and Insolvency Act, the settlement of a debt for an amount less than its principal will have tax consequences for the debtor corporation. For example, certain tax attributes of the debtor corporation such as the balance of loss carryforwards, the undepreciated portion of the capital cost of depreciable property or the adjusted cost base of capital assets will be reduced by the amount of the reduction in the receivable, if any.   In certain cases, if the tax attributes of the debtor corporation are insufficient to absorb the amount of debt forgiven, inclusion in the calculation of its taxable income may occur, creating a tax liability.  Several strategies can be adopted to limit undesirable consequences in the context of a restructuring under the Companies' Creditors Arrangement Act.  As mentioned, it may be possible, among other things, to convert the debt into shares of the debtor company without causing adverse consequences, if the fair market value of the shares issued upon conversion of the debt is equal to the principal of the debt.   In some cases, a debt held by a shareholder of the debtor company could be written off without consideration and without the need to issue shares.  Finally, it may be possible, in certain situations, to avoid inclusion in the income of the debtor corporation through the use of certain reserve mechanisms or through tax deductions.  Insolvency is a delicate situation for any business. Proper tax planning will allow the debtor company to maximize the effectiveness of the restructuring process offered by the CCAA.  Our taxation team can help you set up effective planning in this context.   R.S.C. 1985, c. C-36 and amendments R.S.C. 1985, c. B-3 and amendments

The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.