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  • Tax Aspects of Insolvency and Bankruptcy

    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

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  • Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

    The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” ( 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.

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  • Farmers, drivers and debtors: The Supreme Court considers the conflicts between the Bankruptcy and Insolvency Act and several provincial statutes

    On November 14, 2015, the Supreme Court of Canada rendered three decisions on the application of the the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (BIA) and its interaction with certain provincial statutes. OVERVIEW OF THE FACTS In Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd. Ltd., 2015 SCC 53 (Lemare), the Court, sitting as a bench of seven judges, considered the conflict between a provincial statute, which imposes a 150-day notice period before instituting any action relating to farm land, and the BIA, which permits a secured creditor to apply for the appointment of a receiver for the property of a debtor upon the expiry of a 10-day notice period under section 244 BIA. In Alberta (Attorney General) v. Moloney, , 2015 SCC 51 (Moloney), and 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy), 2015 SCC 52 (ETR), the nine judges considered the conflict between a provincial statute which allowed for the revocation or suspension of the motor vehicle permits or driver’s licences of persons who failed to pay certain driving-related debts, even where these drivers were discharged bankrupts and the debt targeted by the provincial statute was a provable claim in bankruptcy. APPLICABLE RULES In these three cases, the Court had to determine whether the BIA and the provincial statutes could coexist or whether they were in conflict, in which case the provincial statutes had to be declared inoperative and give way to the BIA, which would take precedence pursuant to the principle of the paramountcy of federal law over provincial law. The Supreme Court noted that when reviewing the interaction between different laws of different jurisdictions, the courts must be careful, in that they should favour an interpretation seeking to reconcile the two laws in question, and only declare the provincial law inoperative where the inconsistency with the federal law is inescapable. In this regard, a conflict may be operational, i.e. where one law prohibits what the other imposes, or in the purpose, where the effects of one frustrate the purposes of the other. Since a conflict could arise both with respect the effects or the purposes, to resolve the alleged conflicts at bar, the Court had to assess the rationale behind the BIA and the provincial laws in question, as well as their respective mechanisms. APPLICATION In Lemare, the review was limited to the purposes which underlie the existence of the 150-day notice period in favour of the debtor/ owner of farm land under the provincial statute, which protects farms and farming operations, and to the purposes of the 10-day notice period provided in section 244 BIA before the appointment of a receiver can be required under section 243 BIA. For the majority of the Court, the time period in the provincial statute constitutes a grace period, whereas the purpose of the 10-day notice period in section 244 BIA is to avoid the multiplication of proceedings. The BIA does not require the appointment of a receiver upon the expiry of the 10 days. Moreover, this time period can be extended or abridged, depending on the circumstances. The creditor’s right to obtain the appointment of a receiver is in all cases subject to court authorization. According to the majority of the Court, there is therefore no inconsistency between the two regimes: in complying with the 150-day time period under the provincial statute, one is by the same token also only exercising one’s option to apply to the courts beyond the 10-day time period under the BIA. Justice Côté dissented: for her, timeliness and effectiveness were also purposes of the BIA and the objective of protecting farm land must therefore yield to this imperative. She would have declared the provincial law inoperative. In Moloney and ETR, the Court considered the purposes of the BIA as a whole. In this regard, the Court was unanimous: on the one hand, the bankruptcy and insolvency regime lays down the principle of the equitable distribution of the bankrupt’s assets among his creditors and, on the other hand, the principle of the financial rehabilitation of the bankrupt, which is achieved through his discharge from all provable claims at the end of the process. The Court also unequivocally found that there was a conflict between the fact that the bankrupt could be discharged of his debts under the BIA and the fact that a provincial statute could continue to attach sanctions to one of these debts. However, the seven majority judges diverged from their two dissenting colleagues on how this conflict was to be characterized. For the majority, there was a true operational conflict between the BIA and the provincial statutes because the BIA neutralizes the debt while the provincial statutes continued to give some effect to the debt. Since one statute prohibited what the other required, the inconsistency was direct. According to Justices McLachlin and Côté, there was no operational conflict between the BIA and the provincial statutes because it was still possible for a bankrupt to renounce the privilege which the provincial statute sought to deprive him of by giving up his driver’s licence or willingly paying his debt. However, since the provincial statutes frustrated the purpose of the BIA, they were inoperative in the insolvency context. EFFECTS AND LESSONS In Moloney and ETR, the Supreme Court reaffirmed known concepts (bankrupt’s discharge and rehabilitation), and these decisions therefore do not revolutionize insolvency practice. However, the Court’s decision in Lemare could potentially change practice by making the appointment of a receiver under section 243 BIA subject to the time periods provided in provincial statutes. For instance, in Quebec, one can easily imagine that debtors might attempt to convince the courts that a receiver cannot be appointed under the BIA until the time limits provided for in the Civil Code of Québec for the exercise of a hypothecary recourse have expired (20 days for movable property and 60 days for immovable property). Lavery has the knowledge and experience necessary to assist you in any bankruptcy and insolvency matters and protect your assets and property. Do not hesitate to contact us.

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  • The interim receiver: A “Trustee in Bankruptcy” dispensed from obtaining a clearance certificate

    In a judgment rendered in the case of 9210-6905 Québec Inc. (proposal of),1 the Superior Court of Québec held that an interim receiver is not required to obtain a clearance certificate from the tax authorities before proceeding with the distribution of a debtor's property, and is not subject to personal liability for this reason. Indeed, the Court stated that an interim receiver appointed under the Bankruptcy and Insolvency Act2 is a "trustee in bankruptcy" within the meaning of subsection 159(2) of the Income Tax Act3 ("BIA") is a "trustee in bankruptcy" within the meaning of subsection 159(2) of the Income Tax Act ("ITA"). Therefore, the interim receiver benefits from the exception dispensing the "trustee in bankruptcy" from obtaining a certificate ("clearance certificate") attesting that all amounts due under the ITA have been paid. CONTEXT On March 24, 2014, the debtor 9210-6905 Québec Inc. (“Debtor”) filed a notice of intention to make a proposal and Richter Advisory Group Inc. (“Richter”) was appointed to act as trustee under the notice of intention. On March 27, 2014, the Court rendered an order appointing Richter to act as interim receiver under the BIA. The Debtor, with Richter’s help, then undertook a process aimed at soliciting offers from potential purchasers for its assets. On July 17, 2014, the Court rendered an order authorizing the sale of the majority of the Debtor’s assets and ordering that the proceeds of sale be remitted to Richter for distribution to the Debtor’s creditors. DISTRIBUTION OF THE AMOUNTS COLLECTED BY RICHTER Following the sale of the assets and the collection of the Debtor’s claims, Richter wished to distribute a net amount of more than $500,000 to the creditors, according to their respective rights. As part of this distribution, Richter proposed to pay first the amounts that were owed to the tax authorities in respect of source deductions made by the Debtor which were subject to deemed trusts within the meaning of the tax statutes or certain other statutes. The amounts owed by the Debtor to the tax authorities which were not source deductions subject to deemed trusts were however not paid under the proposed distribution. Indeed, the Debtor’s secured creditors ranked ahead of the tax authorities in respect of these amounts, and the balance of the net amount to be distributed by Richter was clearly insufficient to allow for the full payment of the amounts owed to the secured creditors. QUESTION IN ISSUE Richter presented a Motion for directions to the Court for authorization to proceed with the proposed distribution and asked the Court to declare that it was not required to obtain a clearance certificate under the relevant federal and Quebec statutory provisions (i.e. section 159(2) ITA and section 14 of the Tax Administration Act4 (the “TAA”)). Revenu Québec did not contest Richter’s motion, as opposed to the Canada Revenue Agency (the “CRA”), which essentially alleged that the exception provided for in section 159(2) ITA did not apply to Richter acting as an interim receiver, so that Richter would be bound to obtain a clearance certificate. Section 159(2) ITA states that “[e]very legal representative (other than a trustee in bankruptcy) of a taxpayer shall, before distributing to one or more persons any property in the possession or control of the legal representative acting in that capacity, obtain a [clearance] certificate from the Minister”. Under section 159(3) ITA, where a legal representative fails to obtain a clearance certificate before proceeding with a distribution, such representative is personally liable for the amounts owed to the tax authorities to the extent of the value of the property distributed. It should be noted that section 14 TAA contains provisions to the same effect. DECISION Analyzing the practical effects of the terms of sections 159(2) and 159(3) ITA in light of the position put forward by the CRA, the Court stated as follows: [Translation] [11] However, the trustee will not be able to get a clearance certificate because, as we saw above, an amount of $29,640 remains due to the CRA. [12] The trustee is therefore caught in this predicament in which it has fulfilled the Court’s order, but must retain the proceeds of sale due to the lack of a clearance certificate which it will never be able to obtain, whereas in the case of a bankruptcy, the issue would not arise. The Court rejected the position taken by the CRA that the expression “trustee in bankruptcy” used in section 159(2) ITA excludes an interim receiver appointed under the BIA. Firstly, the Court noted that only a “trustee” can act as an interim receiver within the meaning of the BIA. Next, the Court explained that the expression “in bankruptcy” was added after the word “trustee” in section 159(2) ITA because it was the federal legislator’s intention [translation] “to distinguish the trustee acting under the Bankruptcy Act from, for example, the syndic of a professional corporation or an agent chosen by the co-owners of a building.”5. The Court held as follows: [Translation] [23] Since only a licensed trustee, commonly referred to as a trustee in bankruptcy, is authorized to act under section 47 BIA, what the legislator had in mind was that the immunity in section 159(2) ITA applied to a trustee appointed under the BIA to act as an interim receiver. This interpretation is also consistent with the spirit of section 215 BIA which provides that the interim receiver, like the trustee, benefits from relative immunity when carrying out any duty under the law.6. Finally, the Court rejected the CRA’s argument to the effect that it could not grant the conclusion sought by Richter without exceeding its jurisdiction on the grounds that only the Tax Court of Canada could dispense Richter from the requirement to obtain a clearance certificate. Indeed, the judge held that the Superior Court has jurisdiction to interpret the meaning of the expression “trustee in bankruptcy” and to declare that an interim receiver appointed under the BIA is included in this expression. CONCLUSION Therefore, the Court declared that Richter, acting as interim receiver, was a “trustee in bankruptcy” within the meaning of section 159(2) ITA. Given the similar terminology used in the Quebec statute,7 in our view, the Court’s holding applies both to the federal statute and the provincial statute. As well, we are of the opinion that the Court’s holding also applies to a trustee under a notice of intention, a trustee under a proposal, a receiver appointed under section 243 BIA, a monitor appointed under the Companies’ Creditors Arrangement Act,8 and a liquidator appointed under the Winding-up and Restructuring Act.9 This judgment is important in practice because it permits any person licensed as a trustee and acting in any of the aforementioned functions to benefit from the “trustee in bankruptcy” exception and to be dispensed from the requirement to obtain a clearance certificate when such person distributes the property of an insolvent person. 1 S.C.M. 500-11-046426-140, Revised transcript of the reasons for judgment rendered from the bench on June 25, 2015 by the Honourable Danielle Turcotte, J.S.C. 2 R.S.C. (1985), c. B-3. 3 R.S.C. (1985), c. 1 (5th Supp.). 4 CQLR, c. A-6.002. 5 Paragraph 19 of the judgment. 6 Paragraph 22 of the judgment. 7 See s. 14 TAA. 8 R.S.C. (1985), c. C-¬36. 9 R.S.C. (1985), c. W-11.

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  • Bitter Bidder Better Stand?
    Bloom Lake, G.P.L. (Arrangement of), 2015 QCCS 1920

    In May 2010, Justice Gascon of the Superior Court of Québec issued an important decision in AbitibiBowater Inc. (Arrangement relatif à)1. The context was that of a motion for authorization of the sale of assets owned by AbitibiBowater, following the latter’s restructuring under the Companies’ Creditors Arrangement Act (hereinafter the CCAA). The Court notably reflected on the rejected bidder’s standing to intervene in order to contest the fairness of the sale process and its approval. Lavery published its observations on the decision in a July 2010 publication, “Bitter Bidder Bites the Dust”2. A bitter bidder is an unsuccessful bidder in a sale process under the CCAA who will seize the courts to denounce the approval of the sale and call for a new tendering process. When assessing a given sale process under Section 36 CCAA, courts will look at certain criteria, including3: Was there sufficient effort to obtain the best price? le meilleur prix ? Was the process conducted effectively and with integrity? Were the interests of the parties involved considered? Was the sale process fair?4 However, the mere standing of the bitter bidder, and its capacity to contest the sale process and its approval, is a matter of its own. Often, the courts will assess the fairness and appropriateness of the sale process under the CCAA before entertaining the issue of the bitter bidder’s standing to contest it, if they ever do. Indeed, the rapidity with which the insolvency cases are dealt with makes it difficult for judges to extensively dissert on the issue of standing when they could simply address the legitimacy issue head-on. In Canadian jurisprudence, Skyepharma5 is the leading authority on the disgruntled bidder’s standing to contest the sale process that saw them lose the bid. In this 2000 Ontario Court of Appeal case, Justice O’Connor, writing for the court, states that: “ [i]f an unsuccessful prospective purchaser does not acquire an interest sufficient to warrant being added as a party to a motion to approve a sale, it follows that it does not have a right that is finally disposed of by an order made on that motion.6” Justice O’Connor proposes the following reasons which explain why this is so. First, a prospective purchaser has not acquired any legal or proprietary right in the thing being sold. There is no requirement that a certain offer be accepted, and the receivers have discretion to accept the offer that best suits those with an interest in the proceeds of the sale, mainly the creditors. As such, the involvement of unsuccessful prospective purchasers can distract the court from this central issue. The bitter bidder has no interest in the proceeds of the sale and as such, the insertion of other issues within the motion could undermine the interests of the other parties. Thus, there are policy reasons for restricting the involvement of prospective purchasers in motions for sale approval: “There is often a measure of urgency to complete court-approved sales. [...] When unsuccessful purchasers become involved, there is potential for greater delay and additional uncertainty. This potential may, in some situations, create commercial leverage in the hands of a disappointed would be purchaser which could be counterproductive to the interests of those for whose benefit the sale is intended.7” In AbitibiBowater, although the standing of the bitter bidder had become a theoretical issue, Justice Gascon nevertheless thought some remarks were warranted, especially since Quebec courts never seemed to address nor analyse the standing issue of the disgruntled bidder with the contestation of sale approval motions8. Justice Gascon drew from Justice O’Connor’s reasons in Skyepharma. He underscored the fact that none of the creditors supported the bitter bidder’s contestation of the sale process, and that its sole interest was commercial, to close the deal and reap the profits. Furthermore, the contestation did, in this case, cause delays in the approval of the sale and “brought uncertainty in a process where the interested parties had a definite interest in finalizing the deal without further delays.9” This was, according to Justice Gascon, a good example of the policy reasons that question the bitter bidder’s standing in sale approval motions. Shortly following AbitibiBowater, Justice Mongeon of the Superior Court of Québec very succinctly dealt with the bitter bidder’s standing issue in White Birch10. He stated that while the bitter bidder may have standing as a stakeholder, it may not have any as a disgruntled bidder. On this point, Justice Mongeon noted that he was “impressed” by Justice Gascon’s comments in AbitibiBowater.. More recently, Justice Hamilton of the Superior Court of Québec dealt with the “Bitter Bidder” issue in Bloom Lake g.p.l. (Arrangement of)11. A brief overview of the facts is useful. In February 2015, a letter of intent between Cliff, the seller, and Noront, the purchaser, was executed. While they were negotiating the Share Purchase Agreement, CDM submitted three letters of intent, all of which were considered, then rejected. The initial Share Purchase Agreement between Cliff and Noront was thus executed in March 2015. In April 2015, CDM made an unsolicited offer with a purchase price higher than the one agreed to with Noront in the initial Share Purchase Agreement, which provided a “Superior Proposal” mechanism that allowed the sellers to accept an unsolicited and superior offer from a third party. CDM’s proposal was deemed such a “Superior Proposal” by the Monitor, who then supported the establishment of a Supplemental Bid Process. Both Noront and CDM participated in this supplementary bid process and, at the end, Noront’s bid was the highest and the sellers accepted its offer. As the sale approval motion was submitted to the Court, CDM, as Intervener, contested the sale on the grounds that: The sellers were required to accept their Superior Proposal, as specified in the initial purchase agreement; le meilleur prix ? The Supplemental Bid Process did not treat both bidders fairly; The Monitor’s support of the process should not be determinative of its validity. Finally, CDM submitted that it had sufficient interest to intervene in the CCAA proceedings and contest the motion12. Justice Hamilton dismissed CDM’s objections regarding the validity of the Supplemental Bid Process. He reminded CDM that the criteria set forth in Section 36 of the CCAA are not cumulative, nor exhaustive, and that the courts must look at the transaction as a whole to determine whether the process was fair, reasonable and appropriate13. Referring to White Birch and AbitibiBowater, Justice Hamilton added that the Court should additionally give credit to two other elements: the “business judgement” rule and the Monitor’s recommendation. Indeed, courts should refrain from second guessing the commercial and business judgement of the sellers and of the Monitor, and the latter’s role and expertise in insolvency proceedings. As court-appointed officer, the Monitor’s recommendations, especially when supported by the stakeholders, should be given great weight. Justice Hamilton then reviewed the sale process in light of these factors, and dismissed CDM’s objections. As such, he did not have to address the issue of CDM’s standing to intervene in the proceedings and contest the motion. He nevertheless chose to do so in light of the parties’ extensive pleadings on this matter. Justice Hamilton confirmed that the Ontario authorities do not grant a bitter bidder any interest or standing to challenge approval motions, and that these authorities were followed in Quebec14. He agrees that a losing bidder often has no interest but its own to promote, and that “ [i]t will seek to raise these issues, not because it has any particular interest in fairness or integrity, but because it lost and it wants a second kick at the proverbial can.15” Nevertheless, Justice Hamilton sees a certain disconnect between the Court’s duty of assessing the reasonableness, fairness and integrity of the sale process and the exclusion of the disgruntled bidder from the proceedings: [85] However, if the losing bidder is excluded from the process, who will raise the issues of fairness and integrity?   The creditors will not do so, because their interest is limited to getting the best price.   Where there is a subsequent higher bid, their interest will be in direct conflict with the integrity of the sale process16. Justice Hamilton attempts to reconcile the reasons why the bitter bidders should be excluded from the process – lack of interest, distraction – and the problems this causes in assessing the reasonableness of a sale. He proposes that if losing bidders are excluded from the proceedings, at least they should be able to voice their complaints to the monitor who, in turn, would have to report these objections to the court. In the case before him, however, he admits that CDM’s intervention in the proceedings helped the Court assess the reasonableness of the sale under Section 36 CCAA17. He concludes by saying that although he dismisses the objections raised by CDM, he does not do so on grounds of lack of interest or standing18. Thus, Justice Hamilton’s observations on the standing of the bitter bidder appear somewhat critical of the judges’ reasoning in Skyepharma, AbitibiBowater and White Birch. While not denying the validity of the policy reasons which weighed heavily in these other cases, Justice Hamilton proposes a new approach to disputes surrounding contested sale approval motions, which begs the question: does the bitter bidder better stand, now? _________________________________________ 1 2010 QCCA 1742. 2 3 Para 37, AbitibiBowater. 4 Ibid. 5 47 O.R. (3d) 234. 6 Para 24, Skyepharma. 7 Para 30, Skyepharma. 8 Para 81, AbitibiBowater. 9 Para 87, AbitibiBowater. 10 2010 QCCS 4915. 11 2015 QCCS 1920, motion for leave to appeal dismissed, 2015 QCCA 754. 12 Para 23. 13 Para 26. 14 Para 82, Bloom Lake. 15 Para 84, Bloom Lake. 16 Para 85, Bloom Lake. 17 Para 86, Bloom Lake. 18 Para 89, Bloom Lake.

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  • Class Actions : The Conversion Rate Tale Reaches it's Final Chapter

    This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. On September 19, 2014, the Supreme Court of Canada issued its ruling in the so called “banks’ cases”1, in the context of which consumers instituted class actions to recover the conversion fees charged on credit card transactions in foreign currencies by many institutions issuing such cards. The plaintiffs were maintaining that these charges were contravening the Consumer Protection Act (Quebec) (the “CPA”).  In these decisions, the Supreme Court had to rule, among other things, on the following issues:   1) The necessity for class representatives in class actions to have a direct cause of action against each defendant in order to have the required standing to sue all of them; 2) Whether the CPA applies to banks in view of The Constitution Act, 1867; 3) The right of the class members to obtain the reimbursement of the conversion fees they had paid and, in the case of some of the banks, the payment of punitive damages. As to the first question, the Court decided that the class representatives had the standing to sue all the banks, noting that the Code of Civil Procedure (Quebec) (the “CCP”) allows the exercise of a class action even where the representative does not have a direct cause of action against or a legal relationship with each defendant where the remedy allows for getting a similar result in the case of each defendant. As to the second question, the Court examined whether sections 12 and 272 of the CPA, which apply to the disclosure of the charges in question and set out the possible remedies in the event these obligations are not complied with, impair the federal jurisdiction over banks. The Court was of the view that a disclosure requirement for certain charges ancillary to one type of consumer credit neither impairs nor significantly trammels the manner in which Parliament’s legislative jurisdiction over bank lending can be exercised. Accordingly, since the Court concluded that the banks had in fact contravened the provisions of the CPA and that such law applied to them in this respect, it decided that the class members should be granted a reduction of their obligations equal to the conversion fees charged during the period when they were not disclosed in accordance with the CPA. Lastly, the Court ordered some of the defendant banks to pay punitive damages to class members since, in its view, they contravened the CPA for many years without explanation, likening this behavior to a lax, passive or ignorant attitude in respect of consumer rights and their own obligations, or to a behavior tantamount to ignorance, carelessness or serious negligence. Lavery will shortly publish a more detailed analysis of these three decisions, which will certainly have a significant impact on consumer law and the application of some principles which apply to class actions as a procedural vehicle. _________________________________________ 1 Bank of Montreal v. Marcotte, 2014 SCC 55, Amex Bank of Canada v. Adams, 2014 SCC 56, and Marcotte v. Fédération des caisses Desjardins du Québec, 2014 SCC 57 

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  • Does the federal pension deemed trust outrank a perfected security interest in the context of CCAA proceedings? The Superior Court of Québec weighs in

    In the last few years, pension deemed trust issues have been a subject of debate before the courts. The Supreme Court of Canada itself addressed some of these issues in the Indalex case.1 On November 20, 2013, the Honourable Justice Mark Schrager of the Superior Court of Québec rendered an important judgment in Aveos addressing whether the federal pension deemed trust outranks a perfected security interest in the context of proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”)2.THE FACTSIn 2007, the debtor company, Aveos Fleet Performance Inc. (“Aveos”), established a defined benefit pension plan in favour of its non-unionized employees (the “Plan”) which was registered with the Office of the Superintendent of Financial Institutions (“OSFI”) and governed by the federal Pension Benefits Standards Act (the “PBSA”). On March 18, 2012, Aveos ceased the operations of its Airframe Division and informed all of its employees not to report to work the following day. On March 19, 2012, Aveos made an application under the CCAA and an Initial Order was issued granting a stay of all proceedings against Aveos. In addition, the Initial Order suspended the making of special payments to the Plan (to amortize the Plan’s deficits) but permitted Aveos to make normal cost contributions. The next day, Aveos ceased the operations of its two other divisions and terminated the employment of all but a select few employees.In April 2012, a divestiture process was approved by the Court. In accordance with this process, virtually all of Aveos’ assets were subsequently sold.In May of 2012, OSFI was informed that accruals would cease with respect to the Plan effective May 19, 2013.The Superintendent of Financial Institutions (the “Superintendent”) filed a motion before the Superior Court of Québec for declaratory judgment under which it mainly claimed that the deemed trust created by Section 8 of the PBSA required Aveos to pay to the Plan, in priority to Aveos’ secured lenders, an amount of $2,804,450 which represented the special payments due the Plan for the period of February to December 2012 (Aveos’ last special payment having been made for the month of January 2012).3 According to the Superintendent, once the Plan was terminated, the balance of the prescribed special payments for 2012 became due pursuant to Section 29(6) of the PBSA and these payments were protected by the PBSA deemed trust and, as such, ranked in priority to Aveos’ secured lenders. The Superintendent added that since almost all Aveos’s assets had been sold pursuant to the divestiture process, there had been a “liquidation” within the meaning of Section 8(2) of the PBSA which provides for the following:8(2) In the event of any liquidation, assignment or bankruptcy of an employer, an amount equal to the amount that by subsection (1) is deemed to be held in trust shall be deemed to be separate from and form no part of the estate in liquidation, assignment or bankruptcy, whether or not that amount has in fact been kept separate and apart from the employer’s own moneys or from the assets of the estate.The Superintendent argued that the CCAA is silent on the issue of the PBSA deemed trust and as such, Section 8(2) of the PBSA continues to apply in CCAA proceedings. The Superintendent also argued that the PBSA deemed trust priority exists notwithstanding the date on which it was created or the date of perfection of the security lenders’ charges.Independent of any considerations of rank, the Superintendent also requested that paragraph 19 of the Initial Order, which suspended the making of special payments, be retroactively amended and that Aveos be ordered to make such payments. More specifically, the Superintendent argued that insofar as the underlying rationale of such suspension is to provide an employer with the “breathing room” necessary for it to move forward with its restructuring plans, this underlying rationale was no longer present once Aveos decided to cease its business activities.Aveos’ secured lenders contested the Superintendent’s motion. Significant sums of money were owed to them by Aveos and fixed charges on all present and future moveable and personal property had been granted in six provinces and one territory, each one having been perfected in accordance with applicable legislation. Registration dates confirmed that, with the exception of the security interest registered in the Northwest Territories in August 2011, all of the charges were perfected in March 2010.The secured lenders took the position that the PBSA deemed trust was subordinated to their charges insofar as all of Aveos’ property was subject to their security at the time the PBSA deemed trust came into existence and therefore, either the assets were not subject to the PBSA deemed trust or there was a prior charge in their favour. The secured lenders relied, by analogy, on the Supreme Court of Canada’s decision in Royal Bank of Canada v. Sparrow Electric Corp.4 in which it was held that property subject to a fixed charge cannot be subsequently impressed with the deemed trust under Sections 227(4) and 227(5) of the Income Tax Act. Furthermore, the secured lenders in Aveos argued that the Supreme Court in Sparrow had also made it clear that a deemed trust will only be given effect in the context of insolvency proceedings to the extent that the applicable insolvency legislation explicitly provides as such.As for the Superintendent’s argument that the suspension of special payments should be reversed and Aveos should be ordered to retroactively pay the special payments claimed, the secured lenders indicated that it was not open to the Court, at this point, to grant such an order.The secured lenders argued that the Superintendent had ample opportunity to request an amendment to the Initial Order and that it failed to do so. Consequently, it would be unfair, at this stage, to retroactively amend the Initial Order in this way. More specifically, the stay of proceedings contained in the Initial Order was extended six (6) times and there have been twelve (12) asset sales and four (4) distributions of funds produced by these asset sales. Despite all of these proceedings, the Superintendent failed to make any application to the Court seeking the amendment of the Initial Order. According to the secured lenders, faced with a timely application to amend the Initial Order, they might have strategized differently and may simply have provoked a bankruptcy.THE DECISIONTHE PRIORITY ISSUEJustice Mark Schrager begins his analysis by addressing the issue of the priority afforded to the PBSA deemed trust in insolvency proceedings and with a review of the Supreme Court’s decision in Sparrow. In this judgment, the Supreme Court held that property validly encumbered by a security interest was not subject to the deemed trust under Sections 227(4) and 227(5) of the Income Tax Act.Following the Sparrow judgment, these provisions of the Income Tax Act were replaced so as to grant priority to the deemed trust in respect of property that is subject to a security interest regardless of whether the security interest was perfected before the deemed trust came into effect. Justice Schrager notes that while similar amendments were made to other statutes, no such amendment was made to Section 8(2) PBSA following the decision in Sparrow.Justice Schrager noted that the fixed charges in this case were created and perfected in 2010 and 2011 while the PBSA deemed trust arose later on. As a result, the Court held that since Aveos’ assets were already charged with the secured lenders’ security interests, the PBSA deemed trust was, at best, subordinate to such charges.Justice Schrager also agreed with the secured lenders’ position that the PBSA deemed trust is not effective in CCAA proceedings where secured creditors hold prior perfected security interests or charges which are not paid in full. The Court cited the Supreme Court of Canada’s decision in Century Services Inc. v. Canada (Attorney General)5 in which Justice Deschamps stated that where the intention is to protect the rank of deemed trust claims in insolvency matters, Parliament clearly expresses such intent. In the absence of such explicit statutory basis, no such protection exists in an insolvency context.Justice Schrager adds that, while Century Services dealt specifically with source deductions in favour of the Crown, the Supreme Court’s reasoning in that case was not limited to such deemed trusts and Justice Deschamps was clear that there exists a “general rule that deemed trusts are ineffective in insolvency.”6In response to the Superintendent’s question of what exactly would be the use of the deemed trust provided under Section 8(2) of the PBSA, Justice Schrager states that such deemed trust “is useful for the protection of special payments but only vis-à-vis creditors who do not hold security over the assets of the debtor company which was perfected prior to the deemed trust attaching to the assets”.7Finally, citing the Supreme Court’s judgment in Indalex, Justice Schrager notes that in Ontario, section 30(7) of the Personal Property Security Act subordinates security interests to the deemed trust created by the Ontario Pension Benefits Act. There is no similar or equivalent provision in the PBSA or in Quebec provincial law that would give priority to the PBSA deemed trust.THE SUSPENSION OF SPECIAL PAYMENTS ISSUEJustice Schrager stated that judges should be very hesitant to retroactively amend the Initial Order after such a long period of time and after various sales, vesting orders and distributions already occurred. The Court found that given the circumstances, the Superintendent’s delay in seeking to retroactively amend the Initial Order was unreasonable and the Superintendent was estopped from seeking such an amendment. The other parties, including the secured lenders, relied in good faith on the Initial Order.No appeal of Justice Schrager’s decision was filed.CONCLUSIONThis decision shows that the question of whether, in a CCAA context, a specific pension deemed trust has priority over a security interest perfected prior in time to the deemed trust’s creation must be answered by analysing the language used in the legislative provisions which create the pension deemed trust or which are related thereto. Ultimately, Justice Schrager concluded that neither Section 8(2) nor any other provision of the PBSA or Quebec provincial law contains the language required to grant such priority to the federal pension deemed trust._________________________________________1 Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6 (Indalex).2 Aveos Fleet Performance Inc./Avéos Performance aéronautique inc. (Arrangement relatif à), 2013 QCCS 5762.3 As for the Plan wind-up deficit of $29,748,200, the Superintendent took the position that it is an unsecured claim which is not protected by the PBSA deemed trust.4 [1997] 1 SCR 411.5 [2010] 3 SCR 379 (Century Services).6 Ibid at para 45.7 Aveos, supra note 2 at para 83.

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  • Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 21

    CONTENTS The Pros and Cons of Arbitration Clauses in Commercial Contracts Pirating and Using Software Without a Licence: The BSA | The Software Alliance Case Interprovincial Taxation: The Importance of Severing Residential Ties on Departure Security Under Section 427 of the Bank Act: Do the Rights of a Bank Rank Ahead of Those of the Holder of a Retention Right? THE PROS AND CONS OF ARBITRATION CLAUSES IN COMMERCIAL CONTRACTSCatherine Méthot and André PaquetteArbitration clauses are increasingly finding their way into commercial contracts. However, the fact that arbitration is a frequently chosen path nowadays does not necessarily mean that it is always the best solution. One must know its advantages and disadvantages and be wary of standard clauses which may be ill-adapted to one’s situation.Generally, the main advantages and disadvantages of arbitration clauses which are most often mentioned are the following:Advantages: (i) simplified procedure; (ii) less documentation to file; (iii) obtaining a decision is quicker than in the context of the judicial process; (iv) generally reduced costs compared to the judicial process; (v) absence of a right to appeal; and (vi) the confidentiality of the process and the decision, subject to an application for homologation of the arbitral award or a recourse to cancel the decision.Disadvantages : (i) the absence of a right to appeal, with some exceptions; (ii) the risk of the arbitration clause being ill-adapted to your particular situation; (iii) costs beyond the expectations of the parties, particularly when three arbitrators are appointed, some authors even maintaining that in such a case, arbitrators’ fees are sometimes almost multiplied by four because of the delays caused by time management and communications between three arbitrators;(iv) the impossibility to access items of evidence in the hands of opposing party outside of the judicial process; and (v) the exclusion of this decision from case law while the issue in dispute may constitute an important law issue.Before inserting an arbitration clause in a contract, one must assess these advantages and disadvantages and, if arbitration is chosen, the terms of the clause must be adapted, particularly with respect to following items : (i) things and situations covered under the clause; (ii) applicable law, making sure to verify whether such law limits or prohibits arbitration (for example, section 11.1 of the Consumer Protection Act,1 which prohibits stipulations whereby the consumer is obliged to refer a dispute to arbitration or restrict his right to go before a court, particularly by prohibiting him from bringing a class action or being a member of a group exercising such a remedy); (iii) the opportunity to provide for a right to appeal; (iv) the confidentiality of the arbitration process (subject to an application for homologation or a recourse for cancelling the decision); (v) the arbitration process (number of arbitrators, rules for submitting evidence, etc.); and (vi) the opportunity to provide for mediation meetings prior to arbitration.In all cases, the objective sought should be to ensure that in the event a dispute occurs, your interest will be better served by arbitration rather than the judicial process. If such is not the case, avoid inserting an arbitration clause in your contract._________________________________________1 C. P-40.1.PIRATING AND USING SOFTWARE WITHOUT A LICENCE: THE BSA | THE SOFTWARE ALLIANCE CASEBruno VerdonThe claims of the BSA | the Software Alliance (the “BSA”) against Quebec and Canadian businesses seem to be increasingly frequent.The BSA is a U.S.-based non-profit organization operating in more than 80 countries. Its members include companies such as Adobe, Apple, IBM and Microsoft.According to the information it publishes on its website, the BSA particularly fights copyright infringement when software has been installed by users without acquiring the necessary licence. It would appear that most investigations of the BSA target businesses and are conducted further to calls on its anti-piracy line or anonymous reporting via its website. Most reports come from current or former employees. In principle, after receiving information alleging software infringement, the BSA contacts the business to investigate the matter further and invites it to negotiate a settlement where it concludes that there is actual infringement. If a settlement cannot be reached, the BSA assigns the file to its attorneys and ultimately, if they cannot negotiate a settlement, the case goes to court.In Quebec and elsewhere in Canada, the BSA bases its claims for use of software without a licence on the provisions of the Copyright Act.1 this Act particularly provides that “When a person infringes copyright, the person is liable to pay such damages to the owner of the copyright as the owner has suffered due to the infringement and, in addition to those damages, such part of the profits that the infringer has made from the infringement and that were not taken into account in calculating the damages as the court considers just.”2In addition, since the Act to amend the Copyright Act,3 assented to on June 29, 2012, came into force, the holder of the infringed copyright may elect to claim, instead of damages and profits made by the person who infringed the copyright in question, an award of statutory damages which are not less than $500 and not more than $20,000 per violation if the infringements are for commercial purposes and not less than $100 and not more than $5,000 in the case of violations for non-commercial purposes.4Therefore, since 2012, a business which uses software without having acquired the required licences is liable to a claim of not less than $500 and not more than $20,000 per licence which it failed to acquire.In the case of Adobe Systems Incorporated et al. c. Thompson (Appletree Solutions),5 the Federal Court was called upon to apply this new provision of the Copyright Act. the Court noted that in awarding statutory damages, the following must be taken into account: (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question.Having concluded that proof had been made of the intention of the defendant to infringe and that severe deterrent measures were warranted, the Federal Court issued an injunctive order to prevent defendant from continuing to violate copyrights. On the issue of damages, the Court declared:“ I find no reason not to award maximum statutory damages in the amount of $340,000, being $20,000 per work infringed for each of the three Plaintiffs.”Proof the (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question being easier to make than that of the damages, it is anticipated that the BSA and its members will not hesitate in invoking the statutory damages provided for in this new provision of the Act in support of their claims.As these statutory damages can be well beyond the value of each non-acquired licence, it goes without saying that a negotiated settlement of the claim will constitute a preferred approach.The BSA usually publishes on its website the settlement agreements entered into with businesses.However, nothing prevents the parties from agreeing that the settlement of the claim and the settlement terms will be kept confidential, which will avoid he business concerned having its name associated with the settlement of a BSA claim._________________________________________1 R.S.C. (1895) c. C-42.2 Ibid., sec. 35.3 S.C. 2012, ch. 20.4 Ibid., sec. 38.1.5 2012 CF 1219 (CanLII).INTERPROVINCIAL TAXATION: THE IMPORTANCE OF SEVERING RESIDENTIAL TIES ON DEPARTUREJean-Philippe LatreilleThe place of residence of an individual is a fundamental tax concept which determines, among other things, his liability for provincial income tax. under the Taxation Act,1 an individual is subject to tax for a given year if he resides in Quebec on December 31 of that year. the tax base then consists of the individual’s income from all sources, except for business income from a Canadian establishment situated outside Quebec.The fact that an individual moves from a province to another usually results in a change of his place of residence for provincial tax purposes. However, it may happen that some residential ties with the province of origin remain, with unanticipated and unwanted results, as shown by a recent decision of the Court of Quebec in the case of Perron c. L’Agence du revenu du Québec.2In that case, the taxpayer was challenging assessments made by revenu Québec for taxation years 2005 to 2007, arguing that he was a resident of Alberta during the relevant period. the taxpayer, an engineer, had held various positions in Quebec prior to moving in Alberta in May 2005 after finding permanent employment there. From that time on, the taxpayer had rented a dwelling unit in Alberta and had purchased furniture for it. He also had opened a bank account and became a member of the Association of Professional engineers and Geoscientists of Alberta.However, the taxpayer had retained several residential ties with Quebec during years 2005 to 2007, particularly the following:a) His spouse, to whom he was married since 1985, and his son had continued residing in Quebec despite the departure of the taxpayer for Alberta. the taxpayer was neither divorced or separated under a judgment or a written agreement. b) the taxpayer had remained co-owner with his spouse of the family residence located in Beauport. c) the taxpayer had continued to provide for the financial needs of his son and to assume certain maintenance expenses of the residence located in Quebec. d) the taxpayer had stayed in Quebec every three months for periods of four or five days. When doing so, he was staying at his residence in Beauport. e) the taxpayer had retained his Quebec driver’s licence and maintained is eligibility to the Quebec health insurance regime. f) the taxpayer had remained a member of the Ordre des ingénieurs du Québec. g) the taxpayer had continued to use the postal address of his Beauport residence, particularly with respect to his credit cards. h) the taxpayer was the owner of a vehicle registered in Quebec, which he had given to his son in 2009. The Court determined that the taxpayer had provided prima facie evidence that his tax residence was located in Alberta during years 2005 to 2007, particularly by establishing the permanent nature of his position in Alberta and the low frequency of his visits in Quebec. the tax authorities thus had the burden to prove that the residence of the taxpayer had remained in Quebec.After reviewing the case law, the Court concluded that revenu Québec had established, by preponderance of evidence, that the taxpayer had retained his tax residence in Quebec during the disputed period by reason of the absence of severance of residential ties with Quebec.The judge particularly noted the absence of evidence corroborating the separation between the taxpayer and his spouse. According to the Court, several factors rather indicated that the spousal link was maintained between them. In addition, the taxpayer failed to establish sufficient connection to Alberta, except for his employment.This decision of the Court of Quebec, which was not appealed, underlines the importance of severing all residential ties with Quebec when moving to another province, particularly if the tax regime of the other province is less onerous. the place of residence is a complex issue which has to be decided according to the legislation in force and applicable case law. Any individual who maintains a more or less important presence in more than one province would be well-advised to consult a professional in this respect._________________________________________1 RLRQ RSQ?, c. I-3.2 2013 QCCQ 3271.SECURITY UNDER SECTION 427 OF THE BANK ACT: DO THE RIGHTS OF A BANK RANK AHEAD OF THOSE OF THE HOLDER OF A RETENTION RIGHT?Mathieu Thibault, Étienne Guertin and Jean LegaultFor financing its activities, a Quebec-based business may grant to a Canadian chartered bank a security under 427 of the Bank Act. This security interest allows the bank to exercise its rights on the borrower’s inventories as well as on the debts resulting from their sale while avoiding the formalities and notices which would otherwise be required under the Civil Code of Québec upon the exercise of a hypothecary remedy.1For its part, article 2293 of the Civil Code of Québec allows the holder of a retention right to retain the stored property until the depositor has, among other things, paid him the agreed upon compensation.In the Levinoff-Colbex, s.e.c. (Séquestre de) et RSM Richter inc.,2 the Superior Court had to decide whether the rights of National Bank of Canada (“NBC”) resulting from a security granted to it under the Bank Act, a federal statute, ranked ahead of the retention right relied upon by another creditor under the Civil Code of Québec following the failure of the debtor to meet its contractual commitments respecting the payment of the storage and refrigeration costs of its inventories.According to the Superior Court, the rights of a creditor under section 427 of the Bank Act may be described as a sui generis ownership right, according to the wording used by the Court of Appeal in the case of Banque Canadienne Nationale v. Lefaivre.3However, this sui generis ownership right does not constitute a true ownership right within the meaning of the Quebec civil law on property covered by such security interest. Section 427 and following of the Bank Act rather establish a security interest regime focused on ownership and confer on the bank which holds such security interest rights as a secured creditor and not as an owner of the property covered by such security interest.In this context, NBC could not be bound by the retention right created in favour of another creditor. In fact, the determination of the priority of these rights did not derive from holding an ownership right within the meaning of civil law: the NBC was rather a secured creditor of the debtor.The priority of creditors’ rights must be determined by applying and interpreting the Bank Act in accordance with the doctrine of paramountcy and the judgment issued by the Supreme Court of Canada in the case of Bank of Montreal v. Innovation Credit Union.4Since section 428 of the Bank Act contains an express provision resolving this priority conflict, one has simply to apply the rule provided in this section whereby the rights of the BNC had “priority over all rights subsequently acquired in, on or in respect of that property” covered by the security interest._________________________________________1 Banque de Montréal v. Hall, [1990] 1 S.C.R.2 2013 QCCS 1489. It must be noted that an appeal of this judgment has been filed with the Court of Appeal under number 500-09-023539-133.3 [1951] B.R. 83, at page 88, referring to Landry Pulpwood Co. v. Banque Canadienne Nationale, [1937] S.C.R. 605, page 615.4 [2010] 3 S.C.R.3

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  • The Supreme Court rules in Indalex: DIP lenders rank ahead of pension beneficiaries in CCAA Restructuring

    On February 1, 2013, the Supreme Court overturned a controversial decision of the Ontario Court of Appeal which granted pension beneficiaries priority over DIP lenders in the context of a restructuring under the Companies’ Creditors Arrangement Act (“CCAA”).1 The Court of Appeal’s decision led many to worry that lenders would be reticent to advance funds to restructuring debtors for fear of not being able to secure charges which would outrank all other claims. However, the Supreme Court’s decision would appear to assuage many of those fears although it may raise serious concerns for secured lenders outside an insolvency situation.FACTSIn 2009, Indalex, a Canadian subsidiary of a US company which manufactured aluminum extrusions, became insolvent. The US company subsequently filed for Chapter 11 bankruptcy protection in the US and the Canadian subsidiary sought, and was granted, a stay under the CCAA. At the relevant time, Indalex was the administrator of two registered pension plans: one for the company’s salaried employees (the “Salaried Plan”) and one for the company’s executives (the “Executive Plan”). At the time the CCAA proceedings were instituted, the Salaried Plan was in the process of being wound up while the Executive Plan had been closed but not yet wound up. At the time the stay was issued, the plans faced funding deficiencies of $1.8 million and $3.0 million respectively.In April 2009, the CCAA court authorized Indalex to enter into an interim financing agreement with a group of DIP lenders in return for a charge which ranked ahead of all of the company’s other creditors. The DIP loan was further guaranteed by Indalex US.Indalex was successful in selling its assets on a going-concern basis but the accepted bid would not cover the DIP loan in full and the buyer refused to take on the pension plans. On July 20, 2009, both Indalex in Canada and the US applied to their respective courts to obtain an order authorizing the sale of the assets and approving the interim distribution of the proceeds of the sale to the DIP lenders. Members of both pension plans opposed Indalex’s motion, arguing that their claims had priority over that of the DIP lenders because the pension liabilities were covered by a statutory deemed trust under the Ontario Pension Benefits Act (“PBA”). They further argued that Indalex was in violation of its fiduciary obligations as administrator of the pension plans throughout the insolvency proceedings. The Court approved the sale but ordered the Monitor to hold $6.75 million in reserve leaving the determination of the pension beneficiaries’ claims for a later date.Having covered the DIP lenders’ shortfall, Indalex US was subrogated in the DIP lenders’ rights and became the debtor’s first ranking creditor by way of the DIP charge.THE LOWER COURT DECISIONSJustice Campbell of the Ontario Superior Court dismissed the Plan Members’ motions, concluding that the PBA deemed trust did not apply to the wind-up deficiencies as the payments in question were not “due” or “accruing due” as of the date of wind up and the Executive Plan did not have such a deficiency as it had not yet been wound up.2The Court of Appeal allowed the Plan Members’ appeals. Reversing the Superior Court, the Court held that s.57(4) of the PBA applies to all amounts due in respect of pension plan wind-up deficiencies. Moreover, it was held that a deemed trust existed for the Salaried Plan and that such deemed trust had priority over the charge granted in favour of the DIP lenders by virtue of s.30(7) of the Ontario Personal Property Security Act insofar as the doctrine of federal paramountcy had not been raised at the time the Initial Order which provided for the DIP charge was issued and that there was nothing to suggest that this would frustrate the debtor’s ability to restructure. The Court of Appeal also found that Indalex had breached its fiduciary obligations to Plan Members in a number of ways throughout the duration of the CCAA proceedings and that a constructive trust over the reserve fund in favor of Plan Members of the pension plans was an appropriate remedy for these breaches.3THE APPELLANTS’ POSITIONIndalex argued before the Supreme Court that the wind-up deficiency costs claimed by the Plan Members could not benefit from the PBA deemed trust as they are not calculated until well after the effective date of wind up. As such, they cannot be said to have accrued, as required by the legislation.4 Furthermore, they took the position that even if the pensioners benefitted from a deemed trust, the charge in favour of the DIP lenders would outrank any such claim.5With regards to the fiduciary obligations owed by the company, Indalex argued that the company plays two roles, one as administrator of the pension plans and another as employer making decisions in the best interests of the corporation. The argument advanced was that decisions made by an employer in its corporate capacity are not burdened by any fiduciary obligations owed to pension plan members.6 Moreover, Indalex also asserted that, in the event that the company was found to be in breach of its fiduciary duties as administrator of the pension plans, the constructive trust imposed by the Court of Appeal was not an appropriate remedy.7THE PBA DEEMED TRUST AND WIND-UP DEFICIENCIESThe first question addressed by the Supreme Court involved the application of section 57(4) of the Ontario PBA which reads as follows:57(4) Where a pension plan is wound up in whole or in part, an employer who is required to pay contributions to the pension fund shall be deemed to hold in trust for the beneficiaries of the pension plan an amount of money equal to employer contributions accrued to the date of the wind up but not yet due under the plan or regulations [Our emphasis].The question was whether the deemed trust provided for in this provision applies to the wind-up deficiency payments referred to in s.75(1)(b) of the Act. For the Salaried Plan’s wind-up deficiency payments to come under the purview of the statutory deemed trust, they must constitute employer contributions accrued to the date of the wind up but not yet due, as required under s.57(4) PBA.The majority of the Supreme Court upheld the Ontario Court of Appeal on this point, thus refusing to accept the more restrictive interpretation of the word “accrued” offered up by Indalex. Rather, in the Court’s view, the wording, context and purpose of the provision lead to the conclusion that the wind-up deficiencies set out at s.75(1)(b) are indeed protected by a deemed trust. While the entire Court agreed that the wind-up deficiencies were employer contributions which were not yet due, four of the seven sitting justices also concluded that they had “accrued”. Justice Deschamps, writing for the majority on this point, contrasted her view with that of the dissent, stating:The distinction between my approach and the one Cromwell J takes is that he requires that it be possible to perform the calculation before the date of the wind up, whereas I am of the view that the time when the calculation is actually made is not relevant as long as the liabilities are assessed as of the date of the wind up [Our Emphasis].8The majority also held that the legislative history of the PBA coupled with the remedial purpose of the deemed trust provision both lead to the conclusion that the exclusion of wind-up deficiency payments from the protection of the deemed trust would run contrary to the Ontario legislature’s intention.9 However, the entire Court agreed that the deemed trust can only apply with respect to the Salaried Plan and not to the Executive Plan as it had not yet been wound up.10STATUTORY DEEMED TRUSTS AND CCAA SUPERPRIORITY CHARGES: WHICH HAS PRIORITY?While the Court held that a deemed trust was created in respect of the Salaried Plan payments, this was not enough to dispose of the appeal. The question remains, does the provincial deemed trust created by s.57(4) of the PBA take precedence over the court-ordered charge in favour of the DIP lenders? The Court notes that the PBA provincial deemed trust continues to apply in CCAA proceedings, subject to the application of the doctrine of federal paramountcy which renders inoperative provincial legislation where it enters into conflict with federal law.11 Furthermore, the Court rejects the Court of Appeal’s refusal to apply this doctrine on the basis that it had not been explicitly raised by the appellants at the time of the Initial Order and the granting of the DIP charge. Rather, the Supreme Court concludes that paramountcy, as a question of law, can be raised regardless of whether it was invoked in an initial proceeding.12The Court concluded that such a conflict did arise in this case insofar as compliance with the provincial law necessarily entails defiance of the CCAA order made in accordance with federal law. As a result, the granting of priority to the DIP lenders had the effect of subordinating the claims of all other stakeholders, including those of the Plan Members. Moreover, the Court held that the court-ordered DIP charge granted in accordance with the CCAA has the same force as a statutory priority. Insofar as the federal and provincial schemes gave rise to conflicting orders of priority, by operation of the doctrine of paramountcy, the DIP charge ranks ahead of the deemed trust.13DID INDALEX BREACH ITS FIDUCIARY OBLIGATIONS?The Court also held that conflict of interest problems can arise where a company acts as both plan administrator and employer, especially in a restructuring context. More specifically, the company’s corporate interests can come into conflict with its duty as plan administrator to ensure that contributions are made when they are due.14 An employer cannot disregard its fiduciary obligations to plan members in order to privilege its duties to the corporation.15In the case at hand, the Court found that Indalex was indeed in a position of conflict of interest but the majority did not find that the fiduciary breaches committed by the debtor company were as wide-ranging as the Court of Appeal indicated.16 While the company was not in breach of its duties by filing for CCAA protection nor by failing to give notice to the Plan Members of its plan to commence CCAA proceedings, it was obligated to provide such notice when it sought the order approving the DIP loan which would outrank the pension claims.17The majority also provided important guidance for employer-administrators who are in a similar situation to that faced by Indalex. More specifically, Justices Deschamps and Cromwell both provided some means by which employer-administrators may address conflicts and thus avoid breaching their fiduciary duties. Justice Deschamps also added that the solution to address a conflict “has to fit the problem, and the same solution may not be appropriate in every case”.While the justices concluded that Indalex did not live up to its fiduciary obligations, the majority, with two justices dissenting, held that a constructive trust was not an appropriate remedy. In the words of Justice Cromwell, four conditions must be present before a remedial constructive trust may be ordered for breach of fiduciary duty, one of which being that the breach of fiduciary duty must have given rise to assets in the hands of the wrongdoer. According to the majority, to satisfy this second condition, it had to be shown that Indalex’s breach resulted in assets being placed in Indalex’s hands, and not simply, as the Court of Appeal found, that there was a “connection” between the assets and “the process” in which Indalex breached its fiduciary duty. The majority ruled that the failure of Indalex to meaningfully address the conflict of interest that arose in the course of the CCAA proceedings did not give rise to the assets which were retained by the Monitor in the reserve fund (those assets resulted from the sale, not from Indalex’s breach of fiduciary duty).SUMMARYThe Supreme Court could not reach a unanimous decision on all of the issues raised in Indalex. Three different sets of reasons were issued by the Court:  Deschamps J. (Moldaver J. concurring) Cromwell J.( McLachlin C.J. and Rothstein J. concurring) Le Bel J. (Abella J. concurring)On the issues, the Court was split as follows:  The PBA deemed trust applies to wind-up deficiencies: 4 to 3; The DIP charge supersedes the PBA deemed trust because of federal paramountcy: 7 to 0; Indalex breached its fiduciary obligations as plan administrator: 7 to 0; A constructive trust was not the appropriate remedy to the breach of fiduciary obligations: 5 to 2.A QUEBEC PERSPECTIVEQuebec pension legislation differs from the PBA. Under the Quebec Supplemental Pension Plans Act (SPPA), there is no deemed trust for pension deficits on wind up as the SPPA qualifies such deficit as a debt.Also, in Quebec, pension plans are, under the SPPA, administered by pension committees, unlike the Ontario situation in Indalex where the employer was the plan administrator. In cases where the pension committee has not delegated any of its powers and duties to the employer (the SPPA allows a pension committee to delegate all or part of its powers and duties to a third party, including the employer), it would be difficult to find a breach of fiduciary duty by the employer in a situation similar to the one in Indalex.Finally, the Indalex matter raised the application of equitable remedies, in particular the constructive trust. This remedy does not exist in the civil law regime of the Province of Quebec.CONCLUSIONThe Court’s conclusion that the DIP lenders’ charge took priority over the claims of the pension beneficiaries provides an answer to a very live controversy in insolvency law. Moreover, the decision provides restructuring companies with important direction regarding the proper management of conflicts of interest when facing insolvency issues. However, these conclusions may not be easily transported into Quebec law. As we noted above, the role of the employer with a private pension plan in Quebec differs from that of an employer-administrator in Ontario and the legislative framework is different in Quebec.18 As such, the Court’s conclusions in this respect may not be as relevant to restructuring companies in Quebec.The Court also made it clear that pension plan members in Ontario benefit from the protection of a provincial deemed trust even in respect of wind-up deficiencies. Perhaps more importantly, while the Supreme Court confirmed that the deemed trust in this case had to yield to the DIP lenders’ charge, the expansion of the PBA deemed trust and its continued operation absent any conflict with federal law will certainly raise concerns with secured lenders who may see their first ranking security take a bow before a PBA deemed trust for pension deficits on wind up.How will lenders react? Will they seek shelter from provincial deemed trusts in the Bankruptcy and Insolvency Act where most deemed trusts are inoperative? A perverse effect of this could be that lenders will tend to force bankruptcies instead of restructurings in situations where pension plan deficits are substantial. Lenders may impose additional covenants in their loan agreements to seek better protection from such potential pension plan deficits. The formidable flexibility and capacity to adapt which is a true characteristic of the insolvency and restructuring practice may be a silver lining to what may seem to be gloomy times for secured lenders._________________________________________  1 Sun Indalex Finance LLC v. United Steelworkers, 2013 SCC 6 [Indalex]. 2 2010 ONSC 1114. 3 2011 ONCA 265. 4 Indalex, supra note 1 at para 33. 5 Factum of the Appellant, Sun Indalex Finance, LLC, Court File No. 34308, at para 101 [Factum]. 6 Indalex, supra note 1 at para 63. 7 Factum, supra note 5 at para 89. 8 Indalex, supra note 1 at para 34. 9 Ibid at paras 43-44. 10 Ibid at para 46. 11 Ibid at para 52. 12 Ibid at para 55. 13 Ibid at para 60. 14 Ibid at para 182. 15 Ibid at para 65. 16 Ibid at para 74. 17 Ibid at para 73. 18 White Birch Paper Holding Company (Arrangement relatif à), 2012 QCCS 1679.

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  • Francization – Bill No 14 amending the Charter of the French language

    This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The title of this newsletter gives a good summary of the explanatory notes that serve as an introduction to Bill 14, entitled An Act to amend the Charter of the French language, the Charter of human rights and freedoms and other legislative provisions (the “Bill”). The legislator is concerned that English is being used systematically in certain workplaces. The Bill was tabled on December 5, 2012 and the proposed amendments are designed to reaffirm the primacy of French as the official and common language of Quebec.

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  • CCAA: Is the termination of employment contracts subject to section 32 CCAA?

    On August 30, 2011, Hart Stores Inc./Magasins Hart inc. (hereinafter 'Hart'), filed for protection under the Companies' Creditors Arrangement Act (hereinafter the 'CCAA'). As part of the restructuring, Hart closed down 32 out of 92 points of sale and laid off 640 out of 1,600 employees. Included in the lay off are five executives, who are the subject of this bulletin.The executives were all laid off by means of a simple notice of termination. On February 20, 2012, the five executives filed a motion contesting the termination of their employment contracts. Their application was based primarily on section 32 CCAA, which permits a debtor to resiliate certain agreements. This resiliation can be contested, and the court will then issue a ruling.

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  • Creditors suspected of wishing to eliminate a competitor: The Court refuses to annul their votes against a plan of arrangement

    On May 14, 2012, the Honourable Normand Gosselin, J.S.C., ruled on an amended motion seeking the sanction of a plan of arrangement concerning a debtor, Norgate Métal Inc. ('Norgate'). The judgment is special in that Norgate asked the Court to annul some of the votes that had been cast against the plan of arrangement. Norgate submitted that the only reason why the creditors who cast those votes had voted against the plan was that they wished to eliminate a competitor from their industry.Norgate operates in the construction industry and filed for protection under the Companies’ Creditors Arrangement Act (the 'CCAA') in November 2011. In February 2012, Norgate filed its plan of arrangement and the meeting of the creditors was called for March 22, 2012. The plan of arrangement provided for division of the unsecured creditors into two classes, that is the protected creditors and the unprotected creditors. The protected creditors were likely to be paid 100% of the amount of their claims while the unprotected creditors could only hope to recover about 7%.

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