NORTH OF THE BORDER UPDATE
Court-approved asset sales are commonplace under the Companies’ Creditors Arrangement Act (CCAA). What jurisdiction, if any, does an insolvency court have over a solvent arm’s-length purchaser? In a judgment rendered last month, the Québec Court of Appeal confirmed that an insolvency court has jurisdiction over a purchaser, even after the transaction has closed. The Court laid down principles that should be heeded by purchasers making commitments that may extend after the transaction closes.
White Birch Paper formerly owned and operated paper mills in Québec and Virginia. Following the 2009 collapse of the world market for paper, White Birch and certain affiliates filed for and obtained court protection under the CCAA in February 2010. In August 2010, BD White Investment LLC (Purchaser) executed an asset purchase agreement (APA) to acquire substantially all of the debtors’ property. The following month, the Superior Court of Québec blessed the transaction through an Approval and Vesting Order (Vesting Order).
The transaction contemplated by the APA and the Vesting Order took two years to close. Among the main sticking points were the large actuarial deficits in White Birch’s pension plans, which were the object of extensive negotiation and litigation. In July 2012, the union representing the employees of the mill located in Québec City (Stadacona) signed a letter of understanding (LOU) with the debtor entity that operated that mill, providing, notably, that the existing pension plan would be terminated prior to closing and that a new plan would come into force upon closing.
In September 2012, the transaction closed. The court-appointed monitor issued a standard certificate (Monitor’s Certificate), pursuant to the Vesting Order, confirming payment of the purchase price and satisfaction or waiver of all the APA’s conditions. However, the new pension plan was not created upon closing and had still not been created nearly a year later. In parallel, White Birch is still under court protection.
In March 2013, the Regroupement des employés retraités de White Birch-Stadacona Inc., an ad hoc organization representing the Stadacona retirees (Retirees), brought a motion before the Superior Court judge supervising the restructuring. It alleged discontent with the delays in setting up the new pension plan and requested that the Court compel the Purchaser to disclose information regarding the new pension plan, including correspondence exchanged with the provincial pension regulator. In a short judgment, Justice Mongeon granted the motion for the most part and ordered disclosure of the documents.
The Purchaser sought and obtained leave to appeal. Interestingly, it was supported by the union representing current employees. Instead of attacking specific aspects of the disclosure order, on appeal, these parties raised untested arguments:
- An insolvency court has no jurisdiction over a solvent purchaser of assets after closing;
- Any residual jurisdiction of the insolvency court is cleansed by the Monitor’s Certificate; and
- The labour relations regime is the only available redress mechanism.
The Retirees argued that White Birch had made the pension plan commitments in the LOU on behalf of the Purchaser, without which the union would not have consented to the sale closing. More generally, they took the view that the Court had jurisdiction to ensure that the goals of the CCAA were respected.
While not officially taking a position, the Monitor supported the thrust of the Retirees’ argument, adding that, in its view, the pension plan commitments were an integral part of the transaction that was blessed by the Vesting Order.
The Québec Court of Appeal rendered its judgment on July 31, 2013. It vindicated the Retirees’ position and dismissed the appeal.
On the facts, the Court found that the Purchaser had attorned to the Court’s jurisdiction throughout the process, including in the Purchaser’s capacities as creditor of White Birch and stalking horse bidder in the sale process. It relied on the Monitor’s assertion that the satisfactory resolution of pension plan issues was a key factor in the court’s issuance of the Vesting Order. It also found that the Retirees, who were all creditors of White Birch, had relied on the LOU in their decision not to oppose the closing of the asset sale.
The Court took advantage of a rare opportunity to comment on the legal effects of the standard-issue Monitor’s Certificates, which finalize these transactions, with a clear statement of principle:
It is true that, normally, with signature by a judge of an Approval and Vesting Order followed by signature by the Monitor of a Certificate stating that all closing conditions are satisfied, the relevant assets are excluded from the debtor’s patrimony going forward and thus no longer subject to the insolvency court’s jurisdiction. This is in line with the necessary efficiency and reliability of the order signed by the CCAA judge.
The Court nonetheless held that there are exceptions to this principle; the “break” may not always be clean. In particular, the insolvency court “must (…) keep the jurisdiction necessary to police respect and implementation of conditions precedent which are at the heart of its approval and pursuant to which creditors took a position on the sale.”
Reading Monitor’s Certificates literally, in the Court’s view, would be contrary to the policy objectives underlying the CCAA – that is, continuing the company’s operations and avoiding the socioeconomic costs associated with a liquidation. If judges were unable to ensure compliance with commitments upon which parties legitimately relied, successful restructurings would become more difficult to achieve. The Court issued a clear reminder that the CCAA ought to operate not only for the benefit of debtors, but also for the benefit of other stakeholders, including creditors, employees and retirees.
The Court made a distinction between an insolvency court’s intervention in the operations of the Purchaser, which would not generally be permissible, and an intervention linked to compliance with the conditions of a court-approved sale, which passes muster. The Court left the door open to a different result should a Purchaser prove significant prejudice, but found no such situation here.
Recognizing that pension plan deficits are often one of the most sensitive and complex aspects of restructurings, the Court granted considerable deference to the first judge, who ultimately had ruled on the opportunity of the sale in accordance with the criteria found in section 36 of the CCAA.
Finally, the Court summarily dismissed the union’s argument that the only mode of redress should be the labour relations regime. Understandably, it did not appear comfortable with the proposition that only the union would have had the ability to obtain information on the basis of a promise made for the benefit of Retirees rather than its members. The Court also showed some surprise that the union had turned against the Retirees, after having been part of a united front with them throughout the restructuring.
It should be reassuring to the restructuring community that the Court confirmed the principle of finality that underlies court-approved asset sales. The breadth of the exceptions to the “clean break,” however, remains an open question. There may be situations where a party could request that the court waive a condition to allow a questions-free closing. Pending further judicial consideration, additional certainty will come only from proper structuring and papering of asset-sale transactions. If at all possible, promises made for the benefit of third parties who are not present at the negotiating table (creditors, retirees, etc.) should be ratified by these parties. Above all, the consequences of failing to meet one of these commitments should be clear from the start, and not left to interpretation.