NORTH OF THE BORDER UPDATE
This article has been contributed by Sandra Abitan and Julien Morissette, respectively partner and associate in the Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP.
In the context of proceedings under the Companies’ Creditors Arrangement Act (CCAA), many extraordinary remedies are granted by Canadian insolvency courts. Among them, super-priority charges on all of the debtor’s assets to secure certain liabilities and very broad releases in favour of non-filing third parties. While the courts of Ontario have generally taken in the lead in expanding the scope of available relief under the CCAA, courts in the Province of Québec have tended to be more conservative in their approach. Recently, the Superior Court of Québec seized the opportunity to explain why it was bucking the Canadian trend.
In March 2012, Aveos Flight Performance Inc., an aeronautics maintenance, repair and overhaul company, sought and obtained creditor protection under the CCAA (the Initial Order). FTI Consulting Canada Inc. was appointed Monitor. Within hours, the entire board of directors resigned, with the exception of one member who remained for the sole purpose of signing an affidavit supporting a motion for appointment of a Chief Restructuring Officer (CRO), which occurred the next day. The Initial Order originally provided for a $5 million directors’ charge to secure post-filing liabilities. Given that the board only remained in place for a few hours, the charge was later reduced to $2 million. At the time, the reduction of the D&O charge was unsuccessfully contested by the International Association of Machinists and Aerospace Workers (the Union), representing former unionized employees of Aveos.
Under the supervision of the Monitor and the CRO, Aveos proceeded to liquidate its assets. Two of its three divisions were sold and resumed operations under new ownership. It was then determined that the “leftovers” could be disposed of through receivership proceedings at a lower cost. On November 22, 2013, Aveos filed a motion seeking termination of the CCAA proceedings and certain ancillary orders. This motion notably sought to terminate the directors’ charge created under the Initial Order and extensive releases for the Monitor and the CRO. It was contested by the Union as regards the directors’ charge, on the basis that there remained unpaid employee liabilities for which directors could be personally liable.
Aveos’ remaining unpaid liabilities were in the range of $8 to $9 million, but Aveos held a $100 million directors and officers (D&O) insurance policy. While coverage ends with the termination of the CCAA proceedings, prior claims continue to be covered during a three-year runoff period.
Justice Shrager noted that pursuant to the CCAA, a Court should not grant a directors’ charge if the debtor company can otherwise obtain adequate D&O insurance. He held that this criterion applies not only to the initial establishment of a directors’ charge, but also to the its continued existence. Despite the Union’s fear that the insurance company will not honour claims, the Court ruled that the potential claims by employees were adequately covered by Aveos’ D&O policy. The directors’ charge was therefore terminated.
Aveos’ motion also sought comprehensive and unequivocal discharges for the Monitor and the CRO, including a general release of liability for all decisions and actions taken within the context of the CCAA proceedings. This request was apparently not contested. Nevertheless, the Court considered such discharges, despite their prevalence in recent court orders, to be “excessive”.
First, Shrager J. held that under the CCAA, the Monitor benefits from certain specific statutory releases (notably for environmental and employee liability) similar to those extended to trustees under the Bankruptcy and Insolvency Act (BIA). However, unlike the general release granted to bankruptcy trustees at the termination of their duties under the BIA, no such provision exists in the CCAA. Shrager J. concluded that failure by the legislator to incorporate equivalent language in the CCAA was a major factor.
Additionally, citing the Supreme Court of Canada’s judgment in Century Services Inc. v Canada, the Court referred to the broad discretion afforded to a CCAA judge, which extends to discharges. Limits on liability had already been granted to the Monitor and the CRO in prior orders of the Court. The releases sought in the Termination Motion were essentially releases against all liability (except for gross negligence and willful misconduct), including “liability arising in factual circumstances in the course of the administration not put before the Court regarding parties not necessarily before the Court”. Such releases were held to be excessive and unfair to anyone who might have a claim. Interestingly, Shrager J. raised the deterrence effect of potential liability as a relevant policy consideration.
Finally, Aveos’ motion also requested prior court approval and posting of security for any legal action subsequently filed against the Monitor and the CRO. Shrager J. granted this order, despite previous case law to the contrary. In Mecachrome International Inc. (in French), the Superior Court had refused to grant such an order for lack of a statutory basis and because it would constitute an impediment to free access to the courts. Shrager J. justified his order on the basis of Code of Civil Procedure provisions empowering a court to sanction improper use of procedure, and by arguing that such a restriction on access to the courts was “reasonable” in light of the deterrent effect it operates against frivolous lawsuits.
This judgment bucks the trend of ever-expanding charges and releases. It is not isolated within Québec, where judges have often refused to grant such orders. This is likely in part grounded in Québec’s civil law culture, which favours shorter orders and a larger role for the principle of good faith. It remains to be seen whether this counter-cultural affirmation will have an echo in the rest of Canada. Insolvency professionals, and other stakeholders in the restructuring community, should stay tuned.