Canada: Supreme Court Of Canada Opens The Door To Labour Relations Proceedings Against Insolvency Administrators

A decision by a majority of the Supreme Court of Canada rendered late last week may have the effect of declaring "open season" on proceedings seeking to have insolvency administrators declared successor employers under applicable labour legislation.

In GMAC Commercial Credit Corporation – Canada v. T.C.T. Logistics Inc., the narrow relief initially sought by a union before the Ontario Labour Relations Board (OLRB) against an interim receiver selling a business was a declaration that the interim receiver conducted unfair labour practices by colluding with a purchaser to operate the business at a non-unionized location so that the unionized location could be shut down.  Granting the declaration could have exposed the interim receiver to personal liability for all of the obligations under the collective agreements of the bankrupt employer.

The interim receiver defended the OLRB proceedings, in part, by claiming they were stayed until leave was sought and obtained pursuant to s. 215 of the Bankruptcy and Insolvency Act (BIA) from the bankruptcy court having appointed the interim receiver. A leave application was then brought by the union before the bankruptcy court to permit continuation of the existing OLRB proceeding and to seek declarations against the interim receiver as a successor and related employer.

The bankruptcy court denied leave and the union appealed to the Ontario Court of Appeal.  At the Court of Appeal, the union apparently confirmed that it was not seeking a declaration as to the personal liability of a court-appointed officer for collective bargaining obligations that pre-dated the insolvency proceeding (i.e. pre-filing).

The Court of Appeal enumerated a number of factors to be assessed in determining whether to grant leave pursuant to s. 215 of the BIA, which raised the threshold for leave applications against court appointed officers in similar situations, and remitted the case back to the bankruptcy court for reconsideration. The union appealed to the Supreme Court of Canada.

The Supreme Court ruled that s. 215 of the BIA may not be used to shelter trustees in bankruptcy and interim receivers from leave applications in labour relations matters on any basis that differs from the very low threshold for leave that prior case law set for actions generally against a court-appointed officer.  The Court said that when presented with evidence that suggests a prima facie case exists against a trustee or interim receiver in a labour relations matter, courts ought to grant leave so that the matter may be heard on its merits by a labour tribunal.

As the Supreme Court noted, under s.14.06 of the BIA, Parliament explicitly conferred immunity on trustees and receivers from certain types of pre-filing liabilities arising from the continuation of the debtor’s business or employment of the debtor’s employees - these liabilities include those which the union confirmed at the Court of Appeal it was not pursuing.  The majority of the Court also noted that the leave mechanism in s. 215 of the BIA does not give jurisdiction to the bankruptcy court to shield court officers alleged to have engaged in conduct outside of the explicit protections afforded by s. 14.06 of the BIA. 

Regrettably, the Supreme Court did not expressly state that the leave mechanism in s. 215 of the BIA, even at the low threshold established by the Court, can be used to limit proceedings relating to pre-filinglabour obligations. Instead the decision merely establishes the applicable leave threshold, without analysis as to whether if leave is granted and successor status is declared the relief sought should be limited explicitly to matters not protected by s.14.06 of the BIA. 

As such, a recognition that the potential liabilities facing the court officer from an adverse finding by the labour tribunal did not include those from which the court officer is immune must have been inherent in the Court’s reasoning to permit leave.   However, the Supreme Court appears to have missed a clear opportunity to be instructive and proscribe pointless future litigation.  Indeed, it could well be that in this case the matter will have to return to the courts for adjudication on the scope of the interim receiver’s liabilities if an adverse determination of liability is made by the OLRB.

It remains to be seen if the courts will rule that: a) the low threshold of s. 215 of the BIA has not been met when asserted claims fall within the ambit of immunity set out s. 14.06 of the BIA; or b) leave should be granted for such claims to proceed before a labour board prior to determining whether and to what extent immunity applies under s. 14.06 to a labour board decision. Given the lack of clarity of the Supreme Court’s decision on the point, it remains open to the courts to grant leave on a basis where the relief sought must not go beyond the scope of the protections afforded under s. 14.06 of the BIA.

The Supreme Court’s ruling likely will apply equally to any leave application in proceedings against any insolvency administrator subject to court supervision. Given the risks associated with adverse decisions of labour tribunals, the decision could easily cause many more liquidations or protracted debtor-in-possession insolvency proceedings at a huge cost to secured and other creditors.  The decision is also likely to lead to a re-examination of the utility of CRO (Chief Restructuring Officer) appointments and creditor-sponsored insolvency proceedings for debtors-in-possession to address governance issues inherent in insolvency proceedings.

A legislative amendment to cure this problem is doubtful at this time, given the Crown's approach to the successor liability issue as expressed in the dialogue relating to recent proposed amendments to Canada’s insolvency laws.

As a result of this decision, we expect a renewed focus on indemnities in connection with the appointment of insolvency administrators, and a clearer view to be taken of the purposes for which appointments are made and the manner in which they are carried out.   An increase in litigation in connection with administered insolvencies is also likely.

Rupert Chartrand is a partner in the Business Law Department of the firm's Toronto office, his practice focuses on the insolvency area. Edward A. Sellers is a partner in the firm's Business Law Department and a leader of the firm’s Insolvency & Restructuring Practice Group.

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