Canada: Re Bock Inc.: Reviving A Terminated Contract For The Benefit Of All Stakeholders

Courts frequently observe that the Companies' Creditors Arrangement Act [CCAA]¹ is skeletal in nature and tasks the supervising judge with having to make a great number of procedural and substantive decisions during proceedings conducted thereunder. These decisions are "often based on discretionary grants of jurisdiction."² In that respect, s. 11 of the CCAA plainly grants very broad and discretionary authority to the supervising judge who "may, subject to the restrictions set out in this Act [...] make any order that it considers appropriate in the circumstances."³ Accordingly, CCAA courts have been called upon to innovate "beyond merely staying proceedings against the debtor to allow breathing room for reorganization" and "have been asked to sanction measures for which there is no explicit authority in the CCAA."⁴

As such, there is a growing trend in CCAA proceedings that sees Canadian courts issuing orders that directly affect third parties. But what is the extent of the powers vested in the courts to reengineer the contractual relationships of a debtor company? For instance, can a judge acting under s. 11 of the CCAA order the suspension or cancellation of a notice of termination and order the specific performance of the (otherwise terminated) agreement, even as a safeguard measure?

Apparently so: on April 19, 2013, in the matter of Re Bock inc.,⁵ the Honourable Jean-Yves Lalonde J.S.C., of the Superior Court of Québec (District of Montréal, Commercial Division), rendered an unprecedented safeguard order wherein he suspended a notice of termination and ordered specific performance of a distribution contract, which represented the bulk of the debtor company's sales. From a practical point of view, Lalonde J.S.C.'s order was an attempt to give "artificial respiration" to the debtor's business—in line with the rescue objectives of the CCAA. This is a prime example of the pragmatic approach judges take when called upon to issue remedial orders under s. 11 of the CCAA.

Summary of the Case The Facts

CNH Canada Ltd. ("Case") is a maker of heavy machinery. Case and Bock inc. ("Bock") were parties to a distribution agreement pursuant to which Bock was an authorized dealer of Case's construction equipment in Quebec—the relationship between the parties, including their predecessors, going back over 50 years. As amended in 2009, the agreement established that Case could immediately terminate the contract if Bock did not comply with any of the provisions therein, one of which required Bock to meet certain sales and market share targets. As a result of Bock having failed to meet the annual market share targets for three consecutive years, Case sent four notices of default during the course of 2012, stating that the agreement would be terminated on or about February 28, 2013.

In the meantime, Bock tried to sell its business and assets, the most important of which was the distribution agreement with Case (representing 70 per cent of its revenues). Case consented to a process whereby offers would be solicited in the marketplace with the assistance of an insolvency consultant previously retained by Bock (who later became the court-appointed Monitor). Two offers were made by third parties, one by Longus, and one by Strongco. Strongco's offer was by far superior: it would have allowed Bock to pay all of its creditors and distribute approximately $3 million to its shareholders. However, Case refused to accept this potential purchaser, because Strongco did not satisfy Case's equity ratio requirements for new dealers.⁶ This was a non-negotiable point for Case, which consequently declined to consent to the transfer of the agreement (such consent being specifically required under the terms of the agreement).

Considering that Bock was unable to remedy its defaults under the agreement, Case sent a notice of immediate termination of the agreement on March 28, 2013. That was the death knell for Bock, which produced a notice of intention to file a proposal under the Bankruptcy and Insolvency Act [BIA]⁷ a few days later and applied for relief under the CCAA shortly thereafter.

Decision of the Superior Court of Québec¸(District of Montréal, Commercial Division)

Under the CCAA, the continuation of the proceedings commenced under the BIA was not an issue, Bock being insolvent and having not yet filed a proposal. The main issue was the safeguard order that Bock was seeking: that the effect of the termination notice be suspended in order to allow Bock to resume its operations and continue the process it had initiated to sell its business as a going-concern. In other words, Bock wished to be able to present itself to potential buyers as an authorized Case dealer.

Justice Lalonde granted Bock's wish. He noted that the CCAA is a remedial statute entitled to a liberal interpretation and that the breadth of an insolvency court's jurisdiction under s. 11 of the CCAA means that it can validly be used to interfere with third-party contractual relationships in circumstances that threaten a company's existence. Accordingly, the CCAA confers upon courts the authority to alter the legal rights of parties other than the debtor company without their consent.⁸ What mattered most was to promote the purpose of the CCAA and to facilitate the emergence of an arrangement for the benefit of the debtor and its creditors.⁹ Seeing as the CCAA need not be employed specifically to revitalize a corporation but can also involve a liquidation scenario, Bock's sale process was "not incompatible" with the purpose of the CCAA.¹⁰

Nevertheless, Lalonde J.S.C. was faced with an unprecedented issue under the CCAA. With that in mind, he decided that the criteria for the issuance of a safeguard order in civil matters—urgency, appearance of right, irreparable harm, balance of inconvenience—should apply to determine whether the suspension of the termination notice should be ordered.¹¹

There was, according to the judge, a serious appearance of right to Bock's claim that Case's termination of the agreement was abusive. He said that "it is certainly not frivolous to claim that Case acted abusively by setting the bar too high in its negotiations with Strongco"¹² and that "one can infer from [this] that Case simply did not want the continuation of business in Quebec in the way it was run under Bock's administration."¹³ Moreover, Lalonde J.S.C. found that Bock would suffer serious and irreparable harm if the safeguard order was not granted. That is, the critical importance of the agreement to Bock's operations meant that the sudden end of its relationship with Case would nevitably result in the shutdown of Bock, which in turn meant not only heavy losses for its creditors and shareholders but also the loss of roughly 60 jobs.¹⁴ The balance of inconvenience clearly favoured the issuance of a safeguard order: Case could put into operation a new dealer within months, while Bock stood to lose everything.¹⁵ Justice Lalonde felt that for all intents and purposes, Case had been dictating Bock's conduct, and it was timely and urgent to intervene to level the playing field between the parties.¹⁶

Justice Lalonde further found that even though Case had stated its intention to terminate the agreement well in advance, it gave no notice period to Bock when it finally did. This deprived Bock of any chance to react and apply to the court for a safeguard order to preserve the status quo (which would maximize the chances of a successful restructuring or sale process) to the sole detriment of Bock's estate.¹⁷

In short, Bock's insolvency was directly caused by the immediate termination of the agreement; without the safeguard order sought, bankruptcy was inescapable. In order to preserve the status quo and give Bock a reasonable prospect of survival, Lalonde J.S.C. decided it was necessary to suspend the effect of the unilateral termination notice until such time as the court rules upon whether such a termination was abusive or not. Justice Lalonde ordered Case to abide by the agreement.

Decision of the Court of Appeal of Québec on the Leave Application

Case sought leave to appeal from the judgment on the issue of the "revival" of the distribution agreement. The Honourable Marie-France Bich J.A., sitting alone, dismissed the motion as she found that the point raised was not of significance to the action and that an appeal would unduly hinder the progress thereof.¹⁸ She stated:

Justice Bich also noted that Bock and the court-appointed Monitor were actively engaged in the process of selling the business and that, should a suitable offer be made, the matter would then be resolved amicably—and profitably—for all.²⁰ She also considered that if Bock and the Monitor sought the renewal of the order, Case would then get another chance to convince the CCAA supervising judge that ordering specific performance of the distribution agreement would be impossible or inappropriate at that time.²¹

Despite her refusal to grant leave, the peculiarity and novelty of the issue was not lost on Bich J.A. She agreed that the "situation, indeed, is unusual" and went on to ponder:

This question, she found, was of significance to the practice, and the appeal prima facie meritorious.²⁶ She further noted that "[i]t is also a question that has never been addressed by our court nor, apparently, by other courts of appeal in Canada."²⁷

The Broad Discretionary Power of the Court under s. 11 of the CCAA

As expected, there are not many precedents of safeguard orders reviving contracts terminated pursuant to a unilateral termination clause. Justice Lalonde cited two cases in which orders similar to what Bock asked for were granted; however, one was rendered outside the insolvency context,²⁸ and the other, apparently, in the absence of any contestation.²⁹ As Bich J.A. pointed out (with references to appellate jurisprudence), it is actually debatable in civil law whether a judge can order the "cancellation" of a notice of termination and order the specific performance of such an agreement even as a safeguard measure. The same is just as doubtful at common law, but the question is whether it can be otherwise for a judge acting under s. 11 of the CCAA. While Bich J.A. believed that such scenario was also arguable, leave to appeal was denied for essentially pragmatic reasons. At the Superior Court level, it is easy to see how Lalonde J.S.C.'s analysis was driven by the fact that the inconvenience caused to Case by the safeguard order was significantly outweighed by the hardship that Bock, its creditors, and many other stakeholders would suffer if it were not granted.

The sale process continued, and the courtappointed Monitor eventually filed a motion for authorization to sell assets outside the ordinary course of business, which went uncontested by Case and the other interested parties. As a result, Lalonde J.S.C. rendered an order on June 12, 2013, authorizing the Monitor to accept, on behalf of Bock, a second offer by Longus to purchase assets from Bock.³⁰ Justice Lalonde further ordered that upon the completion of this transaction, the suspension of the notice of termination and the order of specific performance of the distribution agreement between Case and Bock would cease to have effect.³¹ This order effectively put the debate to rest in this particular matter, but the overriding issue remains unsettled. It is also noteworthy that, strictly speaking, Lalonde J.S.C. did not actually see the initial order as reviving the distribution contract. Justice Lalonde stated that the issue was not the "resuscitation" of a terminated contract. Rather the issue was whether, according to the criteria of the appearance of right, the contract was abusively terminated. As Lalonde J.S.C. saw it, the contract would then be deemed to have never been terminated in the first place, and the status quo would therefore be the one that existed prior to the notice of termination.³²

In any event, the key point is that suspending the notice of termination of the agreement was ultimately in the best interests of Bock's estate and all other stakeholders. It was ordered with a view to facilitate a sale of Bock's business that would yield a fair outcome for all. In Century Services,³³ the Supreme Court of Canada provided guidance on the sources of a court's authority under the CCAA and the limits thereof:

The Supreme Court ruled that "[w]hen an order is sought that does realistically advance the CCAA's purposes, the ability to make it is within the discretion of a CCAA court."³⁵ This is especially true, considering that the primary policy instrument of the CCAA is the ability to create "conditions for preserving the status quo while attempts are made to find common ground amongst stakeholders for a reorganization that is fair to all."³⁶

Of course, no one would suggest that the extent of the discretionary powers vested in courts pursuant to s. 11 of the CCAA and the extent to which specific performance can be ordered in that context are unlimited. So what is the permissible extent? In other words, at what point do the ends no longer justify the means? While the authors of this article believe that the safeguard order rendered in Re Bock inc. was appropriate in the circumstances, courts should consider this precedent carefully going forward. One thing is for sure: the limits of these powers remain to be truly challenged and will continue to be the focus of reflection and debate.

For now, in spite of the unusual circumstances of this case, the rationale for the decision is potentially applicable to a range of other situations involving various types of distributors and dealers. At the very least, Re Bock inc. sets a precedent for an insolvent debtor wishing to revive a contract fundamental to its business that was terminated before the formal insolvency proceedings commenced, provided the debtor can present a prima facie case that the termination was abusive. As a result, contractual parties and their counsel should tread carefully when considering the termination of a contract that may be fundamental to the continuation of the debtor's business.

[Editor's note: Gerry Apostolatos is a litigation partner at Langlois Kronström Desjardins (LKD) in Montreal. His practice principally focuses on corporate/commercial, insolvency, class action, and arbitration matters. He has served the profession as President of the Quebec Branch of the Canadian Bar Association (CBA), as National and Quebec Chair of the Bankruptcy and Insolvency Sections of the CBA, and as Chair of the Liaison Committee of the Montreal Bar with the Commercial Division of the Superior Court of Montreal. Like Mr. Apostolatos, Pascal Archambault graduated from the Faculty of Law of McGill University with degrees in civil law and common law. He is an associate in the litigation group at LKD.

The authors thank Mr. Raphaël Buruiana, a student at law at LKD, for his assistance and wish him well in his LL.M. studies at the University of Cambridge.]

Reproduced with permission of the publisher LexisNexis Canada Inc. from National Insolvency Review, Vol. 30, No. 4 (August 2013) at 45-50.

Footnotes

^{1 CCAA, R.S.C. 1985, c. C-36.}

^{2 Century Services Inc. v. Canada (Attorney General), [2010] S.C.J. No. 60, 2010 SCC 60, at para. 58 [Century Services].}

^{3 CCAA, supra note 1, s. 11.}

^{4 Century Services, supra note 2 at para. 61.}

^{5 Bock inc. (Arrangement relatif à), [2013] J.Q. no 3925, 2013 QCCS 1723 [Bock (Trial)].}

^{6 The potential purchaser, Strongco, was already a dealer for Case, but in Ontario.}

^{7 BIA, R.S.C. 1985, c. B-3.}

^{8 Bock (trial), supra note 5 at paras. 66, 69, and 72.}

^{9 Ibid. at para. 71.}

^{10 Ibid. at para 74.}

^{11 Ibid. at para. 63.}

^{12 Ibid. at para. 104 (authors' translation).}

^{13 Ibid. at para. 106 (authors' translation).}

^{14 Ibid. at paras. 114–121.}

^{15 Ibid. at para. 123.}

^{16 Ibid. at para. 127.}

^{17 Ibid. at paras. 90 and 112.}

^{18 Bock inc. (Arrangement relatif à), [2013] Q.J. No. 4614, 2013 QCCA 851 [Bock (Appeal)].}

^{19 Ibid. at paras. 12 and 18.}

^{20 Ibid. at para. 13.}

^{21 Ibid. at para. 15.}

^{22 [2006] J.Q. no 8803, 2006 QCCA 1068.}

^{23 [2012] J.Q. no 4430, 2012 QCCA 885; motion for leave to appeal to the Supreme Court dismissed (December 6, 2012) [2012] S.C.C.A. No. 320, File No. 34924 and [2012] S.C.C.A. No. 328, File No. 34923.}

^{24 See BMW Canada inc. v. Jalbert, supra note 22 at para. 104; Robert J. Sharpe, Injunctions and Specific Performance, 4th ed. (looseleaf) (Aurora: Canada Law Book, November 2012), 7-1ff. and 9-10ff.}

^{25 Bock (Appeal), supra note 18 at para. 10.}

^{26 Ibid. at paras. 3 and 11.}

^{27 Ibid. at para. 11.}

^{28 De Bonis c. Boulangeries Weston Québec ltée, [2007] J.Q. no 8141, 2007 QCCS 3761.}

^{29 Dans l'affaire de CT-Paiement Inc., unreported, Superior Court, District of Montréal, 500-11-042173-126, February 23, 2012 (Auclair J.).}

^{30 Unreported, Superior Court, District of Montréal, 500-11-044467-138, June 12, 2013 (Lalonde J.S.C.). Justice Lalonde also authorized the Monitor to accept, on behalf of Bock, an offer by Garage Pierre Lessard Inc. to purchase Bock's real property in St-Hyacinthe, Québec. This offer and the Longus offer were confidential, and the terms thereof were placed under seal.}

^{31 Ibid. at para. 30.}

^{32 Bock (trial), supra note 5 at paras. 87–89.}

^{33 Supra note 2 at paras. 57–81.}

^{34 Ibid. at para. 70.}

^{35 Ibid. at para. 71.}

^{36 Ibid. at para. 77.}

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