Canada: Assign At The Dotted Line: CCAA Assignment Orders And Their Impact On The Contracts Assigned – The SM Group Case

Last Updated: January 17 2019
Article by Luc Béliveau, Marc-André Morin and Nicolas Mancini

On December 10, 2018, the Superior Court of Quebec (Court) released an important judgment concerning the assignment of contracts under the Companies' Creditors Arrangements Act (CCAA), in which the Court held that it was possible for an assignee to have contracts transferred to it without having to assume the monetary penalties arising from the assumed contracts for defaults by the assignor prior to the assignment.1

Background 

The SM Group is a Québec-based engineering, project management and consulting firm composed of several subsidiaries and operating in some 30 countries. In August 2018, the SM Group became subject to a secured creditor-driven restructuring process under the CCAA. At the time the initial order was made, the SM Group had about 700 employees and several hundred active contracts.

At the beginning of the restructuring proceedings, a sales process for the assets of the SM Group was put in place. Following discussions that began once the initial order was made, FNX-Innov inc. and affiliated companies (Buyer) were identified as interested buyers. The sale transaction was concluded quickly and in November 2018, the Court issued a vesting order approving the sale transaction, and provided that the parties were to return to court on a later date to authorize the assignment of several contracts from the SM Group to the Buyer.

In the days following the vesting order, 789 notices of assignment relating to 1,739 contracts were sent out to various parties with which the SM Group had entered into contracts (Contracts) stating that the Court would be asked to approve the assignment of the Contracts in the next few days, the whole in accordance with section 11.3 CCAA.

At the hearing of the application for the assignment, some of those cocontractants contested the following provision in the assignment order, relating to the right of compensation [set-off], sought by the Buyer:

[21] DECLARES that subject to the Purchaser's obligations relating to the monetary defaults set forth in paragraph [87], the counterparties to any Assigned Agreements have no right to claim or effect compensation between:

a) on the one hand, the amounts that are currently owing or which may become owing by such counterparties to any of the Vendors or the Purchaser, as the case may be, in connection with professional services rendered or to be rendered under the Assigned Agreements by the Vendors or the Purchaser, as the case may be, as and from November 19, 2018, being the date of the Monitor's Preliminary Closing Certificate; and

b) on the other hand, any amounts owed, or allegedly owed, by the Debtors to such counterparties prior to November 19, 2018, whether related or not to the Assigned Agreements;

The contesting parties took the position that adding this paragraph was unfair and illegal, in that its effect would be to neutralize the contractual set-off mechanism that was already included in their contracts with the SM Group. According to the contesting parties, such an inclusion would have the effect of rewriting their contracts. They also argued that assignment of a contract under section 11.3 CCAA involves not only the assignment of the assignor's rights, but also the assignment of all of the assignor's obligations under the contracts. Accordingly, the Buyer, as assignee, was required to honour all of the obligations created by the contracts, with no limit as to time.

Decision 

On December 10, 2018, the Hon. Chantal Corriveau, J.S.C., allowed the assignment in accordance with all of the conclusions sought by the Buyer. In its analysis, the Court stated that the criteria in section 11.3 CCAA had been met. More specifically, (i) the monitor supported the assignment of contracts requested; (ii) the Court was satisfied that the Buyer would be able to perform the contracts; and (iii) the assignment of the contracts would make it possible to perform the contracts and preserve almost 650 jobs.

Regarding the contested provision concerning set-off, the Court held that the paragraph requested by the Buyer was fair and reasonable in the circumstances. Noting its discretionary power to make any order that the Court considers appropriate in the situations before it, the Court compared the contested provision to a "vesting order" in that its effect was to eliminate the uncertainty for the Buyer associated with potential claims by counterparties under the contracts. As well, it became apparent at the hearing that the contesting parties were unable to provide a figure for the amount of the set-off they had in mind. In the circumstances, the Court believed it was more logical to give effect to the counterparties' right of set-off against the Buyer only at the point when the Buyer took control of the assets:

[Translation]

[70] In the view of the Court, paragraph 21 does not amount to an amendment to the contracts. Rather, we are in a situation where the contracts will be implemented on a fixed date, and moreover, that date, November 19, 2018, precedes the assignment date of the contracts.

[71] The Court would not have taken the same view of an application that simply barred the set-off mechanism with no limit in time. But that is not the case.

[72] Of course, the buyer, FNX-Innov inc., benefits from the assignment of a bouquet of contracts with no obligation to bid on them. However, it must be observed that this scenario would have been disastrous for all actors. Work on major contracts would have been interrupted for a period that would probably have lasted several months. Massive layoffs could have resulted. After the bidding process, the new counterparties would then have had to perform the work and take over the obligations for the future only.

[73] The Court is of the opinion that the assignment of contracts must be observed not from the perspective of the principles of civil law, but in the context of the specific facts of a process subject to the CCAA. The Court therefore approves the application on the basis of the proposed order.

Conclusion 

This is an important decision in insolvency law, in that it expressly acknowledges that in certain circumstances, an assignment order may, in fact, resemble a vesting order, as its objective is the same: to enable the buyer to acquire the property (in this case, a contract) free of certain related obligations before the transaction. The decision is another example of the flexible and pragmatic approach that the courts must often adopt in a restructuring context.

Fasken advised the Buyer, with a team composed of Luc Béliveau, Marc-André Morin and Nicolas Mancini.

Footnotes

1 Arrangements relatifs à Groupe SMI inc., 2018 QCCS 5319.

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