Canada: Court of Appeal Empowers Trade Unions on Receiverships and Bankruptcies

Last Updated: April 8 2004
Article by David Elenbaas, H.P. Rolph and Stephane Y. Thiffeault

On Friday, April 2, 2004, the Ontario Court of Appeal released a decision that may have a significant effect on how receivers and trustees in bankruptcy realize on the assets of a business where a trade union holds bargaining rights for employees of an insolvent company.

Prior to the Court of Appeal’s decision in T.C.T. Logistics Inc., receivers and trustees in bankruptcy regularly moved before bankruptcy courts for orders that, among other things, essentially provided immunity from successor employer declarations. That is, such orders would typically empower the receiver or trustee to engage the service of employees without such employment resulting in the receiver or trustee becoming a "successor employer" within the meaning of provincial labour relations statutes and therefore party to a collective agreement.

Naturally such an order, which was typically obtained without the affected union receiving notice of the application, irked trade unionists, particularly when a receiver or trustee subsequently ignored the collective agreement.

T.C.T. Logistics Inc. suffered financial difficulties in early 2002, which resulted in its largest creditor moving for an order appointing KPMG Inc. as interim receiver. The order as issued by the court contained typical receivership provisions, including a stay of proceedings and further protections against possible "successor employer" findings under the Labour Relations Act, 1995.

The International Wood and Allied Workers of Canada, Local 700, which represented a small bargaining unit of warehouse employees in Toronto, took issue with the order claiming that it effectively immunized the receiver from the obligations of a "successor employer". The Union asserted that the bankruptcy judge did not have the authority to do so under the Bankruptcy and Insolvency Act ("BIA"), and that the order invaded the Ontario Labour Relations Board’s exclusive jurisdiction to adjudicate such matters.

Feldman J.A., writing for the majority of the Court of Appeal, first held that s.14.06(1.2) of the BIA only protects a receiver or trustee from liability for the debts and obligations of the debtor company, but not necessarily from any obligations a receiver or trustee may incur on a going forward basis after it takes possession of the debtor’s assets. The Court then went on to conclude that neither s. 14.06(1.2) nor s. 47(2) directly authorizes the court to deem, in their appointment Orders, that actions undertaken by a receiver will not make it a successor employer for the purposes of the Labour Relations Act, 1995. Thus, the initial protections generally afforded to receivers or trustees in appointment Orders may no longer be available.

However, the Court of Appeal was not prepared to relinquish all of its authority or jurisdiction over the issue. Rather, the Court of Appeal then concluded that s. 215 of the BIA in fact gives the court the jurisdiction to grant or deny a union leave to apply to the Ontario Labour Relations Board for a declaration of successor employer status against a receiver or trustee. It determined that before a trade union may bring a successor employer application before the Ontario Labour Relations Board, the proceeding must first be sanctioned by the supervising bankruptcy court pursuant to a new, pragmatic test under s. 215 of the BIA. This aspect of the decision was not surprising.

According to the Court, in determining whether a stay of proceedings should be lifted to allow a trade union to commence successor employer proceedings before the Ontario Labour Relations Board, the following factors should be taken into consideration: the timing of the application, the complexity of the receivership, the demands on the receiver as it carries out its obligations, the potential duration of the period that the receiver intends to operate the business before it can be sold (normally as brief as possible), the availability of potential purchasers and their financial strength and the likelihood that a purchaser will be declared a successor employer and assume all of the obligations under the collective agreement. Accordingly, it now seems that although the initial protections afforded to receivers or trustees in their appointment orders may no longer be available, trade unions must nonetheless convince the supervising bankruptcy court that their proposed successor employer application before the Ontario Labour Relations Board is warranted, or at least justified, in light of the circumstances of the particular receivership or bankruptcy.

The Court of Appeal’s decision confirms the bankruptcy court’s role as the "gatekeeper" of insolvency proceedings under s. 215 of the BIA. It remains to be seen how this new approach to s. 215 applications under the BIA will in fact affect receivers and trustees. Clearly, a receiver and/or trustee that intends to operate a business as a going concern in an effort to maximize value will have to further evaluate the risks it is willing to assume under a collective agreement. The Court of Appeal’s decision in T.C.T. Logistics Inc. makes it uncertain when the protections against "successor employer" declarations typically sought in orders at the onset of insolvency proceedings will be available if at all and, if available, effective. Consultation with the affected union may very well be appropriate.

Should you have any questions about the Court of Appeal’s decision in T.C.T. Logistics Inc., please do not hesitate to contact any member of our Employee and Labour Relations or Corporate Restructuring/Insolvency groups.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2004 McMillan Binch LLP

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