Canada: CCAA Court Undoes Dealership Termination in Insolvency Proceeding

In Re Bock inc.1, a recent case decided under the Companies' Creditors Arrangement Act ("CCAA"), the Superior Court of Quebec made an order reviving a dealership agreement that was purported to be validly terminated by the manufacturer prior to the commencement of any insolvency proceedings. While the decision is in the context of a heavy equipment dealership, the approach is potentially applicable to a wide variety of other types of distributors and dealers.

The Court made the order without having yet determined whether the termination was invalid or made in bad faith as alleged by the dealer/CCAA Applicant or validly terminated as alleged by the manufacturer. Leave to appeal was sought and denied on the basis that the appeal could have become moot by the time of the hearing or that the Quebec Court of Appeal would have been confronted with a new factual scenario.2 In its reasons for denying leave, the Quebec Court of Appeal acknowledged that the issue of whether the CCAA Court had jurisdiction to make the order is an important and debatable question that has not yet been considered.

It should be noted that the facts in Re Bock inc. appeared favourable to the dealer, to the point that the purported termination by the manufacturer was framed by Bock as "abusive" in the circumstances. Notwithstanding the unique facts, manufacturers, suppliers and others parties to contracts that are fundamental to the continuation of the counterparty's business should be aware of this case.

Background

Bock inc. ("Bock") is a retailer specialized in the sale, rental and service of construction machinery and equipment in Quebec. The majority of the machinery and equipment sold and leased by Bock is manufactured by CNH Canada Ltd ("Case"). Bock's relationship with Case is governed by a dealership agreement with no determinate term (the "Agreement") that includes market-share targets that Bock is required to achieve in Quebec. Bock never achieved the targets. The Agreement permits Case to terminate the dealership relationship if Bock fails to comply with the terms of the Agreement and also requires that Case approve any transfer of the dealership business.

In 2012, Case sent four notices of default to Bock, stating the Agreement would be terminated on or about February 28, 2013 due to Bock's failure to meet the market-share targets. During this time, Bock engaged Raymond Chabot Inc. ("Raymond Chabot") to review its business and recommend strategic options. Raymond Chabot recommended a sale of Bock's business. With Case's consent, Raymond Chabot canvassed the market to solicit offers.

Strongo Corporation ("Strongco"), an existing distributor of Case products in Ontario, offered the greatest value for Bock's business. The sale to Strongco would have allowed Bock to pay its creditors in full and distribute approximately $3 million to Bock's shareholders. In the resulting negotiations, Case insisted that its consent to the sale was conditioned on Strongco making a substantial investment in the business. Strongco refused, presumably on the basis that it should simply step into the shoes of Bock under the Agreement and live by the existing terms. On March 28, 2013, Case terminated the Agreement and demanded that Bock immediately cease doing business under the Case brand.

On April 3, 2013, Bock filed a notice of intention to make a proposal to its creditors under the Bankruptcy and Insolvency Act. The following week, Bock sought Court approval to continue the bankruptcy proceeding under the CCAA and an order that the Agreement continue in force as if it had not been terminated.

Revival of the Agreement

In applying for protection under the CCAA, Bock requested that the termination of the Agreement be set aside and that Case be bound to perform the Agreement until otherwise decided by the Court. In support of this request Bock asserted that (i) Case's participation in the sale negotiations prevented it from terminating, (ii) the provision of the Agreement permitting termination was abusive and, consequently, illegal and (iii) although the termination may have been strictly legal, the timing of the termination and the lack of notice amounted to abusive conduct that injured Bock's creditors, shareholders and employees.

The Court held that it could suspend the termination of the Agreement pursuant to the CCAA without deciding the merits of Bock's assertions that the termination was illegal or abusive, provided that Bock presented a prima facie case. The Court did not cite any specific authority for this proposition. The Court came to this conclusion even though it appeared unconvinced that the termination was illegal, noting that the terms of the Agreement clearly permitted Case to terminate if Bock did not meet its market-share targets. However, the Court found Bock had demonstrated an arguable case that the termination was abusive. The Court stated that the investment condition imposed on Strongco was excessive and that it could be inferred that Case simply no longer wanted to do business in Quebec under the terms of the Agreement. Case's failure to provide even two days notice before the termination became effective prevented Bock from seeking protection and maintaining its business as a going concern. Ultimately, the Court held that given the urgency of the situation, the reality that Bock's value as an enterprise depended on the existence of the Agreement and the temporary nature of a CCAA initial order, suspending the termination was warranted.

Case denied leave to appeal

The Quebec Court of Appeal refused to grant Case leave to appeal the reinstatement of the Agreement. The Appeal Court noted that the question as to whether a CCAA Court has authority to order the cancellation of a notice of termination and specific performance of an agreement as a "safeguard measure" is an issue that has not been addressed by a Canadian Court and appears to be a debatable proposition. However, the Appeal Court found that in the case at hand there was no immediate need to decide the issue which could become moot or turn on considerably evolved facts by the time the appeal would be heard.

Looking ahead

Given the unique facts of this case, it is uncertain whether the decision in Re Bock inc. will have a significant impact on Canadian restructuring or dealership/distribution law. However, the case may open the door for an insolvent debtor to take steps to revive a contract fundamental to its business – particularly dealership or distribution contracts – that was validly terminated by a counterparty before the commencement of formal insolvency proceedings. If this is the case, a party terminating a relationship with a dealer before an insolvency filing may be drawn into the proceeding to contest a motion by the insolvent person to revive the terminated relationship. Accordingly, until a Court provides greater clarity on this issue, contractual counter parties who intend to terminate a contract that is fundamental to the continuation of the business should be careful and obtain expert advice prior to exercising a termination right to minimize the risk that the termination may be set aside.

We suggest that the question of whether a CCAA Court has jurisdiction to suspend the termination of a contract made prior to the commencement of proceedings and revive the contract before first deciding the validity of the termination is an issue that should receive closer scrutiny from the Court.

1 Re Bock inc., QCCS 1723, 2013 CarswellQue 3852 (Qc Sup Ct).

2
Re Bock inc., JE 2013-924, 2013 CarswellQue 4394 (Qc CA).

Additional author credit: William Wu, summer student

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 2013 McMillan LLP

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