Canada: Successor Employer liability–The Gates Are Open

On Thursday 27 July, 2006 the Supreme Court of Canada released its decision in the TCT Logistics ("TCT") case¹. This decision substantially heightens the risk that a courtappointed receiver or trustee in bankruptcy that operates a debtor’s business, employing the debtor’s employees, will be found to be a successor employer for the purposes of employment and labour law and liable for many of the obligations of the debtor to its employees. The reasons for judgment of the 7 to 1 majority in the Supreme Court of Canada confirmed the following:

1. Provisions in court orders that attempt to insulate receivers and trustees in bankruptcy from successor employer liability by deeming such persons not to be successor employers are ineffective;
2. In Ontario, where there is a union in place, the Ontario Labour Relations Board ("OLRB") has the exclusive jurisdiction to determine whether or not a receiver or trustee in bankruptcy is a successor employer for the purposes of the Ontario Labour Relations Act (the "Act"). The result should be the same in all other provinces; and
3. Before an application can be made to a labour relations board, leave of the Bankruptcy Court pursuant to section 215 of the Bankruptcy and Insolvency Act ("BIA") must first be obtained. However, the burden on the applicant is relatively light. The Supreme Court of Canada has said that the purpose of the leave requirement is to prevent the trustee or receiver from having to respond to actions that are frivolous or vexatious or from claims which do not disclose a cause of action, but legitimate claims can be advanced. It is not for the Bankruptcy Court on the leave motion to decide the merits. All that is necessary is that evidence be put forward that is sufficient to establish that there is a factual basis for the proposed claim and that it discloses a cause of action.

Justice Deschamps, in a dissenting judgment, argued for a more robust test on a leave application which would allow the Bankruptcy Court to take into account the various effects that giving leave might have on the operation of the particular case. The majority rejected that approach.

In the Ontario Court of Appeal, both the receiver and the secured creditor argued that a successor employer declaration would be a conflict with the priority scheme set out in the BIA. The majority in the Supreme Court of Canada said these considerations were not relevant to the union’s application for leave to make a successor employer application to the OLRB. The majority said that these issues were matters for the OLRB’s consideration.

It does not follow that because the court in TCT has given the union leave to make an application to the OLRB that the Board will hold that the receiver is a successor employer. However, in other cases labour boards have held that court-appointed receivers who operate the business of a debtor are successor employers.

Section 14.06 of the BIA contains protections for trustees, including interim receivers appointed under the BIA, for certain employment liabilities. However, those provisions are untested. Moreover, some courts have said that the scope of the protection that they provide is unclear. The most recent amendment to the BIA (Bill C-55 – which is not in force) would amend section 14.06 but not in a way that provides clarity to the protection provided by the existing provision.

The TCT decision will have a substantial impact on insolvency practice in Canada:

1. Creditors and proposed receivers will want to assess the potential costs and liabilities arising from a successor employer declaration before a receiver is appointed and authorized to carry on a debtor company’s business;
2. In many cases the cost of a successor employer liability will outweigh the value of the chance for a going concern sale. Non-operating or shutdown receiverships will become more prevalent; and
3. Liquidating CCAA proceedings, perhaps initiated by creditors, may be the best means of preserving a going concern sale solution without foisting successor employer liability upon court officers or potentially reordering the normal priority rights among creditors.

As a result of this decision, it will be interesting to see if the federal government bows to pressure from the insolvency community to introduce legislation to protect trustees and receivers from potential liability as successor employers.

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