HBC Adds An Important Chapter To The Law On Forced Assignments Of Contracts And Ipso Facto Clauses

The demise of the iconic Hudson's Bay Company (HBC) culminated in a highly publicized and hotly contested bid by Ruby Liu and her company, Ruby Liu Commercial Investment Corp. (Central Walk), to acquire 25 of HBC's most consequential department store leases. The Central Walk bid was vigorously opposed by landlords owning 24 of the 25 locations. The resulting decision by the Ontario Superior Court of Justice (Commercial List)—decided in favour of the objecting landlords—is now the seminal case on forced assignments of contracts by insolvent persons over the objections of contractual counterparties pursuant to section 11.3 of the Companies' Creditors Arrangement Act (CCAA)¹. The Court also provided an important ruling on ipso facto clauses as applied to contractual rights that are consensually altered by the parties prior to the commencement of CCAA proceedings.

What you need to know

• Section 11.3 of the CCAA grants the court authority in certain circumstances to compel an assignment of a contract held by an insolvent assignor to a purchaser/assignee, notwithstanding the fact that the contractual counterparty has a contractual consent right and refuses to consent.
• The Court provided an extensive summary of the applicable law and requisite elements to be considered when asked to forcibly assign a contract. In so doing, it provided a clear roadmap for future motions seeking to force the assignment of contracts under the CCAA. The court is not a rubber stamp; the debtor must show that certain relevant factors are reasonably met.
• In this case, Central Walk's bid fell short on all the relevant factors. The Court recognized the forced assignment powers as extraordinary, and determined that this case was not an appropriate exercise of that power. In the context of a liquidating CCAA, there was no "compelling reason" to prefer the interest of a single secured creditor over the interests of landlords.
• Contractual provisions that violate the common law anti-deprivation rule and section 34 of the CCAA are void and unenforceable as ipso facto clauses. However, where a landlord and tenant consensually alter their respective rights prior to commencement of a tenant's insolvency, those agreements—if structured properly—might not fall afoul of the rule against ipso facto clauses.

The details

The forced assignment of leases under the CCAA

HBC was Canada's oldest company but succumbed to the pressures on "bricks and mortar" retail department stores. Unable to restructure, it proceeded to liquidate in the course of its CCAA proceedings. Central Walk participated in a court-approved liquidation process with respect to HBC's leases and agreed to acquire 25 of HBC's leases, subject to court approval. HBC sought to have the leases forcibly assigned to Central Walk pursuant to section 11.3 of the CCAA, over the objections of all but one of the affected landlords.

Section 11.3 requires the court to consider three criteria: (i) whether the Monitor approves of the proposed assignment; (ii) whether the proposed assignee will perform the obligations under the assigned contract; and (iii) whether the proposed assignment is appropriate.

With respect to forced assignment applications under the CCAA, the Court noted the following:

• the burden to prove the appropriateness of the forced assignment is on the party seeking it;
• compliance with mandatory requirements under section 11.3 of the CCAA (e.g., payment of cure costs) must be demonstrated;
• the standard of proof is one of reasonableness;
• the analysis must be fact-specific;
• there must be an evidentiary basis that supports the requested forced assignment;
• the three factors for consideration listed in section 11.3 of the CCAA are neither mandatory nor exhaustive;
• consideration of the proposed assignee's ability to perform the assumed contract is required and includes performance of both monetary and non-monetary obligations;
• where the assignment is part of a broader asset sale, the court will consider the Soundair principles and factors set out in section 36(3) of the CCAA, as well as whether there has been compliance with any sale process approved by the court;
• the remaining term of the contract is a relevant consideration, with a greater emphasis on the proposed assignee's ability to perform the assumed obligations when the remaining term of the contract is lengthy; and
• the appropriateness of approving the assignment requires a consideration of: (i) what is just and equitable in all the circumstances; (ii) the interests of stakeholders; (iii) whether the proposed assignment furthers a going concern transaction or a liquidation process; (iv) the relative importance of the proposed assignment to the overall restructuring or liquidation; and (v) the proposed assignee's acceptance of the contract as drafted versus requiring amendments to the contract.

The Court also highlighted two important caveats:

• the lack of consent by the counterparty and the reasonableness of that position is not relevant to the court's analysis; and
• proof of ability to perform assumed obligations does not amount to a requirement for a guarantee of performance; a contractual counterparty may not use this process to improve its position or require greater certainty of performance than it already has.

The Court applied the considerations above to the facts and evidence before it, noting that the Monitor did not support the proposed assignment and—although that fact is not determinative—the Monitor's position was a "significant" consideration. The Court held that it was deeply concerned with the ability of Central Walk to meet the monetary and non-monetary obligations under the leases, particularly given the length of the remaining term of the leases—some which ran, with extensions, over 100 years. With respect to the business plan submitted by Central Walk, the Court found the concerns raised by the Monitor and by the objecting landlords (including the experts engaged by the objecting landlords) to be compelling.

The Court concluded that HBC and Central Walk fell "well short of any reasonable standard" with respect to the proposed assignee's ability to perform the obligations under the leases.

In finding that the proposed assignment was not appropriate, the Court noted that, among other things:

• there was a troubling history of events leading to the proposed assignment motion;
• the lease assignments were to occur in isolation and not as part of a broader acquisition of assets;
• this was a liquidation transaction and not in furtherance of a going concern sale;
• the court was being asked to, in effect, consider the interests of one secured creditor that would benefit from the assignment as compared to the interests of the objecting landlord, and there was no compelling reason to favour the former over the latter;
• the proposed assignee was a shell company with no assets and no experience in a venture of this nature; and
• the leases had a significant remaining term, and a forced assignment would compel the objecting landlords to involuntarily deal with Central Walk for a particularly long period of time.

Altered rights under leases as ipso facto clauses

It is well settled that contractual provisions that remove value from an insolvent party's estate upon its insolvency are void and unenforceable. This is true under the common law anti-deprivation rule and section 34 of the CCAA. At issue in the HBC decision were transactions with one landlord in 2023, whereby existing leases that contained broader renewal rights and restrictive covenants in favour of HBC were terminated and new leases with narrower rights were entered into. The landlord provided HBC with financial support in exchange for these new leases, but provided that HBC was entitled in the future to a restoration of its broader rights if certain conditions precedent were met, including solvency. Because HBC became insolvent, it was not entitled under the terms of the new leases to these broader rights in the old leases that had been given up.

The Central Walk bid for the leases included a requirement that HBC obtain from the court a determination that the conditions precedent to the broader rights were invalid, so as to effectively restore HBC's former broad rights for the benefit of Central Walk.

The Court likened ipso facto determinations to forced assignments, which should occur sparingly so that the requested relief does not adversely affect the third party's contractual rights beyond what is absolutely required to further the reorganization process. This interference should not entail an inappropriate imposition upon the third party. Importantly, ipso facto clauses may only be impugned where existing value is taken away from a debtor because of insolvency.

The Court held that the intentions of the parties entering into new or amended agreements is not relevant, as the test is an effects-based test rather than one of intention. But conditions precedent that must be satisfied before gaining rights—including that the debtor is solvent—are distinguishable and do not offend the anti-deprivation rule or section 34 of the CCAA. Conditions precedent do not remove rights: on the contrary, the debtor has no such rights until the conditions precedent are met. In short, HBC did not meet the conditions precedent to the restoration of broader rights under those leases and therefore it did not have—and did not have removed—rights of any value. Central Walk, as the proposed assignee, could not be put in a better position and given rights that HBC itself did not have.

Implications

There have been few decisions to date in which courts have denied forced assignments and fewer still that provide a comprehensive analysis of the CCAA's forced assignment provisions. The HBC decision provides a clear roadmap of considerations and criteria that must be addressed in future instances in which a forced assignment of contract is attempted under the CCAA. The decision does not necessarily move the bar in the sense of making it harder or easier to obtain a forced assignment; rather, it provides all parties with helpful clarity as to what is required in order for the court to approve a forced assignment of contract.

With respect to ipso facto clauses, the HBC decision provides important guidance for contracting parties that wish to structure their affairs with greater certainty that a subsequent insolvency proceeding will not render unenforceable contractual agreements and amendments entered into prior to insolvency.

Footnote

1. In Re Hudson's Bay Company, 2025 ONSC 5998. Torys LLP acted for The Cadillac Fairview Corporation Limited, one of Canada's largest retail landlords, in respect of this matter.