In Arrangement relative a Rising Phoenix International Inc., 2022 QCCS 1675, Justice Collier considered the interplay between: (a) the right of the winning party in an arbitration to homologate or enforce an arbitral award in the courts in arbitration legislation; and (b) the stay of proceedings in effect when a corporation is granted creditor protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). Here, a creditor of the corporation obtained an arbitral award in its favour and applied to have it homologated and enforced as against the directors of the corporation in respect of their personal liability. Justice Collier found that the language of the CCAA and the Amended and Restated Initial Order did not stay proceedings involving a director’s liability for personal wrongdoing, even if those wrongful acts occurred while the person was a director of the company under creditor protection. However, he exercised his broad discretion under the CCAA to make orders that are consistent with the remedial objectives of the Act and extend the stay to third parties. Therefore, he refused the creditor’s application to homologate or enforce the arbitral award as against the directors personally because it would likely negatively affect the CCAA restructuring process.
On January 5, 2022, Rising Phoenix International Inc. (“the Debtor”) applied for creditor protection pursuant to the CCAA. The following day, on January 6, 2022, the Court issued a First Day Initial Order, which suspended all proceedings against the Debtor. The stay of proceedings continued to be renewed.
Despite the broad terms of the stay, on January 17, 2022, the Court issued an Amended and Restated Initial Order, section 12 of which provided that the stay of proceedings under section 11 did not operate to prevent an arbitrator from rendering an award in an ongoing arbitration brought by creditor Les Consultants 3 LM, carrying on business as Institut supérieur d’informatique, (“the Creditor”) against the Debtor and its directors. The arbitration commenced in November 2020, and the parties were awaiting the final award when the CCAA proceedings were filed.
The arbitrator rendered his award on February 17, 2022, and ordered the Debtor and the directors to pay over $2.7 million in damages to the Creditor, plus interest.
Section 12 of the Amended and Restated Initial Order contained the exception that the section 11 stay did not prevent the rendering of the arbitral award, but the exception did not apply to its homologation and enforcement. The Creditor applied to homologate and enforce the award as against the directors of the Debtor in respect of their personal liability.
The Creditor argued before Justice Collier that the stay of proceedings under the Amended and Restated Initial Order did not apply to prevent homologation of the award against the directors because the arbitrator held that they were personally liable for the debt; therefore, the award did not concern an obligation incurred by them in their capacity as directors of the Debtor. In the alternative, even if the stay of proceedings under s. 11 of the Amended and Restated Initial Order applied, the Creditor asked Justice Collier to lift the stay and allow it to homologate and enforce the award as against the directors personally.
The Debtor and the Monitor opposed the order for two reasons: the award against the directors was stayed under s. 11 of the Amended and Restated Initial Order; and a lifting of the stay would jeopardize the re-structuring process.
Scope of the stay of proceedings – On the first issue, Justice Collier found that the directors’ obligations to the Creditor were personal and were not obligations of the Debtor. Therefore, they were not covered by the stay of proceedings.
Section 11 of the Amended and Restated Initial Order contained the stay of proceedings, which Justice Collier found suspended proceedings which relate to the directors’ obligations arising from their capacity as directors:
“[10] … The operative words of section 11 [of the Amended and Restated Initial Order [read as follows:
11. ORDERS that […] no Proceeding may be commenced or continued against […] any present director […] in respect of any claim against such Director […] which relates to any obligation of the Applicants where it is alleged that any of the Directors is under any law liable in such capacity for the payment of such obligation. [emphasis in original]
[11] Section 11 is based on sections 11.02 and 11.03 of the CCAA, which allow the Court to stay legal proceedings against the company and its directors during CCAA restructuring proceedings. Section 11.03 allows for a stay of claims against directors that relate to the “obligations of the company if directors are under any law liable for the payment of those obligations […]”. Section 11.03(2) provides that a stay does not include claims against a director based on a guarantee given by the director relating to the company’s obligations.
[12] Section 11 of the Amended and Restated Initial Order also mirrors section 5.1(1) CCAA, which provides that a compromise or arrangement under the Act may include a compromise of claims against directors of the company “that relate to the obligations of the company where the directors are by law liable in their capacity as directors for the payment of such obligations.” An example of a claim that may be compromised under section 5.1 (1) CCAA is one against directors for certain employee benefits accrued before the commencement of proceedings under the CCAA.
[13] Section 5.1 (2) creates an exception to section 5.1 (1). By doing so, it allows for a better understanding of the type of claims – when the directors “are in law liable in their capacity as directors” – that can be compromised by section 5.1 (1). Section 5.1 (2) (b) states that a provision for the compromise of claims against directors may not include claims that “are based on allegations of misrepresentation made by directors to creditors or of wrongful conduct or oppressive conduct by directors…”
Justice Collier concluded that section 5.1 (2) (b) of the CCAA therefore clearly distinguishes between claims against directors by reason of their status as directors – claims that may be compromised – and claims against directors arising from their personal wrongdoing while they were directors that may not be compromised. Therefore, a director’s liability for personal wrongdoing is not covered by sections 5 of the CCAA and section 11 of the Amended and Restated Initial Order and it was not relevant that those wrongful acts occurred while the person was a director of the company under creditor protection. He cited various cases in support of this interpretation of the Act: Bear Creek Contracting Ltd. v Pretium Exploration Inc., 2020 BCSC 1523, para 127; Magasin Laura (PV) inc./ Laura’s Shoppe (PV) Inc. (Arrangement relative à ), 2015 QCCS 4716, paras 25, 30; Liberty Oil & Gas Ltd. (Re), 2002 ABQB 949, para 5.
Therefore, the directors’ obligations to the Creditor arising out of the award were not covered by the stay of proceedings.
Whether homologation should be ordered – On the second issue, Justice Collier denied the Creditor’s application to homologate the award, even though the stay did not affect proceedings against the directors personally. He extended the stay to cover them:
“[18] Section 11 CCAA grants broad discretionary power to the Court to render orders that it “considers appropriate in the circumstances” and that are consistent with the remedial objectives of the Act. This includes the power to lift a stay of proceedings when there are “sound reasons” for doing so, and the power to extend a stay of proceedings to third parties where it is just and reasonable and in the interest of the restructuring process.”
Justice Collier found that there were good reasons to extend the stay of proceedings to the directors in their personal capacities. They had given personal guarantees to the interim lender, whose support for the restructuring process could be jeopardized if the Creditor were to enforce its award against the directors’ assets. The interim funding also allowed the Debtor’s business to continue to operate notwithstanding its insolvency. It operated private colleges offering post-secondary technical training to several hundred students, some of whom lost their tuition as a result of the insolvency. When the Monitor sold the business, the colleges began to operate again and some students were able to continue with their studies and graduate. The interim lender’s interests were not to enforce the personal guarantees against the directors and it would be disadvantaged if the Creditor could execute on the directors’ assets. Further, if the Creditor were to act immediately it could precipitate other claims against the directors, which could prejudice the restructuring. Finally, the directors were assisting in the operation of the colleges and that might not continue if they were forced to defend homologation and other legal proceedings.
Therefore, Justice Collier denied the Creditor’s application to homologate and enforce the award as against the directors in their personal capacity and, to protect the Creditor’s position, ordered them to provide to the Monitor and Creditor a sworn declaration of their assets and not to dispose of their assets. Homologation would be ordered after a plan of arrangement had been presented to the creditors and voted upon.
Contributor’s Notes:
First, article 646 of Québec’s Code of Civil Procedure, CQLR c C-25.01 (“C.C.Q.”) sets out the Court’s homologation power:
“Article 646 The court cannot refuse to homologate an arbitration award or a provisional or safeguard measure unless it is proved that
(1) one of the parties did not have the capacity to enter into the arbitration agreement;
(2) the arbitration agreement is invalid under the law chosen by the parties or, failing any indication in that regard, under Québec law;
(3) the procedure for the appointment of an arbitrator or the applicable arbitration procedure was not observed;
(4) the party against which the award or measure is invoked was not given proper notice of the appointment of an arbitrator or of the arbitration proceedings, or it was for another reason impossible for that party to present its case; or
(5) the award pertains to a dispute not referred to in or covered by the arbitration agreement, or contains a conclusion on matters beyond the scope of the agreement, in which case only the irregular provision is not homologated if it can be dissociated from the rest.
The court cannot refuse to homologate the arbitration award on its own initiative unless it notes that the subject matter of the dispute is not one that may be settled by arbitration in Québec or that the award or measure is contrary to public order.”
Second, there have been a number of other recent cases in which the Courts have considered the interplay (and possible conflict) between arbitration legislation and bankruptcy and insolvency legislation. See for example B.C. – doctrine of separability allows receiver to disclaim agreement to arbitrate while litigating main contract – #399.