In 9327-6269 Québec inc. and Banque de Montréal, 2024 QCCS 3399, the Court dismissed the Creditor Applicants’ demand to lift the stay of proceedings under the Loi sur les arrangements avec les créanciers des compagnies (LACC)/ Companies’ Creditors Arrangement Act (CCAA) so that they could file proceedings against one of the Debtors (Laboratoires C.O.P. inc.) in a New York-seated arbitration, where they sought to be declared owners of potential tax credits and refunds to which they alleged they were entitled as part of the selling price under a Sale Purchase Agreement between the Applicants and the Debtors’ shareholders. The Sale Purchase Agreement contained an arbitration clause. The Applicants argued that under New York law the Sale Purchase Agreement created a constructive trust in their favour, as a result of which the tax credits and refunds received or to be received by the Debtor were never included in the Debtor’s assets. Therefore, the Applicants argued that they should not be subject to the CCAA. The Court dismissed the Applicants’ motion. Even if the Applicants obtained a favourable ruling from the arbitration tribunal, it would be ineffective because the constructive trust concept is not recognized under Québec law and it would be detrimental to other creditors of the Debtor. In any event, the arbitral award would not modify the distribution order of the Debtors’ assets to their creditors under the CCAA because, when a conflict of law arises, the CCAA’s application is governed by the lex fori, in this case Québec. Foreign law should not alter the outcome of the CCAA’s implementation due to its rehabilitative purpose. Therefore, lifting the stay would not help the Applicants and would only cause the CCAA procedure to be delayed.
Background to the dispute – Pursuant to the Sale Purchase Agreement, the Applicants (Investissements D. Vachon inc., Investissements A. roy inc., Investissements MJV inc. and 9314-9573 Québec inc.) sold the majority of their shares in the Debtor (Laboratoires C.O.P. inc.) and became minority shareholders. The Sale Purchase Agreement stated that any tax credits and refunds that the Debtor would obtain after a successful objection to a tax assessment for the pre-transaction period would be included in and increase the selling price. The Debtor and other related companies filed for CCAA protection and, accordingly, were subject to a stay so that no proceedings could be filed against them.
Applicants’ position – In order to bring proceedings against the Debtor before a New York-based arbitration panel in accordance with the arbitration agreement included in the Sale Purchase Agreement, the Applicants requested that the stay be lifted. In the arbitration, the Applicants intended to try to establish a constructive trust in their favour in accordance with the Sale Purchase Agreement and New York law and so claimed ownership of tax credits and refunds earned or to be received by the Debtors. The Applicants argued that if the arbitration tribunal were to acknowledge the establishment of the constructive trust, the tax credits and refunds ought to be disregarded in the CCAA proceedings because they would not be assets of the Debtors.
Respondents’ position – Because the Sale Purchase Agreement was governed by the laws of the state of New York and included an arbitration agreement, Respondents recognized the jurisdiction of a New York-based arbitration tribunal under the Sale Purchase Agreement. However, they asserted that any finding of a constructive trust in favour of the Applicants under New York law would be irrelevant. According to the CCAA, rights are to be determined by the lex fori. BecauseCCAA proceeding was brought in Québec where no constructive trustis recognized, even a favourable ruling from the arbitration tribunal would not modify the outcome of CCAA proceeding. Therefore, lifting the stay would only cause the CCAA procedure to be delayed to the Respondents’ detriment.
The ruling – The Court reviewed the applicable criteria for lifting a stay in a CCAA context. The Court determined that lifting the stay is discretionary:
“[…] In determining whether to lift the stay, the court should consider whether there are sound reasons for doing so consistent with the objectives of the CCAA, including a consideration of the balance of convenience, the relative prejudice to parties, and whether relevant, the merits of the proposed action […]” (para. 9)
After reviewing the applicable criteria, the Court determined that the following question was relevant: would a favourable arbitration tribunal ruling be helpful in determining the outcome of the Debtors’ CCAA procedure in Quebec?
The Court answered “no” to this question.
The Court examined how provincial laws and federal laws, such as the CCAA, interact. It concluded that provincial laws take effect in cases where federal laws are silent. Although there might be some differences in how federal laws are applied in different provinces, this is in line with the Legislator’s intention. No foreign law concept, such as the principle of constructive trust, can intervene in CCAA implementation when it is not recognized by the lex fori, here, Québec. The fact that an arbitral ruling could recognize a constructive trust would be meaningless because it is not recognized by Quebec law. As a result, the Court ruled that lifting the stay would be pointless for the Applicants and detrimental to other creditors. The Court therefore dismissed Applicants’ demand for a lifting of the stay.
Contributor’s Notes:
Here, the Court addressed the application for lifting the stay under the CCAA for referral to arbitration in the presence of an arbitration agreement. The Court did not examine the application through the lens of the general standards applicable to a motion for referral to arbitration. Therefore, the Court did not address the application of the Supreme Court of Canada’s decision in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41, which examined interactions between insolvency and arbitration laws.
In Peace River, the Supreme Court of Canada confirmed that parties should be held to their contractual agreements to arbitrate, consistent with principles of party autonomy and freedom to contract. Therefore, an arbitration agreement will generally apply even in an insolvency context, unless the arbitration would compromise the orderly and efficient conduct of the insolvency proceedings. See more comments about Peace River in Lisa Munro’s Case Note for Arbitration Matters : Supreme Court – Peace River v Petrowest Part 2: no conflict between arbitration, bankruptcy law – #687 and Supreme Court – Peace River v Petrowest Part 1: Separability Clarified? – #682.
In the current case, the Court merely looked at the award’s hypothetical impact on the CCAA proceedings. Because the Court positioned its point of view based on a hypothetical outcome, rather than considering the possibility of ever referring the case to arbitration, the Court avoided applying Peace River‘s criteria in its reasoning. The Court may have concluded that Peace River‘s test did not apply.
We will probably hear more about this case and the Court’s perspective soon because the Applicants are seeking leave to appeal this ruling!