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In the past, the judicial sale of a bankrupt business allowed the purchaser to continue the operations of the business without being bound by the obligations of the bankrupt business to its employees. The rules of the game are now very different.

THE EXCEPTION FOR A JUDICIAL SALE NO LONGER EXISTS

In 2001, the legislator amended section 45 of the Labour Code, according to which a new employer is bound by a certification or collective agreement following the "alienation or operation by another in whole or in part of an undertaking." The amendment abolished the exception for a judicial sale. A similar amendment was made in 2003 to section 96 of An Act respecting labour standards, which provides that a new employer is responsible for all civil claims arising from the application of that act following the "alienation or concession of the whole or a part of an undertaking." Article 2097 of the Civil Code of Québec, according to which a contract of employment is not terminated by "alienation of the enterprise," never provided a specific exception for judicial sales. Therefore, it is now clear that the continuity of a collective agreement or an employment contract is not interrupted by a judicial sale.

LIABILITY OF INTERIM RECEIVERS AND TRUSTEES

When a business is insolvent or bankrupt and is the subject of proceedings pursuant to the Bankruptcy and Insolvency Act,[1] an interim receiver or trustee in bankruptcy may be put in charge of temporarily administering or liquidating its property, depending on the circumstances. Since a business is generally worth more than the liquidation value of its assets, the interim receiver or the trustee will often try to maintain the operations of a business that is in financial difficulties in order to sell it as a going concern, and thus obtain a better price for the creditors. If the business is unionized, the union can then claim that the trustee or interim receiver has temporarily replaced the employer and has thus become a new employer within the meaning of s. 45 L.C.

In such cases (prior to the removal of the exception for a judicial sale), the Labour Court (the predecessor of the Commission des relations du travail) had ruled that whoever has possession of a bankrupt business is bound, as a new employer, by the certification and collective agreement of the union representing the employees of the bankrupt business, if it continues to operate the business, until the date of the judicial sale, if any.[2] The Labour Court arrived at the opposite conclusion, however, when the trustee only continued the business's operations in a limited or temporary capacity, in the course of liquidating the business or specific assets seized by a creditor.[3]

In GMAC Commercial Credit Corporation - Canada v. T.C.T. Logistics Inc.,[4] the Supreme Court of Canada ruled that the interim receiver could not avail itself of the protection contained in the order for its appointment to circumvent the application of an Ontario provision similar to s. 45 L.C. The Supreme Court held that the bankruptcy courts did not have jurisdiction to declare that an interim receiver appointed under the Bankruptcy and Insolvency Act was not a successor employer and that under the circumstances this determination fell within the exclusive jurisdiction of the Ontario Labour Relations Board. The Supreme Court did not rule on the application of the principle of immunity set out in section 14.06(1.2) of the Bankruptcy and Insolvency Act, which provides that where a trustee (or receiver within the meaning of subsection 243(2) of the Bankruptcy and Insolvency Act or interim receiver) "carries on in that position the business of the debtor or continues the employment of the debtor's employees, the trustee is not by reason of that fact personally liable in respect of any claim against the debtor or related to a requirement imposed on the debtor to pay an amount where the claim arose before or upon the trustee's appointment."

Following this Supreme Court decision and the uncertainty with respect to the liabilities of a trustee in bankruptcy or interim receiver towards the employees of an insolvent or bankrupt company when operations are temporarily maintained, the government proposed amendments[5] to section 14.06(1.2) of the Bankruptcy and Insolvency Act to ensure that the trustee (or the estate or the receiver within the meaning of subsection 243(2) of the Bankruptcy and Insolvency Act or the interim receiver) cannot be held liable for any obligation of the employer, including as a successor employer, towards the employees or former employees, if such an obligation existed prior to his appointment or if it is calculated based on a period prior to his appointment.

DISMANTLING A BUSINESS

It is well established that simply selling the assets of a business does not always result in the application of s. 45 L.C. if the defining components of the business or part of the business are not substantially present in the purchaser's business.[6]

That is why the dismantling of a bankrupt business and the subsequent sale of its assets will not necessarily result in the application of s. 45 L.C., even in extreme cases, when a purchaser acquires all the assets of such a business, without continuing the activities of the business in whole or in part. That was the decision of the Commission des relations du travail in two very similar cases, Syndicat canadien des communications, de l'énergie et du papier, section locale 145 c. Claude Forget inc.[7] and Métallurgistes unis d'Amérique, local 9318 c. Métacor International inc.[8]

In both these cases, employers had to move from the premises they occupied, due to regulatory constraints and lack of space following the growth of their business. They had taken advantage of the bankruptcy and closing of competing unionized businesses to purchase all the assets of the businesses, including the buildings which met their new needs and into which they moved their own business. It was decided that s. 45 L.C. did not apply, since these employers were continuing their own business and not that of the bankrupt business of which they had only purchased the assets.

In the first case, the certified union representing the employees of the purchaser (Claude Forget Inc.), maintained its certification pursuant to s. 39 L.C., since the business had simply moved from one building to another. In the second case, the employees of the purchaser (Métacor International inc.), were not unionized; therefore certification of this business following its move to the premises of the liquidated business was not an issue.

CONCLUSION

What has changed is that the purchaser of a bankrupt business may be bound by the obligations of the previous employer pursuant to the Civil Code, An Act respecting labour standards and the Labour Code. Following the decision in T.C.T. Logistics and pending the adoption of the proposed amendments to section 14.06(1.2) of the Bankruptcy and Insolvency Act, interim receivers and trustees may also be bound by these obligations if they decide to continue the operations of a bankrupt business. However, these obligations will not apply if the assets of the bankrupt business are simply liquidated and the operations are not continued in whole or in part by the purchaser.

Pierre Pronovost
and Sylvain Rigaud

[1].    R.S., 1985, ch. B-3.

[2].    Caron, Bélanger, Ernst & Young inc. c. Syndicat canadien des travailleurs du papier, section locale 204, 1993 T.T. 317.

[3].    Syndicat des travailleurs du bois usiné de St-Raymond (CSN) c. Banque nationale du Canada, [1987] R.J.Q. 1685 (C.A.).

[4].    2006 SCC 35.

[5].    The proposed amendments are contained in a Notice of Ways and Means Motion tabled on December 8, 2006 by the Minister of Labour to amend the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Wage Earner Protection Program Act.

[6].    Mode Amazone c. Comité conjoint de Montréal et de l'Union internationale des ouvriers du vêtement pour dames, 1983 T.T. 227; U.E.S. Local 298 v. Bibeault, [1988] 2 S.C.R. 1048.

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Sylvain Rigaud
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