Friday, September 15, 2017

Canada - Clash of Principles Leads to Sea Change in Union Rights During Insolvency Proceedings

By Theodore Goloff, Robinson Sheppard Shapiro, and Brian Sherman (law student)

In law as in life, where one begins determines where one ends, particularly where one’s starting point for legal analysis depends upon one’s choice between competing principles to champion. In a federal system such as Canada, where insolvency law lies within federal jurisdiction but where provincial competence in labour relations law is presumptive (indeed less than 10% of Canada’s working population falls under the jurisdiction of federal labour and employment law), conflict arises where the two intersect, as they represent divergent objectives.

Labour relations law provides employees the mechanism to advance their interests and redress the imbalance of economic power in their favour. Insolvency law is predicated upon the competing principle of maintaining the rights of all creditors within a predictable scheme and order, so that their claims are treated pari passu, and is designed to prohibit one group of aggressive creditors from gaining at the expense of others.

Unless varied by the Supreme Court of Canada, the recent decision of the Court of Appeal for Ontario in Romspen Investment Corporation v. Courtice Auto Wreckers Limited, 2017 ONCA 301, may well represent a sea change in the relationship between labour relations law and insolvency. Romspen appears to be the first instance where a Canadian appellate court was asked to consider whether, on principle and/or on the facts of the case, a union should or should not be allowed to pursue a certification application during receivership/bankruptcy, by lifting a stay of proceedings resulting from a receiving order issued in accordance with the Bankruptcy and Insolvency Act [BIA]. Considering the different vantage points of the majority and the dissent, it is not surprising that their analysis and their disposition of the case are diametrically opposed.


As Justice Lauwers, in dissent, wrote:

[60] The insolvency regime in Canada is intricate and the way it addresses the interests of debtors, creditors and others is carefully calibrated.

In the event of insolvency, legal structures are available in Canada for both restructuring and reorganization, i.e. the Companies’ Creditors Arrangement Act [CCAA], allowing companies to retain value as “going concerns”, while protecting against intangible losses, such as evaporation of the companies’ goodwill that, inter alia, result from liquidation. Reorganization serves the public interest by facilitating the survival of companies supplying goods or services crucial to the health of the economy while, hopefully, saving large numbers of jobs. As the CCAA does not specify what happens if reorganization fails, the BIA, supplies the backdrop for that unfortunate situation, i.e. the firms’ demise. The two statutes work in tandem, grouping all possible actions for recovery against the debtor into a single proceeding controlled in a single forum overseen by a single judicial officer, avoiding the chaos that would attend insolvency if each creditor initiated recovery proceedings individually in different forums, all the while placing all creditors on an equal footing, diminishing the risk that the most aggressive creditors would realize their claims against the debtor’s limited assets to the detriment of all the others.

The insolvency regime proceeds from the premise of a statutory freeze and standstill to allow for judicially supervised reorganization and rebirth, if possible, with the pain of the “haircut” required being shared amongst creditors and stakeholders, and the orderly and schematic disposition of assets if bankruptcy ultimately ensues.

The essential premise of labour relations law, in Canada, at least since the last Supreme Court pronouncements on Section 2(d) of the Canadian Charter of Rights and Freedoms [Charter], known as the “trilogy” of 2015, proceeds from a constitutionally recognized and protected right of the “working class” to better its economic position and redress the inequity of uneven bargaining power through (i) associational rights, i.e. certification; (ii) collective bargaining; and (iii) the use of the strike weapon. Clearly because its purpose is to redress imbalance through dynamic collective change, labour relations law challenges rather than preserves the status quo.

The issue raised in Romspen is different from the more classic case of a simple employee unfair labour practice charge, e.g. termination, given that the outcome of such proceedings might involve liquidating the amount of back pay (lost wages and interest), if any, owed, providing, in that sense, the data required to allow the receiver or trustee in bankruptcy to determine whether there even is a “claim provable in bankruptcy”. There seems therefore, in that circumstance, to be a more cogent argument for allowing such proceedings to go forward, because the interests of both the complainant and the receiver or trustee are, in that sense, advanced in tandem. Such was, in fact, the view of the Quebec Superior Court in Re, Engrenage P.Y.G. (Faillite de), 2003 CanLII 27983 and Société de gestion ltée (Syndic de), J.E. 98-155.

Salient Facts

In the Rompsen case, certification proceedings were filed almost two months after Courtice Auto Wreckers was put into receivership by Rompsen, one of Courtice’s secured creditors. A general stay of certification proceedings was imposed, pursuant to the provisions of the BIA by the receiver.

The issue of whether or not the general order to stay proceedings applied so as to block the certification was canvassed by the Ontario Labour Relations Board, which held that, indeed, the general stay applied. The Board proceeded to stay the union’s certification application pending before it. The union sought an order to quash the Receiver’s stay, and by ricochet the Board’s order, from a judge of the Ontario Superior Court of Justice, without success. That decision was appealed by the union allegedly “de plano”, i.e. as of right, without leave being sought. Both the majority and dissenting judges agreed that leave was required but, because the central issue raised in the appeal, as the majority put it, was “the relationship between, and intersection of, federal bankruptcy law and general provincial labour relations law” [para 26], leave to appeal was exceptionally granted on public interest grounds.

In the end, the majority allowed the appeal, set aside the order of the motion judge, and granted the union leave to proceed with its certification application.

A Clash of Principles – Dissent vs. Majority Decision: To Stay or not to Stay Certification Proceedings

As noted by the dissent, “[w]hatever the applicable test, ‘lifting the automatic stay is far from a routine matter’” and that “lifting of a stay is exceptional in view of the expectation that most creditors’ claims will be resolved through the summary procedure, and not through ongoing court or administrative law proceedings” [para 78].

Indeed, the lifting of a stay order is a matter that lies within the bankruptcy judge’s discretion. It has long been a tenet of higher courts that discretion given to trial court judges ought not to be disturbed or appeal, save on grounds of palpable error of law, or less than reasonable appreciation of the facts.

Certainly a bankruptcy court judge, in any of Canada’s provinces, would per force have a specialized expertise akin to that of any administrative tribunal created by statute whose decisions, in Canada, even when not protected by a privative or preclusive clause, are reviewable only under extremely narrow parameters.

In this regard, Justice Lauwers, in dissent, noted:

[84] As a commercial list judge with long experience in insolvency, the bankruptcy judge would be fully alive to the relevant and to the business realities faced by the debtor, the creditors and the receiver. Moreover, he would be intimately familiar with the particular facts of the case. That is why it is important for this court, from the viewpoint of the standard of review, to defer to the bankruptcy judge in the exercise of his discretion under s. 215 of the BIA or the terms of the receivership order: see e.g. Royal Crest Lifecare Group Inc. (Re) (2004) […] 181 O.A.C. 115 (C.A.), leave to appeal refused, [2004] S.C.C.A. No. 104, at para. 23; Grant Forest, at paras. 97–99.

To be sure, the majority decision took issue with a number of findings of fact of the receiver, and/or of the bankruptcy judge, terming them inter alia “speculative” [paras 34 and 41] or adding: “The Receiver’s statement in its first report that it has ‘serious concerns’ that certification could negatively impact a sale amounts to little more than self-serving speculation”. In this respect, the dissent countered:

[116] In my view, the bankruptcy judge’s statement that certification could negatively impact the sale of the Harmony Road depot is self-evidently true and falls well within the margin of appreciation that is his due, given his knowledge of the commercial realities. I would be most reluctant to disparage the advice of the court-appointed receiver as mere “self-serving speculation”. Such an officer has no self-interest and owes duties to all the parties and to the court. In my view, it was open to the bankruptcy judge to accept the receiver’s advice.

[117] If the union achieves certification and the Harmony Road depot is sold in such a way as to attract successor labour rights, then any prospective purchaser of the depot will be faced with the obligation to immediately embark on first collective agreement negotiations. This is not a small additional burden on what would otherwise be the terms and conditions of the depot’s sale. It will plainly discourage some potential bidders and therefore negatively affect the depot’s market price by reducing the number of buyers who would be willing to engage. Any cooling of the interests of potential purchasers in the debtor’s assets would reduce the proceeds of sale to the prejudice of all the creditors. With respect, this is more than a mere “inconvenience to the receivership process.”

[118] If the court were to permit the post-receivership certification process to continue, it would effectively hand one interested group of creditors, the newly unionized employees, a tool with which to increase their leverage over the other creditors.” (emphasis added)
At para 114, the dissent in Romspen referenced the “significant professional costs to the Receiver’s administration”, stating that “[t]he cost of a labour negotiation will, in effect, be a super-priority expense that will ultimately be absorbed by and materially prejudice other creditors through reduced realizations and distributions.”

Most respectfully, it certainly lies within the role of any court to draw factual inferences from statutory language. Apparently, that is what the dissent understood the bankruptcy trial court judge to have done. While before the bankruptcy judge, the receiver is and was a party ad-litem, in law at least, the latter is and was rightly to be viewed as a court-appointed judicial officer who has no separate personal and self-serving interests but those of the collectivity of creditors and the proper administration of the BIA.

In that respect, if the receiver’s “serious concerns” were speculative, in the absence of proof to the contrary aren’t they to be taken as having been raised in the best interests of the mass of creditors? Isn’t that the true role of the receiver?

Was Federal Paramountcy Triggered?

The next, more substantive, issue between the majority and dissent centered on how to reconcile federal insolvency and bankruptcy legislation with the provincial statutory labour relations scheme, itself a regime that is constitutionally grounded in human rights.

As insolvency is within the exclusive competence of the Parliament of Canada, the paramountcy of federal legislation, while engaged, is tempered by Section 72(1) of the BIA providing:

72(1) The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act. [Court’s emphasis]

In Rompsen, there is between majority and dissent a fundamental disagreement as to when federal paramountcy is or is not triggered.

The majority, on the basis of GMAC Commercial Credit Corporation – Canada v. T.C.T. Logistics Inc., [2006] 2 SCR 123 [GMAC], determined that for paramountcy to be triggered there must be an “operative conflict”, between one or more provisions of the statutes, defined in 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy), [2015] 3 SCR 397, as being an impossibility to comply with both the provincial law and the federal bankruptcy regime. For the dissent, this latter and more recent case suggested a second flexible more context- and fact-specific paramountcy trigger.

Apparently, the majority did not consider the second portion of the “conflicts” test suggested by ETR Concession, which, in the dissent’s view, is “the latest word from the Supreme Court on paramountcy” [para 98]. This second test posits that federal insolvency paramountcy is triggered where, although it is possible to comply with both laws, the operation of the provincial law “frustrates” the purpose of the federal regime. In such an event, pursuant to ETR Concession, “the provincial law remains valid, but will be read down so as to not conflict with the federal law, though only for as long as the conflict exists” [para 101].
The difference between the majority and dissent, in their approach, is telling. As the dissent put it:
[103] The court’s task here is not to reconcile statutory language, but to reconcile different policies. This is a nuanced, difficult and delicate task informed by the bankruptcy judge’s knowledge both of the law and the operation of the marketplace in the context of the specific matter before him, drawing also on his experience and wisdom, and his sense of what is commercially reasonable. The bankruptcy judge brought just that perspective to this case.

The dissent continued:

[107] In my view, the policy contest presented in this case is precisely the kind of conflict between provincial regulatory regime for labour relations and the federal insolvency regime that the paramountcy doctrine is intended to recognize and accommodate.

[108] My colleague relies on the Supreme Court’s decision in GMAC. In that case the issue was whether leave should be granted to the union under s. 215 of the BIA so that the Labour Relations Board could determine “successor employer” status.

[109] However, there is a crucial distinction between this case and GMAC. The union had long been certified in GMAC. By contrast, in this case, the certification effort followed the appointment of the receiver by several months. This distinction is important because it engages one of the fundamental policy principles in insolvency law, which is to preserve the status quo among the creditors as of the date the receiver was appointed. The bankruptcy judge accurately identified that this principle would be violated if the debtor could be forced to accept union certification post-bankruptcy. In my view, my colleague does not give due weight to this critical principle.

To Stay or Not To Stay – The Central Question

The majority took issue with the suggestion that the certification “would in effect increase the rights of the members of the proposed bargaining unit relative to other creditors” [para 31], adding:

[32] […] A successful certification application does not guarantee employees better wages; it simply allows employees to combine their bargaining power and rely on the union’s assistance in negotiating their terms and conditions of employment. While it is true that upon certification certain rights and obligations crystallize that would not otherwise (e.g. the employer’s duty to recognize the union and bargain with it in good faith), certification does not have the effect of automatically increasing the rights employees have as creditors, thereby prejudicing other creditors. It is simply conjecture at this point to assume that the union will be successful in negotiating a more financially favourable contract for bargaining unit employees. Moreover, at this juncture, allowing the union’s certification application to proceed merely entitles the union to a representation vote, not to certification.


[34] In my view, this line of reasoning is speculative. While some purchasers may be dissuaded by recognition of the proposed bargaining unit, it may also be that a set collective agreement, with its clarity of terms, would be attractive to a prospective purchaser. The union, on behalf of its members, has an interest in the business being sold as a going concern and therefore has an incentive to act in a manner that would promote such an outcome.

[35] More fundamentally, however, there is simply no concrete evidence that recognition of the proposed bargaining unit would negatively impact a sale.

From this writer’s perspective, is the opinion regarding the supposed incentive to act “in a manner that would promote such an outcome” any less speculative than the conclusion reached by the receiver, which the bankruptcy judge saw no reason to vary?

From this writer’s perspective, and with respect, the issue lies at the core of both (i) how one views the latitude of an appellate court to review the exercise of trial courts’ discretionary remedies and, more fundamentally, (ii) the validity of assumptions as to the harmony of the goals of labour and the mass of the creditors. Even if both see value in the sale of the business rather than its dismantling, it is certainly a more than reasonable and plausible, if not a more compelling assumption, that all things being equal, a prospective buyer would have to negatively factor the possibility, if not probability, of the cost of bargaining of first collective agreement into the mix. This would be doubly true in Quebec where first contract negotiation can lead to an agreement imposed by arbitrator, even without proving bad-faith bargaining.

In any case, with the greatest respect for the majority opinion, with more than 45 years as a management side labour relations lawyer in Quebec behind me, I would suggest that first collective agreements that do not alter the employer’s economic landscape through improvements in wages, benefits or other non-monetary conditions of employment, are as rare as hen’s teeth. I would doubt that my colleagues at the Bar of Ontario on either side would see matters differently.

In determining whether lifting a stay order is or is not appropriate, the bankruptcy court was required to weigh the relative “prejudices” that may result.
With respect, fairly predictable and logical results of certification, even if they cannot be calculated with precision, nonetheless constitute far more than speculative prejudice.

The Charter’s Place in All of This

While no direct mention is made of the Charter, this author clearly believes that the majority’s decision has as its leitmotif the constitutionalization of the right to certification. Clearly, the majority would have been influenced by the Union’s reference thereto writing:

[37] […] The right to form and join a union of one’s choosing is a fundamental right under the Labour Relations Act, 1995, S.O. 1995, c. 1, Sched. A (the “LRA”). While flexibility is required to address the challenges in any particular insolvency proceedings against the legitimate exercise of labour rights simply because the assertion of those rights represents an inconvenience to the receivership process: GMAC, at paras. 50-51.


[44] […] I am simply not persuaded that allowing the union’s certification application to proceed would cause any more than de minimis prejudice to Ambrose Group creditors.

[45] On the other hand, a lot is at stake for the union and the employees. Maintaining the stay prejudices the important objectives “quick votes” are designed to serve, unduly interferes with employees’ ability to exercise their statutory labour rights, and, particularly where employees have allegedly been dismissed for exercising those rights, undermines employee confidence in the efficacy of core labour rights and protections.

[46] Labour rights do not end when insolvency proceedings begin.

To be sure, as the majority points out, obliquely referring, I believe, the above-mentioned Supreme Court trilogy, “the right to form and join a union of one’s choice is a fundamental right” [para 37], it is the dissent that deals with this issue more directly.

Justice Lauwers writes:

[88] The appellant’s factum simply asserts that: “Given the constitutional protection afforded to this process, the court should be wary of allowing the existence of a receivership to frustrate the certification application.” Fair enough, but the union had the entire life of the business before insolvency within which to pursue certification.

[89] In oral argument, counsel for the union expanded on this brief allusion. He asserted that the MPAO decision constitutionalized bargaining rights, and argued that the right of employees to unionize should “supersede” any concern in relation to the sale of the business. He added that there is no empirical evidence that unionization will reduce the sale value of the asset, but even if that were to be the outcome of the employees’ exercise of their rights under the labour legislation: “So be it”.

[90] However, counsel for the union did not take the position that the constitutionalization of labour rights takes away entirely the bankruptcy court’s discretion under s. 215 of the BIA or the order appointing the receiver to refuse to lift the stay where labour rights are in issue.


Romspen represents a clash of principles and a significant shift in the law on many different levels, the fallout of which is as yet not fully known. And if my point of view differs from those of my betters, I differ with deference.

In the end, given that there is an application for leave to appeal to the Supreme Court of Canada, pending it remains to be seen whether the dissent’s apocalyptic vision to the effect that:

[93] In my view, giving unions carte blanche to begin certification efforts for insolvent enterprises after the date of the appointment of a trustee or receiver or the date of an order under the CCAA would effect a sea change in insolvency law; it would profoundly alter the economic dynamics of insolvency, and whether the CCAA route is preferable to outright bankruptcy.

will be stillborn as a result of judicial scrutiny at a higher level and further clarification of the law on this issue by Canada’s highest court. Certainly, though, folks doing business in Canada on either side of the labour-management divide should be keenly interested in this case.