Thinking of picking up a business from a bankrupt company? While the purchase price may be irresistible, some hidden obligations towards employees may surface. Better pay extra attention during the due diligence.

Successor rights typically define the obligations that one employer company, “the successor”, may have in respect of employees of a former employer, in the event of the sale, merger or other “alienation” of an enterprise. In most Canadian provinces, successor/ employer obligations are defined in la- bour relations statutes and are limited to unionized entities. In some provinces, successor rights may also apply to cer- tain obligations set out in labour stan- dards legislation. Alone among Cana- dian provinces, Quebec has legislated successor rights both for the unionized and non-unionized sectors, in respect of everything that is covered by an em- ployee’s employment contract.

In particular, art. 2097 of the Civil Code of Quebec [“C.C.Q.”] provides:

2097. A contract of employment is not terminated by alienation of the enterprise or any change in its legal structure by way of amalgamation or otherwise.

The contract is binding on the suc- cessor of the employer.

In Aéro Photo (1961) inc. c. Raymond, 2014 QCCA 1734, the Quebec Court of Appeal decided that while an earlier version of the successor rights provi- sions of the Labour Code (s. 45 et seq. L.C.), provided an exclusion for “judicial sale” – defined by case law as including sale by a trustee in bankruptcy — and notwithstanding that s. 45 L.C. served as the model for art. 2097 — no such exception was contemplated by that pro- vision.

As long as the trustee in bankruptcy continues operations of the bankrupt enterprise without significant interruption, whatever sale is made by the trustee to third parties will att ract succes- sor/employer obligati ons. In short, the acquiror will be caught by the pre-existing employment contracts including being obliged to continue the employ- ment of employees whose employment was not already severed, and by whate- ver those contracts might provide. Se- niority, for those employees, would continue unaffected.

The Court of Appeal, as well, said that although case law required that some legal relationship between the former employer and the new employer (“lien de droit”) was essential to effect succes- sor rights, such legal relationship need not be direct. In the case of bankruptcy, when there is no significant interruption of operations, the enterprise is trans- ferred from the bankrupt company to the trustee and via the trustee to the acquirer and new employer. The chain between the parties is respected.

For these reasons, there was legal trans- ference of a business as a “going con- cern” from one employer to another. The new employer was required to ho- nour all the severance obligati  ons amongst others that were provided in Appellant’s employment contract  signed with the former employer, to the tune of close to $690,000.

Lessons are that purchasing an enter- prise from a bankruptcy does not al- ways wash away previous obligati  ons. It depends on whether or not, inter alia, there was an interrupti  on long enough to be able to claim that there was no conti  nuity of operati  ons, or that the previous enterprise had been previously dismembered or dismantled.