In a recent decision in the Companies’ Creditors Arrangement Act (“CCAA”) Proceedings ofTimminco Ltd. et al.[1], Justice Morawetz of the Ontario Superior Court of Justice [Commercial List] observed that the disclaimer provisions of the CCAA apply equally in the context of a restructuring plan and a sales process.

In January 2012, Timminco Limited and Becancour Silicon Inc. (collectively, “Timminco”) were granted protection under the CCAA.[2]  At the commencement of the proceedings, Timminco discontinued payment of many of its pre-filing obligations, so as to enable the Timminco entities to continue operations and to pursue a sale of their assets.  This included an agreement (the “Agreement”) with a retired executive (the “Executive”).  Under the Agreement, Timminco was to fund,among other things, a monthly payment to the Executive for life.  In June 2012, the Executive brought a motion to compel Timminco to honour its obligations under the Agreement.  Timminco brought a cross-motion for a declaration that the obligations under the Agreement were at an end or, in the alternative, that Timminco was entitled to disclaim the Agreement in accordance with the provisions of the CCAA.

Justice Morawetz, presiding over Toronto’s Commercial List court, held that the obligations arising out of the Agreement were, in substance, termination and/or retirement benefits; and, accordingly, were unsecured claims.  Relying on prior jurisprudence (including decisions of the Ontario Court of Appeal), Justice Morawetz held that such obligations were pre-filing obligations and subject to the CCAA stay of proceedings.  Justice Morawetz refused to order Timminco to pay the same, holding that to do otherwise would mean that the Executive “would receive an enhanced priority over other unsecured creditors.”

However, having disposed of the issue as above, Justice Morawetz proceeded to discuss the alternative argument:  namely, whether Timminco could disclaim the Agreement.

Section 32 of the CCAA permits a CCAA debtor to disclaim a contract.  That section also empowers a counter-party to apply to the Court to block the disclaimer.  Section 32(4) of the CCAA sets out a non-exhaustive list of factors the Court must consider on such an application:

  1. whether the Monitor approves the disclaimer;
  2. whether the disclaimer would enhance the prospects of a viable compromise or arrangement; and
  3. whether the disclaimer would likely cause significant financial hardship to the counter-party.

The Executive argued that the Court should not sanction the disclaimer as it would (i) not enhance the prospects of a compromise or arrangement – there was no restructuring plan imminent; and, (ii) cause him significant financial hardship.

Justice Morawetz first observed that the scope of the CCAA should not be interpreted so narrowly as to apply only in the context of a process leading to a restructuring plan, but should apply equally in a sales process.  He noted that this applied to the disclaimer provisions as well and stated that “the requirement under Section 32(4)(b) that a disclaimer enhance the prospects of a viable compromise or arrangement should be interpreted with a view to the expanded scope of the CCAA”.  Considering the existing jurisprudence, he noted that a disclaimer need not be essential to the restructuring but only advantageous and beneficial.  Justice Morawetz also stated that the overriding objective of the CCAA is to ensure that creditors in the same class are treated equally; and, that such treatment would enhance the prospects of a viable compromise or arrangement.  Accordingly, Justice Morawetz would have permitted the disclaimer.

Justice Morawetz next considered the Executive’s submission that he would suffer financial hardship if the disclaimer were granted.  Justice Morawetz stated that the test for determining financial hardship is subjective, requiring an examination of the individual characteristics and circumstances of the counter-party in question.  He noted that to invoke an objective test – i.e., an assessment of the general effect of the disclaimer as opposed to the specific effect on the counter-party – would make it difficult, if not impossible, to disclaim large contracts.  Justice Morawetz stated that such a result “would be contrary to the purpose of [sic] principles of the CCAA”.  On the facts, Justice Morawetz would not have made a finding of significant financial hardship.

Although not determinative of the issue in this case, Justice Morawetz’s comments amount to significant and persuasive obiter dicta from the Court in respect of the interpretation and application of the CCAA disclaimer provisions (added to the statute in 2009).  The commentary establishes that:

  1. there is no requirement that a plan of compromise or arrangement be imminent – it is enough that the disclaimer will be advantageous or beneficial to the restructuring efforts, whether a plan or sale is contemplated;
  2. the Court will take into account whether refusing a disclaimer would have the effect of enhancing the position of the counter-party, contrary to a fundamental principle of the CCAA; and
  3. whether a counter-party would suffer significant financial hardship if the disclaimer is allowed is a subjective test.

Following the Timminco reasoning, a debtor may disclaim contracts in the context of a restructuring plan or a sales process.  More importantly, perhaps, it follows from the commentary that a counter-party faces an up-hill battle when opposing a disclaimer.  First, the counter-party would need to tender persuasive evidence of subjective financial hardship. Second, the commentary suggests that where refusing a disclaimer would result in giving a creditor enhanced standing, the Court will be reluctant to do so as such a result is contrary to the principles of the CCAA.  Taken together, the obiter dicta in Timminco reinforces the disclaimer provisions of the CCAA as a “debtor’s tool”, designed to empower the debtor to pursue a restructuring in any form, not to empower a counter-party to frustrate it.