Most due diligence processes in a business acquisition context require a review of material contracts and, in particular, a review of any restrictions on assignment of those contracts.
When a business enters into a long term commercial contract with a customer, the identity of that particular counterparty may influence the terms of the contract. A party deemed more favourable may obtain a better price or better terms. Unless restricted by enforceable anti-assignment provisions, these favourable contracts can be very valuable in a traditional M&A context.
Contracting parties are often surprised to learn that, in an insolvency context, these anti-assignment protections may be ineffective. This is particularly true in the context of a sale of the business of an insolvent party as a going concern.
Many of Canada’s insolvency statutes provide for the mandatory assignment of a debtor’s contracts. This facilitates the creation of value for all stakeholders by ensuring that a debtor’s business can be sold for the highest price possible by reducing the risk that contract counterparties could hold up a potentially beneficial transaction by refusing to consent to an assignment of their contracts.
In many cases contracts may be assigned by court order to a party who would be able to perform the contract as long as payment of all arrears arising prior to that assignment are cured.
Counterparties whose contracts may be assigned in this manner should receive notice that a court order assigning their contract is being sought, including information on the proposed assignee of the contract. Those counterparties will also be given a brief period of time to oppose the assignment. However, opposition simply on the basis that a particular contract has a non-assignment clause or that one does not like the assignee will generally not be a sufficient basis for opposition.
There are, however, limits to the court’s jurisdiction in this regard. For example:
- there is no clear authority for a court to unilaterally amend the terms of a contract, except insofar as is necessary to permit the assignment of that contract. Therefore, one can gain some comfort that the commercial deal that was reached under the original contract will continue post-assignment; and
- some contracts, such as collective agreements, cannot be assigned in this manner.
Transactions in which material contracts may be assigned as part of a going concern sale of an insolvent business can often move forward quickly and, without close attention and immediate reaction, one may find their contract assigned without express consent.