Extension of stay and Settlement Agreement

On January 21, 2010, Mr Justice Morawetz extended the stay of proceedings in the Nortel case to April 23, 2010, and approved a settlement and funding agreement which addressed inter-company issues as between the US and Canadian estates. On the one hand, the settlement concluded numerous thorny issues, including cross-border transfer pricing issues with American and Canadian taxing authorities which had been outstanding for years, and provided funding for the Canadian Nortel companies which the Monitor estimated would be sufficient to complete the administration of the case. On the other hand, as part of the agreement, a claim in the amount of $2 billion dollars by Nortel Networks Inc, an American affiliate of Nortel Canada, was approved and accepted against Nortel Canada, before any other claims determination or inter-corporate claim process.

Nortel Canada will now proceed to close pending sales and to realize on remaining assets. Mr Justice Morawetz has indicated that he wants to see distribution to creditors. But stakeholders acknowledge that there is much to be done before creditors will see any money, including a multi-national determination as to how to allocate proceeds of sale on the various worldwide fully-integrated Nortel businesses.

Appeal Court affirms that Employee Termination and Severance Obligations are stayed

It is not a new concept that debtors in proceedings under the Companies’ Creditors Arrangement Act ("CCAA") "pay as they go," paying for post-filing goods and services only as they are required.

Nevertheless, a group of former Nortel employees and a Nortel union (CAW- Canada) challenged Nortel’s failure to pay certain amounts owed to employees during the CCAA, including termination and severance and other amounts due to former employees. Denied relief by Mr Justice Morawetz this past spring, the groups appealed. The Ontario Court of Appeal recently upheld the lower court decision.

The Court of Appeal rejected the union’s argument that Nortel’s obligation to make payments to former employees could not be severed from the collective agreements, but must be considered as part of the compensation for the post-filing services of current employees. The Court confirmed that even if the triggering event is post-filing, the key factor is whether the employee performed post-filing services: if so, he or she must be compensated for such current service.

The former employees questioned whether the Court could exercise its discretion under the CCAA to excuse Nortel as employer from paying pre-filing termination and severance obligations as otherwise required by the provincial Employment Standards Act.

Where provincial and federal statutory provisions are in conflict and cannot both be complied with, the constitutional doctrine of paramountcy will apply such that the federal law will "trump" the conflicting provincial legislation. The former employees argued that the federal CCAA and the provincial employment minimum standards laws did not conflict, but could operate together.

The Court of Appeal adopted an expanded of view of paramountcy, holding that the doctrine can also be triggered when a provincial law is incompatible with the purpose of the federal law, where complying with the provincial requirements would have the effect of frustrating the purpose of the federal law and therefore the intent of Parliament.

The Court reiterated that the CCAA stay is intended to allow an employer company to freeze its debt obligations in order to facilitate restructuring, for the benefit of all stakeholders. It held that this objective would be frustrated if the stay did not apply to statutory termination and severance obligations, because Nortel did not have sufficient funding to pay these amounts and also to maintain operations. The Court was not swayed by the argument that this proceeding was no longer a restructuring, but had become a going-concern liquidation.

We understand that the former employees have sought leave to apply to the Supreme Court of Canada, arguing that the paramountcy doctrine has been misapplied.

The result of this decision is consistent with a number of cases in the Ontario courts over the past few months, which have dealt with the staying of employees’ pre-insolvency obligations such as termination and severance (in the Windsor Machine & Stamping Ltd. case), pre-filing supplemental pension benefits (Indalex), and special payments under a pension plan (Fraser Paper).