In a decision rendered on April 11, 2025, the Québec Court of Appeal upheld the Superior Court’s decision regarding the stay of proceedings of former shareholders of the debtors in the restructuring proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The case involved a dispute between the former minority shareholders of the debtor Laboratoires C.O.P. inc. (“COP”) and that debtor and its creditors, in which the minority shareholders sought to have their rights to tax refunds under a constructive trust recognized by invoking New York State law to enforce the arbitration agreement and assert their ownership rights to certain tax refunds. In that decision, the Court reaffirmed a number of key issues concerning the application of the CCAA, Québec trust law, the integration of foreign legal concepts into Québec civil law, and treatment of arbitration proceedings in an insolvency context.
Superior Court Judgment
The Honourable Jean-François Émond, J.S.C., ruling on an application for the partial lifting of the creditor’s stay of proceedings ordered under the CCAA, rejected the application of the former minority shareholders (the “Petitioners”) of the debtor COP.
According to the Petitioners, pursuant to a clause in the share purchase agreement entered into in 2015 with the buyer of their shares - a Québec corporation - and governed by the laws of the State of New York, a constructive trust gives them an ownership right to certain tax refunds or credits paid and payable to the Canada Revenue Agency prior to the closing date. They claimed that such amounts did not form part of COP’s assets and therefore sought to have their rights recognized in an international arbitration before the ICC in New York.[1]
In support of his conclusion, the trial judge explained that, unless otherwise provided, the CCAA, as a federal statute of general application, requires a reference to provincial private law in determining ownership rights or the validity and priority of creditor security interests.[2] In this regard, he pointed out that, like the Bankruptcy and Insolvency Act (the “BIA”), Canadian courts have incorporated the CCAA into procedural law.[3] In the Québec context, this means that the Civil Code of Québec supplements the CCAA, and that a concept such as the constructive trust recognized by New York State law but not under civil law, cannot be invoked to establish a creditor’s right of ownership over property located in Québec or a claim acquired there.[4]
Judge Émond added that in Québec, a creditor cannot create or lose a security interest as a result of a foreign rule of law that is not recognized in the jurisdiction where the action was brought (i.e., lex fori).[5] If this were possible, owing to a lack of defined rules, liquidating a debtor’s assets would become nearly impossible due to the difficulty of maximizing the orderly collection of debts, thereby compromising the remedial objectives of the BIA and the CCAA.[6]
In this case, Judge Émond found that staying the remedies of the creditors was neither appropriate nor useful. In fact, even if the Petitioners had been allowed to submit their dispute to the New York arbitration tribunal and had received a favourable decision recognizing the existence of a constructive trust, it would have had no effect on the liquidation process under the CCAA, as the arbitral award could not be recognized in Québec.[7] On the contrary, in Judge Émond’s view, this approach would in no way have benefitted the Petitioners and would cause prejudice to the secured creditors by delaying the collection of their claims and creating unnecessary expenses.[8]
Ultimately, the application was dismissed because the Petitioners failed to meet the stringent burden of proof[9] regarding the conditions required by case law to lift the stay of proceedings.[10]
Principles Set Out By Court of Appeal
In its ruling of April 11, 2025[11] (the reasons of which were published on April 17, 2025[12]), the Court of Appeal upheld the Superior Court’s judgment, stating that the stay of proceedings under the CCAA is intended to enable the orderly and efficient restructuring of companies in difficulty, by centralizing proceedings and avoiding a multiplicity of actions by creditors.
Accordingly, the Petitioners’ arguments were once again rejected by the Court, which noted that while the constructive trust was recognized by New York State law, this concept was not recognized under Québec law.
A three-judge panel of the Court of Appeal provided the following arguments in support of its reasoning:
- Application of the CCAA and stay of proceedings in the public interest: The CCAA allows creditors’ proceedings to be suspended to enable the orderly restructuring of companies in difficulty.[13] The Court reaffirmed the principles set out in Peace River, noting that bankruptcy and restructuring proceedings, and realizing an insolvent person’s assets, are centralized in the public interest.[14]
- Seeking to adopt a common law concept to enforce an arbitration agreement: Despite the Petitioners’ efforts to enforce the arbitration agreement by invoking a constructive trust based on New York State law, the Court of Appeal rejected their application, pointing out that this common law concept could not be integrated into Québec civil law. In fact, the Court of Appeal upheld Judge Émond’s finding that the CCAA, as a federal statute, requires a reference to provincial private law in determining ownership rights and the validity of creditor security interests. Since the constructive trust is a common law concept, it cannot be recognized in Québec civil law, which excludes its application in insolvency proceedings under the CCAA.[15] This decision reaffirms the autonomy of the Québec legal system and the importance of the stability of local procedures in processing creditors’ claims.
- Interpretation of article 622 CCP: The Court of Appeal also considered article 622 of the Québec Code of Civil Procedure (“CCP”) and clarified its meaning. Referring to a book by Frédéric Bachand (published prior to his appointment to the Court of Appeal), the Court concluded that the expression “null” in 622 CPP was to be interpreted broadly and to include other situations where the judge could refuse to refer the matter to arbitration, including the existence of insolvency proceedings. In this regard, the Court stated as follows:
“[29] [OUR TRANSLATION] The application of the second part requires a more detailed analysis. Unlike the legislative provision at issue in Peace River, article 622 CCP provides only one ground for setting aside an arbitration agreement, namely where the agreement is null. However, a literal interpretation of this provision is not appropriate, especially since it “was adopted in the context of the implementation of the New York Convention (the words of which, in article II(3), are ‘null and void, inoperative or incapable of being performed’).” In his book L'intervention du juge canadien avant et durant un arbitrage commercial international, written while a professor, Judge Bachand, makes a similar point:
Article 940.1 of the Québec CCP [now art. 622 CCP] departs somewhat from the formula used in article II(3) of the New York Convention and article 8 of the Model Law (...). The relevant preparatory work does not contain any indication that the legislator actually intended to depart—in substance—from the Model Law and the New York Convention. Rather, the change seems to have been motivated by the Québec legislator’s desire to adopt a style that better reflects the civil law tradition (...), the French term “nullité” being that used by the legislator in France in article 1458 of the NCPC [(Nouveau Code de procédure civile)].”
- The Court’s “highly” discretionary power: Under section 11 of the CCAA, the trial judge has a “highly” discretionary power when deciding whether or not to lift the stay of proceedings based on the objectives of the CCAA.[16] As the Supreme Court noted in Peace River, an otherwise valid arbitration agreement may be inoperative or unenforceable because arbitration proceedings would compromise the proceedings already well underway for the orderly and efficient resolution of the debtor’s liquidation.[17]
- Quick resolution of claims under CCAA: The purpose of the CCAA is to facilitate efficient corporate restructuring, by ensuring the rapid and definitive resolution of creditors’ claims. In this decision, the Court of Appeal noted that the restructuring process must be carried out without undue delay in order to maximize debt recovery. The trial judge pointed out that lifting the stay of proceedings could delay the collection of secured creditors’ claims, which would run counter to the remedial objective of the CCAA, particularly with regard to ensuring financial stability and respecting prior claims when liquidating the debtor’s assets.[18]
Conclusion
In reaffirming the need to comply with the principles of the CCAA, the Court of Appeal stressed the importance of an orderly restructuring and the prompt resolution of claims in order to ensure the efficient debt collection. Moreover, by denying the application of a constructive trust under Québec law, the decision also clarifies the limits of the influence of foreign legal concepts in the Québec civil system, particularly in the context of insolvency proceedings. Lastly, the decision reiterates the court’s “highly” discretionary power to temporarily suspend or lift the stay, noting that any unnecessary delay could undermine the CCAA’s remedial objectives. This clarification is crucial for the future management of corporate restructurings involving Québec-based companies in financial difficulty.
Fasken acted for Ernst & Young inc. with a team composed of Luc Béliveau, Nicolas Mancini and Virginie Lavigne.
