Tag: Layoffs

By: Stuart Clark, Student-at-Law

In an earlier blog, we noted that Sears Canada had agreed to create a fund for former employees who were denied severance payments while the company restructured. Now, according to the Financial Post, Sears’ creditors say that they will seek a motion to lift the court-ordered stay which prevents them from exercising their rights on Sears’ unpaid debts.

Recall that a debtor company can seek an initial order from the court that grants them a ‘stay’ against its creditors while it renegotiates or restructures its debts, but that this stay is not indefinite. The creditors have said that they will seek to remove the stay to go forward with a claim of ‘negligent misrepresentation’ and ‘oppression’ against Sears leadership.

The ‘oppression remedy’ is a specialized tool that corporate stakeholders can use to contest actions by a corporation and its board of directors. The remedy derives from s 241 of the Canada Business Corporations Act (CBCA) which says that the courts may intervene wherever a corporation’s business is carried out, or directors’ powers are being exercised, in a manner that is ‘oppressive’ or ‘unfairly prejudicial’ to the interests of any security holder, creditor, director, or officer. The remedial powers in the section are vast—allowing the court a wide range of discretion to correct the oppressive treatment.

The test for engaging the remedy comes from a case called Icahn Partners LP v Lions Gate Entertainment Corp, which says that the oppression remedy is only appropriate where:

1. There is a breach of reasonable expectations: The stakeholder’s reasonable expectations are breached through the actions of the corporation or its directors; and,
2. The breach is oppressive: The breach was either oppressive, unfairly prejudicial, or unfairly disregarded the interests of the complainant.

For the first condition to be met, the expectations breached form part of the reasonable expectations created between the claimant and the company. This depends on the specific relationship between the two parties and accounts for the relationship between parties, duties under the CBCA (like a director’s duty to act in the best interest of the corporation), and industry standards.

For the second, the conduct must be found to be substantially unfair. A breach of those reasonable expectations is not automatically oppressive, the conduct of the company must unfairly disregard the interests of the security holder.

In Icahn, the court found that shareholders have a reasonable expectation that their interests will not be discriminated against to the benefit of other stakeholders. As a result, board walk a fine line between protecting larger corporate interests and oppressive conduct towards shareholders.

Sears walks this line right now. One of the biggest tensions in corporate governance arises when interests of the corporation run against the interests of its shareholders or creditors. We will have to wait to see if Sears’ leadership has been successful in meeting their duty to the corporation while still taking into account the interests of their creditors.

Devry Smith Frank LLP is a full service law firm that has a very experienced group of lawyers within our corporate and bankruptcy groups. If you are in need of representation, please contact one of our lawyers today or call us directly at 416-449-1400.

“This article is intended to inform and entertain. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

By: Stuart Clark, Student-at-Law

According to the Financial Post, Sears Canada has agreed to create a fund for former employees who were denied severance payments as the company restructures itself.

The deal was hammered out by lawyers representing the company and workers, and will be funded to the tune of $500,000—coming directly from money earmarked for executive bonuses. While it will not make employees as a group whole, the fund will target those facing genuine hardship. Sears’ severance obligations were modified as a component of the court-controlled restructuring process under the Companies’ Creditors Arrangement Act (CCAA). Using the Act, Sears was able to shed roughly 2,900 jobs across the country without severance.

Under the Act, a debtor company can seek an initial order from the court that grants them a ‘stay’ against its creditors while it renegotiates or restructures its debts. In simple terms, this means that creditors are prevented from exercising their rights to collect on a debt, agreements with suppliers cannot be terminated (from either party), and further transactions require court approval. For example, under a stay, a creditor with an outstanding secured debt would be prevented from repossessing the secured property (like a piece of equipment, etc.).

The stay is not indefinite, however. The guiding purpose of the Act is to give companies who qualify time to restructure so they can meet their creditor obligations. Generally, a business may only qualify if the total claims against the company are more than $5,000,000 (s.1). The counterpart to the CCAA is the Bankruptcy and Insolvency Act (BIA), which applies to individuals, corporations, income trusts, and partnerships. The key difference is complexity, debtor companies apply for CCAA protection because of their size, while individuals and small businesses operate under the BIA. The processes are similar, however, and both offer debtors the tools to preserve their business, renegotiate with creditors, and, most importantly, avoid liquidation.

Devry Smith Frank LLP is a full service law firm that has a very experienced group of lawyers within our bankruptcy and insolvency groups. If you are in need of representation, please contact one of our lawyers today or call us directly at 416-449-1400.