In the Matter of the Notice of Intention to Make a Proposal of Emergency Door Service Inc.
Ontario Reports Ontario Superior Court of Justice, Newbould J. August 22, 2016 133 O.R. (3d) 59 | 2016 ONSC 5284 [Indexed as: Emergency Door Service Inc. (Re)]
Case Summary
Bankruptcy and insolvency — Stay of proceedings — Automatic stay of proceedings in s. 69(1) (a) of Bankruptcy and Insolvency Act applying to injunctive proceedings to prevent post-filing conduct of debtor who has filed notice of intention to make proposal under Bankruptcy and Insolvency Act — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 69(1) (a).
R Corp. commenced an action in the Federal Court against EDS and another company for damages for trademark and copyright infringement and for injunctive relief. EDS subsequently filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act ("BIA"). R Corp. moved for an order that the statutory stay of proceedings under s. 69(1) (a) of the BIA did not apply to a motion it intended to bring to prevent certain post-filing conduct by EDS that would allegedly be harmful to R Corp.
Held, the motion should be dismissed.
The word "remedy" in s. 69(1) (a) of the BIA includes injunctive proceedings to prevent post-filing conduct of a debtor who has filed a notice of intention to make a proposal.
In the circumstances, it would not be appropriate to lift the automatic stay of proceedings.
Canadian Petcetera Ltd. Partnership v. 2876 R. Holdings Ltd., [2010] B.C.J. No. 2065, 2010 BCCA 469, [2010] 12 W.W.R. 189, 96 R.P.R. (4th) 157, 10 B.C.L.R. (5th) 235, 295 B.C.A.C. 201, 70 C.B.R. (5th) 180, 194 A.C.W.S. (3d) 635; Golden Griddle Corp. v. Fort Erie Truck and Travel Plaza Inc., 2005 ONSC 81263, [2005] O.J. No. 6305, 277 D.L.R. (4th) 568, 29 C.B.R. (5th) 62, 154 A.C.W.S. (3d) 701 (S.C.J.), consd
Other cases referred to
Century Services Inc. v. Canada (Attorney General), [2010] 3 S.C.R. 379, [2010] S.C.J. No. 60, 2010 SCC 60, 72 C.B.R. (5th) 170, 12 B.C.L.R. (5th) 1, 296 B.C.A.C. 1, 326 D.L.R. (4th) 577, 409 N.R. 201, [2011] 2 W.W.R. 383; Ma (Re), 2001 ONCA 24076, [2001] O.J. No. 1189, 143 O.A.C. 52, 24 C.B.R. (4th) 68, 104 A.C.W.S. (3d) 261 (C.A.); Rizzo & Rizzo Shoes Ltd. (Re) (1998), 1998 SCC 837, 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, 154 D.L.R. (4th) 193, 221 N.R. 241, J.E. 98-201, 106 O.A.C. 1, 50 C.B.R. (3d) 163, 33 C.C.E.L. (2d) 173, 98 CLLC para. 210-006, D.T.E. 98T-154, 76 A.C.W.S. (3d) 894
Statutes referred to
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [as am.], ss. 65.1 [as am.], 69, (1), (a), 69.1 [as am.], (a), 69.3 [as am.], (1) [as am.], 69.4 [as am.], 69.6, (3) Companies' Creditors Arrangement Act, R.S.C. 1986, c. C-36, s. 11.02, (1)(b), (c), (2)(b), (c) Copyright Act, R.S.C. 1985, c. C-42 [as am.] Trade-marks Act, R.S.C. 1985, c. T-13 [as am.]
Authorities referred to
Sullivan, Ruth, Sullivan on the Construction of Statutes, 6th ed. (Markham, Ont.: LexisNexis, 2014)
MOTION for an order that a statutory stay of proceedings in s. 69(1) (a) of the Bankruptcy and Insolvency Act did not apply to moving party's motion for injunctive relief.
Jordan Schultz, for Rytec Corporation. David Ullman, for the debtor Emergency Door Service Inc. Robert A. Klotz, for the proposal trustee.
Endorsement
[1] Endorsement of NEWBOULD J.: — On June 3, 2016, Emergency Door Service ("EDS") filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). On August 2, 2016, EDS filed its proposal with the proposal trustee and the superintendent.
[2] Rytec Corporation ("Rytec") has commenced an action against EDS in the Federal Court and in the Court of Queen's Bench in Alberta in which it seeks in both actions an injunction against EDS. Rytec now moves for an order that the statutory stay of proceedings under s. 69.3(1) of the BIA does not apply to a motion which it says it intends to bring in the Federal Court to prevent post-filing conduct on the part of EDS. 1
[3] For the reasons that follow, the motion by Rytec is dismissed.
Relevant Facts
[4] EDS is in the business of installing, selling and servicing industrial doors on commercial properties. It is a relatively small company, employing 17 people in its sole office in Mississauga, Ontario. It has been in business for 23 years. It conducts its business mainly in Ontario.
[5] Among the products that are sold and installed by EDS are products sold to EDS by an entity known as Efaflex (Efaflex Tor-Und Sicherhaltssysteme GmbH & CO. KG) ("Efaflex"). Mr. Cornelius of EDS states in his affidavit that the doors which are sold and installed by EDS which it acquires from Efaflex are, to the best of EDS's knowledge, based on intellectual property owned by Efaflex. EDS has entered into a licence agreement with Efaflex for the sale of these doors.
[6] Rytec is a manufacturer of doors for industrial, commercial and cold-storage environments in North America. Rytec has been marketing high-speed doors bearing the mark Spiral in Canada since at least 1996.
[7] Rytec claims under a series of agreements with Efaflex that it has the exclusive patent and trademark rights in respect of Spirals. It claims under several agreements as follows:
(a) On March 9, 2004, Rytec and Efaflex entered a new, non-cancellable "technology license agreement" in which Rytec agreed to assign the Rytec patents and applications to Efaflex in exchange for the exclusive licence to make, have made, use, sell and offer to sell, install, maintain and service Spirals in North America, including Canada.
(b) On April 15, 2004, Rytec assigned the Rytec patents and applications to Efaflex.
(c) In conjunction with the technology license agreement, Rytec and Efaflex entered into a purchase agreement that provided, among other things, that Efaflex would sell Spirals only and exclusively to Rytec for distribution in North America.
[8] EDS had a prior existing business relationship with Rytec, which included the sale of Rytec doors. The business relationship between Rytec and EDS ceased in 2014. Since November 2014, EDS has been in business in direct competition with Rytec in Canada.
[9] EDS claims under certain agreements with Efaflex as follows:
(i) On or about November 19, 2014, EDS and Efaflex entered into an agreement to co-operate in the sale and distribution of Efaflex products in North America. This agreement also granted EDS a licence to use Efaflex's intellectual property as necessary for the sale of Efaflex's products.
(ii) As part of this agreement, EDS was not entitled to purchase Efaflex products that were subject to Efaflex's agreements with Rytec until May 2015, at which time certain rights under Rytec's agreements with Efaflex terminated. EDS says it abided by this restriction in good faith and to the best of its knowledge, in accordance with instructions it received from Efaflex as to the scope of the agreements between Efaflex and Rytec.
[10] EDS began distributing Efaflex products on July 1, 2015. It says that it no longer sells or installs any doors bearing the Spiral trademark and has not done so since its relationship with Rytec ended in 2014. The doors it sells are Efaflex branded doors.
[11] Rytec and Efaflex are much larger companies than EDS. According to the Rytec website: ". . . there are over 100,000 Rytec doors in operation today. Rytec corporate offices and manufacturing operations are headquartered in Jackson, Wisconsin. Customer support is provided through a national network of local dealers and installers throughout North America". Efaflex's website advises that there are over 1 million Efaflex doors sold through dealer network, which extends over all five continents, in addition to subsidiaries in Germany, Austria, Switzerland, Great Britain, Slovenia, Czech Republic, Poland, Netherlands, Belgium and Russia.
[12] Mr. Cornelius states that EDS is very much caught in a tug of war between these two giant competitors. I accept that, which is clear from the litigation that is taking place.
[13] On January 25, 2016, Rytec commenced an action in the federal court against EDS and Efaflex claiming that both defendants had breached the Trade-marks Act, R.S.C. 1985 c. T-13 and the Copyright Act, R.S.C. 1985, c. C-42. The claim for relief includes interim, interlocutory and/or permanent injunctions against both defendants prohibiting the selling of Efaflex doors and damages of $325,000. On the same day, Rytec commenced an action in the Alberta Court of Queen's Bench against EDS based on the same agreements pleaded in the federal court claiming various torts including a claim that EDS has induced Efaflex to breach its agreements with Rytec. Damages of $325,000 are claimed.
[14] Although issued on January 25, 2016, the statement of claim in the federal court was not served until the end of March 2016. On May 9, 2016, Rytec served a notice of motion in the federal court proceedings to seek an interlocutory injunction against EDS to prohibit its sale and installation of Efaflex products and to require the destruction of such doors as are in its inventory. Rytec initially made that motion returnable on June 13, 2016. Later, it amended the motion to make it returnable on a date to be appointed by the judicial administrator. No affidavits or supporting evidence have been served in that injunction proceeding. Efaflex was not named in the injunction motion although its interests would clearly be affected if Rytec were successful in obtaining the injunctive relief it seeks.
Does the Stay of Proceedings in the BIA Apply?
[15] Section 69(1) (a) of the BIA provides for an automatic stay of proceedings once a notice of intention to file a proposal has been filed, as follows:
Stay of proceedings -- notice of intention
69(1) Subject to subsections (2) and (3) and sections 69.4, 69.5 and 69.6, on the filing of a notice of intention under section 50.4 by an insolvent person,
(a) no creditor has any remedy against the insolvent person or the insolvent person's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy[.]
[16] Rytec takes the position that injunctive relief for post-filing conduct of EDS is not caught by the stay as relief sought in the injunction motion is not aimed at recovery of any monetary claims against EDS but rather seeks to enjoin EDS from further behaviour that harms Rytec. It says that the injunction is not in relation to collection or enforcement of a debt, liability or obligation, nor is it possible to attach a monetary value to the injunction. It further says that the relief sought in the injunction motion is relief in respect of the ongoing conduct of EDS and therefore necessarily relates to conduct that continues to occur after the filing of the NOI. The behaviour that the injunction motion seeks to curtail would, absent an injunction, not result in a claim provable in bankruptcy as any claim would be a post-filing matter, the enforcement of which is not stayed.
[17] EDS takes the position that the stay in s. 69(1) (a) is intended to prohibit all remedies against an insolvent person, or an insolvent person's property, including an injunction. It says that the purpose of a proposal is to try to achieve a restructuring of the business and that if an injunction proceeding would detrimentally affect its ability to proceed with its proposal, the purpose of the proposal provisions in the BIA would be frustrated. It says further that under a Companies' Creditors Arrangement Act, R.S.C. 1986, c. C-36 ("CCAA") stay an injunction motion would ordinarily be stayed and that the two statutes should be read harmoniously to reach similar results.
[18] The issue involves the interpretation of s. 69(1) (a) of the BIA. In interpreting statutes, there is only one principle or approach, namely, the words of an Act are to be read in their entire context, in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament. See Rizzo & Rizzo Shoes Ltd. (Re) (1998), 1998 SCC 837, 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, at para. 21.
[19] Rytec contends that a grammatical and ordinary reading of s. 69(1) (a) indicates that the phrase "for the recovery of a claim provable in bankruptcy" modifies the entirety of "any remedy against the insolvent person or the insolvent person's property, or shall commence or continue any action, execution or other proceedings".
[20] Rytec relies on a decision in Canadian Petcetera Ltd. Partnership v. 2876 R. Holdings Ltd., 2010 BCCA 469, [2010] B.C.J. No. 2065, 10 B.C.L.R. (5th) 235 (C.A.). In that case, a landlord sought to terminate a lease after the debtor filed a notice of intention to file a proposal for failure of the debtor to pay rent when due and failure to pay post-filing rent. It was held that s. 65.1 of the BIA, which deals specifically with a landlord's rights after a tenant has filed a notice of intention to file a proposal, applied and that the landlord had the right to terminate the lease. It was argued by the trustee of the debtor who had gone bankrupt by the time of the appeal that the stay provided for in s. 69.1 (a) of the BIA prevented the landlord from terminating the lease. Justice Tysoe in the Court of Appeal held that s. 69.1 did not apply to the situation as leases were expressly dealt with in s. 65.1. He held, however, that s. 69.1 could not prevent termination of the lease as the termination was not the exercise of a remedy for the recovery of a claim provable in bankruptcy. Tysoe J.A. stated [at paras. 29 and 30]:
In my opinion, s. 69(1) does not stay the termination of leases because the phrase "for the recovery of a claim provable in bankruptcy" at the end of clause (a) modifies each of the earlier phrases in clause (a). I agree with counsel for the Landlord that this is confirmed by the placement of a comma after the word "proceedings" because there would be no comma if it was intended that the last phrase was to modify only the immediately preceding phrase. Thus, while the termination of a lease is an exercise of a remedy, it is not the exercise of a remedy for the recovery of a claim provable in bankruptcy.
The wording of s. 69(1), which came into effect in 1992, was taken from the stay provision applicable when a debtor becomes bankrupt, which is now contained in s. 69.3. The general purpose of s. 69.3 was discussed by the Supreme Court of Canada in R. v. Fitzgibbon, 1990 SCC 102, [1990] 1 S.C.R. 1005 at 1015-16, 78 C.B.R. (N.S.) 193, (when the provision was s. 49(1) of the Bankruptcy Act, R.S.C. 1970, c. B-3):
The aim of the section is to provide a means of maintaining control over the distribution of the assets and property of the bankrupt. In doing so, it reflects one of the primary purposes of the Bankruptcy Act, namely to provide for the orderly and fair distribution of the bankrupt's property among his or her creditors on a pari passu basis. See Duncan and Honsberger, Bankruptcy in Canada (3rd ed. 1961), at p. 4. The object of the section is to avoid a multiplicity of proceedings and to prevent any single unsecured creditor from obtaining a priority over any other unsecured creditors by bringing an action and executing a judgment against the debtor. This is accomplished by providing that no remedy or action may be taken against a bankrupt without leave of the court in bankruptcy, and then only upon such terms as that court may impose.
It was held in Fitzgibbon that the stay provision did not apply to the making of a compensation order under the Criminal Code. Similarly, it has been held the stay provision does not apply to proceedings for contempt of court because, although contempt is a remedy against a debtor, it does not result in the recovery of a claim provable in bankruptcy (see Neufeld v. Wilson (1997), 1997 BCCA 3163, 86 B.C.A.C. 109, 45 C.B.R. (3d) 180, and Long Shong Pictures (H.K.) Ltd. v. NTC Entertainment Ltd. (2000), 2000 FC 50931, 18 C.B.R. (4th) 223, 190 F.T.R. 257).
[21] As stated by Tysoe J.A., the wording of s. 69(1), which came into effect in 1992, appears to have been taken from the stay provision then in effect applicable when a debtor becomes bankrupt, which is now contained in s. 69.3, which provides:
Stays of proceedings -- bankruptcies
69.3(1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.
[22] Tysoe J.A. referred to and relied on a statement of Justice Cory in R. v. Fitzgibbon that the aim of s. 69.3(1) is to provide a means of maintaining control over the distribution of the assets and property of the bankrupt and reflects one of the primary purposes of the BIA, namely, to provide for the orderly and fair distribution of the bankrupt's property among his or her creditors on a pari passu basis.
[23] I have difficulty, however, in applying that reasoning in a case of bankruptcy to a case dealing with a notice of intention to file a proposal. The purpose of a proposal is to give a debtor some breathing space to negotiate a compromise with the debtor's creditors in the hopes of saving the debtor. Such a purpose does not exist in the case of a bankruptcy.
[24] Thus, while s. 69(1) (a) dealing with a stay after a notice of intention to file a proposal has been made contains the same language as s. 69.3 it is necessary in my view to construe it purposively taking into account the intent of proposal proceedings.
[25] Tysoe J.A. relied on the second comma in the section after the word "proceedings" to conclude that an injunction for post-filing conduct was not stayed as it was not for the recovery of a claim provable in bankruptcy. When one looks at the French version of the section, there is no such comma. The reasoning of Tysoe J.A. does not apply to it. It states:
Suspension des procédures en cas d'avis d'intention
69(1) Sous réserve des paragraphes (2) et (3) et des articles 69.4, 69.5 et 69.6, entre la date du dépôt par une personne insolvable d'un avis d'intention aux termes de l'article 50.4 et la date du dépôt, aux termes du paragraphe 62(1), d'une proposition relative à cette personne ou la date à laquelle celle-ci devient un failli :
a) les créanciers n'ont aucun recours contre la personne insolvable ou contre ses biens et ne peuvent intenter ou continuer aucune action, exécution ou autre procédure en vue du recouvrement de réclamations prouvables en matière de faillite[.]
[26] Both the English and French versions are official and authoritative. Neither version enjoys priority or paramountcy over the other. This is known as the equal authenticity rule. When the two versions of a bilingual enactment appear to say different things, the courts are obliged by the equal authenticity rule to read and rely on both versions. If an acceptable meaning common to both versions cannot be found, some way of dealing with the discrepancy must be found by some means other than a preference for a particular language. Reliance on a single version is totally unacceptable for any official interpretation. Any discrepancy between the two versions must be reconciled. See Ruth Sullivan, Sullivan on the Construction of Statutes, 6th ed. (Markham, Ont.: LexisNexis, 2014), at 5.7, 5.12, 5.17 and 5.19.
[27] In my view, the discrepancy between the two versions can be reconciled by interpreting the sections taking into account the purpose of the BIA involved in proposals made by a debtor.
[28] Taking into account the purposes of insolvency legislation was discussed by Justice Deschamps in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, [2010] S.C.J. No. 60 in considering the CCAA. At para. 70, she stated:
Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully further efforts to achieve the remedial purpose of the CCAA -- avoiding the social and economic losses resulting from liquidation of an insolvent company.
[29] The direction to consider the remedial purpose of legislation is equally applicable to the BIA. The remedial purpose in proposal proceedings is to save a debtor form the social and economic losses resulting from a bankruptcy. Interpreting the word "remedy" in s. 69(1) (a) to include injunctive relief sought against a debtor that has made a proposal would be a purposive interpretation that fulfills the aim of the legislation.
[30] In Golden Griddle Corp. v. Fort Erie Truck and Travel Plaza Inc., 2005 ONSC 81263, [2005] O.J. No. 6305, 29 C.B.R. (5th) 62 (S.C.J.), the same arguments made in this case by Rytec were made to Justice Lederman in a case in which a franchisor sought an injunction to prevent a franchisee who had filed a notice of intention to make a proposal from post-filing breaches of provisions of the franchise agreement and a lease. The same argument was made that because of the second comma in s. 69(1) (a) of the BIA, as the injunctive relief sought was not for payment of money or collection of a debt or a liability provable in bankruptcy there was no automatic stay precluding it. Lederman J. did not accept that argument and stated [at paras. 11 and 12]:
While I agree that the word "remedy" in section 69(1) (a) should be given a broad interpretation it must be a purposive one that is in accord with the objectives of the BIA generally, and in particular, the specific purposes of the stay provisions against secured and unsecured creditors, giving, in the words of L.B. Leonard and R.G. Marantz in their article, "Debt restructuring under the Bankruptcy and Insolvency Act, June 1, 1995 -- Stays of proceedings, under the Bankruptcy and Insolvency Act" (for the 1995 Insolvency Institute of Canada lectures), "a reorganizing debtor an opportunity to have some aebreathing room' during which to negotiate with its creditors and hopefully put together a prospective financial restructuring which would meet their requirements."
A purposive definition of the word "remedy" in section 69(1)(a) would suggest that, remedies which in any way hinder or could impair that process are caught within the section and are stayed. The issue should be approached contextually on a case-by-case basis and the remedy sought should be considered in terms of its impact on the objectives of the statutory stay provision. It is the impact rather than the generic nature of the relief sought which should govern. Therefore, if the injunctive relief sought detrimentally affects or could impair the ability of the insolvent persons to put forth a proposal it should be stayed, whereas, if the nature of the injunction sought would have no effect whatsoever on the ability, it should not be stayed.
[31] There is much to say in favour of this principle enunciated by Lederman J. in Golden Griddle. It gives effect to the aim of the proposal provisions of the BIA to permit a debtor who had filed a notice of intention to file a proposal some space if needed to achieve a successful proposal.
[32] One of the exceptions in the stay provision in s. 69(1) (a) of the BIA is s. 69.6, which excepts regulatory proceedings. It provides:
Meaning of "regulatory body"
69.6(1) In this section, regulatory body means a person or body that has powers, duties or functions relating to the enforcement or administration of an Act of Parliament or of the legislature of a province and includes a person or body that is prescribed to be a regulatory body for the purpose of this Act.
Regulatory bodies -- sections 69 and 69.1
(2) Subject to subsection (3), no stay provided by section 69 or 69.1 affects a regulatory body's investigation in respect of an insolvent person or an action, suit or proceeding that is taken in respect of the insolvent person by or before the regulatory body, other than the enforcement of a payment ordered by the regulatory body or the court.
Exception
(3) On application by the insolvent person and on notice to the regulatory body and to the persons who are likely to be affected by the order, the court may order that subsection (2) not apply in respect of one or more of the actions, suits or proceedings taken by or before the regulatory body if in the court's opinion
(a) a viable proposal could not be made in respect of the insolvent person if that subsection were to apply; and
(b) it is not contrary to the public interest that the regulatory body be affected by the stay provided by section 69 or 69.1.
[33] One may ask why an exception from the stay provisions in these broad terms was required for regulatory proceedings if not covered in ss. 69 and 69.1. As an example, under provincial securities legislation, it is common for proceedings to be taken against a bankrupt who has contravened securities legislation for non-monetary claims such as orders preventing future access to the capital markets. If it is right that the stay in s. 69(1) does not apply to such proceedings because they are not for the recovery of a claim provable in bankruptcy, the broad exception in s. 69.6 would not be necessary. Moreover, one of the exceptions in s. 69.6(3) preventing regulatory proceedings from continuing if it can be established to the satisfaction of a court that a viable proposal could not be made in respect of the insolvent person, confirms the legislation's intent that non-monetary claims should not be permitted if they affect the chances of a successful proposal.
[34] Under s. 11.02(1)(b) and (c) and (2) (b) and (c) of the CCAA, a court may stay proceedings in any action, suit or proceeding against the company and may prohibit the commencement of any action, suit or proceeding against the company. This is the normal provision in initial orders under the CCAA. 2 There is a thrust under modern Canadian insolvency law to harmonize the statutory schemes contained in the CCAA and the BIA.
[35] In Century Services Inc. v. Canada (Attorney General), Justice Deschamps stated [at para. 24]:
With parallel CCAA and BIA restructuring schemes now an accepted feature of the insolvency law landscape, the contemporary thrust of legislative reform has been towards harmonizing aspects of insolvency law common to the two statutory schemes to the extent possible and encouraging reorganization over liquidation[.]
[36] There is no reason in principle why a larger corporation with debts of $5 million or more would be entitled to a stay of proceedings against an injunction proceeding for post-filing activity under the CCAA while a smaller corporation with debts less than $5 million that would not able to file under the CCAA would not be entitled to a stay in an appropriate case under the proposal provisions of the BIA.
[37] In my view, every attempt should be made to interpret the provisions of s. 69(1) (a) in a harmonious way with s. 11.02 of the CCAA, thus giving effect to the Century City principles. This can be done by interpreting the word "remedy" to include injunctive proceedings to prevent post-filing conduct of a debtor that has filed a proposal. If a debtor were to misuse this protection from a stay, an application could be made to lift the stay.
[38] I do not see the interpretation of s. 69(1)(a) resting on the placement of the second comma in the English version as being a purposive interpretation of the section, particularly as the French version does not contain such a comma.
[39] The way to avoid that and to make a purposive interpretation of s. 69(1)(a) is to interpret the word "remedy", or in French le mot "recours", to include injunctive proceedings to prevent post-filing conduct of a debtor. I thus interpret s. 69(1) (a) of the BIA to stay an injunction proceeding taken to stop post-filing conduct of a debtor who has filed a notice of intention to file a proposal.
Should the Stay be Lifted?
[40] If the stay applies, the bankruptcy court has jurisdiction to lift the stay under s. 69.4, which provides:
Court may declare that stays, etc., cease
69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied
(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or
(b) that it is equitable on other grounds to make such a declaration.
[41] Thus, Rytec must establish to the satisfaction of the court that it is likely to be materially prejudiced by the stay or that it is equitable on other grounds to lift the stay. If it does, it is still a matter of discretion for the court as the section provides that the court may lift the stay if so satisfied.
[42] In Ma (Re), 2001 ONCA 24076, [2001] O.J. No. 1189, 24 C.B.R. (4th) 68 (C.A.), the Court of Appeal set out the test for lifting the stay in the following [at paras. 2 and 3]:
The approach to be taken on s. 69.4 application was considered by Adams J. in Re Francisco (1995), 1995 ONSC 7371, 32 C.B.R. (3d) 29 at 29-30 (Ont. Gen. Div.), a decision affirmed by this court (1996), 1996 ONCA 10233, 40 C.B.R. (3d) 77 (Ont. C.A.)):
In considering an application for leave, the function of a bankruptcy court is not to inquire into the merits of the action sought to be commenced or continued. Instead, the role is one of ensuring that sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, exist for relieving against the otherwise automatic stay of proceedings.
As this passage makes clear, lifting the automatic stay is far from a routine matter. There is an onus on the applicant to establish a basis for the order within the meaning of s. 69.4. As stated in Re Francisco, the role of the court is to ensure that there are "sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act" to relieve against the automatic stay. While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whether there are "sound reasons" for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.
[43] Mr. Grasso of Rytec says that Rytec is suffering from the actions of EDS and Efaflex in that "Efaflex and EDS continue to act together to sell Spirals in Canada" at below cost. What he means by "Spirals" in his affidavit are doors that contain the Spiral trademark. Yet the evidence on the record is that EDS has not sold or installed any doors bearing the Spiral trademark since its relationship with Rytec ended in 2014.
[44] Mr. Grosso also states that Rytec has suffered and continues to suffer through loss of market share, loss of distinctiveness of Spirals, loss of customer goodwill, loss of profits and loss of Rytec's investment in building the market and brand for Spiral doors in Canada. This results in significant prejudice to Rytec's business in Canada and the U.S. He says that since EDS began competing with Rytec, the sales of Rytec Spirals has plummeted. There is little to support the assertions.
[45] The argument that Rytec will be materially prejudiced if it may not proceed with its injunction proceedings suffers from the absence of alacrity with which it has taken injunction proceedings. Its claims relate to actions taken by EDS and Efaflex since 2014. Rytec only commenced its claims in the federal and Alberta courts on January 26, 2016, and did not serve them until late March. No injunction application was brought until May 9, and when served did not contain any sworn materials. Rytec then on its own adjourned its motion sine die on May 19. I accept that if Rytec were truly suffering material prejudice, it would have moved with far more haste.
[46] The claim by Rytec is essentially for lost market share and damages, which it has quantified in its claim against EDS and Efaflex in the federal court action at $325,000. This kind of claim usually does not attract injunctive relief. In this case, there is no issue of Efaflex being able to fund any such award if made.
[47] Mr. Cornelius of EDS states the difficulty caused to a restructuring if it is required to become immersed in injunction proceedings. He states that the business of EDS continues to operate and is generally on track for the projections set out in its cash flow in the NOI proceedings. He says that the restructuring plans of EDS are still being developed and that EDS is still in the process of considering its restructuring options and discussing them with counsel, the proposal trustee and key stakeholders. It would be extremely distracting to those restructuring efforts for EDS to have to turn all its energy now to address this injunction. To be denied access to the products which are the subject of the injunction would have a material impact on EDS's business. Without access to these products, the restructuring would likely fail and the company would become bankrupt.
[48] Mr. Cornelius further states that EDS is continuing to take delivery of Efaflex doors which are the subject of the injunction, and it continues to market and sell those doors. The completion of the orders to which these doors relate are an essential part of the cash flow which the company filed with the superintendent. In general, the business of selling and installing Efaflex doors represents approximately one-half of the business of EDS. Without the Efaflex business, and certainly in the event of an abrupt and unplanned stop to that business, it is likely that the company would not be able to continue with its restructuring process.
[49] The proposal trustee states in its report to the court that it is concerned that continuation of the injunction proceedings, even if the injunction is ultimately refused, will adversely affect EDS's ability to successfully restructure via this process. The EDS's cash flow will be needed to fund legal fees in that proceeding. Injunction proceedings normally require considerable time and resources. The proposal trustee states that it has reviewed the potential return to unsecured creditors in a bankruptcy scenario and based on its preliminary analysis, it would appear that the proposal that EDS filed on August 2, 2016 offers a larger return to the company's unsecured creditors if accepted.
[50] I accept that the injunction proceedings would be a large negative at this time to a successful restructuring. EDS is a small company and without a stay, the cost and time involved in injunction proceedings would be very disrupting of its attempts to negotiate a successful restructuring of the business. It has not gone unnoticed that Rytec has chosen not to seek an injunction against Efaflex, the effect of which is that the cost of defending the injunction would be entirely at EDS's expense.
[51] There is evidence that Rytec is taking advantage of the proposal proceedings on EDS. Mr. Cornelius in his affidavit states on information and belief that he was told by Mr. Jakob Hess, a senior executive at Efaflex, that on June 16, 2016, Mr. Grasso sent an e-mail to the owners of Efaflex and advised that EDS was bankrupt and unable to continue to conduct business in Canada. As a result of these statements, Efaflex threatened to place EDS on credit hold and stop the supply of doors which had been ordered prior to the commencement of the NOI process. There is no affidavit from Mr. Grasso denying this evidence. I have little doubt that Rytec is quite prepared to see the failure of EDS if the injunction proceedings mean the end of the line for EDS.
[52] In the result and considering all of the evidence, I am not prepared to lift the automatic stay provided under s. 69(1) (a) of the BIA.
Costs
[53] EDS is entitled to its costs. It claims costs on a partial indemnity scale totalling $19,058.85, all in. Rytec's cost outline claims costs on a partial indemnity scale totalling $10,140.33, all in. I note that EDS's rates for its partial indemnity cost claim are calculated at 70 per cent of their actual rates. This is too high, the norm being 60 per cent of reasonable actual costs. The actual rates charged to EDS appear reasonable. Reducing the partial indemnity rates to 60 per cent of actual rates would reduce the cost claim by about $2,500. I allow costs for EDS of $16,500, all in, to be paid by Rytec within 30 days.
[54] EDS is responsible for the costs of the proposal trustee. The trustee prepared a report specifically in connection with the motion and its counsel attended court three times. EDS is entitled to be paid these costs of the trustee. These should be agreed, but if not, brief submissions in writing by the parties may be made within ten days.
Motion dismissed.
Notes
1 In its motion material, Rytec took the position that the applicability of the statutory stay under the BIA was to be determined in the Federal Court. This position was abandoned at the hearing of the motion.
2 It is contained in the model order adopted in Ontario.