The purchaser of all the assets of a bankrupt business will be bound by the employment contracts of the bankrupt company and must therefore honor these contracts. So ruled the Court of Appeal of Quebec in a recent decision, Aéro-Photo (1961) Inc. c. Raymond (available in French only).
Benedict Raymond was president and general manager of Groupe Alta Inc. (Alta). His employment contract included a “golden parachute” clause. It provided that in case of termination of employment following a change of control, he would be entitled to 24 months’ pay in lieu of notice.
There was a rapid deterioration of the company’s financial situation in 2009. Following a notice from its main creditor that it would exercise its guarantees, a major conflict between the two main shareholders led to Alta’s bankruptcy in 2010.
In March 2010, the Superior Court authorized the sale of all of the assets to Aéro-Photo. A few days later, Aéro-Photo decided to retain the services of some former Alta employees but not that of the former president and general manager. Raymond claimed he had been dismissed without cause by Aéro-Photo and sought to deploy his golden parachute.
Article 2097 of the Civil Code of Quebec (CCQ) provides that a contract of employment is not terminated by the sale or the change in legal structure of a company.
According to the court, Article 2097 does not provide for any exceptions. Consequently, to the extent the new employer continues the operations of the former business, it will be bound by the former employer’s obligations even when the sale occurred through a trustee in bankruptcy.
The real issue was whether there was continuity of the business. The timeliness of events between the bankruptcy, the purchase of the assets, and the start of operations of Alta’s former business allowed the court to conclude that there was in fact continuity of the Alta business. Moreover, a direct nexus or connection between the former and new employer is not necessary for Article 2097 of the CCQ to apply.
Consequently, Aéro-Photo was obligated to respect and apply the employment contracts of the former Alta employees. In this case, not calling Raymond back to work when it restarted operations was akin to a dismissal without cause and the golden parachute clause applied.
Lessons to be learned
In Quebec at least, where all or most of the assets of a business are bought through a trustee in bankruptcy and to the extent the new employer continues the operations of the bankrupt company, the new owner will inherit the obligations of the former employer. Going forward, even when the sale occurs by court order, it will be important for the prospective purchaser to review the employment contracts of the employees and officers. As we have just seen, it could become costly to terminate the employment of those that held executive positions with the former employer.
Similar results may or may not apply in other jurisdictions across Canada. The result in each jurisdiction may depend on the precise wording of the applicable “sale or transfer of business” provisions of employment standards statutes and whether or not the employee ever became an employee of the purchaser.