Are demobilization costs incurred by the lessor of property leased pursuant to an agreement which was disclaimed during insolvency proceedings to be paid by the debtor?

In the matter of the Companies’ Creditors Arrangement Act of Nemaska Lithium, the Québec Superior Court rendered  an interesting decision regarding the possibility for a debtor to disclaim agreements and its obligation, if any, to pay its counterparty the costs it must incur to repossess leased property.

Background: Nemaska Lithium disclaims a housing modules rental agreement

On January 20, 2020, pursuant to the Initial Order issued by the Court in this matter as well as Section 32 of the Companies' Creditors Arrangement Act (“CCAA”), Nemaska Lithium gave notice to its counterparty Eenou of its intention to disclaim the agreement entered into between the parties on March 31, 2019 (the “Agreement”) within 30 days. The Agreement provided for the installation, rental and maintenance of housing modules by Eenou to provide housing for Nemaska Lithium’s employees at its mining project in Northern Québec, as well as the demobilization by Eenou of the installed modules upon termination of the Agreement. Pursuant to the Agreement, Nemaska Lithium had to pay, in four instalments, a lump sum of $5,460,031 covering, among other things, all costs related to the removal, demobilization and return transportation of these modules (the “Demobilization Costs”). Faced with financial difficulties, Nemaska Lithium did not pay the last instalment due in June 2019.

Eenou claims that the last instalment covers all of the Demobilization Costs and that, since it has still not been made by Nemaska Lithium, it constitutes a post-filing expense within the meaning of the Initial Order. It is therefore seeking payment of all the Demobilization Costs it will have to incur as a result of the disclaimer.

For its part, Nemaska Lithium claims that the Demobilization Costs represent termination costs duly provided for in the Agreement and are an integral part of the agreed price. These costs cannot qualify as post-filing expenses since they result from an obligation that arose prior to the issuance of the Initial Order. Nemaska Lithium thus submits that it does not owe Eenou anything in this respect.

Relying on the ruling of the Court of Appeal in Kitco, the Court notes that post-filing expenses are those which arose after the commencement of the insolvency proceedings and that result from an obligation that arose after the issuance of the Initial Order. In the present case, the Demobilization Costs were expressly provided for in the Agreement and formed an integral part of the negotiated price. In this sense, the fact that the expenses are actually incurred by Eenou after the issuance of the Initial Order cannot transform them into post-filing expenses, insofar as the obligation providing for them originates from the Agreement, which was entered into months before the commencement of the insolvency proceedings. The fact that these fees are due after the Initial Order does not convert them into post-filing expenses. To conclude otherwise would mean that all creditors whose agreements with Nemaska Lithium will be disclaimed will then be able to claim such termination costs as post-filings expenses. The Court cannot accept such a conclusion; the terms of the Agreement must prevail.

Importance of the global picture when analyzing whether an agreement should be disclaimed

Eenou also claims that the notice of disclaimer of the Agreement should be set aside, for two distinct reasons. First, it submits that neither section 32 CCAA nor the Initial Order allows Nemaska Lithium to disclaim an agreement which contains termination provisions.

Second, Eenou submits that the conditions provided for in section 32 CCAA are not met insofar as the disclaimer of the Agreement would not be necessary for the restructuring or arrangement of Nemaska Lithium. Finally, it alleges that the disclaimer would cause it financial harm. Nemaska Lithium submits in response that the criteria set out in section 32 CCAA are all established and that the disclaimer of the Agreement should be ordered. Nemaska Lithium argues more specifically that the significant savings resulting from the disclaimer will favour the conclusion of a viable arrangement for the benefit of all creditors and submits that Eenou did not present any evidence of significant financial hardship.

The Court rejects outright Eenou’s argument that it is not possible under the CCAA or the Initial Order to disclaim an agreement which contains termination provisions. Rather, section 32 CCAA provides an additional mechanism that supplements other existing contractual and statutory provisions, all of which otherwise remain applicable. The Court agrees with Nemaska Lithium’s arguments and concludes that the factors listed in subsection 32(4) CCAA were met and that, therefore, the Agreement must be disclaimed.

As part of its analysis, the Court indicates that it must consider what it describes as the “global picture” in order to ensure the fair treatment of all creditors involved. It cannot be ignored that Nemaska Lithium plans to send more than 200 notices of disclaimer; as such, the Court cannot grant a preferential treatment to one of the debtor’s creditors. This would effectively ensure that all those who will receive a notice of disclaimer would then apply to the court to obtain the same treatment as Eenou. With regards to the global picture analysis, such situation ought to be avoided. Moreover, the fact that only one and a half months remained to the Agreement cannot be taken into account.

Rather, the analysis conducted by the Court with regards to the global picture points to a conclusion contrary to that sought by Eenou: when added together, all these small claims would represent a significant amount of money for Nemaska Lithium. The disclaimer does not need to be necessary for the restructuring of; it simply has to be advantageous or beneficial to the global picture.

The Court also dismisses Eenou’s claim that it would suffer significant financial hardship as a result of the disclaimer since no evidence to that effect is presented. Turning profits that are less substantial than anticipated cannot be characterized as serious financial hardship!

Case information

Re Nemaska Lithium inc, 2020 QCCS 482