Can the duty of good faith be used to set aside a notice of disclaimer?

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Laurentian University faced significant financial challenges and sought protection from its creditors under the Companies Creditors Arrangement Act, RSC 1985, c.C-36, (“CCAA”) enabling it to work out a plan of compromise for its creditors and to reorganize its finances and operational structure. As part of its reorganization, Laurentian issued notices of disclaimer to terminate its relationship with three federated universities: the University of Sudbury, Thorneloe University and Huntington University. Terminating these relationships would free up funds that would otherwise be transferred to the federated universities, thus increasing the funds Laurentian had available to restructure. 

Two of the federated universities, University of Sudbury and Thorneloe University sought orders disallowing the notices of disclaimer. The University of Sudbury argued that the notice of disclaimer was not made in good faith, as required by s. 18(6) of the CCAA, and that Laurentian was using the CCAA proceedings for a collateral and improper purpose by effectively destroying a competitor.

In its decision, in Laurentian University v Sudbury University, 2021 ONSC 3392 (CanLII), the court referenced s. 32(4) of the CCAA for the non-exhaustive factors a court is to consider when considering whether to uphold a notice of disclaimer, including whether the monitor had approved the proposed disclaimer, whether the disclaimer would enhance the prospects of a viable compromise or proposal being made by the debtor and whether the disclaimer would likely cause significant financial hardship to a party to the agreement. The court ultimately did not agree that Laurentian was not acting in good faith or was using the CCAA for a collateral or improper purpose. Rather the court held that the termination of the agreements with the federated universities was part of putting an end to an unsustainable financial model in urgent circumstances. Laurentian had engaged in negotiations with the federated universities regarding their agreements but those negotiations were only partly successful. Huntington had come to an arrangement with Laurentian to dissolve its relationship but the other two federated universities had not. The court upheld the notice of disclaimer on the basis that it was approved by the monitor and that without the additional funds available from the federated universities, Laurentian would not be able to put forward a viable plan of compromise or secure further debtor in possession financing to pursue its restructuring objectives.

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