Social Policy in Ontario

OCUFA, Laurentian and the First (and Last) CCAA Proceeding in the University Sector

Posted on November 16, 2024 in Education History

Source: AcademicMatters.ca — Authors: James Harnum

AcademicMatters.ca – Funding/Public Policy/Universities and the Academic Mission
Fall 2024 Issue.   James Harnum

Law firm Koskie Minsky LLP advised OCUFA on the impact of the unprecedented corporate bankruptcy proceedings undertaken by Laurentian University in February 2021. This experience provided a unique vantage point to explain how the Laurentian crisis happened and the lessons learned from its outcomes.

On February 1, 2021, Laurentian University of Sudbury (better known as Laurentian) commenced restructuring proceedings under the Companies’ Creditors Arrangement Act (CCAA). This was the first time that a public university in Canada had availed itself of Canada’s principal restructuring law, which until then was largely in the public consciousness as a result of the high-profile insolvency of private sector actors such as Nortel and Sears.

In the days that followed the proceedings, OCUFA retained Koskie Minsky LLP (KM) to advise on the impact of the CCAA proceeding on OCUFA and its members and to represent it before the CCAA Court.

At the same time, OCUFA and KM began strategizing around what steps—if any—could be taken to attempt to mitigate the impact of the CCAA filing. OCUFA and its counsel engaged other stakeholders in the CCAA proceeding, including the faculty and staff associations at Laurentian, as well as other stakeholders such as the Freedom of Information and Privacy Commissioner and Laurentian’s Board of Governors.

OCUFA staff and KM concluded that the CCAA proceeding appeared to be based on a very limited evidentiary record, and one that did not properly explain the role of the Ontario Government regarding the causes of Laurentian’s insolvency (including decreased provincial funding) and what role it would have with Laurentian’s attempts to restructure.

The CCAA proceeding appeared to be based on a very limited evidentiary record.

On February 10^th, 2021, OCUFA’s lawyers attended the CCAA Court and argued that the paucity of evidence on the role of Ontario and its role as chief funder of Laurentian required that the CCAA only be continued with Ontario’s participation in the proceeding. OCUFA’s lawyers also objected to the sealing of certain letters between Laurentian and the Ontario government. (called the “Sealed Documents”). The judge denied these requests.

OCUFA instructed its lawyers to seek leave to appeal the decision of the CCAA judge not to unseal the Sealed Documents. KM filed this motion in cooperation with the Laurentian University Faculty Association and CUPE. The Court of Appeal denied this motion on March 31^st, 2021. The Sealed Documents would not be released until late 2022.

Laurentian used the CCAA proceeding to fundamentally restructure the university in a host of ways. Collective agreements were renegotiated with both faculty and staff. Tenured faculty were fired with no severance pay. The Laurentian Pension Plan was restructured. Entire programs of study were eliminated—76 in total—including math, music, and philosophy. Longstanding affiliations with federated colleges were terminated.

Laurentian used the CCAA proceeding to fundamentally restructure the university in a host of ways.

On top of all this, as of September 2022, Laurentian had paid more than $30 million for the services of Bay Street financial advisors and lawyers who had orchestrated the use of the CCAA.

In November of 2022, a Special Report on Laurentian University was released by the Office of the Auditor General of Ontario. Although the Auditor General was not asked to reach a conclusion about the appropriateness of using the CCAA for public entities, she concluded that: “There is a strong argument that CCAA is an inappropriate, and perhaps damaging, remedy for public entities.” The Auditor General specifically noted that “despite its circumstances, Laurentian did not have to file for creditor protection,” pointing out that “the University could have followed the broader public sector precedent by making comprehensive and clear efforts to seek financial assistance from the Ministry, as the North Bay-based Nipissing University had done in 2014.”

The Auditor General found that Laurentian failed because of its mismanagement and poor governance.

The Auditor General found that Laurentian failed because of its mismanagement and poor governance. It did not fail because of a change in demand for its educational services, or because changing technology undermined the market for its services, or because of rising input costs or loss of market share—all reasons that commercial enterprises can and do fail.

The Auditor General also noted that Laurentian attempted to place blame on its employees for the University’s descent into crisis, and it was this narrative—that it was the University’s employees rather than its administrators and governors who were responsible for Laurentian’s crisis—that Laurentian placed before the Court and the supervising CCAA Judge.

The Auditor General commented on Laurentian’s conduct as follows:

“Throughout its CCAA process, Laurentian’s leadership has publicly maintained that high-paid faculty employees were a principal cause of the University’s decline. In 2021, University executives called the faculty collective agreement “above market in several aspects” after previously citing “excessive faculty costs” as a contributing factor in the school’s insolvency.

Contrary to Laurentian administration’s public messaging, our review found that faculty salaries were lower than those of comparable universities and that, collectively, its academic programs had positively contributed to the University, helping to pay the growing costs of debt, senior administration and special advisors.”

In considering why Laurentian decided to file under the CCAA rather than pursue alternative options, the Auditor General specifically cited the influence of Laurentian’s external professional advisors and consultants, who advocated in favour of a CCAA filing as early as mid-2019. The insolvency lawyers advising Laurentian were described by Laurentian’s Board as “giddy to try something new.”

Faced with the immense human tragedy of the Laurentian crisis—including job losses, learning interruptions, and wider economic impact in Sudbury—multiple actors in the sector, including OCUFA, began advocating for the removal of the CCAA as an option for university administrators who are faced with financial challenges.

Public institutions, such as universities, have a public purpose. They are not commercial enterprises that produce goods or services for commercial use.

There are many reasons why OCUFA believed that the CCAA and other insolvency legislation was (and remains) wholly inappropriate in the University sector. Perhaps most importantly, public institutions, such as universities, have a public purpose. They are not commercial enterprises that produce goods or services for commercial use, and they are not profit-generating entities. Rather, they are created by governments or government agencies to fulfill public needs. For this reason, public entities such as universities cannot be managed solely and exclusively to match revenues and expenses and ensure sustainable debt loads—they must be managed, as well, to fulfill the public purpose for which they were created, and upon which society depends.

Insolvency proceedings, on the other hand, have a very narrow and specific purpose. As Virginia Torrie explains in the book, Reinventing Bankruptcy Law: A History of the Companies’ Creditors Arrangements Act, the CCAA in particular was introduced for the benefit of large, secured creditors in 1933, during the Great Depression. Other interests may be represented in a CCAA process, but they occupy a strictly subordinate position. The purpose of restructuring is to repair the distressed entity’s income statement and balance sheet to maximize the chance that the debtor can repay its creditors from future revenues. Restructuring proceedings have no other purpose. The Courts that supervise them are ill-equipped to supervise the performance of a public purpose and the accounting firms that are typically appointed as monitors in a CCAA proceeding similarly have no such expertise.

Restructuring proceedings are typically conducted in “real time,” meaning that they are highly time-pressured and do not engage in public policy deliberation or community consultations. Insolvency proceedings are emergency interventions focused on financial considerations. In such a situation, there is no consideration of the public interest despite the obvious fact that this should be the central consideration in the restructuring of a public entity.

Similarly, a liquidation is antithetical to the public purpose for which the distressed public entity was created. If the distressed entity is to be discontinued, then the decision to do so should be made by publicly accountable persons in the same way as the decision to create the entity in the first instance.

The decision to liquidate a university with a public purpose should not be in the hands of an entity’s creditors. The creditors’ interests are simply to be repaid without regard for the public purpose of the university, which serves myriad purposes, including providing education to students, and a steady flow of capable and skilled workers to both the communities that those institutions are situated in as well as the rest of the country. If that public interest is to be protected, the future of a public university cannot rest solely in the hands of its creditors. Further, the independent oversight that is supposed to be provided by monitors, trustees, and other insolvency professionals will have little utility in a university sector that such actors have little to no experience in.

The Laurentian CCAA process well illustrates how public interests are ignored in insolvency proceedings.

The Laurentian CCAA process well illustrates how public interests are ignored in insolvency proceedings. Laurentian University’s programs, courses, and professors were terminated without regard to their academic contribution to the University, nor with any regard to the community that the University serves. Rather, a simplistic comparison between revenues and costs was used to justify the termination of programs such as physics, geography, political science, math and philosophy.

While Laurentian University was created and mandated to offer postsecondary educational opportunities to Ontario’s francophone, northern, and Indigenous communities, it was precisely these programs that bore the brunt of the cuts during the CCAA process, thereby compromising the public purpose of the University.

Fortunately, the CCAA proceedings of Laurentian should be both the first and last insolvency in the university sector. In 2021, the Federal Liberal platform included a promise to “Protect public post-secondary educational institutions, such as Laurentian University, from being subject to corporate restructuring.”

Bills that would have done the same thing were also introduced by Timmins—James Bay Member of Parliament Charlie Angus and Senator Lucie Moncion.

Although the Federal Liberals included the exemption from insolvency laws in their platform, that was far from the end of the story. On December 16, 2021, the Minister of Innovation, Science and Industry François-Philippe Champagne was mandated by Prime Minister to “[e]ngage with provinces and seek feedback from universities, colleges, experts, lenders and other post-secondary education stakeholders to explore ways to better protect the public interest functions of public post-secondary educational institutions in insolvency and restructuring situations.”

The CCAA proceedings of Laurentian should be both the first and last insolvency in the university sector.

This mandate resulted in consultations being scheduled between the Ministry and various stakeholders. In the leadup to those discussions, the Ministry proposed a range of different options for stakeholders to consider. First, the Federal Government could replace restructuring under the CCAA and Bankruptcy and Insolvency Act (BIA) with an alternative mechanism for post-secondary institutions. Second, it could establish special rules in the CCAA and the BIA for restructuring in the post-secondary sector. Finally, the Ministry could simply remove post-secondary institutions from the ambit of federal insolvency legislation and leave issues of financial sustainability up to the provinces.

For numerous reasons, OCUFA strongly favoured the third approach. OCUFA submitted a brief to the Ministry on this basis. It noted that the idea of creating a completely separate federal insolvency regime, as exists for banks, insurance companies and railways, would not solve the fundamental issue: as public institutions under provincial authority, postsecondary institutions must be overseen by public authorities who are fully cognizant of the public interest and accountable to their electorates. Universities should not be restructured under the supervision of Judges and accounting firms with no experience or expertise in higher education and no democratic accountability. As well, the future of such institutions cannot fall to be determined exclusively on the basis of market-based factors, which are the factors that drive BIA and CCAA proceedings.

OCUFA’s arguments on this issue were ultimately accepted, and on June 20, 2024, Bill C-59 was given Royal Assent. The Bill, which also implements various aspects of the 2024 budget, simply amends the definition of “Corporation” in the CCAA and BIA, such that any “prescribed post-secondary educational institutions” are not covered by that legislation. In this context, “prescribed” means set out in Regulations, and those Regulations have not yet come into force.

OCUFA and its lawyers will continue to monitor this issue as it develops, to ensure that the Regulations effectively capture all public universities in Canada. The crisis at Laurentian University was unprecedented and tragic—and it should never happen again.

James Harnum is a lawyer in the Pension and Benefits Group of Koskie Minsky LLP. James and his partner Murray Gold represented OCUFA in the CCAA Proceedings of Laurentian.

OCUFA, Laurentian and the First (and Last) CCAA Proceeding in the University Sector

Tags: budget, ideology, Indigenous, jurisdiction, participation

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