Laurentian restructuring prompts feds to exclude post-secondary institutions from CCAA proceedings

Amongst the group of promises listed in the recent 2023 Fall Economic Statement (FES), the federal government included one measure that originated in 2021.

That was the year Sudbury, Ont.-based Laurentian University was declared insolvent, leading it to undertake a court-supervised restructuring under the Companies’ Creditors Arrangement Act (CCAA). As part of the process, the institution cut 69 programs (including French-language ones) and eliminated staff.

Since then, as the FES puts it, “Canadians have raised concerns about the appropriate protection of important programs and services in the event of a publicly funded post-secondary educational institution becoming insolvent.” Ottawa has decided to change how these matters are dealt with under the law to prevent a similar situation.

“The 2023 Fall Economic Statement proposes that the government will amend federal insolvency laws, namely the Companies’ Creditors Arrangement Act and the Bankruptcy and Insolvency Act, to exclude public post-secondary educational institutions from becoming the subject of proceedings under either Act. These amendments will reduce the risk of negative consequences in possible corporate restructuring at public post-secondary educational institutions, such as reduced programming.”

It is a decision that has found both supporters and detractors in the legal community, but no matter what side of that line they fall on, lawyers familiar with the Laurentian situation tend to agree that universities and colleges – as well as other public institutions – need to be treated differently from regular businesses – and that more oversight is required to prevent another postsecondary school from repeating Laurentian’s mistakes.

Eugene Meehan, a partner at Supreme Advocacy, got a close look at how CCAA-based restructuring affected people and organizations included in Laurentian’s ecosystem when he represented Thorneloe University during the Laurentian restructuring. As an affiliated university, Thorneloe, which focused on theology, philosophy and the humanities, was drawn into the restructuring process, even though it wasn’t insolvent, explains Meehan.

“Whilst the [CCAA] consequences were significant for Laurentian, they were particularly devastating for the affiliated universities, as they were the unintended collateral damage,” he says. What he called the “diminution” of the school also caused students to be unable to finish their programs and forced others to find new advisors at other universities to supervise graduate work.

“The consequences significantly altered the education of so many students, both undergraduates and graduates and also significantly affected staff, too. On the other hand, universities are not there, ultimately, for their staff. They’re there for the benefit of students. That’s where the focus should lie.”

Laurentian dissolved the federation agreement two months after it began CCAA court proceedings. As a result, “All of the departments and programs at Thorneloe, along with our full- and part-time teaching commitments, were over,” as the Thorneloe website explains. The university, however, has continued to operate its school of theology.

Meehan calls the CCAA “an extremely heavy sledgehammer” that is not the appropriate tool for every situation and agrees with the government’s decision to prevent the CCAA from being applied to post-secondary institutions.

Instead, he’d like to see an oversight body put in place with “realistic” powers that could be better in tune with how microorganisms like colleges and universities operate. He believes such a body could put the needs of students, which include issues beyond simply education and encompass housing in residences and medical, student and religious services, at the forefront of any financial restructuring. While he acknowledges that provincially based ombudspersons and auditors general have oversight abilities and responsibilities for postsecondary institutions, a new body could be granted more authority to ensure proper governance is occurring and that schools are being fiscally responsible.

Although she doesn’t use the sledgehammer terminology, Cheryl Foy, president of Strategic Governance Consulting Services, does call the CCAA a “blunt instrument” when it is wielded against colleges, universities and public institutions. Where Foy and Meehan differ, however, is that Foy thinks the use of the CCAA is appropriate when the financial situation at a university or college is severe enough. Foy presented that point of view to the Senate while the Red Chamber considered the Laurentian situation's fallout.

Foy says that initially, she believed the CCAA wasn’t the right tool when universities and colleges must restructure their finances. Still, after looking into the matter, she changed her mind, mainly due to the existence of financial exigency clauses.

“In Laurentian’s case, the board wasn’t in a position to make a decision by itself, according to this financial exigency clause.” She explains that the clause in the faculty’s collective agreement was structured such that once the university admitted it was in severe financial jeopardy, it was required to refer matters to a commission – a commission where the faculty association played a significant role in the decision-making process.

“Then, there was a series of things that had to happen, including making cuts, as much as possible, outside of the faculty association’s bargaining unit. Effectively, what Laurentian concluded, given that and given its poor labour-relations environment, was that the CCAA was the way it had to go because it would lose control over the financial management situation,” Foy explains.

Her preference would be to see the CCAA reworked to be more helpful to colleges, universities, non-profits and other public-sector-facing organizations with mandates directing them to act for the greater good.

“The courts, under the CCAA, can’t legitimately consider non-financial considerations. The definition of public interest is loose and broad. And so, we’ll have to figure out how to let the courts consider these other stakeholders and these other public-interest considerations. But keep the CCAA in place in case for the worst-case scenario.”

Foy, however, would also like to see colleges and universities be more financially accountable, preventing them from even contemplating turning to the CCAA. An “early-warning system,” such as the framework proposed by the Council of Ontario Universities, is one approach she likes. Among other actions, educational institutions would commit to annually reporting five common core financial health indicators (net income/loss ratio, primary reserve ratio, interest burden ratio, viability ratio and net operating revenues ratio) and agree to be reviewed by third-party credit rating agencies.

Foy doesn’t dismiss the roles of Laurentian’s leaders or the provincial government. “This was an absolute failure of governance on the part of Laurentian. And these financial conditions [existed] for many years. In fact, the government could have intervened many years earlier because their financial reports are public and are available to the government.”

But, she notes that there are pressures on universities that are not their own doing, and it may be time for society to rethink exactly what it wants from these institutions. For schools that, for example, are located in remote areas, offer French language instruction in primarily English-speaking jurisdictions, have a focus on Indigenous studies or languages or deliver specialized programming that is deemed to have a specific value, then there should be some consideration given for the constraints they operate under (such as smaller class sizes, or the need to offer more remote teaching) that don’t lend themselves to profitability, and instead, increase costs.

“Because of government policy and lack of funding and a lack of understanding of the kinds of contributions universities make, I don’t think their social purpose and the contributions they make are being appropriately recognized,” says Foy.