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Department of Justice
Canada
Ministere de la Justice
Canada
MEMORANDUM / NOTE DE SERVICE
TO 1 DEST:
Yaprak Baltacioglu
Security dassificalion - COte de securite
Solicitor-Client Privilege
File number -- Nurnero de dossier
Date
March 28, 2012
Telephone I FAX - Telephone I Telecopleur
L.. _____ . _________________________
Deputy Minister of Transport, Infrastructure and Communities
FROM/ORIG:
Pierre Legault
Assistant Deputy Minister
Business and Regulatory Law Portfolio
Justice Canada '
SUBJECT 1 OBJET:
AIR CANADA and AVEOS
Background
When Air Canada ("AC") was privatized in 1998, obligations stemming from its
history as a Crown Corporation were imposed on it through the Air Canada Public
Participation Act ("ACPP A"). These obligations included requirements to provide
services to the public in both official languages (section 10) and to ensure that its
articles of continuance included provisions requiring AC to maintain "operational
and overhaul centres" in the City of Winnipeg, the Montreal Urban Community
and the City of Mississauga (paragraph 6 ( 1 ) ( ~ .
As part of its corporate restructuring after emergence from bankruptcy protection
in 2004, AC's in-house maintenance, repair, and overhaul (MRO) division was
spun off to become Air Canada Technical Services (ACTS). In 2007, private
equity companies purchased a majority'stake in ACTS and it was renamed Aveos
Fleet Performance Inc. (Aveos) in 2008.
A veos announced on March 19, 2012 that it filed for insolvency protection. A veos
has elected to liquidate, rather than restructure, and as a result its roughly 2,600
employees are without work.
Since this announcement, there have been public statements made alleging that AC
is no longer complying with its legal obligations under federal laws, and
suggesting the Government should commence legal proceedings against AC to
force the company to comply with its obligations.
JUS 107A (91/10) 7530-21-036-5336
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You have asked the Department of Justice (DOJ) to opine on the applicability of
the ACPPA and the Canada Business Corporation Act (CBCA) to this case.
Analysis
Paragraph 6(1)(d) of ACPPA provides that:
6.(1) The article of continuance ofthe Corporation shall contain
(d) provIsIons requmng the Corporation to maintain operational and
overhaul centres in the City of Winnipeg, the Montreal Urban Community
and the City of Mississauga.
It is important to note at the outset that ACPP A only- requires AC to include the
above-noted provisions in its articles as opposed to directly requiring AC to
maintain operational and overhaul centres in the three communities. To our
knowledge, AC's articles of continuance have at all times since 1988 provided that
"Air Canada shall maintain operational and overhaul centres for its aircraft or their
components in the City of Winnipeg, the City of Mississauga and the Montreal
Urban Community"l. In our view, there are no grounds on which to argue, based
on the language found above, that AC's articles are not in compliance with the
provisions of paragraph 6(1)( d) of ACPP A. Other than paragraph 6(1)( d), there are
no other provisions in ACPP A that are relevant to the current issue and that could
be used to support an argument that AC is no longer in compliance with its
obligation under that Act as a result of A veos ceasing its operations.
2
Given that AC appears to be in compliance with its obligations under paragraph
6(1)(d) of ACPPA, the next question is whether AC continues to comply with its
own articles as a result of A veos ceasing its operations.
Section 247 of the CBCA provides:
247. If a corporation or any director, officer, employee, agent or
mandatary, auditor, trustee, receiver, receiver-manager, sequestrator or
liquidator of a corporation does not comply with this Act, the regulations,
articles or by-laws, or a unanimous shareholder agreement, a complainant
or a creditor of the corporation may, in addition to any other right they
have, apply to a court for an order directing -any such person to comply
I The inclusion of such language in the Articles of Air Canada was confirmed as late as last year in
a decision issued by the Ontario Superior Court of Justice.
2 While paragraph 7(b) of ACPPA provides that the Corporation and its shareholders and directors
shall not make any articles or bylaws that are inconsistent with the provisions included in its articles
of continuance pursuant to subsection 6(1), we have no indication or evidence to suggest that AC,
its shareholders or directors intend to modify AC's articles in a manner inconsistent with the
provisions of paragraph 6(1)(d) of ACPPA.
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with, or restraining any such person from acting in breach of, any
provisions of this Act, the regulations, articles or by-laws, or a unanimous
shareholder agreement, and on such application the court may so order
and make any further order it thinks fit.
Section 238 ofthe CBCA defines"complainant" as:
(a) a registered holder or beneficial owner, and a former registered holder
or beneficial owner, of a security of a corporation or any of its affiliates,
(b) a director or an officer or a former director or officer of a corporation
or any of its affiliates, .
(c) the Director, or
(d) any other person who, in the discretion of a court, is a proper person to
make an application under this Part.
While there are a range of policy and operational issues at play, there are mainly
three legal issues .that lead the DOJ to advise you against making any application
against AC, including an application under section 24"7 of the CBCA (either as a
former owner of AC or upon being granted leave by the courts). It should be noted
that that the remedy available under section 247 of the CBCA is not restricted to
the Crown, and as such, other persons affected such as shareholders and creditors
could avail themselves of this remedy.
1- Difficulties in proving breach of articles
It is far from clear that AC is in breach of its articles even though A veos no longer
provides services to AC under its contracts. AC handles its own day-to-day aircraft
maintenance and repair work, and according to its website has 2,300 employees
focused on these activities. These employees work at facilities" across Canada,
including Winnipeg, Montreal, and Toronto.
One of the difficulties in establishing that AC is not in compliance with its articles
is that the language used by Parliament - particularly the word "overhaul" - is not
absolutely clear. As mentioned by our colleague Jacques Pigeon in an opinion
dated September 29,2004:
From these definitions, it appears that an "overhaul" is a process that may
be equally applicable in the context of line maintenance of aircraft and
heavy maintenance of aircraft. Certainly, in the Canadian Aviation
Regulations, the word "overhaul" is used in connection with specialized
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maintenance of aircraft but without distinction between line maintenance
and heavy maintenance.
It should be borne in mind that there is no specification in the relevant
provisions of the articles of Air Canada as to the nature and level of
activities that must be carried out in the facilities for the facilities to be
considered to be maintained in compliance with the said relevant
provisions. So long as some activities carried on in the facilities can be
properly characterized as "overhaul", then presumably the facilities would
qualify as "overhaul" centres". So arguably to the extent that there is a
certain amount of "overhaul" involved in line maintenance, an aircraft
maintenance facility could be described as an "overhaul" centre.
(. . .)
Hence, Air Canada would be free to move heavy maintenance out of Air
Canada without contravening the relevant provisions of the articles of Air
Canada.
Another difficulty in establishing that AC is not in compliance with its articles is
that the Machinists Union attempted in 2011 to obtain an injunction from the
Ontario Superior Court stopping the transfer of employees from AC to A veos.
Part of their argument was that to do so would place AC in violation of its
obligation to maintain operational and overhaul facilities in the three cities. The
court declined to issue the injunction and declaratory relief on different grounds,
but nevertheless did provide its views on whether AC was in violation of its
articles. The Court refused to accept the Union's arguments, and stated that it
found Air Canada's witness to be "knowledgeable" and his evidence to be
"compelling". In examining AC's argument that even if Aveos was no . longer
providing services to AC under its contracts, AC would still be in compliance with
its articles, the Court held:
Thus, on this evidence, Air Canada asserts that apart from what Aveos is
doing, it is in compliance with its articles by maintaining certain overhaul
functions through its line maintenance operations in Montreal, Mississauga
and Winnipeg. It asserts that even if Aveos stopped doing work under its
contracts with Air Canada, it would still be in compliance with its articles. '
There is some force to this argument ....
(emphasis added)
The Court concludes that:
The requirement in ACPPA that Air Canada was to include in its articles
an obligation to maintain operational and overhaul centres was vague, and
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no doubt purposely so. I conclude that lAMA W has not established on the
record that Air Canada has not on its own maintained operational and
overhaul centres in Montreal, Winnipeg and Mississauga.
(emphasis added)
In summary I find that Air Canada does maintain operational and overhaul
centres in those cities by maintaining overhaul operations under its
contracts with Aveos and by itself maintaining certain overhaul functions
through its line maintenance operations.
The nature and extent of AC's own maintenance activities in Montreal, Winnipeg
and Mississauga may have changed since that decision. However, given the
known facts, the ambiguity in the language used in ACPPA and AC's articles, as
well as the Court's prior decision in favour of AC with regard to its compliance
with its articles, DO] would assess the Crown's likelihood of success in any
proceedings including proceedings under section 247 of the CBCA as
low.
2- Effect of decision
Even if we were to obtain an order, including an order under s. 247, it is not at all
certain that this would result in A veos' former employees returning to work. The
order would be made against Air Canada, not A veos. AC's articles do not specify
how much of its maintenance operations must be maintained in Montreal,
Winnipeg and Mississauga. Assuming AC might financially and operationally be
capable of bringing itself back into compliance, AC may very well do that without
using A veos' former facilities and employees. AC states on it website that it has a
contingency plan if A veos is unable to provide it maintenance services, and that
"the airline is prepared to make arrangements with a number of other service
providers, located primarily in the United States and Canada, with whom AC has
longstanding relationships." On this point, it is important to note that the Ontario
Superior Court judge held that "on my reading of the legislation, and thus of the
articles of Air Canada, there is nothing to prevent AC from contracting that work
out."
In sum, it is not to conclude that an order, including an order under the
CBCA, would prove useful to resolving the issues related to A veos, even if we
were able to obtain such an order.
j
3- Government interest
The core of the problem the government seeks to address is one related to airplane
maintenance (and by extension airplane safety) and labour relations. This is not a
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problem of Air Canada's corporate governance. A court could very well have
reservations about making an order under the CBCA in relation to AC if it
concludes that the Crown's true interest lies in resolving a labour dispute regarding
a different company. Further, there is some caselaw which states that the purpose
of s. 247 is to resolve technical problems related to corporate governance. It seems
unlikely, once it understands the background facts, that a court would treat this
matter as a merely technical one under the CBCA.
In our view therefore, there are a number of legal problems related to the making
of a CBCA application or any other judicial application against Air Canada. Based
on the facts as we presently understand them, and on the previous legal challenges
brought by the Machinists Union, we would advise against bringing such
application in this case.
Finally, it is our understanding that a question was raised as to whether, instead of
seeking a judicial finding that AC is in breach of its articles, amendments to
ACPP A could be considered. No concrete proposition was advanced and,
therefore, it is impossible for DO] to provide any kind of risk assessment.
However, we need to caution that any proposition that would somehow require AC
to perform all of its maintenance and overhaul work in Canada or sustain historical
levels of maintenance and overhaul work in Canada is likely to raise trade issues.
We have been advised by the Trade Law Section that any such proposition could
run afoul of article 1106 of the North American Free Trade Agreemene and of a
Canada-US Bilateral Agreement that specifically recognizes the repair work done
to aircrafts in either territory.
As a last comment and although it was not the focus of this opinion, we understand
that with A veos ceasing its operations, it may create maintenance issues for AC.
Any such issues, should they relate to safety, would continue to be regulated by
Transport Canada through the Aeronautics Act and the Canadian Aviation
Regulations.
Me Pierre Legault
3 Article 1106: Performance Requirements
1. No Party may impose or enforce any of the following requirements, or enforce any commitment or
undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation
of an investment of an investor of a Party or of a non-Party in its territory:
(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or
to purchas'e goods or services from persons in its territory;