Implied duty of good faith to disclose impending insolvency?

Dematic Limited c. Atallah Group Inc., 2025 QCCA 1649
Does a debtor have an obligation to disclose its impending insolvency to a contractual counterparty?

Summary: The Quebec Court of Appeal granted leave to appeal a supervising judge’s order homologating a disputed settlement reached by email shortly before the Atallah Group (trading as SSENSE) entered CCAA proceedings. The application for leave to appeal was brought by Dematic, the settlement counterparty, who argued that the chambers judge erred in law by failing to consider that the debtor had an implied contractual duty to disclose its insolvency. The Court granted leave to appeal, holding that the order was “made under” the CCAA because it was issued in the context of an active restructuring and because CCAA considerations informed the judge’s exercise of discretion, particularly given the settlement’s potential impact on the debtor’s ability to propose a viable plan and manage ongoing services during the restructuring. While the chambers judge found a binding agreement and rejected Dematic’s claim that its consent was vitiated by fraudulent concealment of insolvency, the Court of Appeal concluded that Dematic met the stringent leave criteria, emphasizing that whether a debtor has an implied duty of good faith to disclose impending insolvency, especially where a contract includes insolvency termination rights, raises a serious issue for insolvency practice.

Atallah Group Inc. (“AGI”), doing business under the name SSENSE, runs an online retail platform specializing in luxury fashion and accessories. It is part of the Atallah Group of companies. AGI operates a “fulfillment centre” at which it completes and ships client orders. In 2020, AGI entered into an agreement with Dematic Limited (“Dematic”), an engineering company specializing in supply chain management, for the design, sale and implementation of an automated material handling system for the fulfilment centre (the “Master Agreement”).

A dispute arose between the parties, litigation was threatened, and settlement discussions took place. In that context, AGI took the position that by an exchange of emails on August 26 and 27, 2025, a settlement was reached that provided, among other things, for Dematic to make an immediate $10 million payment and to waive fees for certain of its services through July 31, 2026. Several hours after that exchange, an application was filed under the Companies’ Creditors Arrangement Act (the “CCAA”) by the creditors of the Atallah Group.

On September 12, 2025, the judge granted an initial order recognizing that six companies forming the Atallah Group, including AGI, were insolvent and met the statutory criteria for the issuance of an order under the CCAA. On September 29, 2025, AGI brought an application for homologation of the transaction, which was subsequently modified to ask that execution of the transaction be ordered as well. Dematic contested the application, arguing that no transaction was reached and, in the alternative, that its consent to any such agreement had been vitiated by AGI’s fraudulent concealment of its insolvency and bad faith.

The judge granted the application. In his view, the exchange of emails between the representatives of the parties constituted a meeting of the minds on the essential terms of a transaction. He further determined that Dematic’s consent had not been vitiated. Finally, he held that homologation was appropriate relief under the circumstances, but that neither execution of the transaction—which would have required, among other things, the immediate payment of $10 million—nor provisional execution of the judgment was necessary. Dematic sought leave to appeal the judgment.

Judgments that are determined to have been “made under” the CCAA may be appealed with leave of a judge of the Court in accordance with s. 13 of the CCAA. Dematic submitted that the judgment was not made under the CCAA and that permission to appeal was, accordingly, not required. In the alternative, Dematic submitted that it met the criteria for leave to appeal to be granted. AGI argued that Dematic did not meet the requirements for leave to be granted.

When determining whether an order requires leave to appeal under s. 13 of the CCAA, an appellate court should ascertain whether the order was made in a CCAA proceeding in which the judge was exercising his or her discretion in furtherance of the purposes of the CCAA by supervising an attempt to reorganize the financial affairs of the debtor company, either by way of plan of arrangement or compromise, sale, or liquidation. If the order resulted from such an exercise of judicial decision-making, then it is an order “made under” the CCAA for purposes of s. 13. Section 13 of the CCAA would apply if “CCAA considerations informed the decision of and the exercise of discretion by the chambers judge” or “if a claim is being prosecuted by virtue of or as a result of the CCAA”.

Here, the Court found that the judgment was rendered in the context of an active CCAA proceeding by the supervising judge. While the judge did not rely on the provisions of the CCAA except in considering AGI’s request for immediate execution of the transaction, which he denied, the judgment clearly affected the restructuring of the Atallah Group in at least two ways.  First, if AGI is entitled to the initial $10 million payment, it will no doubt have an impact on its ability to formulate a viable plan of arrangement. Second, the settlement deals with issues relating to services to be rendered by Dematic and payment thereof, which are matters clearly within the purview of the judge’s supervision. Furthermore, the judge’s reasons for refusing to order provisional execution notwithstanding appeal demonstrate that, at least in this respect, he was supervising an attempt to reorganize the financial affairs of the Atallah Group.  

In this case, the question of whether or not to order provisional execution notwithstanding appeal involved considerations that were closely tied to the ability to restructure. The judge ultimately refused the request because he concluded that the Atallah’s Group ability to secure interim financing did not hinge on an immediate $10 million injection. However, CCAA considerations, including the ability to restructure, clearly informed his decision. Accordingly, the Court of Appeal held that the judgment was made under the CCAA within the meaning of s. 13.

Permission to appeal a judgment rendered under the CCAA is granted only sparingly. The applicant must demonstrate that each of the following criteria are met: 

1. Whether the point on appeal is of significance to the practice;

2. Whether the point is of significance to the action or proceedings;

3. Whether the appeal is prima facie meritorious or frivolous;

4. Whether the appeal will unduly hinder the progress of the action or proceedings.

Dematic argued that the judge erred in law by failing to consider that AGI had an implied contractual duty to disclose its insolvency on the basis of a clause contained in the Master Agreement that gave each party the right to terminate in the event that the other became insolvent. The Court held that the impact of a contractual provision regarding insolvency on a party’s duty of good faith to its co-contracting party and on the notion of fraudulent concealment could have importance to the practice of insolvency.

Without expressing any view on Dematic’s chances of success on appeal, the Court was also satisfied that its arguments concerning fraudulent concealment satisfied the third criterion. The questions surrounding this issue involved a point of principle which can be seriously argued on the merits. Finally, the judge’s reasons for refusing to grant provisional execution notwithstanding appeal satisfied the Court that granting permission would not unduly hinder progress of the CCAA. The judge considered that the Atallah Group’s ability to secure interim financing and thus pursue its effort to restructure was not undermined by an appeal of the judgment.  This determination by the judge supervising the CCAA proceedings merited deference.

The Court granted leave to appeal.

Judge: The Honourable Peter Kalichman, J.A.

Professionals involved:

• Laurent Nahmiash and Lydia Amazouz of INF for Dematic Limited

• Danny Vu, Charles Ouimet and Anna Arapovic of Stikeman Elliott for Atallah Group Inc. (SSENSE)

• Brandon Farber of Fasken Martineau DuMoulin for Ernst & Young Inc. as monitor