Ontario Court Confirms that an Outsourcing Transaction Was "In the Ordinary Course of Business"

In one of the many interim judgments in the Ontario Superior Court (Commercial List) relating to the insolvency proceedings affecting Stelco Inc (Stelco), the Court has confirmed what many observers suspected: entering into a major IT outsourcing transaction, in and of itself, does not constitute an activity of a corporation that is out of the ordinary course of its business. During the long-running saga of Stelco Inc's insolvency proceedings it became relevant, for purposes of ranking creditors, to know whether Stelco's assumption of obligations under a long-term IT outsourcing transaction entered into with EDS Canada Inc prior to the insolvency was done in connection with the acquisition of any services "excluding indebtedness incurred in relation to any such acquisitions made in the ordinary course of business". The outsourcing transaction was governed by the terms of an agreement referred to as a Master Information Technologies Services Agreement (MITSA). Most of the existing case law on this point relates to situations involving the disposition of assets rather than their acquisition, so the Court was not faced with any binding precedent. Instead, Justice Herman Siegel, in analyzing the situation, highlighted these as important factors: (i) the nature of Stelco's business and the lack of significant change in scale and nature of its manufacturing and distribution activities brought about by the transaction, other than an increase in operating efficiencies; and (ii) despite the large scale of the project, the lack of financial materiality in relation to Stelco's projected annual financial performance. Given that Justice Siegel indicated an obligation to interpret the concept of a "non-ordinary course acquisition" narrowly, he had little difficulty in these circumstances in concluding that the MITSA was indeed within the ordinary course of business of Stelco. For the full reason for judgment (In Re Stelco Inc and Other Applicants, File No. 4-CL-5306), visit: http://www.canlii.org/on/cas/onsc/2006/2006onsc15871.html (The sections of the judgment relating directly to the question of the MITSA are found in paragraphs 150 to 168). Summary by: The Editor