Could lenders be subject to the obligations under the Fighting Against Forced Labour and Child Labour in Supply Chains Act?

4 minute read
24 July 2023

The Fighting Against Forced Labour and Child Labour in Supply Chains Act (the "Act") comes into force on Jan. 1, 2024, and can generally be described as an act aimed at preventing unacceptable labour practices from existing in supply lines of Canadian companies. Entities subject to the Act are required to report on and disclose the steps taken to avoid unacceptable labour practices in their supply chain. An inspection regime is applicable as well. In certain circumstances and based on certain interpretations of "control," an argument exists that a lender could be enveloped in its borrower's obligations under the Act. Operative provisions of this Act apply "to any entity:

(a) producing, selling or distributing goods in Canada or elsewhere;

(b) importing into Canada goods produced outside Canada; or

(c) controlling an entity [emphasis added] engaged in any activity described in paragraph (a) or (b)."

Control is defined in section 10 of the Act as follows:

"subject to the regulations, an entity is controlled by another entity if it is directly or indirectly controlled by that other entity in any manner " [emphasis added].

No regulations to the Act exist as of yet.

No specific judicial interpretation of this definition of control has yet been issued. However, the language is consistent with wording considered by the Supreme Court of Canada this year in Deans Knight Income Corp v Canada in which the use of the phrase "controlled, directly or indirectly in any manner whatever" specifically refers to de facto control, which exists when a party has direct or indirect influence over the corporation which can result in control in fact. This is potentially more expansive than a de jure control test.

The de jure control test as explained in Supreme Court of Canada in Duha Printers (Western) Ltd. v R, 1998, focuses only on locating a controlling party that enjoys the ability to elect the majority of the board of directors.

De facto control is a statutory test that was introduced in the Income Tax Act (Canada) in 1988 with the addition of subsection 256(5.1) which stipulates:

"where the expression "controlled, directly or indirectly in any manner whatever," is used, a corporation shall be considered to be so controlled by another corporation, person or group of persons (in this subsection referred to as the "controller") at any time where, at that time, the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation" – de facto control.

Obvious similarities exist between this language and the language in the Act.

The SCC in Duha Printers (Western) Ltd. v R, 1998, took a purposive approach to interpreting the word "control." Interpreted literally, "control" could mean any type of influence over a corporation.

What does this mean for lenders?

A potential concern for lenders if a de facto control test is applied under the Act is that lenders who have rights beyond simple debtor/creditor rights, for example via equity holdings, board of directors seats or even significant control via covenants (which could be enhanced in a forbearance or distressed loan scenario) is the assertion that these elements meet the de facto control test. This could lead the lender to be subject to the regime contained in the Act on the basis that they control an entity producing, selling or distributing or importing goods. Pending further guidance from regulations or judicial interpretation, lenders, funds and other investors should be alert to this possibility, including via activist action.

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