Are Profit-Sharing Claims Equity Claims?

The Court of Appeal for Ontario recently affirmed a decision of the Ontario Superior Court of Justice (Commercial List), which found that the profit-sharing claim of a former employee of an insolvent company in proposal proceedings was not an equity claim within the meaning of the Bankruptcy and Insolvency Act (the “BIA”). At first glance, the decision would appear to constitute appellate confirmation that profit-sharing claims are debt obligations or liabilities of debtors, rather than ownership interests. The narrow guidance handed down from the Court of Appeal on this issue, however, warrants a closer look.

In YG Limited Partnership and YSL Residences Inc. (Re), 2025 ONCA 591, YSL Residences Inc. (“YSL”), along with its limited partner, YG Limited Partnership (“YG”), owned a development property on which they intended to develop an 85-storey retail and condominium complex (the “YSL Project”). Following financial difficulties, YSL and YG filed Notices of Intention to Make a Proposal under the BIA (the “Proposal Proceedings”).

The Respondent was a long-term employee of the Cresford Group, which owned and controlled several companies, including YSL. Her contract of employment included an oral agreement that she would be paid 20% of the profits earned on all current and future Cresford Group projects, including the YSL Project (the “Profit-Sharing Agreement”).

Following the Respondent’s dismissal in December 2019, the Respondent (a) commenced a claim in January 2020 against YSL for $1,000,000 in damages for constructive dismissal and $18,000,000 in damages for a breach of the Profit-Sharing Agreement, and (b) filed a proof of claim for two unsecured claims in the 2021 NOI proceedings of YSL in connection with the claims raised in her lawsuit against YSL.

The court in the Proposal Proceedings ultimately approved a proposal by YSL and YG, pursuant to which $30.9 million would be paid to the proposal trustee of YSL and YG (the “Trustee”) to be distributed to unsecured creditors with proven claims. Any amounts left over after the distribution to unsecured creditors would then be distributed to equity stakeholders. If the Respondent’s profit-sharing claim were proved and paid to her as an unsecured creditor, the equity stakeholders stood to receive nothing.

The Trustee and the Respondent agreed to submit her claims to arbitration, and the arbitrator ultimately found that the Profit-Sharing Agreement was part of the Respondent’s employment contract, and the Respondent was constructively dismissed from her employment. The Trustee subsequently denied the Respondent’s profit-sharing claim on the basis that it was, in substance, an equity claim, and, to the extent it was based upon projected future profitability, it was a claim that was too contingent, remote and speculative to be quantified.

The Respondent appealed the Trustee’s disallowance to the Commercial List, and the appeal judge found that the Respondent’s claim under the Profit-Sharing Agreement was a valid claim for unliquidated damages for breach of contract, not an equity claim, and was to be allowed in an amount to be subsequently determined. The Trustee and the equity stakeholders of the Cresford Group appealed from the decision.

In dismissing the Appellants’ appeal, the Court of Appeal provided important guidance on the confines and treatment of equity claims in insolvency proceedings.

Definition of ‘Equity Claim’ in BIA Is Exhaustive

The Trustee disallowed the Respondent’s claim on the basis that it was not a debt obligation or liability of YSL but rather an equity claim. An equity claim is not a debt or liability under the BIA and is, therefore, not a provable claim.

Pursuant to amendments to the BIA and the Companies’ Creditors Arrangement Act (“CCAA”) enacted in 2009, section 2 of the BIA defines an “equity claim” as “a claim that is in respect of an equity interest […]” and an “equity interest” as “[…] a share in the corporation – or a warrant or option or another right to acquire a share in the corporation […].”

The Trustee submitted that the scope of equity claims that do not qualify as debts or liabilities was not constrained by the definition of “equity claim” or “equity interest” in the BIA. As such, the appeal judge ought to have applied a contextual approach instead of a narrow interpretation of these terms in order to find that the Respondent’s profit-sharing claim was, in substance, an equity claim.

However, the Court of Appeal confirmed that the 2009 amendments to the BIA and CCAA provided exhaustive definitions for both equity claims and equity interests, which left no room to read in “in substance” equity claims. The 2009 amendments were introduced to remove the uncertainty associated with the common law approach, which required courts to determine the nature of a claim based on the intention of the parties and the surrounding circumstances. As the law stands, an equity claim arises from nothing other than an ownership interest in a corporation.

Conversion of Profit-Sharing Claims Into Unliquidated Damages Claims

The Court of Appeal confirmed that the Respondents’ claim was an unliquidated claim for damages arising from a breach of her employment contract, which included the oral Profit-Sharing Agreement and under which she was entitled to a share of the profits of the Cresford Group. Her claim was not a contingent claim and neither a remote nor speculative one at that.

The claim did not depend on a future event, namely the completion of the YSL Project and the subsequent distribution of profits to the limited partners and then to the Cresford Group, which did not occur. Rather, the claim arose from the Respondent accepting the repudiation of the Profit-Sharing Agreement (which formed part of her employment agreement) and suing for damages in January 2020. Until there was a breach, the Profit-Sharing Agreement would have remained in place, such that any claim for payment under it would have been considered contingent upon profits actually being earned on the YSL Project. Once the Respondent accepted the repudiation of the Profit-Sharing Agreement, her future right to receive actual profits, if and when earned, was converted into a current right to receive damages for breach of contract, which right arose on the date of the breach.

The damages claim, then, was not for the actual profits payable under the Profit-Sharing Agreement but rather for the lost opportunity to earn profits under the Profit-Sharing Agreement. Accordingly, the claim would only be unrecoverable if the loss at issue was assessed to be too remote.

Treatment of Stand-Alone Profit-Sharing Claims

Central to the appeal judge’s decision to declare the profit-sharing claim not to be an equity claim, which was subsequently affirmed by the Court of Appeal, were the arbitrator’s findings that the oral Profit-Sharing Agreement existed; it was a key element of the Respondent’s employment agreement; and that the Respondent was wrongfully dismissed in December 2019, but the Profit-Sharing Agreement did not depend on her continuing to be employed by Cresford Group. That the profit-sharing claim was so clearly tethered to the Respondent’s overall compensation under her employment agreement appeared to be a decisive factor in the appeal judge concluding that the claim had no connection to equity or ownership. This begs the question: outside of the employment law context, would a claim arising from a stand-alone profit-sharing agreement still be treated as a non-equity claim?

In her decision, the appeal judge did not foreclose on the possibility that a stand-alone profit-sharing claim could be a debt or liability. Her Honour noted that while the arbitrator made no express finding that the Profit-Sharing Agreement was breached, it “follow[ed] from [the arbitrator’s other findings] that the Profit Sharing Agreement, an integral part of the [Respondent’s] employment contract was also repudiated when she was constructively dismissed.”^[1] She further noted that it might have been open to the Respondent not to accept the repudiation of the Profit-Sharing Agreement, and let it continue, even though she was no longer employed by YSL, and wait to be paid in the normal course, in which case “the Profit Share Claim might still have been a provable claim.”^[2]

The Court of Appeal did not opine on this nuance, focusing instead on the fact that the Respondent’s claim was not based on an ownership interest (she did not own shares in any of the Cresford Group companies, nor any units in the limited partnership) but rather on a term of her employment, under which she was entitled to a share of the profits. It remains to be seen, then, whether a profit-share that is clearly independent of any employment relationship would similarly be upheld as a non-equity claim.

The Financial Services Group at Aird & Berlis LLP will continue to monitor developments related to profit-sharing claims and the treatment of equity claims under the BIA. Please reach out to the author or a member of the group for more information.