The restructuring of Sanjel Corporation and its affiliates (previously discussed here) continues to provide interesting developments on the application and interpretation of the Companies’ Creditors Arrangement Act. In a recent decision in the case, the Court of Queen’s Bench of Alberta interpreted an initial order so as to limit the super-priority of a financial advisor’s court-ordered charge to the priority amount specified in the order. In doing so, the court rejected a unique argument made by the financial advisor that attempted to classify the amount claimed beyond the court-ordered charge as an obligation that had to be paid due to certain other provisions of the order.
In Sanjel, the debtors retained financial advisors prior to filing and, at the initial application, sought and obtained the approval of pre-filing engagement letters between the debtors and the respective advisors. The financial advisors also obtained the benefit of priming charges for all amounts owing to them up to the collective amount of $6.7 million. As it turned out, the $6.7 million charge did not provide enough coverage for the success fee due to [one of] the financial advisors. That advisor took the position that, notwithstanding the cap on its specific charge, it was entitled to full payment of the amounts claimed under the engagement letter because the court had directed the debtors to “…comply with all of [their] obligations thereunder.”
In a prior Alberta case, a court-appointed monitor was successful in its application to upsize its administrative priority charge at the conclusion of the piece and on notice to all affected parties so as to recover the entirety of its fees. In this particular instance, no such application was brought and the court did not accept the creative argument advanced that would have required payment in full. In holding that the financial advisor would only be paid up to the amount of the charge, Madam Justice Romaine relied upon the well-established principle that a CCAA court is not entitled to disregard the general statutory scheme of priorities without good reason. Creditors should know whether they are entitled to the benefit of a charge or other form of priority at the outset of the proceedings and, for that reason, a CCAA order that creates a priming charge in favour of a creditor over other creditors must have clearly defined terms and scope. In this regard, it is important for any creditor who has an expectation of maintaining priority over others in CCAA proceedings to ensure that it is sufficiently secured or that it is being paid from cash flow over the course of the proceedings. A failure to do so can, as in this case, yield the unfortunate result of the outstanding balance owing to the creditor being subordinate to secured claims generally.