Applicants who seek ex parte relief under the Companies’ Creditors Arrangement Act (CCAA) have an obligation to make full and fair disclosure of all material facts to the court. In the case of Re CanaSea PetroGas Group Holdings Limited , in which the debtor group of companies sought and obtained ex parte relief under the CCAA, the court took the extraordinary step of subsequently terminating a previously entered initial order and declaring the order void ab initio after learning additional facts that were not disclosed in the initial application.

FACTS

On September 19, 2014, CanaSea PetroGas Holdings Limited (a Canadian holding company) and its subsidiaries (collectively, the Applicants) filed for protection from creditors under the CCAA on an ex parte basis. Two of the Applicants were incorporated in Singapore and had issued the vast majority of the Applicants’ indebtedness. Another Applicant (CPII) was incorporated in Canada, while the operating company (COGL), which owned the Applicants’ valuable petroleum and natural gas licences, was incorporated in Saskatchewan (CPII and COGL, collectively, the Canadian Subsidiaries).

At the ex parte hearing in the Ontario Superior Court of Justice (Commercial List), the Applicants convinced the judge (CCAA Judge) that they were eligible for relief under the CCAA because (1) each of the Applicants had liabilities in excess of C$5 million and was clearly insolvent; (2) each of the Applicants was unable to meet its obligations as they generally became due; and (3) the Applicants’ finances were inextricably intertwined through intercompany advances. The CCAA Judge granted an initial order under the CCAA (Initial Order).

Subsequently, the two major creditors (Noteholders) of CanaSea Oil and Gas Group Pte. Ltd. (COGG), one of the Singapore-incorporated Applicants, brought a joint motion to remove COGG from the CCAA proceedings on the grounds that: (1) COGG did not have any assets in Canada; (2) COGG did not do any business in Canada; and (3) the Applicants’ financial records disclosed in the initial application record were woefully deficient. The CCAA Judge found, based on the application materials and a cross-examination of the Applicants’ founder and director (Affiant), that (1) the Applicants had produced no evidence (apart from the conclusory assertions of the Affiant) that the Canadian Subsidiaries were insolvent and (2) there was no evidence of any intercompany debt obligations that made the Canadian Subsidiaries liable to COGG for its debt to the Noteholders. The CCAA Judge noted that exhibits to the initial affidavit referred to as “financial statements” were plainly not financial statements at all and were insufficient to demonstrate the insolvency of the Canadian Subsidiaries.

CCAA JUDGE DECLARES CCAA PROCEEDINGS ‘VOID AB INITIO'

The CCAA Judge held that the Applicants did not fulfil “their high obligations of candor and disclosure on an ex parte application” because if the CCAA Judge had been made aware of certain facts and deficient financial statements, he would not have issued the Initial Order in the first place. Given that no evidence was adduced establishing the Canadian Subsidiaries’ insolvency and that the “real debtors” in the proceeding were Singapore companies with very little connection to Canada, the CCAA Judge terminated the Initial Order and declared it void ab initio.

COURT OF APPEAL DENIES LEAVE TO APPEAL

The Applicants sought leave to appeal the CCAA Judge’s decision to a single judge of the Ontario Court of Appeal (Appeal Judge) in an oral hearing, even though the usual practice is for a motion for leave to appeal an order made under the CCAA to be heard in writing by a panel of the Court of Appeal, as prescribed by Rule 61.03.1 of the Rules of Civil Procedure.

The Applicants relied upon section 13 of the CCAA, which provides that “any person dissatisfied with an order made under the CCAA may appeal from the order on obtaining leave of the judge appealed from or of the court or a judge of the court to which the appeal lies . . .” (emphasis added). Citing the one Ontario case on point, the Appeal Judge held that it is “clear” from the wording of section 13 that a motion for leave to appeal in a CCAA proceeding may either be heard by a single judge of the Court of Appeal (i.e., orally in motions court) or by the Court of Appeal (i.e., a panel in writing).

After determining that he had jurisdiction to hear a motion for leave to appeal, however, the Appeal Judge refused to grant leave. The Appeal Judge reiterated the established principle that discretionary decisions of CCAA judges—including whether to grant (or terminate) an initial order—are entitled to deference. In this case, it was for the CCAA Judge to assess the evidence as to the nature of the Applicants’ debts, the nature of the financial relationship between the Applicants, and the degree of connection between the alleged insolvency and Canada as the appropriate jurisdiction. The Appeal Judge held that there was “ample evidence” to support the CCAA Judge’s findings and that the Appeal Judge was “far from persuaded” that the CCAA Judge made any error in principle or misapprehended the evidence.

IMPLICATIONS

There are two critical implications from this decision, one procedural and one substantive:

First, despite the usual process and the Rules of Civil Procedure, the Court of Appeal has clearly stated that the appellant/moving party has the procedural option of bringing a motion for leave to appeal a CCAA decision orally in front of a single judge of the Court of Appeal or in writing to a panel of three judges. An appellant will have to analyze the best strategy for obtaining leave.

Second, and perhaps obvious, all applications for ex parte insolvency relief require the utmost candour and full disclosure. Prior to requesting ex parte relief, applicants must ensure that all relevant financial information is complete, accurate and disclosed to the court in a fair and open manner, including any potential deficiencies. Otherwise, a CCAA applicant risks having stakeholders come back to the court with evidence to show that the applicant did not meet its disclosure obligation, which could lead to the court subsequently terminating an entered order or declaring it void ab initio.