In a recent decision of the Ontario Superior Court of Justice, Re Smurfit-Stone Container Canada Inc., Justice Pepall examined the conflicting interests that arise where companies within a group of restructuring companies have made intercompany loans to one another, and where the board of directors mirror each other in each subsidiary.
The factual background of the group of companies is required to understand this case. The parent company Smurfit-Stone Container Enterprise Inc. (“Enterprise”), is a US Company, with two wholly owned Canadian subsidiaries: Smurfit-Stone Container Canada (“Smurfit Canada”) and Stone Container Finance Company of Canada II (“Finance II”). Smurfit Canada and Finance II have identical boards of directors.
Prior to the companies seeking protection from their creditors, Finance II raised funds in the public debt market by issuing unsecured senior notes in the amount of $200,000,000 to the noteholders, guaranteed by Enterprise. By way of an intercompany loan, Finance II then lent the proceeds of the raised funds to Smurfit Canada. The entire Smurfit-Stone group of companies sought creditor protection under the CCAA and Chapter 11 in the United States. The companies implemented a claims process, wherein Finance II did not make a claim against Smurfit Canada. The noteholders brought an application to lift the stay and have a trustee in bankruptcy appointed. The noteholders alleged that Finance II and Smurfit Canada have inherently conflicting positions in their restructurings and as a result there is a conflict of interest in having overlapping directors and officers, mutual counsel, and the same court monitor.
The Court identified two issues in this case: (1) did a conflict of interest exist that merited relief being granted, namely the appointment of a trustee in bankruptcy; and (2) is this a case where the stay should be lifted to appoint a trustee in this respect.
It was the position of the noteholders that there was an irreconcilable conflict of interest between Finance II and Smurfit Canada in the CCAA and the Chapter 11 proceedings ongoing that the interest of Finance II and its noteholders was to ensure that Finance II maximized recovery from Smurfit Canada and from Enterprise. Further it was their position that the overlapping directors and officers among Finance II, Smurfit and Enterprise, mutual counsel, and the same monitor, could not properly maintain the conflicting fiduciary duties throughout the restructuring. The noteholders argued that an assignment into bankruptcy and the appointment of a Trustee in Bankruptcy would eliminate the conflict issues.
In examining these issues Justice Pepall noted that CCAA restructurings often involve consolidated plans that address intercompany claims and that in particular section 3(1) of the CCAA contemplates these types of group filings. Justice Pepall continued in stating:
… conflicts are frequently found in the CCAA proceedings particularly those involving corporate groups. If one were to insist on independent counsel and an independent court officer for every instance of perceived conflict interest, restructuring proceedings of corporate groups would become completely, unwieldy and unproductive.
Importantly, the Court found that it was not yet determined whether the intercompany claim of Finance II was a debt or equity claim, and it was therefore unclear whether Finance II would have a claim entitling it to vote in the plan. The Court found that this issue could be addressed in the plan itself or beforehand by way of a motion. The Court found that there was no evidence that the applicants were not working on a plan in good faith for the benefit of all stakeholders or that the interests of Finance and the noteholders were not being taken equally into account. The Court found that there was no evidence of any breach of any duty by any of the impugned parties: the directors, officers, counsel or court appointed monitor.
Finally, Justice Pepall found that stay of proceedings should not be lifted to allow the assignment into bankruptcy. She found that the Court in exercising the discretion to lift the stay should balance the interests of creditors and debtors and consider the prejudice that may be suffered by each party. Reminding the parties of the underlying purpose of the CCAA, the Court cited the purpose as outlined in Chef Ready, that is, to facilitate the making of a compromise or arrangement between an insolvent debtor company and its creditors. Justice Pepall outlined this purpose is to be applied to the whole of the group of companies and stated that:
[t]he goals of the CCAA apply not only to the individual companies but to interdependent corporate groups operating as a single enterprise, particularly when the treatment of the corporate group as an integrated system will result in greater value.
Lifting this stay against Finance II would cause series prejudice to the applicants in the restructuring and therefore the Court denied the application of the noteholders.