Affinity Credit Union 2013 v. Vortex Drilling Ltd. 2017 SKQB 228

In late July 2017, Mr. Justice Scherman was faced, for the second time in less than two years, with competing applications for CCAA and receivership orders. For the second time, he rejected the application under the CCAA and ultimately a receiver was appointed (in both cases, an interim receiver was appointed to preserve the status quo). On the first occasion, which involved Phenomenome Discoveries Inc. and Phenomenome Laboratories Inc., the decision was unreported notwithstanding that Justice Scherman appears to have given reasons. This time we have a full reported set of reasons.

Background Facts

Vortex Drilling Ltd. (“Vortex”) was in the business of drilling oil wells. It was hit hard by the drop of the price of oil. In 2013, Affinity Credit Union 2013 (“Affinity”) advanced Vortex nearly $15 million to refinance two drilling rigs and purchase a third rig. While the loan facilities were repayable on demand, prior to demand there was a schedule of combined monthly interest and principal payments. The credit agreement also provided that any material change in risk or adverse change in the financial condition of Vortex would constitute a default.

After oil prices collapsed, Vortex could not make its scheduled monthly payments to Affinity. Affinity agreed on several occasions to allow Vortex to defer principal payments, so that through 2016 it paid only interest in most months. Vortex then failed to make negotiated balloon principal payments and in January 2017 failed to resume regular monthly principal and interest payments as Vortex had undertaken to do.

Affinity demanded payment in May 2017, allowing Vortex 30 days to pay in full. In June 2017, Affinity applied to appoint a receiver. Vortex sought an adjournment (a second adjournment) to allow it to apply for CCAA relief. The Court granted that adjournment but appointed an interim receiver pending the hearing of the competing motions.

There was no question in the Court’s mind that Vortex was insolvent.

Vortex’s Argument for CCAA Relief:

  • Putting it into receivership could only result in liquidation and loss of employment for many individuals, and other economic impacts.
  • Affinity had ample security to cover its debt.
  • The oil industry was improving and it expected a substantial improvement in its cash flow.
  • It was pursuing promising refinancing opportunities.

Affinity’s Position:

  • It had the contractual right to appoint a receiver given Vortex’s state of insolvency.
  • It had already provided Vortex with substantial accommodations and deferrals (some $4.5 million in payments deferred over 2 ½ years), and Vortex had failed to honour its contractual commitments in return.
  • Vortex’s business was no longer viable. It could not cover its operating costs, let alone its make required payments on its capital loans.
  • Vortex had had many months to refinance but had failed to do so.
  • Allowing Vortex to continue to operate when it could not cover its costs would mean the value of the rigs would depreciate and Affinity’s security position would be eroded.

The Court’s Findings

Justice Scherman rejected the CCAA application and ordered the appointment of a receiver. One factor that clearly influenced him was that Vortex relied primarily on affidavit evidence from a Tina Twietmeyer, who described herself as Administrative Director of Vortex without describing her job function or how she obtained the knowledge she claimed to have. She had never been a corporate director of Vortex.

It was evident to the Court that much of Tina Twietmeyer’s evidence was based on information and belief, with no basis for that information and belief being established. That in itself would be contrary to the Rules of Court but Justice Scherman determined that an application for an initial order and stay under the CCAA is not an interlocutory application. While further applications would be expected, His Lordship held that such an application is more in the nature of one for a final order, such that affidavit evidence based on information and belief would not be admissible.

In any event, Justice Scherman concluded that he could not place significant weight on Tina Twietmeyer’s evidence because he had no ability to assess its reliability. He raised numerous specific concerns:

  • Tina Twietmeyer’s affidavits included opinions that Vortex was experiencing significant growth. The whole of the evidence simply did not support that.
  • She provided evidence on the economic climate in the western Canadian oil industry, which Justice Scherman characterized as at best a hope and ultimately inadmissible speculation.
  • She referred to an appraisal on the value of the rig assets, without filing it, claiming confidentiality. Affinity thus had no ability to test that opinion evidence. Affinity’s evidence also raised significant doubt about those values, particularly given that the rigs were significantly underutilized.
  • While there were multiple affidavits from Tina Twietmeyer, the President and General Manger of Vortex filed none.

Vortex’s conduct also concerned Justice Scherman deeply. During the period that Affinity’s receivership application was adjourned, and the parties were negotiating a potential forbearance agreement, Vortex represented to another credit union (which happened to be part of Affinity’s syndicate) that it had no accounts payable. It wrote cheques purporting to pay various payables but then did not deliver them to the payees, to create an “accounting fiction” that allowed Vortex to access some $121,000 in operating credit under its margin requirements with the second credit union. This came to light only because of investigations by the interim receiver. Justice Scherman viewed it as a breach of Vortex’s covenants to provide honest and accurate financial information to Affinity, and a failure to act in good faith.

Justice Scherman expressed many additional concerns but one factor seems to have been particularly important to him:

[38] … Affinity has provided significant relief from the contractual terms over a two year period. In a practical sense, Affinity has already effectively provided Vortex with much of the remedial opportunity contemplated by the CCAA. Vortex has had the benefit of two years of debt repayment accommodations and forbearance and the opportunity to seek alternate financing.

Thus, at least on this one occasion, voluntary forbearance by a lender to provide extended relief to the borrower, was taken into account by the Court, and Justice Scherman rejected the CCAA application and ordered the appointment of a receiver.