In a recent decision released by Madam Justice Kent of the Alberta Court of Queens Bench (the “Court”) the Court declined to grant Octagon Properties Group Ltd. and certain affiliates (“Octagon” or the “Debtors”) relief pursuant to the Companies’ Creditors Arrangement Act, R.S.C. 1985 c.C36 (“CCAA”).

Octagon is the parent company and sole shareholder of the other applicants who had applied for an Initial Order under the CCAA. Octagon is a real estate company which purchases, holds and sells various properties. At the time that Octagon made an application under the CCAA for relief, it owned approximately twenty properties which would all have fallen under the CCAA proceedings if such Order was granted by the Court. There was however one property named Blackfalds which Octagon proposed would not fall within the ambit of any Initial Order granted by the Court in the CCAA proceedings. The vast majority of the properties owned by Octagon had at least one mortgage on it and in some instances a second and third mortgage.

At the hearing of the application for protection from its creditors under the CCAA, counsel for various mortgagees appeared and made submissions to the Court. The majority of the mortgagees opposed the application for protection under the CCAA with at least one mortgagee supporting the application and another taking a neutral position but requesting an adjournment to deal with issues arising out of the proposed debtor in possession financing (“DIP Financing”).

The inability of Octagon to make all of its mortgage payments was the factor that precipitated the filing for relief under the CCAA. The Debtor’s cash flow had diminished with the result that a number of overdue amounts for taxes and mortgage interest payments had not been made. In addition, some of the properties owned by the Debtors were in foreclosure proceedings. Octagon advised that should the CCAA protection be granted, it proposed to market some or all of the properties which would assist the company in extinguishing some of the mortgage obligations and provide the company with enough equity to deal with the remaining properties. As part of the application for relief under the CCAA, the Debtors requested DIP Financing from Echo Merchant Fund Ltd. for a total amount of three million five hundred thousand dollars.

The majority of the first mortgagees opposed the application for protection under the CCAA. The mortgagees argued that they had each negotiated specific arrangements with Octagon, which included remedies for defaults under the mortgage and remedies such as the foreclosure remedy should be available to the mortgagees to pursue under the circumstances. The effect of the CCAA Initial Order would be to deprive the mortgagees of their rights to exercise those remedies in light of the broad stay of proceedings under the CCAA. The first mortgagees also argued that a plan proposed by Octagon was not really a plan as there are no real employees of the Debtors, and the only stakeholders beyond the secured lenders are shareholders and a small number of unsecured creditors who are owed approximately three hundred thousand dollars. The first mortgagees also raised the issue of the professional fees that would be incurred in the CCAA proceedings and raised concerns about the DIP Financing which would prime the first mortgagees with no proposed method of allocating the DIP Financing amongst the various properties. The first mortgagees referenced the decision of Justice Butler in Marine Drive Properties Ltd. (Re), 2009 B.C.J. No. 207 where Justice Butler allowed an application to set aside an ex parte Order under the CCAA on the basis that the debtor’s proposal was an inappropriate use of the CCAA. In the Marine Drive Properties case, Justice Butler noted that the purpose of the CCAA was to facilitate the making of a compromise or arrangement between an insolvent debtor and its creditors and to allow a company to stay in business. In that situation, Justice Butler found that the arrangement was doomed to failure. Justice Butler made the following observations:

To put it bluntly, the petitioners have sought CCAA protection to buy time to continue their attempts to raise new funding. As counsel for the petitioners stated in argument, they need time to “try to pull something out the hat”. They have sought DIP Financing so that they can do this at the expense of their creditors. This is not an appropriate use of the extraordinary remedy offered by the CCAA.

Justice Kent also in the course of her reasons for Judgment referred to the decision of the British Columbia Court of Appeal in Cliffs Over Maple Bay Investment v. Fisgard Capital Corp., where the debtor was a business involved in a single land development deal. In Cliffs Over Maple Bay the chamber’s judge had extended a CCAA stay and authorized DIP Financing but the British Columbia Court of Appeal allowed an appeal from that Order essentially providing three reasons for doing so, which are as follows:

(1) the fundamental purpose of the CCAA is to facilitate a compromise or arrangement and granting or continuing a stay is ancillary to that purpose.

(2) the Court questions whether it should grant a stay under the CCAA to permit a sale, winding up or liquidation without requiring the matter to be voted on by the creditors if the plan of arrangement intended to be made by the debtor will simply propose that the net proceeds from the sale, winding up or liquidation be distributed to its creditors.

(3) if the sole business of a company is a single land development, the company may have difficulty proposing an arrangement that would be more advantageous to the secured lenders than their exercise of remedies available pursuant to their security.

Justice Kent also considered a final decision of the British Columbia Court in Encore Developments Ltd. (Re), 2009 B.C.S.C. No. 13 which involved a developer where the projects were either bare land or completed subdivisions awaiting sale. In that case, the Court noted that there was no active business being carried out and Chief Justice Brenner found that there was no reason for putting in place or maintaining a stay which would “prevent the real estate lenders from enforcing their security in the conventional manner should they so choose.” Chief Justice Brenner went on to hold that in those circumstances it would not be appropriate to apply for CCAA protection ex parte, particularly since the terms of the DIP Financing were particularly onerous to the secured lenders who would bare the costs of restructuring.

After considering the decisions set out above, Justice Kent concluded that she was in agreement with the submissions of the first mortgagees. Justice Kent made the following observations:

(1) this is not a case where it is appropriate to grant relief under the CCAA. First I accept the position of the majority of the first mortgagees who say that it is highly unlikely that any compromise or arrangement proposed by Octagon would be acceptable to them. That position makes sense given the fact that they are permitted to proceed with foreclosure procedures and taking into account the current estimate of value, for most mortgagees on most of their properties they will emerge reasonably unscathed. There is no incentive for them to agree to a compromise. On the other hand, if I granted CCAA relief, it would be these same mortgagees who would be paying the cost to permit Octagon to buy some time.

(2) here is no other reason for CCAA relief such as the existence of a large number of employees or significant unsecured debt in relation to the secured debt.

For the reasons set out above, Justice Kent declined to grant the Debtor’s protection under the CCAA.