Prior to the 2009 amendments (the “Amendments”) to the Companies’ Creditors Arrangement Act (the “CCAA”),1 courts exercising jurisdiction under that statute could, in the appropriate circumstances, approve “roll up” debtor in possession (“DIP”) financing arrangements. While it can take different forms, in essence, a “roll up” DIP loan facility is an arrangement whereby an existing lender refinances or repays its pre-filing loan by way of borrowings under the new DIP loan facility. The priority status of the charge granted by the court to secure the DIP facility (the “DIP Charge”) essentially initially secures the pre-existing debt, which automatically benefits from an improved ranking.
A provision in the Amendments (section 11.2 of the CCAA) that prohibits a DIP Charge from securing an obligation that existed before the order is made cast doubt as to Canadian courts’ ability to approve any “roll up” DIP loan facility in ordinary CCAA proceedings. However, whether a “roll up” DIP loan facility could be approved in the context of recognition proceedings under Part IV of the CCAA (“Part IV Proceedings”) had not yet been put before the courts.
On February 1, 2012, in Re Hartford Computer Inc.2 (“Hartford”), the Ontario Superior Court of Justice (the “Ontario Court”) was asked to answer that question. The partial “roll up” DIP loan facility provided that all cash in the possession or control of the Chapter 11 Debtors (as defined below) as of December 12, 2011 (the “Petition Date”), or coming into their possession or control after the Petition Date, was deemed to have been remitted to the pre-existing lender for application to, and repayment of, the pre-existing debt, with a corresponding borrowing deemed to have been made under the DIP loan facility.3
By way of background, Hartford Computer Hardware, Inc. (the “Foreign Representative”), had been appointed “foreign representative” for itself and on behalf of its subsidiaries (the “Chapter 11 Debtors”) in connection with their proceedings under Chapter 11 (the “Chapter 11 Proceedings”) in the United States Bankruptcy Court for the Northern District of Illinois Eastern Division (the “US Bankruptcy Court”). Following the commencement of the Chapter 11 Proceedings in the US Bankruptcy Court, the Foreign Representative brought a motion before the Ontario Court seeking recognition of the Chapter 11 Proceedings as a foreign main proceeding. On December 21, 2012, the Ontario Court granted two orders, which, among other things, declared the Chapter 11 Proceedings as a “foreign main proceeding” pursuant to Part IV of the CCAA, recognized the Foreign Representative, granted a stay of proceedings, appointed FTI Consulting Canada Inc. as Information Officer in the Part IV Proceedings, and recognized certain orders of the U.S. Bankruptcy Court, including, an Interim DIP Facility Order.
The Foreign Representative’s Motion for Recognition of the DIP Order
On January 27, 2012, the Chapter 11 Debtors brought a motion for a Final DIP Facility Order (the “DIP Order”). As discussed above, the DIP Order contained the partial “roll up” of the pre-existing debt. The U.S. Bankruptcy Court granted the DIP Order on the basis that the Chapter 11 Debtors’ ability to continue to use their cash collateral was necessary to avoid immediate and irreparable harm to them and their estates and was necessary for the protection of the Chapter 11 Debtors’ property and the interest of their creditors.
The Foreign Representative thereafter brought a motion in the Ontario Court under section 49 of the CCAA, seeking recognition of the DIP Order in Canada. In support of its motion, the Foreign Representative submitted that the Ontario Court was not bound by section 11.2 because the motion was brought under section 49 of the CCAA which provides that a court may make any order that it considers appropriate, provided the court is satisfied that such order is necessary for the protection of the debtor company’s property or the interests of a creditor or creditors. The Foreign Representative also noted that notwithstanding that section 11.2 did not apply, the partial “roll up” DIP loan facility did not offend section 11.2 because the cash on hand as of the Petition Date was effectively spent in the Chapter 11 Debtors’ operations and replaced with advances under the interim DIP loan facility in December 2011, such that all cash on hand as of the date of the DIP Order was proceeds of the interim DIP loan facility.
The Information Officer, represented by Norton Rose Canada LLP, supported the Foreign Representative’s motion and submitted that on the facts of the case, there were no public policy concerns to prevent the Ontario Court from recognizing the DIP Order.
The Ontario Court’s Decision
The Ontario Court agreed with the submissions of the Foreign Representative and the Information Officer that, in recognizing an order of a foreign court under section 49 of the CCAA, the court may make any order it considers appropriate, notwithstanding that such an order may not otherwise be permissible under the CCAA4. The Ontario Court was satisfied that the DIP Order was necessary for the protection of the Chapter 11 Debtors’ property and for the interests of the creditors5. The Ontario Court also relied upon the Information Officer’s report that there would be no material prejudice to Canadian creditors and that nothing was being done that was contrary to the applicable provisions of the CCAA.6
In sum, having accepted its ability to recognize the DIP Order, the Ontario Court was satisfied that the DIP Order did not raise any public policy issues and on that basis, it should “mirror” the relief granted in the foreign main proceeding. A significant factor taken into account by the Ontario Court was that the DIP Order was granted by the U.S. Court in the context of a foreign main proceeding. Justice Morawetz, for the Ontario Court, saw no basis to second guess the decision of the U.S. Court.7
This decision thus both confirmed that a “roll up” DIP loan facility can, in the appropriate circumstances, be recognized in Canada, and also emphasized the willingness of the Ontario Court to cooperate with foreign courts and its adherence to the principle of comity in connection with cross-border insolvencies.
Importance of the Decision
As noted, this decision highlights more than just the ability of the courts to approve a “roll up” DIP loan facility in Canada. Rather, this case calls attention to the unique capabilities of recognition proceedings and the possibilities available as a result of the “mirror principle.”
