Companies' Creditors Arrangement Act ("CCAA") plans generally give the debtor a release for liabilities that arose prior to the filing date. It is however highly unusual for a plan to give this relief to unrelated and solvent third parties. The Ontario Court of Appeal in sanctioning the CCAA plan which restructured the asset based commercial paper ("ABCP") market approved of this extraordinary relief.
In August, 2007, a liquidity crisis precipitated by the U.S. sub-prime mortgage debacle shut down the $116 billion Canadian ABCP market which included $32 billion of non-bank sponsored ABCP which was the subject of these CCAA proceedings. Investors were unable to sell their ACBP notes and the assets supporting these notes were worth far less than advertised. Instead of forcing investors to take enormous losses, a group of ABCP market participants agreed to a standstill arrangement which froze the ABCP market pending a successful restructuring. The restructuring was headed by a group which billed itself as the Pan-Canadian Investors Committee and was composed of 17 financial and investment institutions involved in the ABCP market (the "Committee").
The Committee worked to craft a CCAA plan and in March, 2008, the Committee together with other ABCP participants sought CCAA protection for the ABCP debtors and the approval of a pre-negotiated CCAA plan which would unfreeze the market and ensure smaller investors did not take a loss on their holdings (the "Plan"). Contained in the Plan was a comprehensive release which was to be granted for the benefit of certain solvent financial institutions who were threatened with lawsuits for their involvement in the ABCP market. It is this release that proved most controversial and was the subject of these legal proceedings.
The Court had a difficult decision to make. It could approve the Plan with the attendant release and allow the various participants to move on with their economic lives. This had the significant attraction of putting an end to the existing uncertainty and allowing the various participants to minimize their collective losses. This also had the major benefit of allowing small investors (those holding ABCP notes of less than $1,000,000) to be made whole. This position appeared to have been supported by the overwhelmingly positive creditor vote in favour of the Plan. On the other hand, the release would relieve against the potentially liable conduct of the third party institutions to the holders of the ABCP paper who, by this time, were defendants in various pieces of litigation.
In deciding to approve the Plan, the Court first determined that it had the jurisdiction to grant releases to third parties on the basis of the open-ended and flexible character of the CCAA. The Court also noted that the creditors had voted overwhelmingly in favour of the Plan and the Plan itself represented a contractual relationship between the creditors and debtor(s). The Court then noted that the third party institutions had participated in the restructuring and had worked towards formulating a solution – including agreeing to subsidize the Plan. The Plan itself would benefit the ABCP noteholders generally, the releases were essential to the Plan and as such, the Plan was worthy of being approved. Finally, the Court held that this particular Plan, including the third party releases, was fair and reasonable but indicated it would only approve the Plan provided it did not release claims for fraud.
The ABCP CCAA proceedings show how far a court will go to ensure a successful restructuring. It is clear that some sort of restructuring was needed to avoid a liquidation which may have destroyed the ABCP market in Canada. As the Court pointed out, the third parties who were released in the Plan, were committed to the Plan and had contributed financially to its success. Copies of the decisions of the Trial Court and the Ontario Court of Appeal on the ABCP Plan are available from Harvey Garman