On March 13, 2014 the Supreme Court of Canada dismissed applications for leave to appeal by a group of alleged former institutional shareholders of Sino-Forest Corporation. These institutions unsuccessfully sought leave to appeal from orders approving Sino-Forest’s Companies’ Creditors Arrangement Act (CCAA) plan and approving a settlement reached between Ernst & Young and the plaintiff group that was awarded carriage of Sino-Forest class actions in Ontario. The outcome of the leave applications, and the steps leading to that outcome, contain important lessons for class action and insolvency practitioners.


Following publication of a third-party report on June 2, 2011, Sino-Forest, its insiders and certain third parties became embroiled in class action litigation. Three groups vied for carriage of the Ontario class action. On January 6, 2012, Justice Perell awarded carriage to two firms representing two union pension funds. Another law firm, representing three entities that claimed to be large institutional shareholders of Sino-Forest (British Columbia Investment Management Corporation, Comité syndical national de retraite Bâtirente Inc. and Northwest & Ethical Investments L.P.), finished third and last in the carriage contest.

On March 30, 2012, Sino-Forest filed for creditor protection under the CCAA. With the CCAA filing came a stay of the class actions against Sino-Forest. The firms awarded carriage of the class actions filed an appearance in the CCAA and actively participated in an effort to protect the interests of the plaintiff group.

The Claims Procedure Order

On May 14, 2012, Justice Morawetz made a claims procedure order in the Sino-Forest CCAA. Claims procedure orders are common in CCAA proceedings. They are intended to allow for the identification and later resolution of claims relevant to the debtor estate. They require parties with claims against the debtor, and sometimes claims against other parties, to file a proof of claim by a specified date. Claims procedure orders typically provide that failure to file a timely proof of claim forever bars the claimant from advancing a claim that falls within the scope of the order.

The class action plaintiff group filed proofs of claim by the claims bar date, in respect of the class actions they commenced in Ontario and elsewhere. Bâtirente, Northwest, and other alleged shareholders collaborating with them, did not file a proof of claim.

CCAA Mediation

On July 25, 2012, Justice Morawetz made an order requiring key parties to engage in mediation, for the purpose of attempting to resolve litigation surrounding Sino-Forest, including litigation against third parties who in turn asserted indemnification claims against Sino-Forest. The class action plaintiff group participated in the mediation. By this point, if not earlier, it should have been apparent to the Bâtirente/Northwest group that compromises might be reached within the CCAA that could affect their rights. However, the Bâtirente/Northwest group did not seek to participate, and did not participate, in the mediation.

The Poyry Class Action Settlement

Shortly before Sino-Forest filed for CCAA protection, the class action plaintiff group entered into an agreement to settle their claims against the defendant Poyry. The CCAA stay was later lifted to allow the settlement to be approved. The Poyry settlement was approved by Justice Perell on September 25, 2012. The Bâtirente/Northwest group did not oppose the Poyry settlement nor seek to participate in the settlement approval hearing. The settlement approval order afforded an opt-out right to class members, and fixed January 15, 2013, as the deadline to opt-out, but provided that any class member who opted out would cease to participate in the class action.

CCAA Plan Sanction and Implementation

A meeting of creditors called to vote on Sino-Forest’s CCAA plan was scheduled for the week of November 26, 2012. On the eve of the creditor meeting, the class action plaintiff group reached an agreement in principle to settle class action claims against Sino-Forest’s former auditor, Ernst & Young. Ernst & Young and the plaintiff group settled during the CCAA so that Ernst & Young could seek to obtain a broader form of release that would be available in the CCAA court.

At this point, and for the first time, the Bâtirente/Northwest group, now joined by Invesco Canada Ltd., appeared in the Sino-Forest CCAA, initially to oppose Sino-Forest’s CCAA plan, which created the framework for the Ernst & Young settlement, and later to oppose the Ernst & Young settlement. These parties claimed to want to preserve their right to opt-out of the Ontario class action, and to maintain the right to bring one or more individual actions.

After receiving overwhelming creditor support, on December 10, 2012, the CCAA plan was approved by Justice Morawetz over the objections of the Invesco/Bâtirente/Northwest group. Sino-Forest’s CCAA plan was implemented on January 30, 2013.

E & Y Settlement Approval

Some members of the of the Invesco/Bâtirente/Northwest group filed opt-out forms by the January 15, 2013, deadline. The purported opt-outs were expressly conditional on the court not later granting a release in favour of a party against whom the Invesco/Bâtirente/Northwest group wanted to preserve rights of action.

Again over the objections of the Invesco/Bâtirente/Northwest group, on March 20, 2013, Justice Morawetz approved the Ernst & Young settlement. In approving the settlement, Justice Morawetz concluded that the purported opt-outs of the Invesco/Bâtirente/Northwest group were a nullity. He concluded that the Class Proceedings Act does not allow for opt-outs conditional on the absence of prejudice to the putative class member.

Leave to Appeal Denied

While the Invesco/Bâtirente/Northwest group later sought leave to appeal to the Ontario Court of Appeal from the plan sanction and settlement approval orders, that group did not seek a stay of either order pending appeal.

On June 26, 2013, the Ontario Court of Appeal denied leave to appeal from both orders. In denying leave to appeal the plan sanction order, the court noted that, as the plan had been implemented, any appeal from the plan sanction order was moot.

In denying leave in relation to the Ernst & Young settlement, the court concluded that Justice Morawetz had correctly applied the principles governing the court’s ability to grant releases to third parties in CCAA proceedings.

On January 13, 2014, the Supreme Court denied leave from the orders of the Court of Appeal denying leave.

Lessons from this Chapter

Sino-Forest is the most prominent, but not the first CCAA filing to address the relationship between class actions and CCAA proceedings. The tortuous narrative contains important lessons for class action and insolvency practitioners.

  1. Because CCAA courts can grant broader protections in CCAA plans than can class action courts, including by granting orders that are binding on all class members, some parties will seek to settle claims within the CCAA and obtain CCAA releases. This can be a win/win for the settling party and creditors: courts want to facilitate the settlement of claims that can impede the formulation of a successful CCAA plan, and broader protections should serve to increase the quantum a settling party is prepared to pay. As with Ernst & Young, it can also encourage early settlement, before a CCAA plan is submitted to creditors for approval.
  2. Shareholders who want to preserve individual rights of action must be prepared to actively participate in CCAA proceedings. The Invesco/Bâtirente/Northwest group, by failing to participate in the CCAA proceeding until the eve of the plan sanction hearing (including by failing to file individual proofs of claim by the claims bar date), effectively foreclosed their ability to participate in the resolution of shareholder claims. The Invesco/Bâtirente/Northwest group could only shelter under the proof of claim filed by the class action plaintiff group that was specific to the class actions. That said, even if the Invesco/Bâtirente/Northwest group had successfully opted out, a standalone action would have been foreclosed against some defendants by the claims bar order, and would have been foreclosed against others by the third-party releases. For these reasons, their efforts to oppose the CCAA plan and the Ernst & Young settlement were ultimately futile, self-defeating gestures. They were too late to the party.
  3. A CCAA plan, once implemented, renders challenges to the plan sanction order moot. The plan sanction order was made on December 10, 2012, and the plan was implemented on January 30, 2013 – more than sufficient time to seek an expedited appeal or to seek a stay pending appeal, or both. CCAA courts can take a dim view of delay, especially where it appears to be tactical. The Invesco/Bâtirente/Northwest group proceeded at a leisurely pace at a critical time and saw its appeal rights foreclosed as a consequence.