The restructuring proceedings of Canwest Publishing Inc and affiliated entities (“Canwest”) has recently provided secured lenders and particularly debtor-in-possession lenders with some food for thought.
In March of this year, four former non-unionized employees of Canwest brought a motion in the Ontario Superior Court of Justice (the “Court”) for the appointment of representative counsel to protect the interests of themselves and similarly situated former employees in the Canwest Companies’ Creditors Arrangement Act (“CCAA”) restructuring proceedings.
Approximately 45 non-unionized employees would be affected.
Two primary questions were raised on this motion:
- Was the motion to appoint representative counsel for such employees premature as such employees were pre-filing unsecured creditors for whom no recoveries were expected in the restructuring?
- Was the appointment of representative counsel, and the imposition upon Canwest of the costs associated with such counsel, appropriate given the terms of the Support Agreement entered into between the senior secured lenders and the Canwest entities upon the commencement of the CCAA proceedings?
On the first question, the Court explained that, while it was not certain that any recovery would ever be realized by the former employees in question, representative counsel would still be desirable. A “watch and wait” approach, whereby the former employees would continuously check the Monitor’s website to identify any change in the circumstances surrounding the likelihood of any recovery for them, was said to be unhelpful. The Court explained that this approach would place an unreasonable burden on the Monitor and would ultimately result in delays in the assertion of any rights that the former employees may have.
As a related matter, when discussing the issue of whether representative counsel should be appointed, the Court made a noteworthy comment that “[d]esirably, in my view, Canadian courts have not typically appointed an Unsecured Creditors Committee to address the needs of unsecured creditors in large restructurings”.
The second question arose due to a provision of the senior secured lenders’ Support Agreement with Canwest, which stated:
The LP Entities [being the Canwest entities in question in this case] shall not pay any of the legal, financial or other advisors to any other Person, except as expressly contemplated by the Initial Order or with the consent in writing from the Administrative Agent acting in consultation with the Steering Committee.
The payment of representative counsel for these employees was not expressly contemplated by the Initial Order in the CCAA proceedings and did not have the consent of the Administrative Agent. Based upon the foregoing, the Monitor did not support the funding of representative counsel by Canwest.
This created a significant dilemma for the Court – should it enforce the positions of the senior secured lenders and the Canwest entities as bargained for, or should it seek to ensure that the moving former employees were sufficiently represented. Underlying this issue was the fact that without some form of third party funding, any decision to allow representative counsel would be rendered practically meaningless as the moving former employees could not afford to pay such representative counsel out of their own pocket.
In resolving this issue, the Court proposed the following:
[I]t is certainly arguable that relying on inherent jurisdiction, the court has the power to compel the Senior Secured Lenders to fund or alternatively compel the LP Administrative Agent to consent to funding. By executing agreements such as the Support Agreement, parties cannot oust the jurisdiction of the court…
In my view, a source of funding other than the Salaried Employees and Retirees themselves should be identified now…
Counsel are to communicate with one another to ascertain how best to structure the funding and report to me if necessary at a 9:30 appointment on March 22, 2010…If not resolved, I propose to make the structuring order on March 22, 2010.
Based on this endorsement the Court appears to have a right, despite what may have been agreed to between the parties to a Support Agreement, to override that agreement.
Following the Court’s endorsement, it may be that lenders cannot effectively contract out of the possibility of having to deal with representative counsel for employees of the debtor company, or other vulnerable parties who have a collective common interest that the Court feels should be protected.
While it may be beneficial for lenders in a CCAA context to clarify in any agreements with the debtor company that the lenders will not be directly liable for any costs of representative counsel in the CCAA proceedings, the practical realities and the exercise of the Court’s discretion may combine to frustrate that intention. Active participation by the lenders in the proceedings and proactive consultation with the monitor may be valuable investments for the lenders, who may be able to mitigate the costs and expenses directed toward such funding, if in fact any is ordered.