An extract from The Insolvency Review, 9th Edition
Plenary insolvency proceedingsi 9354-9186 Québec Inc v. Callidus Capital Corp, 2020 SCC 10
In early 2020, the Supreme Court of Canada issued an important decision regarding both the powers and discretion of CCAA supervising judges to enforce the requirement that parties act in good faith and confirming that litigation funding is an acceptable form of interim financing in insolvency proceedings.
Bluberi Gaming Technologies Inc (Bluberi) manufactured electronic casino gaming machines. In 2012, Bluberi sought and received financing in the amount of C$24 million from Callidus Capital Corporation (Callidus). Bluberi lost significant amounts of money over the following three years, and Callidus continued to extend credit. By 2015, Bluberi owed Callidus approximately C$86 million. Bluberi claimed that Callidus, as a secured creditor, took de facto control of the business to deplete its value, with the eventual goal of purchasing Bluberi.
In 2015, Bluberi obtained CCAA protection and determined, along with the court-appointed monitor, that an asset sale was necessary. The supervising judge approved a sale in early 2016, over Callidus's objection. Bluberi and Callidus then entered into an asset purchase agreement. Callidus obtained all of Bluberi's assets in exchange for extinguishing almost all of its secured claims against Bluberi. The agreement also allowed Bluberi to retain its claim for damages against Callidus for alleged involvement in causing the debtor's financial difficulties.
In 2017, Bluberi filed a motion seeking approval of an interim financing credit facility to fund litigation against Callidus. However, the day before the motion hearing, Callidus proposed the first of two plans of arrangement. Bluberi's creditors were divided into two classes: unsecured creditors in one class, and Callidus as the sole secured creditor in the other. This first proposal failed to secure the required double majority within the unsecured creditors class (i.e., a majority of unsecured creditors holding two-thirds of the value of the class members' claims).
In 2018, Bluberi filed an application to authorise a third-party litigation funding agreement to pursue its claims against Callidus. A few days later, Callidus proposed its second plan of arrangement. This second proposed arrangement was nearly identical to the first. However, before voting on the plan of arrangement, Callidus filed an amended proof of claim valuing its secured claims against Bluberi at nil.
The supervising judge approved Bluberi's third-party litigation agreement as interim financing pursuant to Section 11.2 of the CCAA, but refused to allow Callidus to vote with unsecured creditors because it was acting with an 'improper purpose'. The Quebec Court of Appeal reversed the supervising judge's decision.
The Supreme Court agreed with the supervising judge that Callidus should not be permitted to vote with the unsecured creditors' class. The Court reaffirmed that Section 11 of the CCAA granted a supervising judge broad discretion to 'make any order that it considers appropriate in the circumstances'. However, certain 'baseline considerations' must be met: the applicant must demonstrate that the order sought is appropriate in the circumstances, and that the applicant has been acting in good faith and with due diligence. Notably, the requirement of good faith conduct was recently codified as Section 18.6 of the CCAA.
Under the CCAA, there is no bar to creditors voting in their own interest. However, the Court held that in this case the 'inescapable inference' was that Callidus had attempted to strategically 'circumvent the creditor democracy the CCAA protects'. The Court concluded that the supervising judge rightfully barred Callidus from voting for the second proposal as an unsecured creditor because it was acting for an improper purpose. The Court found that an improper purpose was any purpose collateral to the purpose of insolvency legislation, which in this case was Callidus' attempt to manipulate the creditors' vote to ensure that its second plan would succeed where its first plan had failed.ii Arrangement relatif à Nemaska Lithium Inc, 2020 QCCS 3218
In October 2020, the Quebec Superior Court granted a reverse vesting order under the CCAA. A reverse vesting order transfers undesirable assets and liabilities from the insolvent entity to a new company, typically incorporated specifically for the purpose. This was the first time a Canadian court granted an opposed reverse vesting order, as they had only previously been granted on consent of the parties.
The debtor companies (Nemaska entities), were involved in the development of a lithium mining project in Quebec. When lithium prices declined, they sought CCAA protection, and a sales process was approved. A group of Nemaska's largest secured creditors then offered to purchase subject to a reverse vesting order.
Two shareholders of Nemaska entities (one of whom was also a creditor) objected the issuance of the reverse vesting order on multiple grounds, including the impossibility under the CCAA for debtor companies to emerge from CCAA protection outside a compromise or arrangement as well as the Court's lack of authority to grant a vesting order for anything other than a sale or disposition of assets.
The presiding judge dismissed these arguments, and held that the reverse vesting order meets the statutory criteria under the CCAA. The issuance of the reverse vesting order was a valid use of the discretion afforded to the supervising judge and in line with the CCAA's remedial objectives.11 The judge also noted the catastrophic impact other alternatives would have on all stakeholders and highlighted that CCAA generally prioritises 'avoiding the social and economic losses resulting from the liquidation of an insolvent company'.12
When approving any vesting order under the CCAA, the court must first assess: '1) whether sufficient efforts to get the best price have been made and whether the parties acted providently; 2) the efficacy and integrity of the process followed; 3) the interests of the parties; and 4) whether any unfairness resulted from the process'.13
This decision was appealed to the Quebec Court of Appeal and recently to the Supreme Court of Canada, but both courts have denied leave to appeal.iii Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339
In November 2020, the British Columbia Court of Appeal held that a receiver can enforce executory contracts of a debtor without being bound by the arbitration clauses contained in them.
Petrowest Corporation and its affiliates, were placed into receivership. The receiver brought an action against Peace River Hydro Partners and its partners (Peace River), to recover amounts outstanding under various contracts. Peace River subsequently sought an order to stay the action under BC's Arbitration Act,14 because all disputes were subject to mandatory arbitration.
The BC Supreme Court rejected the application for a stay, allowing the Receiver to proceed with the action. It reasoned that while BC's Arbitration Act applied, Section 183 of the BIA allowed the Court to control its own processes, including avoiding the operation of Section 15(1) of the Arbitration Act.15
On appeal, Peace River argued that the chambers judge erred in her interpretation of Section 183 of the BIA and the Receiver argued that she erred in concluding that the Arbitration Act applied. The BC Court of Appeal dismissed the appeal, but concluded that the Arbitration Act did not apply in this case because the action was not commenced by a 'party' to the arbitration agreements within the meaning of the provision. There is a fundamental distinction between a receiver/trustee and a debtor/bankrupt as the former has the power to disclaim contracts entered by the debtor/bankrupt.16 This is because unlike the debtor/bankrupt, a receiver is an officer of the court and owes a fiduciary duty to realise proceeds for all stakeholders.17 In opting to commence this action, the receiver had, in effect, disclaimed the arbitration agreements entered by the debtor and was not a 'party' to them. The arbitration agreements became 'void, inoperative or incapable of being performed'.18 Furthermore, arbitration agreements are treated as 'independent agreements' and can be separated from the main contract due to the doctrine of separability in Canada.19 Therefore, due to a receiver's particular powers and position, as well as the separability of the arbitration agreements, the receiver can sue to enforce the debtors' contracts while also disclaiming the arbitration clauses within them.
The Supreme Court has granted leave to appeal this decision.iv Groupe Dynamite Inc v. Deloitte Restructuring Inc 2021 QCCS 3
The Quebec Superior Court held that under the CCAA, the debtor was not relieved from paying post-filing rent for the premises it had not disclaimed, even though its ability to 'use' them had been severely limited by government-imposed covid-19 restrictions.
Groupe Dynamite Inc (Dynamite) operated several retail stores in Canada and suffered from covid-19 restrictions in Ontario and Manitoba. Dynamite, along with its US affiliates, had sought protection under the CCAA. The court order granting CCAA protection stated that no person who supplied goods, services or the 'use of leased property' to Dynamite after the order, could be prohibited from requiring immediate payment. This provision also closely mirrors Section 11.01 (a) of the CCAA.20
Following the continued covid-19 restrictions, Dynamite applied to amend the court order arguing that it was not 'using' the premises during the lockdowns and should not be obligated to pay post-filing rent. The landlords objected, contending that as long as the leases were not disclaimed, Dynamite's occupation qualified as a 'use' of the premises.
The court dismissed Dynamite's application on the basis that it would violate Section 11.01(a) of the CCAA and the court cannot make orders contrary to the restrictions explicitly set out in the CCAA. It noted that for a debtor to make 'use' of the property within the meaning of Section 11.01(a), it need not carry on the original activity for which the property was leased. Despite Dynamite's inability to fully operate its business in the leased properties due to the covid-19 restrictions, it had not disclaimed the premises and continued to assert its right to 'sole possession'. The court noted that 'where leased premises are occupied by a debtor and cannot be leased to anyone else, the landlord is not prevented from demanding immediate payment of rent regardless of whether or not the debtor is carrying on business'.21v CWB Maxium Financial Inc v. 2026998 Alberta Ltd, 2021 ABQB 137
The Alberta Court of Queen's Bench provided guidance on the duty of good faith required by the newly enacted Section 4.2 of the BIA. This section has two parts: (1) any interested person in any proceeding under the BIA must act in good faith with respect to those proceedings; and (2) if satisfied that an interested person failed to act in good faith, then on application by any interested person, the court may make any order that it considers appropriate in the circumstances.
The court made several key findings in this case. First, a secured creditor seeking a receivership order is an 'interested person' subject to the good faith requirement of Section 4.2. Second, the 'good faith' to be exhibited in respect of' BIA proceedings, encompasses not only the conduct in the course of the proceedings, but also the conduct that precipitated the proceedings, 'where that conduct is factually and temporally connected to the proceedings'.22 In this case, the secured creditors' conduct since the issuance of the first demand letters was when the prospect of receivership proceedings first materialised, and thus was relevant for the purposes of Section 4.2. Third, 'good faith' requires that a creditor not bring or conduct proceedings for an oblique motive or improper purpose; it requires parties not to lie to or mislead the other. However, it is not a fiduciary duty, and does not impose a duty of loyalty or disclosure, or require the subordination of one's own interests to the other.vi Chandos Construction Ltd v. Deloitte Restructuring Inc, 2020 SCC 25
In October 2020, the Supreme Court of Canada affirmed the anti-deprivation rule and the effects-based test. The anti-deprivation rule is a long-established common law rule, which prevents contractual provisions from frustrating the insolvency regime and maximises assets available for a trustee to pass to creditors.23 The anti-deprivation rule invalidates a contractual clause if: (1) it is triggered by bankruptcy or insolvency; and (2) if its effect is to remove value from the insolvent's estate that would otherwise be available to creditors.24
Chandos Construction Ltd (Chandos), a general contractor, entered into a subcontract with Capital Steel Inc (Capital Steel). The contract contained a provision where Capital Steel was to pay Chandos 10 per cent of the total contract price in the event Capital Steel became insolvent. Capital Steel filed for bankruptcy prior to completing its contract, and Chandos argued it was entitled to set off the costs it had incurred to complete Capital Steel's work on the project and 10 per cent of the contract price as per the agreement. Furthermore, Chandos submitted that the effects-based test of the anti-deprivation rule should be substituted by the purpose-based test adopted by UK courts.25 The application judge found the provision was enforceable, but the Court of Appeal reversed the decision.
In an eight-to-one decision, the Supreme Court rejected the UK purpose-based test and affirmed that the anti-deprivation rule renders void provisions that remove value otherwise available to an insolvent person's creditors. The Supreme Court, however, noted that provisions that eliminate a property from the estate but not value, or provisions whose effect is triggered by an event other than bankruptcy or insolvency, may not offend the anti-deprivation rule. Moreover, where commercial parties protect themselves against a contracting counterparty's insolvency by taking security, acquiring insurance, or requiring a third-party guarantee, the anti-deprivation rule is not offended.26vii Legislative reforms
On 1 November 2019, reforms to Canada's BIA and CCAA came into force. These reforms aimed at improving the consistency and transparency of the insolvency regime and enhancing protections for workers and pensioners. There were no further legislative reforms in 2020.
Ancillary insolvency proceedingsAllSaints USA Limited
On 17 June 2020, the Ontario Superior Court of Justice, for the first time, recognised an English company voluntary arrangement (CVA) proceeding in Canada under the CCAA. The CVA proceeding in question was commenced by AllSaints Group, a global fashion brand headquartered in the UK, after covid-19 restrictions forced it to close most of its international locations. AllSaints USA Limited (AllSaints USA), a UK-incorporated subsidiary of AllSaints Group with retail stores in Canada and the United States, was unable to pay its rent obligations, including those owed to its Canadian landlords. Therefore, the foreign representative moved to have the CVA proceeding recognised in Canada. Among other things, the CVA (as it relates to AllSaints USA) aimed to amend go-forward payment terms of its Canadian and US leases by temporarily shifting to a sales percentage-based rent model.
The closest Canadian counterpart to a CVA proceeding is a proposal proceeding under the BIA, although the two differ in key ways, including that a BIA proposal: (1) does not allow for different subcategories of unsecured creditors to receive distributions or recoveries on different terms; and (2) does not contemplate amending contractual agreements with unsecured creditors. In recognising this CVA, the Ontario Superior Court confirmed that a foreign proceeding may be recognised in Canada even if the particular relief available under the foreign proceeding is not available domestically, provided that the substantive legal effect it imposes is not inconsistent with Canadian public policy. This case exemplifies the utility and flexibility of the CCAA in facilitating complex, cross-border reorganisations.