The Alberta Court of Queen’s Bench (Court) has provided clarity on how oppression claims will be adjudicated in the context of the Companies’ Creditors Arrangement Act (CCAA). In the recent decision in Lightstream Resources Ltd. (Re), the Court confirmed that it has jurisdiction to hear oppression claims, but held that the exercise of this discretion is limited to appropriate circumstances. The remedy awarded as a result of a successful oppression claim must accord with the remedial purposes and scheme of the CCAA and help the creditor achieve a compromise or plan.
Blakes acted as counsel for the insolvent company, Lightstream Resources Ltd. and its subsidiaries (Lightstream).
Lightstream is a light oil-focused exploration and production company, operating primarily in Alberta and Saskatchewan. In July 2015, in response to continued low commodity prices, Lightstream entered into a privately negotiated agreement with certain holders of its unsecured notes (Exchange Parties) to issue secured notes in exchange for their unsecured notes and additional capital. The proceeds were then used to reduce borrowing under Lightstream’s credit facility. The transaction was viewed positively by the company as it provided additional liquidity and financial flexibility to withstand the low oil price environment.
Following the exchange transaction, certain unsecured noteholders, namely FrontFour Capital Corp. and Mudrick Capital Management (Plaintiffs) alleged that between February and July 2015, Lightstream made a series of representations to the effect that if any such note exchange transaction were undertaken, it would be offered to all unsecured noteholders on equal terms. The Plaintiffs commenced actions in July 2015, claiming, among other things, that it was oppressive and improper for Lightstream to have offered the note exchange transaction exclusively to the Exchange Parties. The primary remedy sought by the Plaintiffs to rectify the alleged oppression was a Court order compelling Lightstream to allow the Plaintiffs to participate in the note exchange transaction on the same terms as the Exchange Parties.
In September 2016, before the oppression claims could be adjudicated, Lightstream sought protection under the CCAA. This raised significant questions regarding: whether the CCAA Court had the jurisdiction to determine oppression claims within the CCAA process and to recognize the Plaintiffs’ claims as secured claims rather than unsecured claims and if there was such jurisdiction within the CCAA process, whether the Court would exercise its discretion to award the remedy sought by the Plaintiffs in the context of this insolvency. Lightstream brought an application to resolve these two questions on a threshold or summary basis.
It was immaterial to the application whether or not the alleged representations actually occurred as the parties agreed that the Plaintiffs’ factual case was to be considered at its “highest and best” for the purpose of determining the threshold issues.
Justice A.D. Macleod confirmed that the CCAA Court has the jurisdiction to use the oppression remedy as a tool in “appropriate circumstances”. This jurisdiction is conferred pursuant to section 11 of the CCAA, which gives the Court broad statutory discretion to make any order “appropriate in the circumstances,” and section 42, which allows the CCAA to be applied in conjunction with other statutes (in this case, the Alberta Business Corporations Act).
However, regarding the availability of the remedy requested by the Plaintiffs in this case, Justice Macleod found that ordering an exchange of securities in the context of insolvency would be inappropriate and that the Plaintiffs were “bound to fail” in this regard. The Court’s primary consideration when determining the appropriate remedy for oppression in the context of insolvency is whether or not the use of the oppression remedy to effect the requested result would further the CCAA’s remedial purpose and objective. The remedial purpose is helping the debtor successfully restructure and find a plan of compromise with its creditors. An order that does not further this purpose is an inappropriate exercise of the CCAA Court’s jurisdiction.
Justice Macleod found that the remedy requested by the Plaintiffs of recognizing their unsecured claims as secured claims was inappropriate. Ordering an exchange of securities within the CCAA would have the effect of reordering the priorities of secured and unsecured claims within the insolvency proceedings. The Plaintiffs identified no other reason for seeking this remedy. The Court held that an equitable remedy, otherwise unavailable, cannot be imposed solely to give a creditor the ability to receive payment. Rather, damages were the appropriate remedy both within and outside the CCAA.
Leave to appeal this decision was refused. Justice T.W. Wakeling of the Alberta Court of Appeal found that the Plaintiffs’ likelihood of prevailing on appeal was extremely low. The order requested by the Plaintiffs would unjustifiably diminish the benefits negotiated by the Exchange Parties and harm the interests of other unsecured noteholders who were not alleged to have acted in any blameworthy manner. The remedy requested by the Plaintiffs was also inappropriate because, among other things, it would force the company to assume debt against its wishes.
Most importantly, however, Justice Wakeling found that an appeal would undermine the proposed restructuring. Leave to appeal would introduce a level of uncertainty at the final stages of the restructuring process, which would conflict with the underlying purpose of the CCAA, namely the successful restructuring of the debtor company’s debt obligations in as short a time as possible. This reinforced Justice Macleod’s findings that furtherance of the remedial purpose of the CCAA is the guiding principle when exercising discretion in a restructuring proceeding.
This case affirms that the oppression remedy can be used as a tool for crafting remedies in the CCAA in appropriate circumstances. This is in keeping with the recent decision in U.S. Steel Canada Inc. (Re), in which the Ontario Superior Court of Justice held that an exercise of discretion pursuant to section 11 of the CCAA requires a determination of whether the order will further the remedial purposes of the Act. For further information, see our September 2016 Blakes Bulletin: Court of Appeal Closes Door on U.S. Doctrine for Re-Ranking Creditors.
In the Lightstream case, the Court found that the circumstances identified were not appropriate for the exercise of its discretion. Whether different circumstances would permit access to the broad remedies available in an oppression action in the context of the CCAA remains to be seen.
It is clear, however, that where oppression actions intersect with the CCAA, they can be adjudicated as part of the CCAA process. The CCAA context will inform any remedies awarded for oppression, thereby ensuring the furtherance of a potential restructuring.