Earlier this year Abitibi-Consolidated Inc. (Abitibi) and various related entities proposed to enter into an arrangement with certain classes of its creditors relying on the plan of arrangement provisions in the Canada Business Corporations Act (CBCA). It is unusual to propose a corporate plan with respect to a company's debt. The CBCA plan of arrangement provision is not fundamentally an insolvency law. The procedure is most often used to restructure securityholder relationships within solvent companies and that is the primary intention. Restructurings involving insolvent entities are typically done under the Companies' Creditors Arrangement Act (CCAA). However, on rare occasions, the corporate proceeding is used by corporations that are insolvent. While the CBCA requires that a corporation be solvent to use the proceeding, courts have "finessed" this requirement by holding that it is satisfied as long as one of the applicant companies is solvent (even where the applicant is often a corporation newly established to take part in the plan) and the insolvent companies will emerge solvent from the plan.
Abitibi, which was insolvent, determined to use the corporate proceeding to restructure not only its relationship with bondholders but also with its term lenders, in the belief that it would be a more expedited procedure than a CCAA proceeding.
The court has jurisdiction under s.192 of the CBCA to make interim orders to facilitate the plan. The court in the Abitibi proceeding made an interim order that looked very much like the type of order a court would make in a CCAA proceeding. Included in the order was a temporary stay (until the hearing date for approval of the arrangement) against any person (not just the bondholders and term lenders) accelerating or terminating any contract with any of the Abitibi entities. Unlike the orders granted under the CCAA, however, there was no exemption for eligible financial contracts with the Abitibi entities.
The Quebec Superior Court in its reasons associated with the order does not deal with eligible financial contracts except to note that the orders requested "exclude from their application swap or derivative transactions or eligible financial contracts". However, the order itself did not exclude all eligible financial contracts from the stay. It only excluded eligible financial contracts with persons "other than the Abitibi parties". The intention here was seemingly not to interfere with the operation of credit default transactions having Abitibi as a reference entity or other eligible financial contracts between third parties where termination may have been triggered by an Abitibi default.
The order made in Abitibi is in contrast to the decision of the Alberta Court of Queen's Bench in Re Enron Canada (2001), 31 C.B.R. (4th) 15 (Alta. Q.B.). In that case, a CBCA plan of arrangement application was brought in which the applicant sought a stay of termination rights under contracts that would have been classified as "eligible financial contracts" under the CCAA. Parties to such contracts had contractual rights to terminate based on the Chapter 11 filing of the applicant's parent corporation or other credit events affecting the parent corporation, which was the applicant's credit support provider. The applicant argued that it was solvent and that it could remain so if a stay was granted to give it time to renegotiate credit support arrangements with its counterparties. The court rejected the application on the basis that it was not appropriate to interfere with the contractual rights of the parties and that the public policy against interfering with close-out and netting rights in the case of insolvent counterparties applied as well to solvent counterparties seeking to reorganize.
The very fact that the Abitibi order was made raises an issue for close-out netting. It is important to note, however, that the court did not hear arguments from any affected parties regarding the application of the order to eligible financial contracts and it was not the focus of Abitibi's submissions to the court. Also, the Enron Canada decision was not before the court. An appeal of the order, including the stay, was launched by the term lenders, but not parties to any EFCs specifically. The order became moot a little over a month after it was made when Abitibi filed under the CCAA, it having become apparent that the corporate plan would not succeed. Given the circumstances, the precedential value of the order on this issue is not as great as that of the Enron Canada case.
If, as this case suggests, the courts will allow the CBCA plan of arrangement proceeding to be used by an insolvent corporation as an alternative to a CCAA proceeding to deal not only with bondholder claims but also claims of ordinary creditors such as term lenders, then it makes sense to treat the commencement of such a proceeding, at least where creditors' claims are involved, in the same way as other bankruptcy events of default. Parties may want to consult with their Canadian counsel to ensure that the bankruptcy event of default is drafted widely enough to capture this type of corporate proceeding. As noted, corporate plans are used in many situations that do not involve insolvent entities or claims of creditors, so not every plan of arrangement procedure should give rise to an event of default. We suggest that the triggering event be the commencement of a proceeding under corporate law that proposes to deal with the claims of any class of creditors.
Parties will be in a better position to challenge the type of stay order granted in Abitibi where they have a clear contractual termination right. That right does not have to be the commencement of the corporate proceeding of course. Parties could have rights to terminate based on other events. For example, very often the Canadian proceedings will be accompanied by a performance default, a cross-default or the commencement of a U.S. Bankruptcy Code proceeding with respect to the entity or its related entities, which may itself be a termination event or event of default.