An “Administration Charge” under the CCAA
The Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (“CCAA”) permits a court having jurisdiction over proceedings for the restructuring of an insolvent company to make certain orders, to secure payment of the fees of certain officials involved in those proceedings, including the Monitor of the insolvent company appointed for the restructuring proceeding.
A surprising judgment re the “Administration Charge”
The British Columbia Supreme Court recently rendered a surprising (and rather important) judgment about such an Administration Charge in the case of WorldspanMarineInc. (Re).1 The court held that the Administration Charge attached to the proceeds of sale of a Canadian vessel belonging to the insolvent company, even where the vessel was physically in the United States. In addition, the Court held that the Administration Charge enjoyed a “super priority” that trumped the vessel’s ship mortgage held by a secured creditor. In fact, the Charge enjoyed a “super priority” outranking all other, traditional in rem claims against the vessel arising under Canadian maritime law.
The Background of the Case
The judgment emerged from a complex case, involving an insolvent B.C. shipyard (Worldspan Marine Inc.), which had fallen into insolvency several years previously, largely because one of its customers (a certain Mr. Sergeant) for whom it had been building a very large yacht, had a conflict with the yard over the vessel’s construction costs, and stopped making payments to the yard under his vessel construction agreement, before the yacht was finished. As a result, his yacht was never completed, and the yard fell on hard times. The yard instituted proceedings under the CCAA in the B.C. Supreme Court, seeking protection from its creditors, in the hope of working out a compromise or arrangement with them, developing a restructuring plan subject to judicial approval, and eventually resuming business, as the statute permits. In those proceedings, the B.C. Supreme Court, in 2011, issued an “initial order” under sect. 11.52 of the CCAA, including an “Administration Charge”2 The Administration Charge was ordered so as to provide security up to $500,000 for the fees and expenses of the Monitor, legal experts engaged by the Monitor, and legal experts engaged by the debtor company for the purpose of the CCAA proceedings. The Administration Charge was stipulated by the order to apply to “… their current and future assets, undertakings and properties of every nature and kind whatsoever, and wherever situate including all proceeds thereof.”
At the time when this initial order establishing the Administration Charge was made, Worldspan Marine owned another, smaller, Canadian-registered yacht (the “A129”), which it had sent to the State of Washington, in the hope of selling it. That smaller yacht was mortgaged to Caterpillar Financial Services Corp. (“CAT”). The A129 was valued at $1.1 million, but its mortgage debt was valued at $1,438,481.03.
CAT had the A129 arrested in rem in foreclosure proceedings in the U.S. District Court in Seattle, even before the initial order under the CCAA was made in B.C. CAT then obtained an order of default in Seattle, declaring that the A129 and all persons interested in her, other than the yacht broker, were in default. CAT also filed a proof of claim in the B.C. Supreme Court when that Court established a claims filing process.
Acting under the U.S. Bankruptcy Code, the CCAA Monitor and the petitioners (Worldspan et al.) obtained a “Recognition Order” from the United States Bankruptcy Court for the Western District of Washington deferring all further litigation relating to the A129 to the B.C. Supreme Court.
The B.C. Supreme Court then approved the sale of the A129, ordering the net proceeds to be held in trust by CAT’s solicitors. The sale order recognized that CAT’s mortgage had first priority, subject only to the potential claim that the Administration Charge attached to the A129.
The remaining issue to be decided was simply whether the Administration Charge applied to the yacht A129 and, if so, whether it ranked ahead of the claim of CAT as a secured creditor of the yacht by virtue of its marine mortgage.
Giving the CCAA a purposive and liberal construction consistent with its plain wording, the court held that the Administration Charge served the purpose of that statute in facilitating corporate restructuring of insolvent companies, inasmuch as it afforded security for the fees charged by or associated with the Monitor. The Administration Charge, by virtue of subsection 11.52(2) of the CCAA enjoyed a “super priority”, and there was no prescribed restriction on the type or location of the property to which it could apply.
The court then considered the “super priority” of the CCAA Administration Charge in the context of the usual order of ranking of maritime in rem claims under Canadian maritime law, holding plainly that it “trumps” them (para. 63). He added that had Parliament, which has exclusive legislative authority over navigation and shipping, as well as bankruptcy and insolvency, intended to exempt maritime in rem claims from the “super priority” created by s. 11.52, it would have said so. Accordingly, the Administration Charge was found to be an in rem charge attaching to the A129. CAT’s solicitors were therefore ordered to pay and deliver to the Monitor the balance of the proceeds of sale of the yacht.
Because of the Worldspanruling, a ship mortgagee or a maritime lienholder, as secured in rem creditors, should be aware that the traditional ranking of in rem maritime claims may not be enforced. If the Canadian corporate owner of the mortgaged or liened vessel becomes insolvent and seeks restructuring under Canada’s CCAA, and if the Canadian court having jurisdiction in those proceedings issues an order under sect. 11.52 imposing an Administration Charge, that Charge may well attach to the mortgaged or liened vessel. In addition, by virtue of the Charge’s “super priority”, it may outrank the maritime in rem claim of the mortgagee or lienholder against the vessel (and any proceeds of her eventual judicial sale).
It remains to be seen whether this judgment will be appealed and, if so, what the ultimate ruling will be. BLG’s admiralty lawyers will keep a close “watching brief” on this case and the point of law concerned, in order to be able to keep clients properly and timely informed of all relevant developments.