A recent decision of the Alberta Court of Queen’s Bench in Tallgrass10 clarifies the threshold that a company must meet when it seeks relief pursuant to the CCAA11, particularly when such an application is met with a competing application by a secured lender for the appointment of a receiver.
In this case, the Court was considering such competing applications, as Alberta Treasury Branches (“ATB”), the Debtor’s senior secured creditor, applied for the appointment of a receiver with the support of the second in priority secured creditor Toscana Capital Corporation (“Toscana”).
The historical attempts by the Debtor to find alternate sources of financing were critical to the Court’s ultimate analysis in this case. The Debtor was extended two secured loans: a credit facility from ATB and a bridge loan credit facility from Toscana (collectively the “Secured Lenders”). Upon the maturity of the bridge loan facility, the Debtor began to look for traditional financing to replace the bridge financing. As no conventional financing was available, the Debtor began to explore the availability of non-conventional financing.
Toscana agreed to forbear from enforcement of the bridge loan for a certain period to provide the Debtor with additional time to finalize financing alternatives. Following the expiry of this period, the Secured Lenders issued demands against the Debtor. Upon the issuance of the demands by the Secured Lenders, a financial advisor (the “Advisor”) was retained to provide reports to the Secured Lenders. The Secured Lenders granted further forbearance until the receipt of these reports. Once the reports were received, the Secured Lenders advised the Debtor that they were no longer prepared to forbear and that they intended to bring an application to appoint a receiver. In response, the Debtor sought an initial order under the CCAA.
The Alberta Court of Queen’s Bench dismissed the Debtor’s application for an initial order under the CCAA and approved the Secured Lenders’ application for a receivership order.
In the Court’s Reasons for Judgment, Madam Justice Romaine highlighted that an order under s. 11 of the CCAA is discretionary. Notwithstanding the fact that an applicant may meet the technical requirement for an initial order under the CCAA, an applicant must also satisfy the court that circumstances exist that make the order appropriate. In that regard, a key issue addressed by Madam Justice Romaine was whether the Debtor could establish that there was any reasonable possibility that the Debtor would be able to restructure its affairs. For a Debtor to establish that it has a reasonable possibility of restructuring its affairs, Justice Romaine stated the Debtor does not need to show a fully developed plan. Rather, the Debtor must show evidence of a “germ of a reasonable and realistic plan”, particularly where there is opposition from the major stakeholders most at risk in the proposed restructuring.
The Court, in considering the restructuring options proposed by the Debtor, found that although the proposed options were sufficiently detailed, they were not realistic or commercially reasonable. Specifically, the Court noted that the Debtor had exhausted any chance of finding conventional funding and that the Debtor had been unable to secure any firm commitments for non-conventional funding.
Due to the lack of realistic or commercially reasonable restructuring options, the Court found that if an initial order were granted, it would likely result in a liquidating CCAA. Although a liquidating CCAA is not itself precluded, the Secured Lenders in this case objected to the Debtor’s management controlling the liquidation process as the Secured Lenders had lost faith in the management of the Debtor. The Court went on to note that this was not a case where the Secured Lenders had acted impulsively, as the Debtor had more than adequate opportunity to canvass the market for refinancing and restructuring options and had been unable to do so. The Court further stated that because the Debtor and Secured Lenders were in an adversarial mode, this would not bode well for an inexpensive CCAA restructuring.
Finally, the Court noted that the fundamental purpose of an initial order under the CCAA is to permit a company to carry on business and, where possible, to avoid the social and economic costs of liquidating its assets. However, in this case, the Debtor was a company with very few employees, a handful of independent contractors, and relatively minor unsecured debt. In other words, the Debtor did not carry on a business that had broader community or social implications that may require greater flexibility from creditors. In the case of the Debtor, the major stakeholders were the Secured Lenders, who opposed the CCAA application.
In light of these findings, the Court was not satisfied that a CCAA order would be appropriate in the circumstances. As such, the Court dismissed the Debtor’s application and approved the Secured Lenders’ application to appoint a receiver.
This case serves as a reminder that an application for a CCAA initial order must be accompanied by a realistic and commercially reasonable “germ” of a plan, and the court will critically examine such proposed plans. Further, it also illustrates that the more a debtor lacks the hallmarks of the most large and difficult CCAA restructurings (such as groups of broad and diverse stakeholder groups), the more the debtor must ensure that its proposed plan is reasonable and realistic.