Ontario Superior Court confirms third-party releases are permitted in BIA proposals

In the Kitchener Frame Ltd¹ decision, the Ontario Superior Court of Justice (Commercial List) confirmed that third-party releases in proposals made under the BIA² are permitted. In doing so, the Court relied on the principle that the BIA and CCAA³ ought to be read and interpreted, harmoniously. Finally, the Court sanctioned a consolidated proposal on the basis it met the requirements set out in section 59(2) of the BIA.

The decision relates to an unopposed motion requesting an order sanctioning an amended consolidated proposal pursuant to the BIA. The consolidated proposal put forward by the Applicants, Kitchener Frame Limited and Thyssenkrupp Budd Canada Inc., included broad third-party releases in favour of the proposal trustee, the union and its counsel, and certain affiliates of the Applicants that provided funding, to name a few. The releases contained in the proposal related to a variety of claims and the releases provided that all such claims would be released and waived to the full extent permitted by applicable law. The proposal was approved over 99.9% in number and over 99.8% in dollar value of the affected creditors (achieving the required “double majority” voting threshold required under the BIA).

The Issues

The central issues of the motion were: i) whether the amended consolidated proposal should be sanctioned, and (ii) whether third-party releases were permitted under the BIA.

The Decision

With respect to the consolidation, Justice Morawetz agreed with the Applicants’ submissions that consolidation is appropriate in the circumstances given the “intertwined nature of the Applicants’ assets and liabilities.” In particular, the Applicants’ share the same creditor base and rely on the same loan to fund both their pension obligations and costs relating to the BIA proceedings. Further, the Court found that no creditor of either Applicant would be prejudiced by the consolidated proposal. Finally, the proposal received approval from the affected creditors, meeting the requisite BIA “double majority” and was endorsed by the proposal trustee.

Justice Morawetz then considered the permissibility of third-party releases. He reiterated the modern statutory interpretation that statutes should not be technically or stringently interpreted in the insolvency context but should be interpreted in a manner that is flexible so as to give purpose to the legislation. He then turned to subsection 62(3) of the BIA, which reads:

The acceptance of a proposal by a creditor does not release any person who would not be released under this Act by discharge of the debtor.

Adopting a “protective but not prohibitive” interpretation (i.e. releases are not automatic but require some other act), he stated:

…that a more flexible purposive interpretation is in keeping with modern statutory principles and the need to give a purposive interpretation to insolvency legislation must start from the proposition that there is no express prohibition in the BIA against including third-party releases in a proposal.

Justice Morawetz then considered the permissibility of third-party releases under the BIA in comparison to their treatment in CCAA proceedings. He stated the recent case of Ted Leroy Trucking³ supports the notion that a harmonious approach to the two statutes must be taken. If the language of these two statutes lends to a harmonious interpretation, Courts should move towards that interpretation; this will avoid “statute shopping.” Accordingly, this is the interpretation which he applied.

Under the CCAA regime, third-party releases are permissible; therefore, in the absence of express language to the contrary in the BIA, a third-party release which meets the requirements under the CCAA, should similarly be sanctioned if part of a BIA proposal. The case of Metcalfe & Mansfield Alternative Investments II Corp (Ltd)⁴ lays out five criteria which are required to justify third-party releases under CCAA proceedings.

Justice Morawetz determined the third-party releases in the Applicants’ proposal met the Metcalfe criteria. Furthermore, the consolidated proposal met the requirements set out in section 59(2) of the BIA (reasonableness, being for the benefit of the Applicants and creditors generally, and made in good faith).

Conclusion

The decision confirms that, in keeping with modern statutory principles, the BIA and CCAA should be interpreted consistently unless directly precluded by the language of the acts. Given that there is no express language prohibiting third-party releases in the BIA, there is no cogent reason for prohibiting or subjecting them to more scrutiny than they would otherwise receive under the CCAA. The appropriate criteria justifying their inclusion in a proposal are set out in Metcalfe, which outlines requirements for third-party releases in CCAA plans. If such criteria are met, the third-party releases should be allowed in the context of a BIA proposal, as well.