Court File No.: ONTARIO ARRANGEMENT

Court File No.: CV-16-11363-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE MATTER OF THE COMPANIES’ CREDITORS
ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF
PACIFIC EXPLORATION & PRODUCTION CORPORATION, PACIFIC E&P
HOLDINGS CORP., META PETROLEUM CORP., PACIFIC STRATUS
INTERNATIONAL ENERGY LTD., PACIFIC STRATUS ENERGY COLOMBIA
CORP., PACIFIC STRATUS ENERGY S.A., PACIFIC OFF SHORE PERU S.R.L.,
PACIFIC RUBIALES GUATEMALA S.A., PACIFIC GUATEMALA ENERGY CORP.,
PRE-PSIE COÖPERATIEF U.A., PETROMINERALES COLOMBIA CORP., AND
GRUPO C&C ENERGIA (BARBADOS) LTD.
Applicants
BOOK OF AUTHORITIES OF THE AD HOC COMMITTEE
OF SENIOR UNSECURED NOTEHOLDERS
(For the Initial Application returnable April 27, 2016)
Dated: April 27, 2016
GOODMANS LLP
Barristers & Solicitors
Bay Adelaide Centre
333 Bay Street, Suite 3400
Toronto, Canada M5H 2S7
Brendan D. O’Neill (LSUC#: 43331J)
[email protected]
Ryan Baulke (LSUC#: 66189O)
[email protected]
Tel: (416) 979-2211
Fax: (416) 979-1234
Lawyers for the Ad Hoc Committee of
Senior Unsecured Noteholders
INDEX
TAB
1.
Crystallex International Corp. Re, 2012 ONSC 2125
2.
Crystallex International Corp. Re, 2012 ONCA 404
3.
Ted Leroy Trucking Century Services Ltd. Re, 2010 SCC 60
4.
White Birch Paper Holding Co., Re 2010 QCCS 1176
5.
Canwest Global Communications Corp. (Re), [2009] O.J. No. 4286 (Sup. Ct. J.
[Commercial List])
6.
8440522 Canada Inc., Re, 2013 ONSC 6167
7.
Tamerlane Ventures Inc., Re, 2013 ONSC 5461
8.
Royal Bank v. Soundair Corp., [1991] O.J. No. 1137 (C.A.)
9.
Nortel Networks Corp., Re, [2009] O.J. No. 4293 (Sup. Ct. J. [Commercial List])
10.
Nelson Education Limited (Re), 2015 ONSC 5557
11.
White Birch Paper Holding Co., Re, 2010 QCCS 764
12.
SkyLink Aviation Inc. Re., 2013 ONSC 1500
1
Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
2012 ONSC 2125
Ontario Superior Court of Justice [Commercial List]
Crystallex International Corp., Re
2012 CarswellOnt 4577, 2012 ONSC 2125, 91 C.B.R. (5th) 169
In Matter of the Companies' Creditors Arrangement Act, 1985, c.C-36 as Amended
And In the Matter of a Plan of Compromise or Arrangement of Crystallex International Corporation
Newbould J.
Heard: April 5, 2012
Judgment: April 16, 2012 *
Docket: CV-11-9532-00CL
Proceedings: affirmed Crystallex International Corp., Re (2012), 2012 ONCA 404 (Ont. C.A.)Proceedings: additional reasons
at Crystallex International Corp., Re (2012), 2012 ONCA 527 (Ont. C.A.)
Counsel: Markus Koehnen, Andrew J.F. Kent, Jeffrey Levine for Crystallex International Corporation
Richard B. Swan, S. Richard Orzy, Emrys Davis for Computershare Trust Company of Canada
David R. Byers, Maria Konyukhova for Monitor, Ernst & Young Inc.
Shayne Kukulowicz for Tenor Special Situations Fund LP
John T. Porter for Juan Antonio Reyes
Robert Frank for Forbes & Manhattan Inc., Aberdeen International Inc.
Subject: Insolvency
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.b Grant of stay
XIX.2.b.vii Extension of order
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.h Miscellaneous
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.3 Arrangements
XIX.3.a Approval by creditors
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.5 Miscellaneous
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1
Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Miscellaneous
C Corp. sought court approval for agreement with T LP providing debtor in possession (DIP) financing — Principal asset
of C was US$3.4 billion arbitration claim against Venezuela arising from cancelled mining contract — Agreement with
T provided for advances of $36 million and resulting entitlement to 35 per cent of net proceeds of arbitration award — T
LP to have right to appoint two directors and right to agree on fifth independent director — Agreement was opposed by
C's noteholders who proposed their own DIP financing — Agreement with T LP approved — Agreement was not "plan
of arrangement" or "compromise" requiring vote — C had tried to find alternative financing — Return of 10 per cent PIK
interest not unreasonable return for DIP lender because of the uncertainty of getting any return — Stay pending appeal by
noteholders not appropriate as repayment of bridge financing due.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Grant of stay —
Extension of order
C Corp. sought court order extending stay contained in intial order — Stay continued — Motion unopposed and supported
by monitor.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Arrangements — Approval by creditors
C Corp. sought court approval for agreement with T LP providing debtor in possession (DIP) financing — Agreement was
opposed by C's noteholders who proposed their own DIP financing — Agreement with T LP approved — Agreement was
not "plan of arrangement" or "compromise" requiring vote.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Miscellaneous
C Corp. sought court approval for agreement with T LP providing management incentive plan (MIP) — Agreement was
opposed by C's noteholders who had own proposed plan — Agreement with T LP approved — Business judgment rule
applicable — Provisions of the MIP approved by independent committee of board — Independent board members not
participants in MIP — Existing stock options ultimately realized by participants of MIP would be deducted from any bonus
awarded under the MIP — Approval of MIP was condition of DIP loan.
Table of Authorities
Cases considered by Newbould J.:
Bennett v. Bennett Environmental Inc. (2009), 2009 ONCA 198, 2009 CarswellOnt 1132, 94 O.R. (3d) 481, 53 B.L.R.
(4th) 100, 308 D.L.R. (4th) 530, 264 O.A.C. 198 (Ont. C.A.) — considered
Calpine Canada Energy Ltd., Re (2007), 2007 CarswellAlta 1050, 2007 ABQB 504, 35 C.B.R. (5th) 1, 415 A.R.
196, 33 B.L.R. (4th) 68 (Alta. Q.B.) — followed
Calpine Canada Energy Ltd., Re (2007), 35 C.B.R. (5th) 27, 410 W.A.C. 25, 417 A.R. 25, 2007 ABCA 266, 2007
CarswellAlta 1097, 80 Alta. L.R. (4th) 60, 33 B.L.R. (4th) 94 (Alta. C.A. [In Chambers]) — referred to
Canadian Red Cross Society / Société Canadienne de la Croix-Rouge, Re (1998), 1998 CarswellOnt 3346, 5 C.B.R.
(4th) 299, 72 O.T.C. 99 (Ont. Gen. Div. [Commercial List]) — considered
Canwest Global Communications Corp., Re (2009), 2009 CarswellOnt 6184, 59 C.B.R. (5th) 72 (Ont. S.C.J.
[Commercial List]) — considered
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2
Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
Canwest Publishing Inc./Publications Canwest Inc., Re (2010), 63 C.B.R. (5th) 115, 2010 CarswellOnt 212, 2010
ONSC 222 (Ont. S.C.J. [Commercial List]) — considered
Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp. (2008), 2008 BCCA 327, 2008 CarswellBC 1758, 83
B.C.L.R. (4th) 214, 296 D.L.R. (4th) 577, 434 W.A.C. 187, 258 B.C.A.C. 187, 46 C.B.R. (5th) 7, [2008] 10 W.W.R.
575 (B.C. C.A.) — distinguished
Grant Forest Products Inc., Re (2009), 2009 CarswellOnt 4699, 57 C.B.R. (5th) 128 (Ont. S.C.J. [Commercial List])
— considered
Kerr v. Danier Leather Inc. (2007), 2007 SCC 44, 2007 CarswellOnt 6445, 2007 CarswellOnt 6446, 87 O.R. (3d)
398 (note), 36 B.L.R. (4th) 95, 231 O.A.C. 348, 286 D.L.R. (4th) 601, [2007] 2 S.C.R. 331, 48 C.P.C. (6th) 205,
368 N.R. 204 (S.C.C.) — followed
Nortel Networks Corp., Re (2009), 2009 CarswellOnt 1330 (Ont. S.C.J. [Commercial List]) — referred to
Reference re Companies' Creditors Arrangement Act (Canada) (1934), [1934] 4 D.L.R. 75, 1934 CarswellNat 1, 16
C.B.R. 1, [1934] S.C.R. 659 (S.C.C.) — considered
Royal Oak Mines Inc., Re (1999), 1999 CarswellOnt 792, 7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial List])
— considered
Stelco Inc., Re (2005), 253 D.L.R. (4th) 109, 75 O.R. (3d) 5, 2 B.L.R. (4th) 238, 9 C.B.R. (5th) 135, 2005 CarswellOnt
1188, 196 O.A.C. 142 (Ont. C.A.) — followed
Timminco Ltd., Re (2012), 2012 ONSC 506, 95 C.C.P.B. 48, 2012 CarswellOnt 1263, 85 C.B.R. (5th) 169 (Ont.
S.C.J. [Commercial List]) — considered
Statutes considered:
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
Canada Business Corporations Act, R.S.C. 1985, c. C-44
s. 123(4) — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
s. 11.2 [en. 1997, c. 12, s. 124] — considered
s. 11.2(4) [en. 2005, c. 47, s. 128] — considered
s. 11.2(4)(d) [en. 1997, c. 12, s. 124] — considered
s. 11.2(4)(f) [en. 1997, c. 12, s. 124] — considered
s. 11.5(1) [en. 1997, c. 12, s. 124] — considered
Securities Act, R.S.O. 1990, c. S.5
Generally — referred to
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3
Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
Words and phrases considered:
plan of arrangement
A "plan of arrangement"or a "compromise" is not defined in the [Companies' Creditors Arrangement Act]. It is, however,
to be an arrangement or compromise between a debtor and its creditors. The [applicant's] DIP facility is not on its face such
an arrangement or compromise between [the debtor company] and its creditors. Importantly the rights of the noteholders
are not taken away from them by the . . . DIP facility. The noteholders are unsecured creditors. Their rights are to sue to
judgment and enforce the judgment. If not paid, they have a right to apply for a bankruptcy order under the BIA. Under
the [Act], they have the right to vote on a plan of arrangement or compromise. None of these rights are taken away by
the . . . DIP
MOTION by corporation for orders approving agreement for debtor in possession financing, management incentive plan,
extension of stay, and approval of actions of Monitor.
Newbould J.:
1 Crystallex moves for four orders, the first being an order approving DIP financing pursuant to a credit agreement between
Crystallex and Tenor Special Situation I, LLC ("Tenor"), the second being an order extending the stay referred to in paragraph
16 of the Initial Order dated December 23, 2011 until July 16, 2012 or such further date as may be ordered, the third being an
order approving a Management Incentive Plan ("MIP") and a Retention Advance Agreement in favour of Robert Fung and the
fourth being an order to approve the actions of the Monitor referred to in the second and third reports of the Monitor.
2
The noteholders of Crystallex 1 oppose the Tenor DIP facility. They propose a DIP loan which they would make for a
smaller amount and for a shorter term than the Tenor DIP facility. They also oppose the MIP. In order to preserve any appeal
rights they may have and may want to assert, they do not consent to an order approving the actions of the Monitor in the second
and third reports, but take no position in opposition to the order sought.
3
A shareholder, Mr. J.A. Reyes appeared on the motion to support the Tenor DIP facility and in principle the MIP, but
has some concerns regarding the terms of the MIP.
4 Forbes & Manhattan Inc. and Aberdeen International Inc., creditors owed approximately $2.5 million by Crystallex, oppose
the Tenor DIP facility and the MIP.
Background to the Financing
5
The history of the business of Crystallex and its mining project in Venezuela has been the subject of prior decisions in
cases brought by the Noteholders. The evidence on the record before me indicates in summary as follows.
6
The principal asset of Crystallex was its right to develop the Las Cristinas gold project in Venezuela. Las Cristinas is
one of the largest undeveloped gold deposits in the world containing measured and indicated gold resources of approximately
20.76 million ounces.
7
In September 2002 Crystallex obtained the right to mine the Las Cristinas project through a Mining Operation Contract
(the "MOC") with the Corporacion Venezolana de Guayana (the "CVG"), a state-owned Venezuelan corporation. Crystallex
complied with all of its obligations under the MOC. Neither the CVG nor the Government of Venezuela raised any material
concerns about lack of compliance. The CVG confirmed on several occasions that the MOC was in good standing and that
Crystallex was in compliance with it.
8
The Ministry of the Environment advised Crystallex in writing in April 2007 that Crystallex had completed all steps
necessary to obtain the required environmental permit. Crystallex was shown a draft of the permit and was told that it would
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Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
obtain the permit as soon as it had paid certain stamp duties and posted an insurance bond. Crystallex paid the duties, negotiated
the bond with the Ministry and posted the bond.
9
On February 3, 2011, despite confirming on several occasions that Crystallex's right to mine the Las Cristinas property
continued unchallenged, CVG purported to "unilaterally rescind" the MOC.
10 CVG rationalized its termination of the contract for reasons of "expediency and convenience" and because Crystallex had
allegedly "ceased activities for over a year" on the project. Crystallex did not cease activities. It was maintaining the mining site
in a shovel-ready state and was awaiting receipt of an environmental permit. Because of Venezuela's refusal to allow Crystallex
to exploit Las Cristinas, Crystallex became unable to pay its debts as they became due effective December 23, 2011.
11 Crystallex has a number of liabilities, the most of significant of which is a liability of approximately $100 million in senior
unsecured notes that were issued pursuant to a Trust Indenture dated December 23, 2004. The notes were due on December 23,
2011. In addition, Crystallex has other liabilities of approximately CAD$1.2 million and approximately US$8 million.
12
The principal asset of Crystallex is its arbitration claim of US$3.4 billion against Venezuela. In addition, Crystallex has
mining equipment with a book value of approximately $10.1 million and cash of approximately $2 million.
13 Crystallex asserts that the insolvency in which it finds itself is not attributable to poor business judgment by Crystallex but
to the illegal conduct of the Venezuelan government in refusing to let Crystallex develop Las Cristina, even though Crystallex
had the undisputed contractual right to do so.
Arbitration proceedings
14
On February 16, 2011 Crystallex filed a Request for Arbitration with the International Centre for the Settlement of
Investment Disputes ("ICSID") against Venezuela pursuant to a Bilateral Investment Treaty between Canada and Venezuela.
ICSID is a mechanism through which private investors can seek legal redress against a foreign government for conduct that
might be otherwise immune from suit. In the arbitration, Crystallex seeks compensation of $3.4 billion plus interest as full
compensation for the loss of its investment.
15 The Arbitration Tribunal held its first procedural meeting on December 1, 2011 in Washington, DC. At that hearing, the
Tribunal established Washington, DC as the seat of the arbitration proceeding, and established a timetable for the arbitration.
Pursuant to the timetable, Crystallex delivered its written case on February 10, 2012. Crystallex's written case comprises fourteen
volumes of detailed witness statements, expert's reports, exhibits, law and argument. Its memorial summarizing the evidence,
law and argument extends to 226 pages. Venezuela is required to respond to Crystallex's case by August 31, 2012. The hearing
of the arbitration is scheduled for two weeks beginning on November 11, 2013.
16
The valuation evidence Crystallex submitted with its ICSID case claims damages of $3.4 billion plus interest. While
the result of the arbitration is unknown, if it is successful, and the award is collected, there will be far more available than
necessary to pay the outstanding debts of Crystallex. It is also clear that any meaningful recovery for the creditors and possibly
shareholders will require some success in the arbitration, either by a collectible award or a settlement.
DIP financing selection process
17 In accordance with paragraph 12 of the Initial Order, Crystallex, with the assistance of its counsel and its financial advisor,
commenced a process to seek DIP financing of $35 million with a term of December 13, 2014.
18
With the approval of the Monitor, Crystallex hired a financial advisor, Skatoff & Company, LLC based in New York
City. Mr. Skatoff is an independent financial advisory firm focused on debt advisory services, financial restructuring advisory
services, financing advisory services and M&A services.
19
Crystallex, in consultation with Mr. Skatoff and on its recommendation, prepared a set of bid procedures to govern
the solicitation of bids to provide DIP financing to Crystallex. The bid procedures were approved by the Monitor. The bid
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Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
procedures are referred to in some detail in my endorsement of January 25, 2012. They included a provision whereby the DIP
lender could obtain a "back-end entitlement" of up to 49% of the arbitration proceeds.
20 The bid procedures provided that Crystallex would only consider bids from qualified bidders. A qualified bidder was one
who, among other things, complied with certain participation requirements including the submission of a participation package.
21 As a result of the DIP financing auction, a small number of qualified bidders ultimately submitted proposals for the DIP
financing. Among the bidders were the three hedge funds that hold approximately 77% of Crystallex's senior unsecured notes.
22 Ultimately Mr. Skatoff recommended, and the board of Crystallex agreed, to accept the terms of the Tenor DIP financing
now before the court for approval.
Proposed Tenor DIP financing
23
The Tenor DIP facility contains the following material financial terms:
(a) Tenor will advance $36 million to Crystallex due and payable on December 31, 2016. This period for the loan
is based on Crystallex's arbitration counsel's assessment of the likely timing of a decision from the arbitral tribunal
and collection of the award.
(b) The advances will be in four tranches, being $9 million upon execution of the loan documentation and approval
of the facility by court order in Ontario, the second being $12 million upon any appeal of the Ontario court order
approving the facility being dismissed and upon a U.S court order approving the facility, the third being $10 million
when Crystallex has less than $2.5 million in cash and the fourth being $5 million when Crystallex again has less
than $2.5 million in cash.
(c) The loans are to be used to (i) repay an interim bridge loan of $3.25 million advanced by Tenor with court
approval of January 20, 2012 and payable on April 16, 2012, (ii) fees and expenses in connection with the facility, (iii)
general corporate expenses of Crystallex including expenses of the restructuring proceedings and of the arbitration
in accordance with cash flow statements and budgets of Crystallex approved by Tenor from time to time.
(d) Crystallex will pay Tenor a $1 million commitment fee.
(e) $35 million of the loan amount will bear PIK interest (payment in kind, meaning it is capitalized and payable only
upon maturity of the loan or upon receipt of the proceeds of the arbitration) at the rate of 10% per annum compounded
semi-annually.
(f) Tenor will receive additional compensation equal to 35% of the net proceeds of any arbitral award or settlement,
conditional upon the second tranche of the loan being advanced. Net proceeds of the award or settlement is defined as
the amount remaining after payment of principal and interest on the DIP loan, taxes and proven and allowed unsecured
claims against Crystallex, including the noteholders, the latter of which will have a special charge for the unsecured
amounts owing. Alternatively, Tenor can convert the right to additional compensation to 35% of the common shares
of Crystallex. This conversion right is apparently driven by tax considerations.
24
The Tenor DIP facility also provides for the governance of Crystallex to be changed to give Tenor a substantial say in
the governance of Crystallex. More particularly:
(a) Crystallex shall have a reduced five person board of directors, being two current Crystallex directors, two nominees of
Tenor and an independent director selected by agreement of Crystallex and Tenor.
(b) The independent director shall be chair of the board of directors and shall not have a second-casting or tie-breaking vote.
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Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
2012 ONSC 2125, 2012 CarswellOnt 4577, 91 C.B.R. (5th) 169
(c) The independent director shall be appointed a special managing director and shall have all the powers of the board of
directors to (i) the conduct of the reorganization proceedings in Canada and in the U.S. and the efforts of Crystallex to
reorganize the pre-filing claims of the unsecured creditors, (ii) any matters relating to the rights of Crystallex and Tenor
as against the other under the facility, (iii) the administration of the MIP to the extent not otherwise delegated to the bonus
pool committee under the MIP, and (iv) to retain any advisor in respect of these matters. The special manager shall first
consult with a non-board advisory panel, consisting of the three Crystallex directors who will step down from the board,
and consider in good faith their recommendations.
(d) With respect to matters that may not at law be delegable to the special managing director, he will be required to
obtain board approval. If the Tenor nominees use their votes to block that approval, Tenor will forfeit its 35% additional
compensation.
25
The Tenor DIP facility contains proscribed rights of Tenor in the event of default. Tenor may seize and sell assets other
than the arbitration proceeding (i.e. any cash and unsold mining equipment). It may not sell the arbitration claim. If there is a
default before any arbitration award, Tenor would have the right to apply to court to have the Monitor or a Canadian receiver and
manager appointed to take control of the arbitration proceedings. If such application were not granted, Tenor would be entitled
to exercise the rights and remedies of a secured creditor pursuant to an order, the loan documentation or otherwise at law.
Proposed Noteholders DIP Loan and Plan
26 The noteholders propose a DIP loan of $10 million with a simple interest rate of 1% repayable on October 15, 2012. This
was essentially the same as the interim bridge loan of $10 million with simple interest of 1% proposed by the noteholders that
would have been repaid on April 16, 2012 that was not accepted by Crystallex. It is quite clear that the interest rate is far below
market in the circumstances of Crystallex, and it is referred to in the noteholders factum as "exceptionally favourable".
27 During the process to find a DIP lender satisfactory to Crystallex and its advisors, the noteholders were asked to increase
their proposed loan to $35 million but they refused. However, in his affidavit Mr. Mattoni on behalf of the noteholders stated
that the noteholders would in the future be prepared under certain circumstances, if required by the court, to advance a DIP loan
on the same terms as the Tenor DIP facility. He stated that the noteholders would do so in the event that prior to October 1,
2012, the court orders that such long-term financing is appropriate and necessary. The noteholders would reserve their ability as
creditors to continue to oppose the need for such a loan and any stay extensions or attempts to secure such long-term financing
outside of a plan of compromise. The $10 million which they provided in interim financing would be repaid from this financing
such that the net effect of the financing would be the same as that of the Tenor DIP facility. During argument on this motion,
Mr. Swan said that the noteholders were not prepared to agree to such a $35 million facility at this time but only at some future
time as the $10 million facility they now proposed became due.
28 The noteholders have also now proposed a restructuring plan, said to be in response to the Tenor DIP and the MIP. This
was first proposed by Mr. Mattoni in his affidavit of March 27, 2012 as a proposal of the noteholders. At that time, he did not
have any internal authority from the QVT fund of which he is the investment manager, or from any of the other noteholders, to
make such proposal. This was shored up as indicated in his further affidavit of April 4, 2012 served just before the hearing of
this motion. The noteholders do not ask for approval of this plan on this motion, but put it forward as indicating a good faith
intention to bargain for a plan. The noteholders plan would:
a) provide $10 million at 1% interest in a single-draw to meet Crystallex's funding needs over the next several months
while a plan is negotiated;
b) provide $35 million to the Company in a straight exchange for 22.9% of Crystallex's equity;
c) exchange all outstanding debt for equity;
d) secure approximately 14% of the remaining equity for existing shareholders; and
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Crystallex International Corp., Re, 2012 ONSC 2125, 2012 CarswellOnt 4577
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e) provide incentives to management at a lesser level than the MIP. It would be up to the post-emergence board to
ensure that management is properly incentivized, which could involve other compensation as well.
Management Incentive Plan
29
In addition to approval of the DIP, Crystallex seeks approval of a Management Incentive Plan ("MIP") for certain of its
key employees. The fundamental terms of the MIP are as follows:
(a) An amount equal to up to 10% of the first $700 million in net proceeds of the arbitration award and an amount equal
to up to 2% of the net proceeds in excess of $700 million will be reserved as a retention pool for key management
employees.
(b) The amount to be retained in this pool is the amount remaining after payment of the outstanding principal and
interest on the DIP loan, outstanding operating and professional expenses, the unpaid claims of noteholders and other
stayed unsecured creditors, together with post-filing interest and all taxes payable by the company on the award.
(c) The size of the pool shall not exceed 10% of the net proceeds of the arbitral award or one quarter of the amount
that is available to shareholders of Crystallex after satisfaction of any additional compensation owing to Tenor under
the loan agreement.
(d) A compensation committee consisting of three persons who are currently independent directors of Crystallex and
who are expected to retire from the board in accordance with the governance provisions of the Tenor DIP facility, will
determine the retention payment paid to each beneficiary of the MIP. The compensation committee will be entitled
to distribute as much or as little of the retention pool as they see fit. Amounts remaining unpaid from the retention
pool will be returned to Crystallex.
30
Crystallex also proposes that there be a MIP charge to secure the payments, the charge to be subordinate to the
Administration Charge, the DIP Charge, the Directors' Charge and the Pre-filing Unsecured Creditors Charge.
31
Also sought for approval is a retention agreement for Mr. Fung which provides that at the end of each calendar quarter
during 2012 and 2013 the board of Crystallex will pay a retention advance of $125,000 per quarter to Mr. Fung. The making
of each payment will be at the discretion of the board but only to the extent that he remains properly engaged in the arbitration.
Those payments are to be treated as if they were pre-payments of any payments that would otherwise be awarded to Mr. Fung
from the retention pool under the MIP and therefore reduce any such amount he may receive from the retention pool.
DIP loan approval analysis
32
Section 11.2 of the CCAA provides that a court may provide security in favour of an interim or DIP lender who agrees
to lend to the debtor company having regard to its cash-flow statement. Section 11.2 (4) provides:
(4) In deciding whether to make an order, the court is to consider, among other things,
(a) the period during which the company is expected to be subject to proceedings under this Act;
(b) how the company's business and financial affairs are to be managed during the proceedings;
(c) whether the company's management has the confidence of its major creditors;
(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of
the company;
(e) the nature and value of the company's property;
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(f) whether any creditor would be materially prejudiced as a result of the security or charge; and
(g) the monitor's report referred to in paragraph 23(1)(b), if any.
33
Crystallex relies on the business judgment rule to support the decision of its board of directors to accept the Tenor DIP
facility. It is clear that the business judgment rule can apply to a debtor in CCAA proceedings. In Stelco Inc., Re (2005), 9
C.B.R. (5th) 135 (Ont. C.A.), Blair J.A. stated in that CCAA proceeding:
65. ...It is well-established that judges supervising restructuring proceedings - and courts in general - will be very hesitant
to second-guess the business decisions of directors and management. As the Supreme Court of Canada said in Peoples,
supra, at para. 67:
Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations
that are involved in corporate decision making ...
34 The noteholders point to Kerr v. Danier Leather Inc., [2007] 2 S.C.R. 331 (S.C.C.) per Binnie J. at para. 54 in which he
stated that the business judgment rule could not be used to qualify or undermine the duty of disclosure required by the Securities
Act and Bennett v. Bennett Environmental Inc., 2009 ONCA 198 (Ont. C.A.) per Lang. J.A. in which she held that whether a
director could be indemnified depended on the application of section 123(4) of the CBCA and not the business judgment rule.
35 I accept that in considering whether security under a DIP loan should be ordered, a court cannot ignore the factors directed
to be considered in section 11.2 (4) of the CCAA and could not order such security if a consideration of those factors led to an
opposite conclusion. But in my view those factors are not the only factors that can be considered, as section 11.2(4) directs a
court to consider the listed factors "among other things". One of the considerations that in my view can be taken into account is
the exercise or lack thereof of business judgment by the board of directors of a debtor corporation in considering DIP financing.
(i) Consideration of the Tenor DIP facility
36
In this case, the Crystallex board took legal advice from its solicitors McMillan LLP and financial advice from Mr.
Skatoff. I am satisfied that they carefully considered the relevant matters leading to the decision to accept the terms of the Tenor
DIP financing, including giving consideration to the noteholders' proposed DIP financing of $10 million to October, 2012, and
that they acted on an informed basis and in good faith with a view to the best interests of Crystallex and its stakeholders. See
the affidavits of Mr. Fung at paras. 52 to 67 and the reply affidavit of Mr. van't Hof at paras. 9 to 12. That being said, I must
consider the contentions of the parties and the factors as set out in section 11.2 (4).
37
The noteholders have made a number of objections to the Tenor DIP financing.
38 They contend that Crystallex should have sought sufficient financing to pay the noteholders in full, as was attempted prior
to the CCAA filing. The evidence indicates, however, that Mr. Skatoff attempted to do so with the market but the message he
received back consistently was that the market had no interest in paying out existing noteholders at 100 cents on the dollar in
a context where the notes were trading at a significant discount to par. Mr. Mattoni himself said on cross-examination that he
did not believe it would be possible to raise sufficient money on the market to pay out the noteholders, as did the noteholder's
financial expert witness Mr. Glenn Sauntry.
39
Mr. Mattoni in his affidavit states that the Tenor DIP facility was a pre-ordained coronation rather than the result of
a competitive bidding process. There is no evidentiary basis for this suggestion. It is clear from the evidence of Mr. Skatoff,
Mr. Fung and Mr. van't Hof and from the Monitor's report that there was a robust competitive bidding process and that full
consideration right up to the last minute was given to other bidders. The Monitor stated it its report that from its observation of
the process, it saw no evidence that Tenor was afforded preferential treatment over other participants in the process. It is also
clear that the noteholders' $10 million bid was considered by the board of Crystallex and, based on advice from its advisors,
not accepted. Thus any complaint from the noteholders on this score could only be that the Tenor bid was higher than market
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pricing for the facility. They had no such evidence and on cross-examination their financial expert Mr. Sauntry acknowledged
that he could not say that the Tenor bid was not reflective of market pricing.
40
The noteholders also complain that Mr. Skatoff did not undertake a valuation of Crystallex. The response of Crystallex
is that it was not Mr. Skatoff's job to do that. In light of the fact that the main asset of Crystallex is the arbitration claim, Mr.
Skatoff in my view would be in a poor position to value Crystallex.
41 Mr. Sauntry in his report attempted to value the arbitration claim in different ways. He is not a lawyer and has no knowledge
of the treaties involved or of the merits of the arbitration claim. He made assumptions in his cash flow analysis that, based on
the reply expert report of Mr. Dellepiane, which I have no reason to doubt as he was intimately involved in the preparation of
the arbitration claim, indicate Mr. Sauntry's lack of knowledge of the basis of the claim. Regarding Mr. Sauntry's analysis in (i)
implying a value to the arbitration claim from an analysis of the Tenor DIP proposal and stating that in substance that proposal
is a sale of a percentage of Crystallex's assets to Tenor and (ii) using the market value of Crystallex's securities as a proxy
for enterprise value, I accept the reply affidavit of Mr. Skatoff, and in particular paragraphs 34 to 41, as reason to doubt Mr.
Sauntry's analysis. As well, Mr. Sauntry's evidence on cross-examination, and in particular that referred to in paragraphs 8 to 12
of the Summary of Key Points From Cross-examinations, indicates little reliability should be placed on Mr. Sauntry's evidence.
42 In any event, in light of the lack of evidence from the noteholders that the Tenor bid was not above market, the contention
that Mr. Skatoff did not undertake a valuation of Crystallex or of the arbitration claim is of little moment.
43 The noteholders also contend that whereas the bid process spelled out terms that must not be contained in a bid and provided
that some terms were to be discouraged, the Tenor bid in the end contained some such terms. In those circumstances, the
noteholders contend that Crystallex should have re-canvassed the market. Mr. Skatoff's evidence is that other bidders presented
loan terms that would have resulted in similarly extensive changes to the loan document that accompanied the bid packages.
The world of restructuring is not a perfect world. A company seeking DIP financing can tell the market what it wants, but
cannot dictate its terms if the market tells it otherwise. The alternative is to walk away from the market. Regarding the changes
sought by the market, the Monitor in its report states:
50. During the negotiations, all bidders requested amendments to the template version of the loan agreement posted on
the Monitor's website as part of the CCAA Financing Procedures. The Monitor is of the view that such requests are
typical in any bidding or investment raising process. The Monitor observed that all parties were provided with the template
loan agreement and, as is common in processes such as the CCAA Financing Procedures, the final forms of the selected
commitment letter and senior credit agreement deviate from the template agreement.
44 The noteholders take a fundamental objection to the Tenor DIP facility on the basis that it is inconsistent with the purposes
of the CCAA and case law dealing with DIP loans. The noteholders say that it is not interim financing but a forced restructuring
plan prejudicial to them and that it should not proceed without a vote as required by the CCAA for a plan of arrangement or
compromise.
45
Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp. (2008), 46 C.B.R. (5th) 7 (B.C. C.A.) is authority
for the proposition that a stay under the CCAA should not be continued if the debtor company does not intend to propose a
compromise or arrangement to its creditors, and DIP financing should not be authorized to permit the debtor company to pursue
a restructuring plan that does not involve an arrangement or compromise with its creditors. In that case, the debtor wanted to
obtain financing to complete the construction of a golf course development without proposing an arrangement or compromise
with its creditors.
46
The noteholders seize upon a statement made by Mr. Fung in his affidavit filed on the initial application leading to the
Initial Order in which he said:
Crystallex strongly desires to pursue the arbitration and have stayed all claims against it until the arbitration has been
settled or Crystallex has realized on an arbitration award, at which point Crystallex expects that all creditors would be paid
in full to the extent of their proven claims.
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47 While there is no doubt that Mr. Fung made that statement, I think it needs to be considered in light of the reality agreed
by the parties that the only way any of the creditors will receive any substantial cash payment is from the proceeds of the
arbitration. This would be the case whether a plan of arrangement could be agreed or not. Also Mr. Mattoni agreed on crossexamination that Crystallex's goal of pursuing the arbitration and using the proceeds to pay creditors in full did not prevent
Crystallex from giving creditors some additional benefit in a plan of arrangement.
48 Moreover, often statements are made in CCAA proceedings about the intention of a party that later change. Mr. Koehnen
made clear in argument that Crystallex has every intention to attempt to negotiate a plan of arrangement with the noteholders
and that this has already been going on now on a without prejudice basis. He said the purpose of the stay to July 16, 2012 is
to negotiate a compromise with the noteholders during that time period. I accept that statement. The situation is not the same
as in Cliffs Over Maple Bay.
49
Is the Tenor DIP facility a plan of arrangement or compromise requiring a vote? In my view it is not.
50
A "plan of arrangement" or a "compromise" is not defined in the CCAA. It is, however, to be an arrangement or
compromise between a debtor and its creditors. The Tenor DIP facility is not on its face such an arrangement or compromise
between Crystallex and its creditors. Importantly the rights of the noteholders are not taken away from them by the Tenor DIP
facility. The noteholders are unsecured creditors. Their rights are to sue to judgment and enforce the judgment. If not paid,
they have a right to apply for a bankruptcy order under the BIA. Under the CCAA, they have the right to vote on a plan of
arrangement or compromise. None of these rights are taken away by the Tenor DIP.
51 I note that in this case the practical exercise of the rights of the noteholders is very problematical because of issues raised
in Mr. Fung's confidential affidavit no. 2.
52 The noteholders contend that giving Tenor 35% of the arbitration proceedings will take away from Crystallex a substantial
amount of equity making a compromise more difficult and less available for the unsecured creditors.
53 In Calpine Canada Energy Ltd., Re (2007), 35 C.B.R. (5th) 1 (Alta. Q.B.), leave to appeal denied (2007), 35 C.B.R. (5th)
27 (Alta. C.A. [In Chambers]), it was contended that a settlement of several claims in a complex cross-border restructuring
constituted a plan of arrangement or compromise and thus required a vote under the CCAA by the creditors affected. It was
contended that the settlement left less assets available for the Canadian unsecured creditors. In rejecting this contention, Romaine
J. stated the following:
12. The primary objection is that the GSA [global settlement agreement] amounts to a plan of arrangement and, therefore,
requires a vote by the Canadian creditors. The Opposing Creditors support their submissions by isolating particular
elements of the GSA and characterizing them as either a compromise of their rights or claims or as examples of imprudent
concessions made by the CCAA Debtors in the negotiation of the GSA. These specific objections will be analyzed in the
next part of these reasons, but, taken together, they fail to establish that the GSA is a compromise of the rights of the
Opposing Creditors for two major reasons:
(b) the Opposing Creditors blur the distinction between compromises validly reached among the parties to the GSA
and the effect of those compromises on creditors who are not parties to the GSA. ... If rights to a judicial determination
of an outstanding issue have not been terminated by the GSA, which instead provides a mechanism for their efficient
and timely resolution, those rights are not compromised.
19 ... While settlements made in the course of insolvency proceedings may, in practical terms, result in a diminution of
the pool of assets remaining for division, this is not equivalent to a compromise of substantive rights.
51. The GSA is not linked to or subject to a plan of arrangement. I have found that it does not compromise the rights
of creditors that are not parties to it or have not consented to it, and it certainly does not have the effect of unilaterally
depriving creditors of contractual rights without their participation in the GSA.
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55. I am satisfied that the GSA is not a plan of compromise or arrangement with creditors. Under its terms, as agreed among
the CCAA Debtors, the U.S. Debtors and the ULC1 Trustee, certain claims of those participating parties are compromised
and settled by agreement. Claims of creditors who are not parties to the GSA either will be paid in full (and thus not
compromised) as a result of the operation of the GSA, or will continue as claims against the same CCAA Debtor entity
as had been claimed previously.
54
In refusing leave to appeal from the decision of Romaine J., O'Brien J.A. stated:
34. ... The GSA does not change its status as a creditor of those companies, nor does it bar the applicant from any existing
claims against those companies.
35. ... the fact that the GSA impacts upon the assets of the debtor companies, against which the applicant may ultimately
have a claim for any shortfall experienced by it, is a common feature of any settlement agreement and as earlier explained,
does not automatically result in a vote by the creditors. The further fact that one of the affected assets of the debtor
companies is a cause of action, or perhaps, more correctly, a possible cause of action, does not abrogate the rights of a
creditor albeit there may be less monies to be realized at the end of the day.
55
While this case is not binding on me, it is persuasive and makes sense. It is also consistent with authorities in Ontario
that a sale of assets or a settlement in a CCAA before a plan of compromise is put forward may be authorized even if there will
be insufficient assets to retire the creditor claims in full. See Canadian Red Cross Society / Société Canadienne de la CroixRouge, Re (1998), 5 C.B.R. (4th) 299 (Ont. Gen. Div. [Commercial List]).
56 In this case, it cannot be said that there will be insufficient assets coming from the arbitration to repay all of the outstanding
notes in full, which at present is approximately $115 million. Even the valuation of Mr. Sauntry, which I do not accept as
reliable, indicates far more than that as a possible outcome of the arbitration. While the outcome of the claim cannot be known
at this stage, it is a claim for $3.4 billion dollars in circumstances in which Crystallex spent approximately $500 million on
the development of the mine.
57
The fundamental purpose of the CCAA is well established, and indicates that flexibility is required in dealing with any
particular case. In Reference re Companies' Creditors Arrangement Act (Canada), [1934] S.C.R. 659 (S.C.C.), the following
was stated:
... the aim of the Act is to deal with the existing condition of insolvency in itself to enable arrangements to be made in
view of the insolvent condition of the company under judicial authority which, otherwise, might not be valid prior to the
initiation of proceedings in bankruptcy. Ex facie it would appear that such a scheme in principle does not radically depart
from the normal character of bankruptcy legislation."
The legislation is intended to have wide scope and allow a judge to make orders which will effectively maintain the status
quo for a period while the insolvent company attempts to gain the approval of its creditors for a proposed arrangement
which will enable the company to remain in operation for what is, hopefully, the future benefit of both the company and
its creditors.
58 Since 1934, of course, there has been wide experience in dealing with the CCAA, and it has been an evolving experience.
In Canadian Red Cross Society / Société Canadienne de la Croix-Rouge, Re, Blair J. (as he then was) approved the sale of the
assets of the debtor that would result in the estate having less than sufficient money to pay all of its creditors in full, and before
a plan of compromise was put forward. He discussed the flexibility involved in these terms:
45. It is very common in CCAA restructurings for the Court to approve the sale and disposition of assets during the process
and before the Plan if formally tendered and voted upon. ... The CCAA is designed to be a flexible instrument, and it is that
very flexibility which gives it its efficacy. As Farley J. said in Dylex, supra (p. 111), "the history of CCAA law has been
an evolution of judicial interpretation". It is not infrequently that judges are told, by those opposing a particular initiative
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at a particular time, that if they make a particular order that is requested it will be the first time in Canadian jurisprudence
(sometimes in global jurisprudence, depending upon the level of the rhetoric) that such an order has made! Nonetheless,
the orders are made, if the circumstances are appropriate and the orders can be made within the framework and in the spirit
of the CCAA legislation. Mr. Justice Farley has well summarized this approach in the following passage from his decision
in Re Lehndorff General Partner (1993), 17 C.B.R. (3d) 24, at p. 31, which I adopt:
The CCAA is intended to facilitate compromises and arrangements between companies and their creditors as an
alternative to bankruptcy and, as such, is remedial legislation entitled to a liberal interpretation. It seems to me that
the purpose of the statute is to enable insolvent companies to carry on business in the ordinary course or otherwise
deal with their assets so as to enable plan of compromise or arrangement to be prepared, filed and considered by
their creditors for the proposed compromise or arrangement which will be to the benefit of both the company and
its creditors. See the preamble to and sections 4, 5, 7, 8 and 11 of the CCAA (a lengthy list of authorities cited here
is omitted).
The CCAA is intended to provide a structured environment for the negotiation of compromises between a debtor
company and its creditors for the benefit of both. Where a debtor company realistically plans to continue operating
or to otherwise deal with its assets but it requires the protection of the court in order to do so and it is otherwise too
early for the court to determine whether the debtor company will succeed, relief should be granted under the CCAA
(citations omitted)
59
In that case, Blair J. considered the factors in Soundair in deciding whether to approve of the sale, being whether the
receiver has made a sufficient effort to get the best price and has not acted improvidently; to consider the interests of the
parties, to consider the efficacy and integrity of the process by which offers are obtained and to consider whether there has been
unfairness in the working out of the process. Those factors are consistent with the factors to be taken into account in considering
whether security for a DIP loan should be approved, and as the Tenor DIP facility involves a grant of a financial interest in part
of the assets of Crystallex, being a percentage of the arbitration award, it seems to me that they can be looked at in this case.
60
It was contended by the noteholders that the size of a loan of $36 million, an amount calculated to complete and collect
the arbitration, was not in accordance with the purposes of a DIP loan as it would take Crystallex beyond what is required
before any reorganization. However this complaint regarding the size of the loan was not strenuously pursued in argument,
no doubt because of the new position of the noteholders that it would fund that amount on the terms of the Tenor DIP loan if
later required and because of the provision in the proposed plan of arrangement put forward by the noteholders that it would
provide $36 million in funding in return for an equity stake in Crystallex. There seems no doubt that the parties agree that at
least $36 million is required to pursue the arbitration.
61
The noteholders also contend that the term of the loan by Tenor is far too long and that it indicates an attempt by
Crystallex to do an end run around the need to propose a plan of arrangement as the term would extend beyond the date of an
anticipated award. I have already dealt with the issue of Crystallex proposing a plan of arrangement. The noteholders contend
that the DIP loan, at least initially, should not extend beyond October, 2012 as by then a plan should have been negotiated.
However, both sides agree that the only way that any substantial cash will be available to Crystallex or its creditors will be
from the arbitration and that it will be necessary to prosecute the arbitration long after October, 2012. The proposed plan of
the noteholders recognizes this as it proposes a $36 million injection for the purposes of prosecuting the arbitration. The $36
million figure is based on a projection of expenditures going far beyond 2012. That is, both sides agree that it will be necessary
to have financing for the arbitration that will continue after October, 2012. The term of the Tenor DIP loan as to when the loan
becomes due in itself is not an impediment to a restructuring.
62
In my view, the term of the loan is not the substantive issue, so long as Crystallex intends to negotiate if possible
an acceptable plan of arrangement or compromise, which it has indicated it intends to do. One of the factors required to be
considered under section 11.2(4) is the time during which Crystallex is expected to be subject to the CCAA proceedings. Like
many cases, it is not clear when these proceedings may be over. However, as the $36 million financing is going to be required
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whether Crystallex is out from under the CCAA in a short or longer period, and as the expenditures are to last for a few years,
this factor of the time during which Crystallex is expected to be subject to the CCAA proceeding is not a determinative factor.
63
The noteholders also contend that Tenor has been given control over Crystallex and the restructuring process by reason
of the changes in the corporate governance required by the Tenor DIP facility. There is no doubt that Tenor has been given
substantial governance rights, including the right to name two of the five directors and the right to agree on who the independent
director shall be. An issue is whether the governance provisions are too intrusive for a DIP loan, which according to case law
relied on by the noteholders should not be excessive or inappropriate. I note that there is no prohibition in the CCAA against
the board of directors changing at the hands of the debtor. There is a provision allowing the court to remove directors, which
I shall later discuss.
64
Any DIP lender wants to obtain as much control as possible over the affairs of the debtor during the term of the DIP
financing, and terms are often imposed to that end. In this case, given the extreme hostility of the noteholders to the board and
management of Crystallex over its actions over the few years prior to the arbitration being commenced, it is not surprising that
Tenor has demanded what it has. The fact that Tenor at the last minute changed the governance terms that it was prepared to
live with, and that the Crystallex board was not happy with the change, does not in itself mean that those terms should not
be approved.
65
To put up the financing and have it subject to change by the noteholders or Crystallex would make no economic sense
to Tenor or to any other DIP lender in the circumstances of this case. Like the noteholders and shareholders, Tenor will only
be able to have its loan repaid from the proceeds of the arbitration, and it has bargained for what it perceives to be necessary
protection for that. I agree with the noteholders that the CCAA is not about protecting new DIP lenders. However, the issue is
whether the protections negotiated in order to obtain the DIP loan from Tenor are reasonable or excessive.
66
Even if there were a prospect of money being raised by Crystallex in some fashion to pay out the noteholders prior to
an arbitration award or settlement, which on the evidence I have referred to is not the case, including the issues referred to
in Mr. Fung's confidential affidavit no. 2, and the opinion of Freshfields, as a practical matter this is not a case in which the
noteholders have any realistic steps to try to cash out now before the arbitration claim is dealt with. 2 A restructuring under the
CCAA, or any bankruptcy of Crystallex, is not going to change that. The market cap of Crystallex is far too small to repay the
noteholders, even if they were given 100% of the equity of Crystallex.
67
The terms of the Tenor Dip facility give Tenor no right to conduct the reorganization proceedings in Canada and in
the U.S. or interfere with the efforts of Crystallex to reorganize the pre-filing claims of the unsecured creditors. That will be
in the hands of the independent/special managing director who will be required to consult with the non-board advisory panel
consisting of the three directors of Crystallex who will step down from the board. With respect to matters that may not at law
be delegable to the special managing director, he will be required to obtain board approval and if the Tenor nominees use their
votes to block that approval, Tenor will forfeit its 35% additional compensation. Tenor is obviously not going to want to put
itself in that position.
68
Tenor recognizes that it cannot conduct the arbitration proceeding. Under the terms of the Tenor DIP facility, if there is
a default before any arbitration award, Tenor would have the right to apply to court to have the Monitor or a Canadian receiver
and manager appointed to take control of the arbitration proceedings. Whether it would make such an application is a question
mark, and likely would depend on whether Crystallex were put into bankruptcy. There would likely be no other reason for
wanting someone other than the Crystallex board to have control over the conduct of the arbitration.
69 As a practical matter, the conduct of the arbitration will no doubt be in the hands of Freshfields who have the knowledge
and expertise. Mr. Mattoni in his affidavit filed on behalf of the noteholders agreed that the arbitration is really in the hands of
litigation counsel. As well, the management personnel of Crystallex that have been involved in the claim in presenting evidence
and instructing counsel regarding the evidentiary issues are going to have to continue to be involved in order to prosecute the
claim. Their failure to do so would compromise the claim.
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70
If any director, whether nominees of Crystallex or of Tenor, is unreasonably impairing the possibility of a viable
compromise, the court under s. 11.5(1) of the CCAA has the power to remove such director. That section provides:
11.5 (1) The court may, on the application of any person interested in the matter, make an order removing from office any
director of a debtor company in respect of which an order has been made under this Act if the court is satisfied that the
director is unreasonably impairing or is likely to unreasonably impair the possibility of a viable compromise or arrangement
being made in respect of the company or is acting or is likely to act inappropriately as a director in the circumstances.
71
The noteholders point out that section 8.1(t) of the DIP facility makes it an event of default of the DIP loan if a Tenor
nominee director is removed from the board without the consent of Tenor except "by reason of misconduct" of the director, and
assert that "misconduct" is a considerably different standard from "unreasonably impairing" in section 11.5(1) of the CCAA,
thus restricting a court's ability to remove a director for unreasonably impairing a compromise or arrangement. Of course,
any application under the section would turn on the particular facts, but it would certainly be arguable that if a director were
unreasonably impairing a compromise or arrangement, that could constitute misconduct, particularly as the purpose of a CCAA
proceeding is to encourage a consensual compromise or arrangement.
72 One of the factors required to be considered under section 11.2(4) is whether Crystallex's management has the confidence
of its major creditors. There is no doubt from the prior litigation that the noteholders expressed extreme displeasure at the steps
taken by its board and management to try to come to some accommodation with Venezuela to maintain the rights to the Las
Cristinas mine project. The noteholders maintained that Crystallex should stop spending money and commence the arbitration.
That of course is now water under the bridge and the only business of Crystallex is the arbitration that has been commenced.
The noteholders did not previously take the position that the management should not be involved in the arbitration, nor do they
now raise any such objection. The Monitor notes in its report that the noteholders' proposed plan contemplates keeping existing
management. It is clear that the management who have been involved in the arbitration are going to be needed further, and
this is not a situation in which the noteholders could want to insert themselves instead of management in the conduct of the
arbitration. As Mr. Mattoni said, that is something in the hands of arbitration counsel.
73
Another factor to be considered under section 11.4(2) is how the company's business and financial affairs are to be
managed during the proceedings. In my view, the management of the business and affairs of Crystallex under the provisions
discussed, being the conduct of the arbitration and paying for it, are a reasonable compromise between Crystallex and Tenor
designed to protect the interests of the stakeholders, including the noteholders. The Monitor, of course, will continue to have an
important role to play as well in the oversight of matters. If the noteholders are unhappy with the expenditures for the arbitration
claim being incurred in the future, and there is no indication so far that they are, they have the ability in the CCAA process
to object to them.
74
The noteholders also contend that because a term of default of the Tenor loan is a refusal of the court to extend the
section 11 stay, that term ties the court's hands on any stay extension application, thus creating an incentive for Crystallex not
to bargain towards a consensual resolution. I do not accept that the court's hands will be tied in any way. One would expect in
any CCAA case that on a refusal to extend the stay, a DIP lender's loan would become payable. This provision in the Tenor
loan is not remarkable.
75 The noteholders make the same point about it being a term of default of the Tenor loan if the CCAA case is converted to
a receivership, a proposal in bankruptcy or bankruptcy proceeding. Again, one would expect a DIP loan to become payable in
these events. This is a normal provision in a DIP loan, as conceded by Mr. Swan in argument. If bankruptcy were appropriate,
this provision would not prevent it.
76 The noteholders contend that the right of Tenor to 35% of the proceeds of the arbitration, convertible into equity at Tenor's
discretion, should not occur as it will hamper any ability to reach any restructuring resolution. In the bid procedures approved
by the Monitor, the market was told that any "back-end entitlement" could not exceed 49% of the equity of Crystallex. 35% is
a very large block of the arbitration proceeds and obviously Crystallex would not have been happy to give that up. It eats into
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any recovery for the shareholders who are entitled to receive any proceeds of the arbitration only after the noteholders have
been paid in full. However, 35% on the record does not appear excessive. The process undertaken by Mr. Skatoff indicates that
the terms of the Tenor bid were the result of a reasonable market search. Mr. Sauntry, the financial expert for the noteholders,
could not say that the Tenor bid did not reflect market pricing. He also said on cross-examination that a return of 10% PIK
interest would not be a reasonable return for DIP lender in this case because of the uncertainty of getting anything because of
the arbitration risk and risk of collecting on any award, and that a lender would require some additional amount such as the
35% to make it a reasonable deal.
77
The noteholders propose in their proposed plan that they receive 23% of equity for their infusion of the $36 million
needed for the arbitration claim. There is no evidence as to how that 23% figure was arrived at. However, the plan also provides
for the noteholders to be given approximately 58% of the equity in return for giving up their notes. Together this amounts to
81% of the equity, and it is artificial to say that the 23% for the $36 million infusion reflects a market indication of the value of
the infusion. I realize that the plan of the noteholders is only a proposal, but it does reflect a recognition that someone financing
the arbitration would require a considerable amount of any arbitration award in order to take the risk of financing it. If the
35% figure in the Tenor DIP facility is used by the noteholders for the $36 million infusion (which the noteholders say they
would be prepared to lend for 35% of the equity if later required), the amount of equity to the noteholders in their plan in return
for their notes would be 46% rather than 58%, indicating an interest in receiving that amount of equity for their notes. If the
Tenor DIP facility is accepted, it would leave 65% of the equity available, less 10% if the MIP is approved, more than the
noteholders propose in their plan.
78
The noteholders also rely on a statement in Mr. Sauntry's expert report that the Tenor DIP proposal will prevent any
plan of arrangement. He states:
The Tenor DIP Proposal will prevent any plan of arrangement. In fact, it is the logical conclusion of a negotiation
between the Company, which has stated that it does not want a CCAA plan prior to an Award or settlement arising from
the Arbitration Claim, and Tenor, which may benefit from the Company's near-complete lack of flexibility, if future
amendments are required.
79 Much of Mr. Sauntry's report is little more than legal argument in the guise of an expert's opinion. I view a good deal of
his report in much the same light as Farley J. did of an expert report of Mr. Dennis Belcher in Royal Oak Mines Inc., Re (1999),
7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial List]), in which he stated "Mr. Belcher has set forth in essence his view of the
CCAA situation; he should be regarded as a powerful advocate..." I see Mr. Sauntry being an advocate for the noteholders.
80
Some things fundamental to Mr. Sauntry's report are wrong. For example, he states that "This is a situation where a
material asset could be sold to provide a significant recovery for creditors" and "It is demonstrably possible to sell a significant
interest in the Company's business (i.e. the Arbitration Claim) for material proceeds." On cross-examination he acknowledged
his understanding that the claim is not assignable. I have earlier referred to problems I have with Mr. Sauntry's attempts to
value the arbitration claim.
81
I do not see the Tenor DIP facility preventing a plan of arrangement. The noteholders have no right to keep Crystallex's
assets and equity static for the purposes of a plan of arrangement, so long as the DIP loan meets the criteria required for approval.
The provisions in the Tenor DIP facility complained of are the result of market forces, and unless there is some other preferable
DIP available, which for reasons I will deal with is not the case, the question is whether the Tenor DIP facility should be
approved.
82 Reliance is placed by the noteholders on provisions of section 7.19 of the Tenor bid. It provides that Crystallex shall not
without the consent of Tenor enter into an agreement with the noteholders that contains certain provisions, including:
(a) Paying any money to pre-filing creditors before Crystallex pays Tenor. The noteholders contend that this
eliminated any realistic possibility of Crystallex being refinanced prior to the collection of an arbitral award or
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settlement. However, this is a normal provision in any DIP financing. Moreover, there is no realistic possibility of
Crystallex being refinanced before an arbitration award or settlement, as previously discussed.
(b) Increasing interest payable to the pre-filing creditors above 15%. The reason for this provision was because under
the Tenor bid, any post-filing interest to be paid to creditors is to be paid before the additional compensation of 35% is
paid to Tenor, and Tenor negotiated to limit this amount. It perhaps is to be noted that on any bankruptcy of Crystallex,
interest to the noteholders would be limited to 5%.
(c) Issuing any equity containing anti-dilution provisions, which the noteholders contend means that any new equity
proposed to be issued as a compromise exchange for debt could immediately thereafter be completely devalued at
the next moment. I am not clear why this was negotiated by Tenor. In reply Mr. Kent contended that the problem
could be taken care of by issuing shares to the noteholders with a coupon or agreement that would lock in their right
to a percentage of the arbitration award. As the equity in Crystallex is essentially the same as the proceeds of the
arbitration, presumably this is something that could be taken care of in a plan. Whether Crystallex would ever attempt
to later issue equity to a third party is of course completely unknown and speculative, but it were to be contemplated
during the course of the CCAA proceedings, presumably the Monitor would be aware of it and it would become
known to the noteholders who would be able to apply to court for any appropriate relief.
83
I have previously discussed much of what is to be considered under s. 11.4 of the CCAA. Regarding (d), whether the
loan would enhance the prospects of a viable compromise or arrangement, in my view it would. Crystallex requires additional
financing to pay its expenses and continue the arbitration. A DIP loan allows the company to have the arbitration financed,
which if it were not at this stage would impair the arbitration and perhaps the attitude of Venezuela towards the arbitration
claim, and as such enhances the viability of a CCAA plan. I have not accepted the argument of the noteholders that the loan
would prevent a plan of arrangement.
84
Regarding (f), whether any creditor would be materially prejudiced by the security, the noteholders are unhappy with
the Tenor bid and say they are materially prejudiced, for the reasons that I have discussed and largely rejected. I think their
complaints have to be looked at in the context of what the market is demanding for a DIP loan. There was a sufficient arm's
length and open effort by Crystallex with the assistance of the Monitor to get the best pricing and terms for the loan and the
process was carried out with integrity and fairness. The noteholders were asked during the process to increase their proposal but
refused to do so. When at the last moment they indicated they would if later required lend on the same terms as the Tenor DIP
facility, they made clear they would not agree to do so at this time. That, of course, is their choice. In all of the circumstances,
I would not find that they have been materially prejudiced.
(ii) Consideration of the noteholders' proposed DIP facility
85
The noteholders' proposed DIP loan is for $10 million at 1% interest repayable on October 15, 2012. The term is said
to give sufficient time to work out a plan of arrangement or compromise. Mr. Swan said in argument that the noteholders were
not being altruistic in this proposal, but merely wanted to maintain the status quo while a plan is being negotiated.
86
The problem that the board of Crystallex had with this proposal was based on the advice of Mr. Skatoff. He advised the
board that if Crystallex needed additional financing in October 2012, it would be difficult to return to the market for financing
because there was only so much time and energy that bidders were willing to devote to a transaction. Having devoted the time
and failed, bidders would be highly reluctant to spend additional time again. In his affidavit, Mr. Skatoff stated that if Crystallex
accepted the $10 million DIP financing it would be highly challenged if not entirely impeded in any subsequent exercise to
raise additional financing from parties other than the noteholders.
87 The noteholders contend that Mr. Skatoff's views on the difficulty of any future financing if the noteholders' proposed DIP
loan is approved is "complete puffery" as he said on cross-examination that the parties with whom he negotiated never told him
that they would absolutely not participate in a financing in the fall of 2012 if it were necessary. I think this is oversimplification
and I do not accept it. Mr. Skatoff also said on cross-examination —
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I know what the facts are in terms of the financing market and how it views Crystallex. ...I believe that the company, if
it were to accept a $10,000,000 financing, would need to go to the market in the very near term to start to address what
happens if that $10,000,000 needed to be refinanced when... we reached October of 2012. And I believe in the construct
of my experience with this situation over the last three months that if the company were to accept that $10,000,000, we
would need to go back out to the market in the very near term to raise capital to possibly refinance that money in the
event that $10,000,000 couldn't be extended, that the company would have a very difficult time in convincing potential
financing parties to undertake to spend additional time and resources in evaluating potential financing, as we have been
able to convince them to do over the last couple months.
88
I accept that evidence as reliable. Common sense would indicate that persons who spent time and energy on pursuing a
$36 million facility for a three year term only to see a 6 month facility for $10 million being accepted would be very reluctant
to go through the process again in the next few months.
89
This is particularly the case, in my view, when the proposed interest rate by the noteholders is only 1%, clearly below
the market rate. 3 The market would see that rate, as would any reasonable observer, as being used for some purpose to further
the ends of the noteholders. Hedge funds are not in the business of lending money at less than market rates. The rate no doubt
was proposed to assist an argument that the court should accept the noteholders' proposed loan. Why would the noteholders
propose that? The answer, I believe, is that it would assist in removing, or seriously eroding, the chance of Crystallex going
to the market in time for a new loan by October and thus further make Crystallex beholden to the noteholders in October, as
stated by Mr. van't Hof and Mr. Skatoff. I do not view the noteholders proposed loan as being a bona fide loan at market rates
but rather a loan to gain tactical advantage.
90 Thus, I do not see the noteholders proposed $10 million 1% six month facility as maintaining the status quo. I accept the
evidence of Mr. Skatoff that it would seriously erode the chances of Crystallex obtaining any third party financing in October.
91 Had the noteholders been prepared to lend now on the basis of the terms of the Tenor DIP facility, that would have been
a preferable outcome, even if it was not made within the terms of the bid process approved by the Monitor, as it would not have
involved the insertion of any third party into the process. Unfortunately, it was made clear during argument that the noteholders
were not prepared at this time to do so. The uncertainty of a short six month loan when it is clear that financing for a much
longer term is required by Crystallex to prosecute the arbitration is something to be avoided.
(iii) Position of the Monitor
92
I have previously referred to portions of the Monitor's report. The Monitor concludes that on the basis that Crystallex,
with assistance of Mr. Skatoff, conducted a canvas of the market and determined that the Tenor Bid was the best available
bid generated out of the process to meet its objectives, the Monitor supports approval of the Tenor DIP Loan. This position of
the Monitor is subject to this court's determination of the validity of the noteholders' legal arguments, on which the Monitor
expresses no view as these are legal issues to be determined by the Court.
93 It is the case, as the Monitor points out, that the introduction of a third party, Tenor, with consent rights to certain actions
will add complexity to the negotiation of a CCAA plan. I entirely agree with the Monitor that a mutually acceptable CCAA
plan is preferable to continued expensive and protracted legal disputes between the Noteholders and Crystallex. However, in
spite of the encouragement of the Monitor and of the court over the last while to see if a settlement could be reached, that has
unfortunately not occurred.
(iv) Conclusion on DIP loan
94
Taking into account all of the forgoing, I approve the Tenor DIP facility.
(v) Request for stay
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95 The noteholders ask that in the event that the Tenor DIP facility is approved, the order should be stayed pending an appeal
to the Court of Appeal. The parties have already had discussion through the Monitor with the Court of Appeal which has agreed
as I understand it to move as expeditiously as possible with any appeal from my decision.
96 A judge whose decision is to be appealed can stay the order on such terms as are just. On motions for stays, courts apply
the RJR Macdonald test and will order stays in restructuring and insolvency proceedings to allow sufficient to for consideration
of an appeal.
97 At first blush during the argument, I was inclined to agree with the noteholders that a stay would be appropriate pending
an appeal, assuming that it could be dealt with expeditiously. However, argument from Crystallex gave me pause, particularly
when the cash flow needs of Crystallex are considered. The cash flow projections as shown in the Monitor's report indicate that
as of the end of the week ending April 13, 2012, Crystallex had only $346,000, and that during the following week, it had cash
requirements of approximately $6 million, including repayment of the bridge loan due on April 16. Crystallex does not have
the luxury of waiting for the conclusion of a successful appeal.
98
The answer of the noteholders to this was that the problem would be solved if the court approved its $10 million DIP
proposal rather than the Tenor bid. I understand that the noteholders would be prepared to lend the $10 million if an appeal to
the Court of Appeal from an order approving the Tenor DIP facility were successful.
99 Under the Tenor DIP facility, the right of Tenor to the additional compensation of 35% of the proceeds of the arbitration
does not arise until the second tranche of the loan of $12 million has been advanced, and this is not due until after any appeal
to the Court of Appeal has been completed. As to concerns of the noteholders that Tenor might pre-pay the second tranche in
order to fix its right to the additional compensation, I was advised during argument that Tenor has undertaken not to do so and
Crystallex has undertaken as well not to draw on the second tranche without two weeks' notice to the noteholders.
100
Crystallex, and I assume Tenor as well, has agreed that pending the completion of an appeal to the Court of Appeal,
the right of Tenor to convert its rights to 35% of the arbitration proceeds and the governance provisions for Crystallex would
also be stayed.
101 In my view, and assuming that the first test of RJR Macdonald has been met, there should be no stay of my order approving
the Tenor DIP facility, and this can be done in a manner that will protect the interests of the parties on the following basis:
(i) The order approving the Tenor DIP facility shall be subject to the undertakings and agreements of Crystallex and
Tenor as referred to.
(ii) The Tenor DIP facility is approved on condition that in the event that the appeal to the Court of Appeal is
successful, and the order approving the Tenor DIP facility is set aside in its entirety, the money advanced by Tenor on
the first tranche shall be immediately repayable with interest at 1% per annum, in which case the Tenor DIP facility
shall be terminated. Tenor shall have no right in that case to any commitment fee which, if already paid, shall be
deducted from the repayment of the loan to Tenor.
(iii) The noteholders shall in that event fund the repayment to Tenor by loan to Crystallex with interest at $1% per
annum repayable on October 15, 2012 or at some other date as may be agreed or ordered by this court.
Management Incentive Plan (MIP)
102
The terms of the MIP are set out above. In sum, a pool of money, consisting of up to 10% of the net proceeds of the
arbitration up to $700 million and 2% of any further net proceeds, after all costs and charges, including the amounts owing to
noteholders, is to be set aside and money in this pool may be paid to the beneficiaries of the MIP, depending on the determination
of an independent committee. The amounts to be allocated to participants by the compensation committee are discretionary and
could be nil. No one will be entitled to any particular amount. Members of the compensation committee will not be eligible
for any payments.
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103
In exercising its discretion to consider whether and in what amount a payment should be made, the compensation
committee will take the following factors into account:
(a) The amount of money recovered by Crystallex in the arbitration.
(b) The risks affecting the size of the retention pool including the quantum of the priority payments and the fact that
others have influence on discussions relating to the settlement of the claim
(c) How quickly the funds are recovered.
(d) The impact the premature resignation of the individual from Crystallex would or could have had upon the results
of the arbitration.
(e) The amount of time and energy spent by the individual on the arbitration.
(f) [Certain matters confidential to the parties.]
(g) The scale and scope of the balance of the compensation package provided by Crystallex to the individual.
(h) The opportunity cost to the individual in staying with Crystallex in terms of professional experience, money and
the development of new opportunities.
(i) The amount of any severance payments the employee would receive on termination if such termination is
reasonably foreseeable and will be accompanied by a severance payment.
(j) The extent to which the arbitration cost more than anticipated to prosecute and the degree to which it may be
appropriate to reduce the bonus pool as a result.
(k) Any other relevant matter.
104 The noteholders disagree with Crystallex on the quantum and method for providing an incentive to management. They
have also expressed concerns as to the timing of the MIP approval motion and inclusion of some MIP participants in the MIP.
Under their proposed plan, management would receive 5% through an equity participation in any after tax award.
105
The Tenor DIP loan is conditional on the approval of a management incentive program acceptable to both Tenor
and Crystallex. Tenor has not voiced any objection to the MIP proposal of Crystallex and I take it is in agreement with it.
The requirement for a management incentive program acceptable to Tenor is a reflection, obviously, of the need to ensure the
participation of the people necessary to pursue the arbitration to a satisfactory conclusion.
106
The reasons for the MIP are set out in the affidavit of Mr. van't Hof. See paras. 4 to 10 and 14 to 23 of his affidavit. In
the circumstances of this arbitration, these reasons appear legitimate. They were considered so by the independent directors of
Crystallex constituting the compensation committee and by Mr. Jay Swartz of Davies Ward Phillips & Vineberg LLP.
107 Mr. van't Hof states in his affidavit that because in past litigation the noteholders have criticized the independent directors
of Crystallex as not being sufficiently independent because of prior business relationships with Robert Fung or companies with
which Mr. Fung was associated, Crystallex retained Jay Swartz, a partner of Davies Phillips Vineberg, to determine, from the
perspective of an independent director, what an appropriate MIP would be. In coming to that determination, Mr. Swartz was told
he could retain such advisors as he saw fit and take such steps as he saw fit. Mr. Swartz' opinion of March 14, 2012 states that he
was engaged on June 6, 2011 to negotiate the terms on which directors and members of management will be compensated for
their ongoing duties. With the consent of Crystallex, Mr. Swartz retained Hugessen Consulting Inc., an independent national
executive compensation consulting firm to provide expert advice with respect to compensation issues and to provide background
information regarding compensation standards in circumstances which were analogous to the issues facing Crystallex. Mr.
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Swartz reviewed extensive documentation and carried out extensive discussions with various persons including the solicitors
for Crystallex, counsel for the board and with Freshfields who are arbitration counsel.
108 Mr. Swartz concluded that the overall compensation proposal for the establishment of the bonus pool for the benefit of
management of Crystallex was reasonable in the circumstances, for reasons expressed in his opinion. Included in his reasons
was the following:
The current members of the Compensation Committee are granted substantial discretion to allocate, or not allocate, the
bonus Pool and can do so in their discretion having regard to what actually occurs over time and the relative and absolute
contributions of each party. In doing so, they are subject to fiduciary duties to Crystallex. In this regard, I note that there
may be circumstances when the absolute amount of the bonus Pool may be very substantial in light of all of the factors to be
considered by the Compensation Committee. In such circumstances, the Compensation Committee may have to carefully
consider the absolute amounts to be paid to each member of a Management Group in order to satisfy its fiduciary duties.
109 Whether KERP provisions such as the ones in this case should be ordered in a CCAA proceeding is a matter of discretion.
While there are a small number of cases under the CCAA dealing with this issue, it certainly cannot be said that there is any
established body of case law settling the principles to be considered. In Houlden & Morawetz Bankruptcy and Insolvency
Analysis, West Law, 2009, it is stated:
In some instances, the court supervising the CCAA proceeding will authorize a key employee retention plan or key
employee incentive plan. Such plans are aimed at retaining employees that are important to the management or operations
of the debtor company in order to keep their skills within the company at a time when they are likely to look for other
employment because of the company's financial distress.
110
In Canadian Insolvency in Canada by Kevin P. McElcheran (LexisNexis — Butterworths) at p. 231, it is stated:
KERPs and special director compensation arrangements are heavily negotiated and controversial arrangements. ... Because
of the controversial nature of KERP arrangements, it is important that any proposed KERP be scrutinized carefully by the
monitor with a view to insisting that only true key employees are covered by the plan and that the KERP will not do more
harm than good by failing to include the truly key employees and failing to treat them fairly.
111 In Grant Forest Products Inc., Re (2009), 57 C.B.R. (5th) 128 (Ont. S.C.J. [Commercial List]), I accepted these statements
as generally being applicable to motions to approve key employee retention plans. See also Canwest Global Communications
Corp., Re (2009), 59 C.B.R. (5th) 72 (Ont. S.C.J. [Commercial List]), Nortel Networks Corp., Re (Ont. S.C.J. [Commercial
List]), Canwest Publishing Inc./Publications Canwest Inc., Re (2010), 63 C.B.R. (5th) 115 (Ont. S.C.J. [Commercial List]) and
Timminco Ltd., Re (Ont. S.C.J. [Commercial List]).
112
I see no reason why the business judgment rule is not applicable, particularly when the provisions of the MIP have
been approved by an independent committee of the board. See my comments in Grant Forest Products Inc., Re, in which the
payments in question were approved by an independent committee of the board of the debtor, in which I said that the business
judgment of the directors should rarely be ignored. See also Morawetz J. in Timminco Ltd., Re.
113
In this case, the qualifications of the independent board members, Messrs. Brown, Near and van't Hof, are impressive,
and these people are non-conflicted as they will not participate in the MIP. They acted on advice from Mr. Swartz and had
market information from Mr. Skatoff as noted in paras. 10 and 33 of Mr. van't Hof's affidavit. Their judgment was informed
and I am in no position to say it was unreasonable.
114
There is no question that the judgment of Mr. Swartz is independent and informed, and I would not lightly ignore it
without good reason.
115 The noteholders contend that the MIP is something that should await the negotiations of a plan. I can understand the logic
of that position, particularly when as here the MIP is to be funded from the proceeds of the arbitration, which is the "asset" that
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will be the subject of the negotiations of a plan, whether that asset is called the proceeds of the arbitration or equity. However,
I am hesitant to have the uncertainty of such a situation hanging over the heads of the people meant to be protected by the MIP.
In Grant Forest Products Inc., Re, over the objection of a substantial creditor, and in Canwest Global, Canwest Publishing and
Timminco Ltd., Re, employee retention plans were approved prior to any plan being negotiated, and it appears to be the practice
today that these types of plans are generally approved at the time of the initial orders.
116 The noteholders do not contend that there should not be any MIP. As the Monitor's report notes, under the noteholders'
proposed plan, management would receive 5% through an equity participation in any after tax award. While the numbers
between the Crystallex MIP (a pool of up to 10% of an award up to $700 million and 2% over that) and the noteholders plan
(5%) are different, it is possible that the end result would not be different depending on what the independent compensation
committee decided to allocate after the results of the arbitration were known.
117
The noteholders contend that there are participants in the MIP that should not belong. That is a matter of judgment,
and the independent committee has exercised its judgment on the matter. The participants were also known to Mr. Swartz who
opined as to the reasonableness of the principles of the MIP. Having reviewed the evidence, including the affidavit of Mr. van't
Hof and of Ms. Kwinter, I cannot say that any of the persons included in the MIP should not be there.
118 Mr. Tony Reyes is a shareholder of Crystallex. He in principle is supportive of the MIP. He raises two concerns regarding
the MIP.
119
The first is the fact that some of the persons who may benefit already have stock options and it is not clear that the
proposed MIP will replace and cancel those options. Thus, these persons could end up with more than the MIP proposes. In
response to this, Crystallex advises that it will amend the MIP to provide that the value of any existing stock options ultimately
realized by participants of the MIP will be deducted from the amount of any bonus awarded under the MIP on a tax neutral basis.
120
The second relates to the method of calculating the bonus pool. It is described by the Monitor as follows:
83. Mr. Reyes also raises a concern that the MIP treats the creation of and payment out of the MIP Pool as a secured debt
and not an equity distribution. The MIP Pool is to be protected by a Court-ordered charge and will be created out of the
net proceeds of the Arbitration Proceedings but before any payment to shareholders. Value to shareholders is after the
repayment of the additional compensation to Tenor and the MIP, while the MIP is calculated based on the gross award
before repayment of additional compensation. He notes that the method of calculating the MIP Pool also serves to increase
the potential effective "equity participation" of the pool participants well above the rate of 10% relative to the participation
rate of existing shareholders, to an effective rate of 18% or more. This is due to the dilutive effect of Tenor's additional
compensation on existing shareholders.
121 The first sentence regarding this concern is not correct. The MIP is triggered by a receipt of funds, and the charge over
that pool does not give any priority to the participants in the MIP. Regarding the remainder of the concern, it seems to me that
this is something that could be taken into account by the compensation committee in determining what, if any, amount should
be allocated to any particular person.
122
The Monitor has reviewed the MIP and the noteholders proposal. The Monitor does not expressly state that it supports
the MIP as proposed by Crystallex being approved, but clearly does not oppose it. Monitor concludes:
130. The MIP is ancillary to the Tenor DIP Loan and approval of a management incentive program is a condition of the
Tenors DIP Loan. The Noteholders and Mr. Reyes appear to accept the Company's position that a substantial incentive
plan is appropriate in these unique circumstances. Mr Swartz, from the perspective of the independent director with advice
from Hugessen Consulting Inc., concludes that the Applicant's proposed MIP is "reasonable in the circumstances". The
Noteholders and Mr. Reyes' position, however, is that the terms of any incentive plan should be less favourable to the
participants than the MIP proposed by Crystallex.
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131. Although the percentage amounts and debt structure provide the potential for compensation to management that could
be substantial, both relative to the recoveries of other stakeholders and in absolute dollar terms, it is subject to the discretion
of the independent directors who have fiduciary duties that will provide a measure of balance in the implementation of
the MIP.
123 Like the DIP issue, it is unfortunate that Crystallex and the noteholders have not been able to come to some agreement
on an MIP. It would have been far more preferable for that to have occurred. However there has been no agreement and it
falls for decision by the court.
124
In all of the circumstances, as discussed, I approve the MIP proposed by Crystallex with the changes regarding the
stock options agreed to by Crystallex.
Approval of Monitor's reports
125
Approval is sought of the actions of the Monitor as disclosed in its second and third report. I have no hesitation in
approving these actions. A Monitor plays a crucial role in any CCAA restructuring, and this is particularly so in this case. The
Monitor is to be commended for the way in which it has participated and in its efforts to bring a consensual resolution of matters
as they have arisen. This assistance is invaluable. I approve the actions of the Monitor as set out in its second and third report.
Continuation of the stay
126
Crystallex seeks a continuation of the stay until July 16, 2012 or such further date as may be ordered. No one opposes
the stay to that date, and it is supported by the Monitor who recommends the continuation. Due to holiday considerations, I
continue the stay to July 30, 2012.
Order accordingly.
Footnotes
*
Affirmed at Crystallex International Corp., Re (2012), 2012 CarswellOnt 7329, 2012 ONCA 404 (Ont. C.A.).
1
The noteholders in question are hedge funds that represent approximately 77% of the outstanding notes. It is they who have caused
Computershare to take action on their behalf in the prior actions against Crystallex and in this CCAA proceeding.
2
The fact that the noteholders have an opinion questioning some of what Freshfields says does not change that.
3
The Monitor calculates the savings in interest over the Tenor loan to October 15, 2012 to be approximately $300,000.
End of Document
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23
2
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
2012 ONCA 404
Ontario Court of Appeal
Crystallex International Corp., Re
2012 CarswellOnt 7329, 2012 ONCA 404, 216 A.C.W.S. (3d)
550, 293 O.A.C. 102, 4 B.L.R. (5th) 1, 91 C.B.R. (5th) 207
In the Matter of the Companies' Creditors
Arrangement Act, R.S.C. 1985, c.C-36 as amended
And In the Matter of a Plan of Compromise or Arrangement of Crystallex International Corporation
D. O'Connor A.C.J.O., R.A. Blair, Alexandra Hoy JJ.A.
Heard: May 11, 2012
Judgment: June 13, 2012 *
Docket: CA C55434, C55435
Proceedings: affirming Crystallex International Corp., Re (2012), 2012 ONSC 538, 2012 CarswellOnt 968, 89 C.B.R. (5th)
303 (Ont. S.C.J. [Commercial List]); additional reasons at Crystallex International Corp., Re (2012), 2012 CarswellOnt 9479,
2012 ONCA 527 (Ont. C.A.)
Counsel: Richard B. Swan, S. Richard Orzy, Derek J. Bell, Emrys Davis for Appellant, Computershare Trust Company of
Canada
Andrew J.F. Kent, Markus Koehnen, Jeffrey Levine for Respondent, Crystallex International Corporation
Barbara L. Grossman for Tenor Capital Management Company, L.P. and Affiliates
Robert Frank for Forbes & Manhattan Inc., Aberdeen International Inc.
David Byers for Monitor Ernst & Young Inc.
Subject: Insolvency
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.1 General principles
XIX.1.e Jurisdiction
XIX.1.e.ii Single judge
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.b Grant of stay
XIX.2.b.vii Extension of order
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.h Miscellaneous
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1
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.3 Arrangements
XIX.3.a Approval by creditors
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.3 Arrangements
XIX.3.b Approval by court
XIX.3.b.iv Miscellaneous
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.4 Appeals
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.5 Miscellaneous
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — General principles — Jurisdiction —
Single judge
Section 11.2 of the Companies Creditors Arrangement Act does not restrict the ability of the supervising judge, where
appropriate, to approve the grant of a charge securing financing before a plan is approved that may continue after the
company emerges from CCAA protection.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Appeals
Corporation moved for approval of DIP financing and management incentive plan against wishes of noteholders —
Supervising judge found there could be no meaningful recovery, and therefore no successful restructuring, without
financing of arbitration which was corporation's biggest asset — Appeal by noteholders dismissed — Supervising judge
was in the best position to balance the interests of all stakeholders — Appellate court should not interfere where question
is one of weight to be given to particular factors rather than failure to consider factors or correctness.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Arrangements — Approval by creditors
C Corp. sought court approval for agreement with T LP providing debtor in possession (DIP) financing — Agreement
was opposed by C's noteholders who proposed their own DIP financing — Agreement with T LP approved — Appeal by
noteholders dismissed — Supervising judge correct in finding agreement was not "plan of arrangement" or "compromise"
requiring vote.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Miscellaneous
C Corp. sought court approval for agreement with T LP providing management incentive plan (MIP) — Agreement was
opposed by C's noteholders who had own proposed plan — Agreement with T LP approved — Appeal by noteholders
dismissed — Supervising judge correctly held that independent committee had applied business judgment.
Table of Authorities
Cases considered by Alexandra Hoy J.A.:
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2
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
Air Canada, Re (2004), 2004 CarswellOnt 469, 47 C.B.R. (4th) 169 (Ont. S.C.J. [Commercial List]) — considered
Calpine Canada Energy Ltd., Re (2007), 2007 CarswellAlta 1050, 2007 ABQB 504, 35 C.B.R. (5th) 1, 415 A.R.
196, 33 B.L.R. (4th) 68 (Alta. Q.B.) — referred to
Calpine Canada Energy Ltd., Re (2007), 35 C.B.R. (5th) 27, 410 W.A.C. 25, 417 A.R. 25, 2007 ABCA 266, 2007
CarswellAlta 1097, 80 Alta. L.R. (4th) 60, 33 B.L.R. (4th) 94 (Alta. C.A. [In Chambers]) — referred to
Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp. (2008), 2008 BCCA 327, 2008 CarswellBC 1758, 83
B.C.L.R. (4th) 214, 296 D.L.R. (4th) 577, 434 W.A.C. 187, 258 B.C.A.C. 187, 46 C.B.R. (5th) 7, [2008] 10 W.W.R.
575 (B.C. C.A.) — distinguished
Computershare Trust Co. of Canada v. Crystallex International Corp. (2009), 65 B.L.R. (4th) 281, 2009 CarswellOnt
7997 (Ont. S.C.J. [Commercial List]) — referred to
Computershare Trust Co. of Canada v. Crystallex International Corp. (2010), 70 B.L.R. (4th) 45, (sub nom.
Crystallex International Corp. v. Crystallex Corp.) 263 O.A.C. 137, 2010 CarswellOnt 3374, 2010 ONCA 364 (Ont.
C.A.) — referred to
Computershare Trust Co. of Canada v. Crystallex International Corp. (2011), 2011 CarswellOnt 10305, 2011 ONSC
5748 (Ont. S.C.J. [Commercial List]) — referred to
Crystallex International Corp., Re (2011), 2011 ONSC 7701, 2011 CarswellOnt 15034 (Ont. S.C.J. [Commercial
List]) — referred to
Grant Forest Products Inc., Re (2009), 2009 CarswellOnt 4699, 57 C.B.R. (5th) 128 (Ont. S.C.J. [Commercial List])
— considered
Imperial Oil Ltd. v. R. (2006), (sub nom. Imperial Oil Ltd. v. Minister of National Revenue) 353 N.R. 201, [2007] 1
C.T.C. 41, 2006 SCC 46, 2006 CarswellNat 3176, 2006 CarswellNat 3177, (sub nom. Imperial Oil Ltd. v. Canada)
2006 D.T.C. 6660 (Fr.), (sub nom. Imperial Oil Ltd. v. Canada) 2006 D.T.C. 6639 (Eng.), (sub nom. Inco Ltd. v.
Canada) 273 D.L.R. (4th) 450, (sub nom. Imperial Oil Ltd. v. Canada) [2006] 2 S.C.R. 447 (S.C.C.) — considered
Ivaco Inc., Re (2006), 2006 C.E.B. & P.G.R. 8218, 25 C.B.R. (5th) 176, 83 O.R. (3d) 108, 275 D.L.R. (4th) 132,
2006 CarswellOnt 6292, 56 C.C.P.B. 1, 26 B.L.R. (4th) 43 (Ont. C.A.) — considered
New Skeena Forest Products Inc., Re (2005), 7 M.P.L.R. (4th) 153, [2005] 8 W.W.R. 224, (sub nom. New Skeena
Forest Products Inc. v. Kitwanga Lumber Co.) 210 B.C.A.C. 247, (sub nom. New Skeena Forest Products Inc. v.
Kitwanga Lumber Co.) 348 W.A.C. 247, 2005 BCCA 192, 2005 CarswellBC 705, 9 C.B.R. (5th) 278, 39 B.C.L.R.
(4th) 338 (B.C. C.A.) — considered
Stelco Inc., Re (2005), 253 D.L.R. (4th) 109, 75 O.R. (3d) 5, 2 B.L.R. (4th) 238, 9 C.B.R. (5th) 135, 2005 CarswellOnt
1188, 196 O.A.C. 142 (Ont. C.A.) — referred to
Ted Leroy Trucking Ltd., Re (2010), (sub nom. Century Services Inc. v. Canada (A.G.)) [2010] 3 S.C.R. 379, [2010]
G.S.T.C. 186, 12 B.C.L.R. (5th) 1, (sub nom. Century Services Inc. v. A.G. of Canada) 2011 G.T.C. 2006 (Eng.),
(sub nom. Century Services Inc. v. A.G. of Canada) 2011 D.T.C. 5006 (Eng.), (sub nom. Leroy (Ted) Trucking Ltd.,
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3
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
Re) 503 W.A.C. 1, (sub nom. Leroy (Ted) Trucking Ltd., Re) 296 B.C.A.C. 1, 2010 SCC 60, 2010 CarswellBC 3419,
2010 CarswellBC 3420, 409 N.R. 201, (sub nom. Ted LeRoy Trucking Ltd., Re) 326 D.L.R. (4th) 577, 72 C.B.R.
(5th) 170, [2011] 2 W.W.R. 383 (S.C.C.) — considered
Timminco Ltd., Re (2012), 2012 CarswellOnt 1466, 2012 ONSC 948, 95 C.C.P.B. 222, 86 C.B.R. (5th) 171 (Ont.
S.C.J. [Commercial List]) — considered
Statutes considered:
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
Bankruptcy Code, 11 U.S.C.
Chapter 15 — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 6(1) — referred to
s. 11 — considered
s. 11.2 [en. 1997, c. 12, s. 124] — considered
s. 11.2(1) [en. 2005, c. 47, s. 128] — considered
s. 11.2(4) [en. 2005, c. 47, s. 128] — considered
s. 11.2(4)(a) [en. 2005, c. 47, s. 128] — considered
s. 11.2(4)(d) [en. 2005, c. 47, s. 128] — considered
s. 11.5(1) [en. 1997, c. 12, s. 124] — considered
Interpretation Act, R.S.C. 1985, c. I-21
s. 14 — considered
APPEALS from judgment reported at Crystallex International Corp., Re (2012), 2012 ONSC 538, 2012 CarswellOnt 968,
89 C.B.R. (5th) 303 (Ont. S.C.J. [Commercial List]) and Crystallex International Corp., Re (2012), 2012 ONSC 2125, 2012
CarswellOnt 4577 (Ont. S.C.J. [Commercial List]), granting orders approving agreement for debtor in possession financing,
management incentive plan, extension of stay, and approval of actions of Monitor.
Alexandra Hoy J.A.:
I. Overview
1
The primary issue in these appeals is the scope of financing the supervising judge can or should approve, without the
sanction of creditors, while a company is under the protection of the Companies' Creditors Arrangement Act, R.S.C. 1985, c.
C-36, as amended (the "CCAA").
2 The respondent Crystallex International Corporation ("Crystallex") is a Canadian mining company. Its principal asset was
the right to develop Las Cristinas in Venezuela, which is one of the largest undeveloped gold deposits in the world. Crystallex
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4
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
obtained this right through a contract with the Corporacion Venezolana de Guayana (the "CVG"), a state-owned Venezuelan
corporation. On February 3, 2011, after Crystallex spent over $500 million on developing Las Cristinas, the CVG sent Crystallex
a letter to "unilaterally rescind" the contract for reasons of "expediency and convenience". There is no suggestion in these
proceedings that the rescission was due to any mismanagement by Crystallex.
3 As a result of the cancellation of the contract, Crystallex was unable to pay its $100 million in senior 9.375 per cent notes
due December 23, 2011 (the "Notes"). It sought and, on December 23, 2011 obtained, protection under the CCAA.
4
At present, Crystallex's only asset of significance is an arbitration claim for US $3.4 billion against the government of
Venezuela in relation to the cancellation of the contract. The arbitration claim is the "pot of gold" in the CCAA proceeding.
5
The appellant Computershare Trust Company of Canada, in its capacity as Trustee for the holders of the Notes (the
"Noteholders"), appeals, with leave, three orders made by the supervising judge in the CCAA proceeding: (i) the January
20, 2012 CCAA Bridge Financing Order (with reasons released January 25, 2012 and reported at 2012 ONSC 538 (Ont.
S.C.J. [Commercial List])) ) (the "Bridge Financing Reasons")) authorizing Crystallex to obtain bridge financing of $3.125
million (the "Bridge Loan") from the respondent Tenor Special Situations Fund, L.P. ("Tenor L.P."); (ii) the April 16, 2012
CCAA Financing Order authorizing Crystallex to obtain $36 million of what the supervising judge characterized as Debtor in
Possession ("DIP") financing from Tenor Special Situation Fund I, LLC ("Tenor") (the "Tenor DIP Loan"); and (iii) the April
16, 2012 Management Incentive Plan Approval Order approving a Management Incentive Plan ("MIP") designed to ensure the
retention of key executives until the arbitration is completed. The supervising judge's reasons for the CCAA Financing Order
and Management Incentive Plan Approval Order are reported at 2012 ONSC 2125 (Ont. S.C.J. [Commercial List])) (the "DIP
Financing Reasons").
6 Among other conditions, the Tenor DIP Loan, due December 31, 2016, entitles Tenor to 35 per cent of the net proceeds of
the arbitration in addition to interest, provides governance rights that may continue after Crystallex exits from CCAA protection,
and requires Tenor's approval to a range of options that might customarily be offered to unsecured creditors in seeking to
negotiate a plan of compromise or arrangement.
7
Substantially all of the creditors opposed the approval of the Bridge Loan, the Tenor DIP Loan and the MIP. Crystallex
represents that it hopes to negotiate a plan of arrangement or compromise with the Noteholders and other creditors before the
current stay until July 30, 2012 expires.
8
The bulk of the $36 million Tenor DIP Loan comprises financing to pursue the arbitration claim, which may continue
after the period of CCAA protection.
II. The Legislative Framework
9
The CCAA was amended effective September 18, 2009 to add the following provisions regarding the grant of a charge
to secure financing required by the debtor:
Interim financing
11.2 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the
security or charge, a court may make an order declaring that all or part of the company's property is subject to a security
or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees
to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow
statement. The security or charge may not secure an obligation that exists before the order is made.
...
Factors to be considered
(4) In deciding whether to make an order, the court is to consider, among other things,
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Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
(a) the period during which the company is expected to be subject to proceedings under this Act;
(b) how the company's business and financial affairs are to be managed during the proceedings;
(c) whether the company's management has the confidence of its major creditors;
(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of
the company;
(e) the nature and value of the company's property;
(f) whether any creditor would be materially prejudiced as a result of the security or charge; and
(g) the monitor's report referred to in paragraph 23(1)(b), if any. 1
Prior to the enactment of these provisions, the court relied on its general authority under the CCAA to approve DIP financing:
see Lloyd W. Houlden, Geoffey B. Morawetz & Janis P. Sarra, The 2012 Annotated Bankruptcy and Insolvency Act (Toronto:
Carswell, 2011), at p. 1175.
III. The Background
A. Events Prior to the CCAA Filings
10
Crystallex has filed a Request for Arbitration pursuant to the Canada-Venezuela Bilateral Investment Treaty, claiming
$3.4 billion plus interest for the loss of its investment in Las Cristinas. The hearing of the arbitration is scheduled for November
11, 2013.
11
Crystallex's most significant liability is its debt to the Noteholders. In addition to amounts owed to the Noteholders,
Crystallex has other liabilities of approximately CAD $1.2 million and approximately US $8 million.
12
The current Noteholders are hedge funds, some of whom purchased Notes after Venezuela announced its intention to
expropriate Las Cristinas at prices as low as 25 cents on the dollar.
13 The relationship between Crystallex and the current Noteholders is hostile. Crystallex and the Noteholders have been in
litigation since 2008. Prior to the maturity date of the Notes, the Noteholders twice, unsuccessfully, brought court proceedings
against Crystallex alleging that an event had occurred which accelerated Crystallex's obligation to pay the Notes. Those
proceedings were also heard by the supervising judge: see Computershare Trust Co. of Canada v. Crystallex International
Corp. (2009), 65 B.L.R. (4th) 281 (Ont. S.C.J. [Commercial List]), aff'd 2010 ONCA 364, 263 O.A.C. 137 (Ont. C.A.); and
Computershare Trust Co. of Canada v. Crystallex International Corp., 2011 ONSC 5748 (Ont. S.C.J. [Commercial List]).
B. Commencement of Proceedings under the CCAA and Chapter 15
14
On December 22, 2011, one day prior to the maturity of the Notes, Crystallex and the Noteholders filed competing
CCAA applications. The Noteholders' application contemplated that all existing common shares would be cancelled, an equity
offering would be undertaken, and if, or to the extent, the equity proceeds were insufficient to pay out the Noteholders, the
Notes would be converted to equity.
15 Crystallex sought authority to file a plan of compromise and arrangement, the authority to continue to pursue the arbitration
in Venezuela, and the authority to pursue all avenues of interim financing or a refinancing of its business and to conduct an
auction to raise financing. In his supporting affidavit sworn December 22, 2011, Robert Fung, Crystallex's Chairman and Chief
Executive Officer, indicated that Crystallex wished to have all claims stayed against it until the arbitration settled or Crystallex
realized the arbitration award. Crystallex had already received an unsolicited offer of financing from Tenor Capital Management.
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Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
16
It was (and is) expected that, if the arbitration is successful and the award is collected, there will be more than enough
to pay the creditors and a significant amount will be available to shareholders.
17 On December 23, 2011, the supervising judge made an order granting Crystallex's CCAA application (the "Initial Order").
In his reasons released December 28, 2011, he explained that the Noteholders' proposal was not a fair balancing of the interests
of all stakeholders: 2011 ONSC 7701 (Ont. S.C.J. [Commercial List]), at para. 26. The Noteholders did not appeal the Initial
Order.
18 Crystallex obtained an order under chapter 15 of the United States Bankruptcy Code from the United States Bankruptcy
Court for the District of Delaware, among other things giving effect to the Initial Order in the United States as the main
proceeding.
C. Crystallex Develops a DIP Auction Process
19
Paragraph 12 of the Initial Order authorized Crystallex to pursue all avenues of interim financing or a refinancing of
its business or property, subject to the requirements of the CCAA and court approval, to permit it to proceed with an orderly
restructuring. It further provided:
Without limiting the foregoing, the Applicant may conduct an auction to raise interim or DIP financing pursuant to
procedures approved by the Monitor and using such professional assistance as the Applicant may determine with the
consent of the Monitor. If such approved procedures are followed to the satisfaction of the Monitor then the best offer as
determined by the Applicant pursuant to the approved procedures shall be afforded the protection of the Soundair principles
so that it will be too late to make topping offers thereafter and such offers will not be considered by this Court.
20 Crystallex hired an independent financial advisory firm, Skatoff & Company, LLC, and developed a set of procedures to
govern the solicitation of bids to provide financing to Crystallex. The Monitor, Ernst & Young Inc., approved the bid procedures.
The bid procedures indicated that Crystallex's objective was to obtain financing of not less than $35 million, net of costs, that,
on completion of the CCAA and U.S. Chapter 15 reorganization proceedings, would roll into financing maturing not sooner
than December 31, 2014. The bid deadline was February 1, 2012.
D. The Bridge Loan
21
On January 20, 2012, the supervising judge considered competing proposals from Tenor L.P. and the Noteholders to
provide bridge financing. Tenor L.P. offered $3.125 million with interest at 10 per cent per annum. The Noteholders offered
$3 million with interest at 1 per cent per annum.
22
The board of Crystallex, taking into account advice received from Mr. Skatoff, recommended the Tenor L.P. offer.
Mr. Skatoff was concerned that the Noteholders' objective may have been to defeat the larger DIP financing process so that
they could ultimately impose financing terms on Crystallex. It was also his view that Crystallex should avoid entering into an
important financial relationship with a hostile party.
23
The supervising judge approved Tenor L.P.'s offer.
E. The Noteholders Object to the DIP Auction Process
24
On January 20, 2012, the Noteholders brought a cross-motion to modify the DIP auction process then underway, which
they severely criticized. They objected to the amount sought, the term, and the lender back-end entitlement a successful DIP
lender could acquire. In their view, Crystallex was inappropriately seeking financing in excess of amounts required until a
compromise or plan of arrangement could be arrived at between Crystallex and its creditors. Given their existing position in
Crystallex, the Noteholders also objected to being required to sign a non-disclosure agreement containing a standstill provision
in order to be a qualified bidder.
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Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
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25 The supervising judge held that if the Noteholders wished to be considered as a qualified bidder, they would have to sign
a non-disclosure agreement: Bridge Financing Reasons, at para. 27. As to their other concerns, he wrote, at para. 29:
In my view these objections are premature and it is not necessary for me to consider their strength at this stage. The time
for filing bids from qualified bidders has not yet expired and what bids will be received is unknown. It is when a successful
bidder has been chosen and the DIP facility is before the court for approval that these issues raised by the Noteholders
would be more appropriately dealt with. Until then, there is no factual foundation for judgment to be passed on the bid
procedures for the DIP facility for which Crystallex will seek approval.
F. Competing DIP Financing Offers: The Tenor DIP Loan and the Noteholders' Offer
26
The bidders who responded to the request for DIP financing included three hedge funds that hold approximately 77 per
cent of the Notes and Tenor.
27
Those hedgefund Noteholders proposed a loan of $10 million with a simple interest rate of 1 per cent repayable on
October 15, 2012.
28
The supervising judge described Tenor's proposed terms in the DIP Financing Reasons:
[23] The Tenor DIP facility contains the following material financial terms:
(a) Tenor will advance $36 million to Crystallex due and payable on December 31, 2016. This period for the loan
is based on Crystallex's arbitration counsel's assessment of the likely timing of a decision from the arbitral tribunal
and collection of the award.
(b) The advances will be in four tranches, being $9 million upon execution of the loan documentation and approval
of the facility by court order in Ontario, the second being $12 million upon any appeal of the Ontario court order
approving the facility being dismissed and upon a U.S court order approving the facility, the third being $10 million
when Crystallex has less than $2.5 million in cash and the fourth being $5 million when Crystallex again has less
than $2.5 million in cash.
(c) The loans are to be used to (i) repay an interim bridge loan of $3.25 million advanced by Tenor with court
approval of January 20, 2012 and payable on April 16, 2012, (ii) fees and expenses in connection with the facility, (iii)
general corporate expenses of Crystallex including expenses of the restructuring proceedings and of the arbitration
in accordance with cash flow statements and budgets of Crystallex approved by Tenor from time to time.
(d) Crystallex will pay Tenor a $1 million commitment fee.
(e) $35 million of the loan amount will bear PIK interest (payment in kind, meaning it is capitalized and payable only
upon maturity of the loan or upon receipt of the proceeds of the arbitration) at the rate of 10% per annum compounded
semiannually.
(f) Tenor will receive additional compensation equal to 35% of the net proceeds of any arbitral award or settlement,
conditional upon the second tranche of the loan being advanced. Net proceeds of the award or settlement is defined as
the amount remaining after payment of principal and interest on the DIP loan, taxes and proven and allowed unsecured
claims against Crystallex, including the noteholders, the latter of which will have a special charge for the unsecured
amounts owing. Alternatively, Tenor can convert the right to additional compensation to 35% of the common shares
of Crystallex. This conversion right is apparently driven by tax considerations.
[24] The Tenor DIP facility also provides for the governance of Crystallex to be changed to give Tenor a substantial say
in the governance of Crystallex. More particularly:
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Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
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(a) Crystallex shall have a reduced five person board of directors, being two current Crystallex directors, two nominees
of Tenor and an independent director selected by agreement of Crystallex and Tenor.
(b) The independent director shall be chair of the board of directors and shall not have a second-casting or tie-breaking
vote.
(c) The independent director shall be appointed a special managing director and shall have all the powers of the board
of directors to (i) the conduct of the reorganization proceedings in Canada and in the U.S. and the efforts of Crystallex
to reorganize the pre-filing claims of the unsecured creditors, (ii) any matters relating to the rights of Crystallex and
Tenor as against the other under the facility, (iii) the administration of the MIP to the extent not otherwise delegated
to the bonus pool committee under the MIP, and (iv) to retain any advisor in respect of these matters. The special
manager shall first consult with a non-board advisory panel, consisting of the three Crystallex directors who will step
down from the board, and consider in good faith their recommendations.
(d) With respect to matters that may not at law be delegable to the special managing director, he will be required
to obtain board approval. If the Tenor nominees use their votes to block that approval, Tenor will forfeit its 35%
additional compensation.
[25] The Tenor DIP facility contains proscribed rights of Tenor in the event of default. Tenor may seize and sell assets
other than the arbitration proceeding (i.e. any cash and unsold mining equipment). It may not sell the arbitration claim.
If there is a default before any arbitration award, Tenor would have the right to apply to court to have the Monitor or
a Canadian receiver and manager appointed to take control of the arbitration proceedings. If such application were not
granted, Tenor would be entitled to exercise the rights and remedies of a secured creditor pursuant to an order, the loan
documentation or otherwise at law.
29
Mr. Skatoff recommended, and the board of Crystallex agreed, to accept the Tenor DIP Loan. Mr. Skatoff indicated,
in an affidavit sworn March 20, 2012, that he had recommended that the board reject the Noteholders' offer of a $10 million
loan for 6 months because Crystallex could not be assured that it could borrow the balance of the required funds at the expiry
of that period on the same terms as the Tenor DIP Loan.
G. The Noteholders' Further, Competing Offer to Allay Mr. Skatoff's Concerns
30
In his affidavit on behalf of the Noteholders, sworn March 27, 2012, Mr. Mattoni responded to Mr. Skatoff's concern
by committing that the Noteholders would be prepared to,
... provide financing to Crystallex on the same terms as the [Tenor DIP Loan], in the event that prior to October 1, 2012,
the Court orders that such long-term financing is appropriate and necessary. The Noteholders would reserve their complete
and unfettered ability as creditors to continue to oppose stay extensions or attempts to secure such long-term financing
outside of a Plan of compromise (including, specifically, financing to the extent contemplated by the Proposed Loan), but
they will provide it if it is ordered by the Court on the same basis as currently proposed with Tenor...
H. The Noteholders' Proposed Plan
31
Prior to the April 5, 2012 hearing, the Noteholders proposed a plan to indicate a good faith intention to bargain. They
did not seek approval of this proposed plan at the April 5, 2012 hearing.
32 The plan's terms included that the Noteholders would provide a $10 million loan on the terms described above; exchange
their debt for approximately 58 per cent of the equity; provide $35 million to Crystallex in exchange for 22.9 per cent of the
equity; and provide incentives to management at a lesser level than the MIP. Their proposed plan left approximately 14 per
cent of the equity for the existing shareholders.
I. The Management Incentive Plan
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33 The Noteholders had criticized the independent directors of Crystallex as not being sufficiently independent. As a result,
the independent directors of Crystallex comprising the compensation committee retained Jay Swartz, a partner of Davies Phillips
Vineberg, to determine, from the perspective of an independent director, what an appropriate MIP would be. He in turn retained
an independent national executive compensation consulting firm to provide expert advice. Mr. Swartz opined that the overall
compensation proposal for the establishment of the bonus pool for the benefit of Crystallex's management was reasonable in
the circumstances. The independent directors of Crystallex comprising the compensation committee approved the MIP.
34
At para. 102 of the DIP Financing Reasons, the supervising judge described the MIP:
In sum, a pool of money, consisting of up to 10% of the net proceeds of the arbitration up to $700 million and 2% of any
further net proceeds, after all costs and charges, including the amounts owing to noteholders, is to be set aside and money
in this pool may be paid to the beneficiaries of the MIP, depending on the determination of an independent committee.
The amounts to be allocated to participants by the compensation committee are discretionary and could be nil. No one will
be entitled to any particular amount. Members of the compensation committee will not be eligible for any payments.
35 The MIP sets out a number of factors to be considered by the compensation committee in exercising its discretion. They
include the amount and speed of recovery, the amount of time and energy expended by the individual, and the opportunity cost
to the individual in staying with Crystallex.
36
In the view of the Noteholders, the MIP is too generous. They proposed that management receive 5 per cent through an
equity participation in any after tax award. They also took issue with the range of persons eligible under the MIP.
J. The April 5, 2012 motion
37
On April 5, 2012, Crystallex sought orders approving, among other things, the Tenor DIP Loan and the MIP. The
Noteholders as well as Forbes & Manhattan Inc. and Aberdeen International Inc., creditors owed approximately $2.5 million
by Crystallex, opposed both the Tenor DIP Loan and the MIP. The one shareholder who attended opposed the MIP.
38
The supervising judge approved the Tenor DIP Loan and the MIP. 2 He also extended the stay until July 30, 2012.
K. Events since April 5, 2012
39
Tenor made the first, $9 million advance under the Tenor DIP Loan. The Bridge Loan was repaid out of the first advance.
40 At the hearing of this appeal, the Monitor advised that Crystallex would require further funds before the anticipated release
of this court's decision. Crystallex accepted Tenor's offer to advance a further $4 million to Crystallex, on the same terms as the
first, $9 million tranche of the Tenor DIP Loan. Accordingly, this further advance does not entitle Tenor to participate in any
arbitration proceeds, or trigger any change in the governance of Crystallex. If the Noteholders' appeal succeeds, the additional
amounts advanced by Tenor are, like the first tranche, to be immediately repaid with interest at the rate of 1 per cent per annum,
and the Noteholders shall fund the repayment. No commitment fee is payable in respect of this additional advance.
IV. The Supervising Judge's Reasons
A. The Bridge Loan
41
The supervising judge noted, at para. 5 of the Bridge Financing Reasons, that Tenor L.P.'s bridge financing proposal
was "really short-term DIP financing". With respect to the boards' recommendation — based on Mr. Skatoff's advice — that
Tenor L.P.'s proposal be approved, he wrote, at para. 12:
This was a business judgment protected by the business judgment rule so long as it was a considered and informed judgment
made honestly and in good faith with a view to the best interests of Crystallex. See Re Stelco Inc. (200[5]), 9 C.B.R. (5th)
135 (Ont. C.A.) regarding the rule and its application to CCAA proceedings. I see no grounds for concluding that the
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decision of Crystallex to prefer the Tenor bridge financing proposal is not protected by the business judgment rule or that
I should not give it appropriate deference. [Citation corrected.]
42
The supervising judge noted, at para. 13, that "the Monitor has no basis to say that the business judgment exercised by
the Crystallex board of directors was unreasonable". The supervising judge accordingly approved the Bridge Loan.
43
Mr. Skatoff expressed concern that the Noteholders' objective in offering bridge financing on such advantageous terms
(interest at the rate of 1 per cent, as opposed to the 10 per cent in the Tenor L.P. offer) was to undermine the DIP auction
process. The supervising judge observed, at para. 14:
Whether Mr. Skatoff is correct in his concerns, it seems to me that the relatively minor extra cost involving the Tenor
proposed bridge financing for at most a few months must be weighed against the risk of harm to the longer-term DIP
financing auction process, and that for the sake of that process, it is preferable not to run the risks that Mr. Skatoff is
concerned about.
B. The Tenor DIP Loan
44
The substance of the supervising judge's reasons for approving the Tenor DIP Loan — as set out in the DIP Financing
Reasons — may be summarized as follows.
i. The exercise of business judgment by the board of directors of Crystallex in approving the Tenor DIP Loan is a factor that
can be taken into account by the court in considering whether to make an order under s. 11.2(1) of the CCAA (at para. 35).
ii. The Tenor DIP Loan did not amount to a plan of arrangement or compromise. Notably, it did not take away the rights of
the Noteholders as unsecured creditors to apply for a bankruptcy order or to vote on a plan of compromise or arrangement.
A vote of the creditors was therefore not required (at para. 50). In coming to this conclusion, the supervising judge relied
on Calpine Canada Energy Ltd., Re, 2007 ABQB 504, 415 A.R. 196 (Alta. Q.B.), leave to appeal refused, 2007 ABCA
266, 417 A.R. 25 (Alta. C.A. [In Chambers])).
iii. Crystallex intended to negotiate a plan of compromise or arrangement with the Noteholders during the stay extension
until July 30, 2012 (paras. 48, 126). The Tenor DIP Loan is therefore distinguishable from the financing rejected by the
court in Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp., 2008 BCCA 327, 296 D.L.R. (4th) 577 (B.C.
C.A.), because in that case the debtor did not have an intention to propose an arrangement or compromise to its creditors.
iv. Because the Tenor DIP Loan involves the grant of a financial interest in part of the assets of Crystallex, it is appropriate
to consider the Soundair factors in deciding whether to approve it (at para. 59). Crystallex conducted a robust competitive
bidding process (at para. 39).
v. Mr. Skatoff's evidence was that the Noteholders' proposed six month facility "would seriously erode the chances of
Crystallex obtaining third party financing in October" (at para. 90). Counsel for Computershare had said during argument
on the motion that the Noteholders "were not prepared to agree to such a $35 million facility at this time but only at some
future time as the $10 million facility they now proposed became due" (at para. 27). While it would have been preferable
if the Noteholders had been willing to lend on the basis of the terms of the Tenor DIP facility, "it was made clear during
argument that the noteholders were not prepared at this time to do so" (at para. 91).
vi. As to the enumerated factors in s. 11.2(4):
(a) Given that Crystallex intends, if possible, to negotiate an acceptable plan of arrangement or compromise, the length
of time during which Crystallex is expected to be subject to the CCAA proceedings is not a determinative factor. The
financing will be required to pursue the arbitration (at para. 62) and, as the supervising judge noted, "the only way
any of the creditors will receive any substantial cash payment is from the proceeds of the arbitration" (at para. 47);
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(b) The management of the business and affairs of Crystallex "are a reasonable compromise between Crystallex and
Tenor designed to protect the interests of the stakeholders, including the noteholders" (at para. 73). The fact that
Tenor is given substantial governance rights does not in itself mean that the DIP Tenor Loan should not be approved.
Tenor does not have the right to conduct the reorganization proceedings or the arbitration proceeding. Moreover,
under s. 11.5(1) of the CCAA, the court may remove a director whom it is satisfied is unreasonably impairing or is
likely to unreasonably impair the possibility of a viable compromise or arrangement being made. Arguably, a court
could remove a Tenor nominee under this section without triggering an event of default under the Tenor DIP Loan
(at paras. 63-71);
(c) While the Noteholders expressed "extreme displeasure" at Crystallex's management's delay in commencing
arbitration proceedings, they do not oppose management having a continuing role in the arbitration (at para. 72);
(d) The Noteholders' argument that the terms of the Tenor DIP Loan — in particular, the fact that the refusal of the
court to grant a stay or a bankruptcy are events of default, the grant of a 35 per cent interest in the arbitration proceeds,
and the limits on the type of restructuring that can be concluded without the approval of Tenor — will effectively
prevent any plan of arrangement was rejected (at paras. 74-82). While, as the Monitor points out, the introduction of
a third party, Tenor, with consent rights to certain actions will add complexity to the negotiation of a CCAA plan (at
para. 93), the Tenor DIP Loan would enhance the prospects of a viable compromise or arrangement (at para. 83):
... Crystallex requires additional financing to pay its expenses and continue the arbitration. A DIP loan allows
the company to have the arbitration financed, which if it were not at this stage would impair the arbitration and
perhaps the attitude of Venezuela towards the arbitration claim, and as such enhances the viability of a CCAA
plan. I have not accepted the argument of the noteholders that the loan would prevent a plan of arrangement.
(e) The supervising judge noted that Crystallex's principal asset is its US $3.4 billion arbitration claim against
Venezuela (at para. 12); and
(f) In considering the Noteholders' complaints of prejudice in the context of what the market is demanding for a
DIP loan and in all the circumstances, the creditors have not been materially prejudiced by the Tenor DIP Loan (at
para. 84).
C. The Management Incentive Plan
45
The supervising judge considered the Noteholders' objections to the quantum and method for providing an incentive to
management, the inclusion of certain persons in the MIP, and the approval of the MIP before the negotiation of a plan.
46 In the DIP Financing Reasons, the supervising judge observed, at para. 109, that whether employee retention provisions
should be ordered in a CCAA proceeding was a matter of discretion. He noted that the provisions of the MIP had been approved
by an independent committee of the board of directors with impressive qualifications, relying on the opinion of Mr. Swartz.
In providing that opinion, Mr. Swartz indicated that the absolute amount of the bonus pool could be very substantial and, in
allocating it, the compensation committee "may have to carefully consider the absolute amounts to be paid to each member of the
Management Group in order to satisfy its fiduciary duties": see DIP Financing Reasons, at para. 108. The supervising judge also
noted that Mr. Swartz had retained an independent national executive compensation consulting firm to provide expert advice.
47
Citing Grant Forest Products Inc. (Re) (2009), 57 C.B.R. (5th) 128 (Ont. S.C.J. [Commercial List]) (st]) and Timminco
Ltd., Re, 2012 ONSC 948 (Ont. S.C.J. [Commercial List])), the supervising judge wrote, at para. 112 of the DIP Financing
Reasons, "I see no reason why the business judgment rule is not applicable, particularly when the provisions of the MIP have
been approved by an independent committee of the board." He further noted, at para. 115, what appears to be the practice
of approving employee retention plans before any plan has been negotiated and, at para.105, that the Tenor DIP Loan was
conditional on the approval of a MIP acceptable to Crystallex and Tenor.
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48
As to who should be eligible to participate in the MIP, at para. 117, the supervising judge noted that the independent
committee had exercised its business judgment on the matter and that the participants were known to Mr. Swartz. Having
reviewed the evidence, the supervising judge could not "say that any of the persons included in the MIP should not be there".
V. The Parties' Submissions
A. The Noteholders' Submissions
49
The Noteholders frame their opposition to the Tenor DIP Loan on a number of bases.
50
They argue that s. 11.2, titled "Interim financing", only permits a supervising judge to approve financing to meet the
debtor's needs while it is developing a plan to present to its creditors.
51
The Noteholders also argue that the supervising judge's finding that the Tenor DIP Loan would enhance the prospects
of a viable compromise or arrangement was unreasonable because it resulted from an error of principle, namely an improper
focus on the fact that it provided financing for the arbitration.
52
The Noteholders submit that the supervising judge misapprehended the evidence in finding that the Noteholders were
not willing to match the Tenor DIP Loan, and this error affected the outcome of the motion.
53 They argue that the supervising judge erred in deferring to the business judgment of the directors of Crystallex in approving
both the Bridge Loan and the Tenor DIP Loan. They argue that directors always make a recommendation and, if Parliament
had thought this was a relevant factor, it would have specifically enumerated it in s. 11.2(4) of the CCAA.
54
They argue that the supervising judge erred in principle in focusing on what was the most expedient way to fund the
arbitration (as opposed to Crystallex's needs while negotiating a plan with the Noteholders) and, in doing so, committed the
same error as the motion judge in Cliffs Over Maple Bay.
55
The Noteholders' position is that the Tenor DIP Loan is effectively an arrangement, in the guise of a financing, and
Crystallex is misusing the CCAA to impose a restructuring without the requisite creditor approval.
56
The Noteholders submit that this court should order Crystallex to accept the Noteholders' "matching" DIP loan offer.
57
They also renew their objections to the MIP.
B. Crystallex's Submissions
58 Crystallex argues that the Noteholders' appeal with respect to the Bridge Loan is moot because the loan has been advanced,
spent and repaid.
59 As to the Tenor DIP Loan, it argues that approving it was within the discretion of the supervising judge, the supervising
judge exercised his discretion on a wide variety of findings of fact, capable of evidentiary support in the record, and there is no
basis for this court to intervene. It relies on Ted Leroy Trucking Ltd., Re, 2010 SCC 60, [2010] 3 S.C.R. 379 (S.C.C.) [Century
Services], which recently addressed the broad discretionary jurisdiction of a supervising judge under the CCAA. Crystallex also
points to Air Canada (Re) (2004), 47 C.B.R. (4th) 169 (Ont. S.C.J. [Commercial List]), as an instance where exit financing was
approved before a plan had been approved by creditors.
C. Tenor's Submissions
60
Tenor argues that "interim financing" in the heading to s. 11.2 of the CCAA does not mean "short term", but rather
refers to the interval between two points or events, and s. 11.2 does not contain anything that would fetter the discretion of the
supervising judge to select an "end point" beyond the expected conclusion of a plan. It argues that the duration of the Tenor DIP
Loan is tailored to Crystallex's unique circumstance: all stakeholders acknowledge that the arbitration must be pursued in order
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for there to be meaningful recovery. In any event, it argues, marginal notes, such as the heading "interim financing" in s. 11.2,
are not part of the statute, and their value is limited when a court must address a serious problem of statutory interpretation,
citing the Interpretation Act, R.S.C. 1985, c. I-21, s. 14, and Imperial Oil Ltd. v. R., 2006 SCC 46, [2006] 2 S.C.R. 447 (S.C.C.),
at para. 57.
61
Moreover, Tenor submits, the supervising judge was in the best position to perform the careful balancing of interests
required to facilitate a successful restructuring.
VI. Analysis
A. The Appeal from the Bridge Financing Order
62
The Noteholders did not strongly pursue their appeal of the Bridge Financing Order. The relief sought at the conclusion
of the hearing related to the Tenor DIP Loan and not the Bridge Loan. The Bridge Loan was disbursed, spent and repaid. I
agree with the respondents that the Noteholders' appeal with respect to the Bridge Loan is moot. I will therefore confine my
analysis to the Tenor DIP Loan and the MIP.
B. The Appeal from the Tenor DIP Financing Order
(1) Century Services Inc. v. Canada (Attorney General)
63
The Supreme Court of Canada had occasion to interpret the CCAA for the first time in Century Services. It used
that opportunity to make clear that the CCAA gives the courts broad discretionary powers. Those powers must, however, be
exercised in furtherance of the CCAA's purposes: para. 59. Section 11, in particular, was drafted in broad language which
provides that a supervising judge "may, subject to the restrictions set out in this Act ... make any order that it considers
appropriate in the circumstances". 3 For the majority in Century Services, Deschamps J. wrote:
[69] The CCAA also explicitly provides for certain orders...
[70] The general language of the CCAA should not be read as being restricted by the availability of more specific orders.
However, the requirements of appropriateness, good faith, and due diligence are baseline considerations that a court should
always bear in mind when exercising CCAA authority. Appropriateness under the CCAA is assessed by inquiring whether
the order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully
further efforts to achieve the remedial purpose of the CCAA — avoiding the social and economic losses resulting from
liquidation of an insolvent company. I would add that appropriateness extends not only to the purpose of the order, but
also to the means it employs. Courts should be mindful that chances for successful reorganizations are enhanced where
participants achieve common ground and all stakeholders are treated as advantageously and fairly as the circumstances
permit.
64
It is with the Supreme Court's interpretation of the scope of judicial discretion under the CCAA in mind that I turn to s.
11.2 and the question of whether it permits a supervising judge to approve financing that may continue for a significant period
after CCAA protection ends, without the approval of creditors.
(2) Section 11.2 of the CCAA
65
Section 11.2 is headed "Interim Financing". Headings may be used as an aid in interpreting the meaning of a statute:
R. Sullivan, Sullivan on the Construction of Statutes, 5th ed. (Markham: LexisNexis Canada Inc., 2008), at p. 394, "Interim"
generally means temporary or provisional: Canadian Oxford Dictionary, 2d ed. The weight to be given to a heading depends
on the circumstances.
66
I agree with the Noteholders that s. 11.2 contemplates the grant of a charge, the primary purpose of which is to secure
financing required by the debtor while it is expected to be subject to proceedings under the CCAA. A further purpose, however,
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is to enhance the prospects of a plan of compromise or arrangement that will lead to a continuation of the company, albeit in
restructured form, after plan approval.
67 Section 11.2(4)(a) directs the court to consider the period during which the debtor is expected to be subject to proceedings
under the CCAA. It stops short of confining the financing to the period that the debtor is subject to the CCAA. Section 11.2(4)
(d) directs the court to consider if the financing would enhance the prospects of a viable compromise or arrangement.
68
Having regard to the broad remedial purpose of the CCAA and the broad residual authority of a supervising judge
described in Century Services, in my view section 11.2 does not restrict the ability of the supervising judge, where appropriate,
to approve the grant of a charge securing financing before a plan is approved that may continue after the company emerges
from CCAA protection. Indeed, although in very different circumstances, financing to be available on the debtor's emergence
from CCAA protection (sometimes called "exit financing") was approved before a plan was approved in Air Canada. 4 Both
Century Services and section 11.2, however, in my view, signal that it would be unusual for a court to approve exit financing
where opposed by substantially all of the creditors. Exit or post-plan financing is often a key element, or a pre-requisite, of
the plan voted on by creditors.
69 The question becomes whether the unique facts of this case permitted the supervising judge to approve "interim financing"
that was of such duration and structure that it could well outlast the CCAA protection period. This court should not substitute
its decision for that of the supervising judge. I must ask this question through the lens of the applicable standard of review.
(3) Standard of review
70 Appellate review of a discretionary order under the CCAA is limited. Intervention is justified only for an error in principle
or the unreasonable exercise of discretion: Ivaco Inc. (Re) (2006), 83 O.R. (3d) 108 (Ont. C.A.), at para. 71. An appellate court
should not interfere with an exercise of discretion "where the question is one of the weight or degree of importance to be given
to particular factors, rather than a failure to consider such factors or the correctness, in the legal sense, of the conclusion": New
Skeena Forest Products Inc., Re, 2005 BCCA 192, 39 B.C.L.R. (4th) 338 (B.C. C.A.), at para. 26.
(4) The supervising judge did not err in principle or unreasonably exercise his discretion
71
As detailed below, I conclude that there is no basis for interfering with the supervising judge's exercise of discretion
in approving the Tenor DIP Loan.
72
Most significantly, in this case, the supervising judge found there could be no meaningful recovery, and therefore no
successful restructuring, without the financing of the arbitration. Although the Noteholders characterized the Tenor DIP Loan
as "exit financing", it furthered the remedial purpose of the CCAA. To that extent, it is appropriate in the first sense used by
Deschamps J. in Century Services, even though it may well outlast the period of CCAA protection. The supervising judge's focus
on the fact that the Tenor DIP Loan provided financing for the arbitration was not, in the circumstances, an error of principle.
73
In my view, the Noteholders' real argument is that the means by which the Tenor DIP Loan was approved were not
appropriate. Ideally, a CCAA supervising judge is able to assist creditors and debtors in coming to a compromise. The creditors
and Crystallex have not "achieved common ground" on a very significant matter. Effectively, the Noteholders argue that the
creditors have not been treated as advantageously and fairly as the circumstances permit. They are the senior creditors and their
offer to provide DIP financing on terms they argue matched those of the Tenor DIP Loan was not accepted. With sufficient
financing in place to fund the arbitration, their leverage in negotiating a share of the arbitration proceeds has been reduced.
Moreover, the Noteholders argue, the supervising judge erred in applying the business judgment rule, and, contrary to Cliffs
Over Maple Bay, involuntarily stayed their rights during what they characterize as a restructuring. I consider each of these
arguments below.
a. The Noteholders' competing DIP loan offer
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74 The Noteholders point to their affidavit on the April motion indicating they would submit to an order to advance funds on
the same terms as the Tenor DIP Loan "in the event that prior to October 1, 2012, the Court orders that such longterm financing
is appropriate and necessary". The supervising judge wrote that it would have been a preferable outcome if the Noteholders had
been prepared to lend at the time of the April motion on the terms of the Tenor DIP facility: DIP Financing Reasons, at para.
91. The Noteholders argue that: they were prepared to advance funds on the terms of the Tenor DIP Loan, if so ordered; the
supervising judge misapprehended the evidence; and, given the supervising judge's comment that it would have been preferable
if the Noteholders had been prepared to lend, that misapprehension affected the outcome of the motion.
75
The supervising judge's comment at para. 91 of the DIP Financing Reasons makes his real concern clear. There, he
stated that "at this time" the Noteholders were not prepared to lend on the terms of the Tenor DIP Loan. The Noteholders' view
as of April 5, 2012 was that such long-term financing was not necessary, as the $10 million they offered to advance at that
time met Crystallex's then cash requirements. The Noteholders reserved their rights to continue to oppose the approval of long
term financing before they had come to an agreement with Crystallex about their entitlement, as creditors. Further hearings,
and further arguments, were required. The supervising judge found, at para. 83 of the DIP Financing Reasons, that not putting
sufficient financing in place to finance the arbitration "at this stage" would impair the arbitration. There was no suggestion from
counsel for the Noteholders that on April 5, 2012 the Noteholders were prepared to waive the condition permitting them to
continue to oppose the approval of long term financing. I am not satisfied that the supervising judge clearly misapprehended
the evidence.
b. Loss of leverage
76
In Crystallex's view, a reduction of the Noteholders' leverage was desirable. It points to the Noteholders' competing
CCAA application, seeking to cancel all of the shareholders' equity, which the supervising judge rejected as not fairly balancing
the interests of all stakeholders. The Noteholders' plan, subsequently proposed, would entitle them to 46 per cent of the equity
in return for giving up their Notes, which Crystallex also views as excessive. 5
77 Crystallex argues that the Noteholders are not contractually entitled to convert their Notes to equity, and should therefore
not be entitled to do so. Moreover, they argue, in the event of bankruptcy, the Noteholders would only be entitled to recover
their principal and interest at the statutory rate of 5 per cent under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, and,
if the arbitration is realized, they will be entitled to the higher rate of interest they are contractually entitled to under the Notes.
As Deschamps J. noted at para. 77 of Century Services, participants in a reorganization "measure the impact of a reorganization
against the position they would enjoy in liquidation".
78
The Noteholders counter that, contractually, they were entitled to be repaid on December 23, 2011 and, since they were
not, and Crystallex proposes to defer repayment for several years and repay the Notes only if the arbitration is successful, the
long delay entitles them to some equity participation. Moreover, contractually, Crystallex is restricted from incurring the Tenor
DIP Loan, which will be senior to the Notes.
79
Crystallex points to the terms of the Initial Order, affording the "best offer" the protection of the Soundair principles,
and providing that "topping offers" would not be considered by the court. Crystallex points out that the Noteholders did not
appeal the Initial Order and argues that accepting the Noteholders' matching offer would offend the Soundair principles. In
Crystallex's view, the Noteholders were treated fairly.
80
In turn, the Noteholders argue that the Initial Order authorized Crystallex to conduct an auction to raise interim or DIP
financing pursuant to procedures approved by the Monitor. Since the outset, the Noteholders maintained their objection that the
auction process sought more than interim or true DIP financing. The supervising judge deferred consideration of their objections
until the DIP facility was before the court for approval.
81
The Noteholders are sophisticated parties. They pursued a strategy. It ultimately proved less successful than hoped. It
appears that the supervising judge would have been prepared to approve the advance of funds to Crystallex by the Noteholders,
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on the terms of the Tenor DIP Loan, notwithstanding the Soundair principles, had the Noteholders agreed to do so, without
condition, on April 5, 2012.
82 The facts of this case are unusual: there is a single "pot of gold" asset which, if realized, will provide significantly more than
required to repay the creditors. The supervising judge was in the best position to balance the interests of all stakeholders. I am
of the view that the supervising judge's exercise of discretion in approving the Tenor DIP Loan was reasonable and appropriate,
despite having the effect of constraining the negotiating position of the creditors.
c. The business judgment rule
83
The supervising judge held that in addition to the factors in s. 11.2(4) of the CCAA, he could take into account the
exercise or lack thereof of business judgment by the board of directors of a debtor corporation in considering DIP financing:
DIP Financing Reasons, at paras. 32-35. He cited Stelco Inc. (Re) (2005), 75 O.R. (3d) 5 (Ont. C.A.), as authority for this
proposition. 6
84 The fact that a debtor's board of directors recommends interim financing is not a determinative factor, and in some cases
may not be a material factor, in considering whether to make an order under s. 11.2. It would be unusual if the board did not
recommend the financing for which the debtor seeks approval.
85 Stelco should not be read as authority for the principle that the recommendation of the directors of a debtor under CCAA
protection is entitled to deference in evaluating whether financing should be approved under s. 11.2 of the CCAA where the
factors outlined in s. 11.2(4) have not been complied with. In Stelco, the debtor did not seek court approval of a recommendation
of the board. In the case of interim financing, the court must make an independent determination, and arrive at an appropriate
order, having regard to the factors in s. 11.2(4). It may consider, but not defer to, and is not fettered by, the recommendation
of the board.
86 The weight given by the supervising judge to the business judgment of the board of directors of Crystallex in recommending
the Tenor DIP Loan is not, however, a basis for this court to interfere with his decision: New Skeena Forest Products Inc.,
Re, at para. 26.
d. Cliffs Over Maple Bay is distinguishable
87
In Cliffs Over Maple Bay, the debtor was the developer of a 300 acre site intended to include residential units, a golf
course and a hotel. The debtor obtained protection under the CCAA and sought approval of financing that would permit it to
complete material parts of the development. It believed that the proceeds generated from the sale of units thus completed would
be sufficient to fund the remaining portions of the development and that, if the development were completed, there would be
sufficient sale proceeds to satisfy all of the debtor's obligations.
88
The motion judge approved the financing; the mortgagees of the development appealed. The British Columbia Court of
Appeal noted, at para. 35, that it was not suggested that the debtor intended to propose an arrangement or compromise to its
creditors before embarking on its restructuring plan. The court allowed the appeal, writing:
[37] ... DIP financing should not be authorized to permit the debtor company to pursue a restructuring plan that does not
involve an arrangement or compromise with its creditors ...
[38] ... What the Debtor Company was endeavouring to accomplish in this case was to freeze the rights of all of its creditors
while it undertook its restructuring plan without giving the creditors an opportunity to vote on the plan. The CCAA was
not intended, in my view, to accommodate a non-consensual stay of creditors' rights while a debtor company attempts to
carry out a restructuring plan that does not involve an arrangement or compromise upon which the creditors may vote.
89
I agree with the supervising judge that this case can be distinguished from Cliffs Over Maple Bay, which turned on the
court's finding that the debtor did not intend to negotiate a plan with its creditors.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
17
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
90
While Mr. Fung initially indicated that Crystallex's plan was to stay creditors' claims until the arbitration was settled or
realized, his more recent evidence was that approval of the Tenor DIP Loan does not preclude further discussions about a plan
with the creditors. In submissions before the supervising judge, and again before this court, counsel for Crystallex reiterated that
Crystallex intended to exit from CCAA protection as soon as a plan was negotiated with the creditors and approved, and that
Crystallex intended to negotiate a plan by the expiry of the stay on July 30, 2012. The supervising judge found that Crystallex
intended to negotiate a plan with its creditors. There is some basis in the record for such a conclusion.
(5) The Tenor DIP Loan is not an arrangement
91
An arrangement or compromise cannot be imposed on creditors unless it has been approved by a majority in number
representing two thirds in value of the creditors: see s. 6(1) of the CCAA.
92
The supervising judge rejected the argument that the Tenor DIP Loan was a plan of arrangement or compromise and
therefore required the approval of the creditors. He held, at para. 50 of the DIP Financing Reasons:
A "plan of arrangement" or a "compromise" is not defined in the CCAA. It is, however, to be an arrangement or compromise
between a debtor and its creditors. The Tenor DIP facility is not on its face such an arrangement or compromise between
Crystallex and its creditors. Importantly the rights of the noteholders are not taken away from them by the Tenor DIP
facility. The noteholders are unsecured creditors. Their rights are to sue to judgment and enforce the judgment. If not paid,
they have a right to apply for a bankruptcy order under the BIA. Under the CCAA, they have the right to vote on a plan
of arrangement or compromise. None of these rights are taken away by the Tenor DIP.
93 I agree. While the approval of the Tenor DIP Loan affected the Noteholders' leverage in negotiating a plan, and has made
the negotiation of a plan more complex, it did not compromise the terms of their indebtedness or take away any of their legal
rights. It is accordingly not an arrangement, and a creditor vote was not required. In this case it was within the discretion of
the supervising judge to approve the Tenor DIP Loan.
C. The Appeal from the Management Incentive Plan Approval Order
94
In my view, the supervising judge did not err in principle or unreasonably exercise his discretion in approving the MIP.
I see no basis for this court to intervene.
95 As the supervising judge noted, employee retention provisions are frequently authorized before a plan is negotiated. The
supervising judge was alive to the exceptionally large amounts that might be paid to beneficiaries of the MIP (including Mr.
Fung) in this case. The supervising judge took specific note of the issues that the Noteholders had raised in the past regarding
the extent to which the independent committee of the board that recommended the MIP was truly independent, and the steps
taken by that committee to address those concerns.
96 The recommendation of an independent committee of the board that has obtained expert advice is entitled to more weight
in the consideration of a MIP than is the recommendation of the board in the consideration of whether financing should be
approved under s. 11.2 of the CCAA. The CCAA does not list specific factors to be considered by the court in the case of a MIP.
Moreover, the board would have the best sense of which employees were essential to the success of its restructuring efforts.
97 In addition to considering the recommendation of the independent committee of the board and Mr. Swartz, the supervising
judge also reviewed the evidence to consider whether any persons had been included in the MIP who should not have been.
He did not rely solely on the board's recommendation.
VII. Disposition
98
Accordingly, I would dismiss the appeals of the CCAA Bridge Financing Order, the CCAA Financing Order, and the
Management Incentive Plan Approval Order.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
18
Crystallex International Corp., Re, 2012 ONCA 404, 2012 CarswellOnt 7329
2012 ONCA 404, 2012 CarswellOnt 7329, 216 A.C.W.S. (3d) 550, 293 O.A.C. 102...
VIII. Costs
99 If the parties cannot agree, I would order that Crystallex and Tenor provide their submissions on the issue of costs within
14 days, and that the Noteholders, if so advised, provide their submissions in response within 10 days thereafter. No reply
submissions are to be provided without leave.
D. O'Connor A.C.J.O.:
I agree
R.A. Blair J.A.:
I agree
Appeals dismissed.
Footnotes
*
Additional reasons at Crystallex International Corp., Re (2012), 2012 CarswellOnt 9479, 2012 ONCA 527 (Ont. C.A.).
1
Paragraph 23(1)(b) provides that the monitor shall "review the company's cash-flow statement as to its reasonableness and file a
report with the court on the monitor's findings".
2
The MIP was approved subject to an amendment (agreed to by Crystallex) to provide that the value of any stock options ultimately
realized by participants of the MIP would be deducted from the amount of any bonus awarded under the MIP on a tax neutral basis.
3
The full text of section 11 is as follows:
11. Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under
this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the
restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers
appropriate in the circumstances.
4
In Air Canada, Farley J. approved a "global restructuring agreement" which included a commitment of an existing creditor to provide
exit financing of approximately US $585 million on the company's emergence from CCAA. DIP financing was in place; the financing
at issue was clearly recognized as exit financing. The restructuring agreement was not opposed by substantially all of the creditors.
Nor was it argued that it adversely affected the ability of the creditors and the debtor to negotiate a compromise or arrangement.
5
The Noteholders proposed that they receive 22.9 per cent of the equity for the $36 million needed for the arbitration and 58 per cent
of the equity in return for giving up their Notes, for a total of approximately 81 per cent of the equity. Assuming that the Noteholders
sought a maximum total entitlement of 81 per cent, if they advanced the $36 million on the terms of the Tenor DIP Loan, as they
now seek to do, the amount of equity on conversion of their notes would be 46 per cent. See the DIP Financing Reasons, at para. 77.
6
An incorrect citation for Stelco was given in the DIP Financing Reasons, at para. 33.
End of Document
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reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
19
3
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
2010 SCC 60
Supreme Court of Canada
Ted Leroy Trucking [Century Services] Ltd., Re
2010 CarswellBC 3419, 2010 CarswellBC 3420, 2010 SCC 60, [2010] 3 S.C.R. 379, [2010]
G.S.T.C. 186, [2011] 2 W.W.R. 383, [2011] B.C.W.L.D. 533, [2011] B.C.W.L.D. 534, 12
B.C.L.R. (5th) 1, 196 A.C.W.S. (3d) 27, 2011 D.T.C. 5006 (Eng.), 2011 G.T.C. 2006 (Eng.), 296
B.C.A.C. 1, 326 D.L.R. (4th) 577, 409 N.R. 201, 503 W.A.C. 1, 72 C.B.R. (5th) 170, J.E. 2011-5
Century Services Inc. (Appellant) and Attorney General of Canada on
behalf of Her Majesty The Queen in Right of Canada (Respondent)
Deschamps J., McLachlin C.J.C., Binnie, LeBel, Fish, Abella, Charron, Rothstein, Cromwell JJ.
Heard: May 11, 2010
Judgment: December 16, 2010
Docket: 33239
Proceedings: reversing Ted Leroy Trucking Ltd., Re (2009), 2009 CarswellBC 1195, 2009 G.T.C. 2020 (Eng.), 2009 BCCA
205, 270 B.C.A.C. 167, 454 W.A.C. 167, [2009] 12 W.W.R. 684, 98 B.C.L.R. (4th) 242, [2009] G.S.T.C. 79 (B.C. C.A.);
reversing Ted Leroy Trucking Ltd., Re (2008), 2008 CarswellBC 2895, 2008 BCSC 1805, [2008] G.S.T.C. 221, 2009 G.T.C.
2011 (Eng.) (B.C. S.C. [In Chambers])
Counsel: Mary I.A. Buttery, Owen J. James, Matthew J.G. Curtis for Appellant
Gordon Bourgard, David Jacyk, Michael J. Lema for Respondent
Subject: Estates and Trusts; Goods and Services Tax (GST); Tax — Miscellaneous; Insolvency
Headnote
Tax --- Goods and Services Tax — Collection and remittance — GST held in trust
Debtor owed Crown under Excise Tax Act (ETA) for unremitted GST — Debtor sought relief under Companies' Creditors
Arrangement Act (CCAA) — Under order of BC Supreme Court, amount of GST debt was placed in trust account and
remaining proceeds of sale of assets paid to major secured creditor — Debtor's application for partial lifting of stay of
proceedings to assign itself into bankruptcy was granted, while Crown's application for payment of tax debt was dismissed
— Crown's appeal to BC Court of Appeal was allowed — Creditor appealed to Supreme Court of Canada — Appeal
allowed — Analysis of ETA and CCAA yielded conclusion that CCAA provides that statutory deemed trusts do not apply,
and that Parliament did not intend to restore Crown's deemed trust priority in GST claims under CCAA when it amended
ETA in 2000 — Parliament had moved away from asserting priority for Crown claims under both CCAA and Bankruptcy
and Insolvency Act (BIA), and neither statute provided for preferred treatment of GST claims — Giving Crown priority
over GST claims during CCAA proceedings but not in bankruptcy would reduce use of more flexible and responsive
CCAA regime — Parliament likely inadvertently succumbed to drafting anomaly — Section 222(3) of ETA could not
be seen as having impliedly repealed s. 18.3 of CCAA by its subsequent passage, given recent amendments to CCAA —
Court had discretion under CCAA to construct bridge to liquidation under BIA, and partially lift stay of proceedings to
allow entry into liquidation — No "gap" should exist when moving from CCAA to BIA — Court order segregating funds
did not have certainty that Crown rather than creditor would be beneficiary sufficient to support express trust — Amount
held in respect of GST debt was not subject to deemed trust, priority or express trust in favour of Crown — Excise Tax
Act, R.S.C. 1985, c. E-15, ss. 222(1), (1.1).
Tax --- General principles — Priority of tax claims in bankruptcy proceedings
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
1
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Debtor owed Crown under Excise Tax Act (ETA) for unremitted GST — Debtor sought relief under Companies' Creditors
Arrangement Act (CCAA) — Under order of BC Supreme Court, amount of GST debt was placed in trust account and
remaining proceeds of sale of assets paid to major secured creditor — Debtor's application for partial lifting of stay of
proceedings to assign itself into bankruptcy was granted, while Crown's application for payment of tax debt was dismissed
— Crown's appeal to BC Court of Appeal was allowed — Creditor appealed to Supreme Court of Canada — Appeal
allowed — Analysis of ETA and CCAA yielded conclusion that CCAA provides that statutory deemed trusts do not apply,
and that Parliament did not intend to restore Crown's deemed trust priority in GST claims under CCAA when it amended
ETA in 2000 — Parliament had moved away from asserting priority for Crown claims under both CCAA and Bankruptcy
and Insolvency Act (BIA), and neither statute provided for preferred treatment of GST claims — Giving Crown priority
over GST claims during CCAA proceedings but not in bankruptcy would reduce use of more flexible and responsive
CCAA regime — Parliament likely inadvertently succumbed to drafting anomaly — Section 222(3) of ETA could not
be seen as having impliedly repealed s. 18.3 of CCAA by its subsequent passage, given recent amendments to CCAA —
Court had discretion under CCAA to construct bridge to liquidation under BIA, and partially lift stay of proceedings to
allow entry into liquidation — No "gap" should exist when moving from CCAA to BIA — Court order segregating funds
did not have certainty that Crown rather than creditor would be beneficiary sufficient to support express trust — Amount
held in respect of GST debt was not subject to deemed trust, priority or express trust in favour of Crown.
Taxation --- Taxe sur les produits et services — Perception et versement — Montant de TPS détenu en fiducie
Débitrice devait à la Couronne des montants de TPS qu'elle n'avait pas remis, en vertu de la Loi sur la taxe d'accise (LTA)
— Débitrice a entamé des procédures judiciaires en vertu de la Loi sur les arrangements avec les créanciers des compagnies
(LACC) — En vertu d'une ordonnance du tribunal, le montant de la créance fiscale a été déposé dans un compte en fiducie
et la balance du produit de la vente des actifs a servi à payer le créancier garanti principal — Demande de la débitrice visant
à obtenir la levée partielle de la suspension de procédures afin qu'elle puisse faire cession de ses biens a été accordée, alors
que la demande de la Couronne visant à obtenir le paiement des montants de TPS non remis a été rejetée — Appel interjeté
par la Couronne a été accueilli — Créancier a formé un pourvoi — Pourvoi accueilli — Analyse de la LTA et de la LACC
conduisait à la conclusion que le législateur ne saurait avoir eu l'intention de redonner la priorité, dans le cadre de la LACC,
à la fiducie réputée de la Couronne à l'égard de ses créances relatives à la TPS quand il a modifié la LTA, en 2000 —
Législateur avait mis un terme à la priorité accordée aux créances de la Couronne sous les régimes de la LACC et de la
Loi sur la faillite et l'insolvabilité (LFI), et ni l'une ni l'autre de ces lois ne prévoyaient que les créances relatives à la TPS
bénéficiaient d'un traitement préférentiel — Fait de faire primer la priorité de la Couronne sur les créances découlant de la
TPS dans le cadre de procédures fondées sur la LACC mais pas en cas de faillite aurait pour effet de restreindre le recours
à la possibilité de se restructurer sous le régime plus souple et mieux adapté de la LACC — Il semblait probable que le
législateur avait par inadvertance commis une anomalie rédactionnelle — On ne pourrait pas considérer l'art. 222(3) de la
LTA comme ayant implicitement abrogé l'art. 18.3 de la LACC, compte tenu des modifications récemment apportées à la
LACC — Sous le régime de la LACC, le tribunal avait discrétion pour établir une passerelle vers une liquidation opérée
sous le régime de la LFI et de lever la suspension partielle des procédures afin de permettre à la débitrice de procéder à la
transition au régime de liquidation — Il n'y avait aucune certitude, en vertu de l'ordonnance du tribunal, que la Couronne
était le bénéficiaire véritable de la fiducie ni de fondement pour donner naissance à une fiducie expresse — Montant perçu
au titre de la TPS ne faisait l'objet d'aucune fiducie présumée, priorité ou fiducie expresse en faveur de la Couronne.
Taxation --- Principes généraux — Priorité des créances fiscales dans le cadre de procédures en faillite
Débitrice devait à la Couronne des montants de TPS qu'elle n'avait pas remis, en vertu de la Loi sur la taxe d'accise (LTA)
— Débitrice a entamé des procédures judiciaires en vertu de la Loi sur les arrangements avec les créanciers des compagnies
(LACC) — En vertu d'une ordonnance du tribunal, le montant de la créance fiscale a été déposé dans un compte en fiducie
et la balance du produit de la vente des actifs a servi à payer le créancier garanti principal — Demande de la débitrice visant
à obtenir la levée partielle de la suspension de procédures afin qu'elle puisse faire cession de ses biens a été accordée, alors
que la demande de la Couronne visant à obtenir le paiement des montants de TPS non remis a été rejetée — Appel interjeté
par la Couronne a été accueilli — Créancier a formé un pourvoi — Pourvoi accueilli — Analyse de la LTA et de la LACC
conduisait à la conclusion que le législateur ne saurait avoir eu l'intention de redonner la priorité, dans le cadre de la LACC,
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
2
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
à la fiducie réputée de la Couronne à l'égard de ses créances relatives à la TPS quand il a modifié la LTA, en 2000 —
Législateur avait mis un terme à la priorité accordée aux créances de la Couronne sous les régimes de la LACC et de la
Loi sur la faillite et l'insolvabilité (LFI), et ni l'une ni l'autre de ces lois ne prévoyaient que les créances relatives à la TPS
bénéficiaient d'un traitement préférentiel — Fait de faire primer la priorité de la Couronne sur les créances découlant de la
TPS dans le cadre de procédures fondées sur la LACC mais pas en cas de faillite aurait pour effet de restreindre le recours
à la possibilité de se restructurer sous le régime plus souple et mieux adapté de la LACC — Il semblait probable que le
législateur avait par inadvertance commis une anomalie rédactionnelle — On ne pourrait pas considérer l'art. 222(3) de la
LTA comme ayant implicitement abrogé l'art. 18.3 de la LACC, compte tenu des modifications récemment apportées à la
LACC — Sous le régime de la LACC, le tribunal avait discrétion pour établir une passerelle vers une liquidation opérée
sous le régime de la LFI et de lever la suspension partielle des procédures afin de permettre à la débitrice de procéder à la
transition au régime de liquidation — Il n'y avait aucune certitude, en vertu de l'ordonnance du tribunal, que la Couronne
était le bénéficiaire véritable de la fiducie ni de fondement pour donner naissance à une fiducie expresse — Montant perçu
au titre de la TPS ne faisait l'objet d'aucune fiducie présumée, priorité ou fiducie expresse en faveur de la Couronne.
The debtor company owed the Crown under the Excise Tax Act (ETA) for GST that was not remitted. The debtor
commenced proceedings under the Companies' Creditors Arrangement Act (CCAA). Under an order by the B.C. Supreme
Court, the amount of the tax debt was placed in a trust account, and the remaining proceeds from the sale of the debtor's
assets were paid to the major secured creditor. The debtor's application for a partial lifting of the stay of proceedings
in order to assign itself into bankruptcy was granted, while the Crown's application for the immediate payment of the
unremitted GST was dismissed.
The Crown's appeal to the B.C. Court of Appeal was allowed. The Court of Appeal found that the lower court was bound
by the ETA to give the Crown priority once bankruptcy was inevitable. The Court of Appeal ruled that there was a deemed
trust under s. 222 of the ETA or that an express trust was created in the Crown's favour by the court order segregating
the GST funds in the trust account.
The creditor appealed to the Supreme Court of Canada.
Held: The appeal was allowed.
Per Deschamps J. (McLachlin C.J.C., Binnie, LeBel, Charron, Rothstein, Cromwell JJ. concurring): A purposive and
contextual analysis of the ETA and CCAA yielded the conclusion that Parliament could not have intended to restore the
Crown's deemed trust priority in GST claims under the CCAA when it amended the ETA in 2000. Parliament had moved
away from asserting priority for Crown claims in insolvency law under both the CCAA and Bankruptcy and Insolvency
Act (BIA). Unlike for source deductions, there was no express statutory basis in the CCAA or BIA for concluding that
GST claims enjoyed any preferential treatment. The internal logic of the CCAA also militated against upholding a deemed
trust for GST claims.
Giving the Crown priority over GST claims during CCAA proceedings but not in bankruptcy would, in practice, deprive
companies of the option to restructure under the more flexible and responsive CCAA regime. It seemed likely that
Parliament had inadvertently succumbed to a drafting anomaly, which could be resolved by giving precedence to s. 18.3
of the CCAA. Section 222(3) of the ETA could no longer be seen as having impliedly repealed s. 18.3 of the CCAA by
being passed subsequently to the CCAA, given the recent amendments to the CCAA. The legislative context supported
the conclusion that s. 222(3) of the ETA was not intended to narrow the scope of s. 18.3 of the CCAA.
The breadth of the court's discretion under the CCAA was sufficient to construct a bridge to liquidation under the BIA,
so there was authority under the CCAA to partially lift the stay of proceedings to allow the debtor's entry into liquidation.
There should be no gap between the CCAA and BIA proceedings that would invite a race to the courthouse to assert
priorities.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
3
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
The court order did not have the certainty that the Crown would actually be the beneficiary of the funds sufficient to support
an express trust, as the funds were segregated until the dispute between the creditor and the Crown could be resolved. The
amount collected in respect of GST but not yet remitted to the Receiver General of Canada was not subject to a deemed
trust, priority or express trust in favour of the Crown.
Per Fish J. (concurring): Parliament had declined to amend the provisions at issue after detailed consideration of the
insolvency regime, so the apparent conflict between s. 18.3 of the CCAA and s. 222 of the ETA should not be treated
as a drafting anomaly. In the insolvency context, a deemed trust would exist only when two complementary elements
co-existed: first, a statutory provision creating the trust; and second, a CCAA or BIA provision confirming its effective
operation. Parliament had created the Crown's deemed trust in the Income Tax Act, Canada Pension Plan and Employment
Insurance Act and then confirmed in clear and unmistakable terms its continued operation under both the CCAA and
the BIA regimes. In contrast, the ETA created a deemed trust in favour of the Crown, purportedly notwithstanding any
contrary legislation, but Parliament did not expressly provide for its continued operation in either the BIA or the CCAA.
The absence of this confirmation reflected Parliament's intention to allow the deemed trust to lapse with the commencement
of insolvency proceedings. Parliament's evident intent was to render GST deemed trusts inoperative upon the institution
of insolvency proceedings, and so s. 222 of the ETA mentioned the BIA so as to exclude it from its ambit, rather than
include it as the other statutes did. As none of these statutes mentioned the CCAA expressly, the specific reference to the
BIA had no bearing on the interaction with the CCAA. It was the confirmatory provisions in the insolvency statutes that
would determine whether a given deemed trust would subsist during insolvency proceedings.
Per Abella J. (dissenting): The appellate court properly found that s. 222(3) of the ETA gave priority during CCAA
proceedings to the Crown's deemed trust in unremitted GST. The failure to exempt the CCAA from the operation of this
provision was a reflection of clear legislative intent. Despite the requests of various constituencies and case law confirming
that the ETA took precedence over the CCAA, there was no responsive legislative revision and the BIA remained the only
exempted statute. There was no policy justification for interfering, through interpretation, with this clarity of legislative
intention and, in any event, the application of other principles of interpretation reinforced this conclusion. Contrary to
the majority's view, the "later in time" principle did not favour the precedence of the CCAA, as the CCAA was merely
re-enacted without significant substantive changes. According to the Interpretation Act, in such circumstances, s. 222(3)
of the ETA remained the later provision. The chambers judge was required to respect the priority regime set out in s.
222(3) of the ETA and so did not have the authority to deny the Crown's request for payment of the GST funds during
the CCAA proceedings.
La compagnie débitrice devait à la Couronne des montants de TPS qu'elle n'avait pas remis, en vertu de la Loi sur la
taxe d'accise (LTA). La débitrice a entamé des procédures judiciaires en vertu de la Loi sur les arrangements avec les
créanciers des compagnies (LACC). En vertu d'une ordonnance du tribunal, le montant de la créance fiscale a été déposé
dans un compte en fiducie et la balance du produit de la vente des actifs de la débitrice a servi à payer le créancier garanti
principal. La demande de la débitrice visant à obtenir la levée partielle de la suspension de procédures afin qu'elle puisse
faire cession de ses biens a été accordée, alors que la demande de la Couronne visant à obtenir le paiement immédiat des
montants de TPS non remis a été rejetée.
L'appel interjeté par la Couronne a été accueilli. La Cour d'appel a conclu que le tribunal se devait, en vertu de la LTA, de
donner priorité à la Couronne une fois la faillite inévitable. La Cour d'appel a estimé que l'art. 222 de la LTA établissait
une fiducie présumée ou bien que l'ordonnance du tribunal à l'effet que les montants de TPS soient détenus dans un compte
en fiducie créait une fiducie expresse en faveur de la Couronne.
Le créancier a formé un pourvoi.
Arrêt: Le pourvoi a été accueilli.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
4
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Deschamps, J. (McLachlin, J.C.C., Binnie, LeBel, Charron, Rothstein, Cromwell, JJ., souscrivant à son opinion) : Une
analyse téléologique et contextuelle de la LTA et de la LACC conduisait à la conclusion que le législateur ne saurait
avoir eu l'intention de redonner la priorité, dans le cadre de la LACC, à la fiducie réputée de la Couronne à l'égard de ses
créances relatives à la TPS quand il a modifié la LTA, en 2000. Le législateur avait mis un terme à la priorité accordée
aux créances de la Couronne dans le cadre du droit de l'insolvabilité, sous le régime de la LACC et celui de la Loi sur la
faillite et l'insolvabilité (LFI). Contrairement aux retenues à la source, aucune disposition législative expresse ne permettait
de conclure que les créances relatives à la TPS bénéficiaient d'un traitement préférentiel sous le régime de la LACC ou
celui de la LFI. La logique interne de la LACC allait également à l'encontre du maintien de la fiducie réputée à l'égard
des créances découlant de la TPS.
Le fait de faire primer la priorité de la Couronne sur les créances découlant de la TPS dans le cadre de procédures fondées
sur la LACC mais pas en cas de faillite aurait pour effet, dans les faits, de priver les compagnies de la possibilité de
se restructurer sous le régime plus souple et mieux adapté de la LACC. Il semblait probable que le législateur avait par
inadvertance commis une anomalie rédactionnelle, laquelle pouvait être corrigée en donnant préséance à l'art. 18.3 de la
LACC. On ne pouvait plus considérer l'art. 222(3) de la LTA comme ayant implicitement abrogé l'art. 18.3 de la LACC
parce qu'il avait été adopté après la LACC, compte tenu des modifications récemment apportées à la LACC. Le contexte
législatif étayait la conclusion suivant laquelle l'art. 222(3) de la LTA n'avait pas pour but de restreindre la portée de l'art.
18.3 de la LACC.
L'ampleur du pouvoir discrétionnaire conféré au tribunal par la LACC était suffisant pour établir une passerelle vers une
liquidation opérée sous le régime de la LFI, de sorte qu'il avait, en vertu de la LACC, le pouvoir de lever la suspension
partielle des procédures afin de permettre à la débitrice de procéder à la transition au régime de liquidation. Il n'y avait
aucune certitude, en vertu de l'ordonnance du tribunal, que la Couronne était le bénéficiaire véritable de la fiducie ni de
fondement pour donner naissance à une fiducie expresse, puisque les fonds étaient détenus à part jusqu'à ce que le litige
entre le créancier et la Couronne soit résolu. Le montant perçu au titre de la TPS mais non encore versé au receveur général
du Canada ne faisait l'objet d'aucune fiducie présumée, priorité ou fiducie expresse en faveur de la Couronne.
Fish, J. (souscrivant aux motifs des juges majoritaires) : Le législateur a refusé de modifier les dispositions en question
suivant un examen approfondi du régime d'insolvabilité, de sorte qu'on ne devrait pas qualifier l'apparente contradiction
entre l'art. 18.3 de la LACC et l'art. 222 de la LTA d'anomalie rédactionnelle. Dans un contexte d'insolvabilité, on ne
pourrait conclure à l'existence d'une fiducie présumée que lorsque deux éléments complémentaires étaient réunis : en
premier lieu, une disposition législative qui crée la fiducie et, en second lieu, une disposition de la LACC ou de la LFI
qui confirme l'existence de la fiducie. Le législateur a établi une fiducie présumée en faveur de la Couronne dans la Loi
de l'impôt sur le revenu, le Régime de pensions du Canada et la Loi sur l'assurance-emploi puis, il a confirmé en termes
clairs et explicites sa volonté de voir cette fiducie présumée produire ses effets sous le régime de la LACC et de la LFI.
Dans le cas de la LTA, il a établi une fiducie présumée en faveur de la Couronne, sciemment et sans égard pour toute
législation à l'effet contraire, mais n'a pas expressément prévu le maintien en vigueur de celle-ci sous le régime de la
LFI ou celui de la LACC. L'absence d'une telle confirmation témoignait de l'intention du législateur de laisser la fiducie
présumée devenir caduque au moment de l'introduction de la procédure d'insolvabilité. L'intention du législateur était
manifestement de rendre inopérantes les fiducies présumées visant la TPS dès l'introduction d'une procédure d'insolvabilité
et, par conséquent, l'art. 222 de la LTA mentionnait la LFI de manière à l'exclure de son champ d'application, et non de l'y
inclure, comme le faisaient les autres lois. Puisqu'aucune de ces lois ne mentionnait spécifiquement la LACC, la mention
explicite de la LFI n'avait aucune incidence sur l'interaction avec la LACC. C'était les dispositions confirmatoires que
l'on trouvait dans les lois sur l'insolvabilité qui déterminaient si une fiducie présumée continuerait d'exister durant une
procédure d'insolvabilité.
Abella, J. (dissidente) : La Cour d'appel a conclu à bon droit que l'art. 222(3) de la LTA donnait préséance à la fiducie
présumée qui est établie en faveur de la Couronne à l'égard de la TPS non versée. Le fait que la LACC n'ait pas été soustraite
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5
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
à l'application de cette disposition témoignait d'une intention claire du législateur. Malgré les demandes répétées de divers
groupes et la jurisprudence ayant confirmé que la LTA l'emportait sur la LACC, le législateur n'est pas intervenu et la
LFI est demeurée la seule loi soustraite à l'application de cette disposition. Il n'y avait pas de considération de politique
générale qui justifierait d'aller à l'encontre, par voie d'interprétation législative, de l'intention aussi clairement exprimée
par le législateur et, de toutes manières, cette conclusion était renforcée par l'application d'autres principes d'interprétation.
Contrairement à l'opinion des juges majoritaires, le principe de la préséance de la « loi postérieure » ne militait pas en
faveur de la présance de la LACC, celle-ci ayant été simplement adoptée à nouveau sans que l'on ne lui ait apporté de
modifications importantes. En vertu de la Loi d'interprétation, dans ces circonstances, l'art. 222(3) de la LTA demeurait la
disposition postérieure. Le juge siégeant en son cabinet était tenu de respecter le régime de priorités établi à l'art. 222(3)
de la LTA, et il ne pouvait pas refuser la demande présentée par la Couronne en vue de se faire payer la TPS dans le cadre
de la procédure introduite en vertu de la LACC.
Table of Authorities
Cases considered by Deschamps J.:
Air Canada, Re (2003), 42 C.B.R. (4th) 173, 2003 CarswellOnt 2464 (Ont. S.C.J. [Commercial List]) — referred to
Air Canada, Re (2003), 2003 CarswellOnt 4967 (Ont. S.C.J. [Commercial List]) — referred to
Alternative granite & marbre inc., Re (2009), (sub nom. Dep. Min. Rev. Quebec v. Caisse populaire Desjardins de
Montmagny) 2009 G.T.C. 2036 (Eng.), (sub nom. Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny)
[2009] 3 S.C.R. 286, 312 D.L.R. (4th) 577, [2009] G.S.T.C. 154, (sub nom. 9083-4185 Québec Inc. (Bankrupt), Re)
394 N.R. 368, 60 C.B.R. (5th) 1, 2009 SCC 49, 2009 CarswellQue 10706, 2009 CarswellQue 10707 (S.C.C.) —
referred to
ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp. (2008), 2008 ONCA 587, 2008 CarswellOnt
4811, (sub nom. Metcalfe & Mansfield Alternative Investments II Corp., Re) 240 O.A.C. 245, (sub nom. Metcalfe &
Mansfield Alternative Investments II Corp., Re) 296 D.L.R. (4th) 135, (sub nom. Metcalfe & Mansfield Alternative
Investments II Corp., Re) 92 O.R. (3d) 513, 45 C.B.R. (5th) 163, 47 B.L.R. (4th) 123 (Ont. C.A.) — considered
Canadian Airlines Corp., Re (2000), [2000] 10 W.W.R. 269, 20 C.B.R. (4th) 1, 84 Alta. L.R. (3d) 9, 9 B.L.R. (3d)
41, 2000 CarswellAlta 662, 2000 ABQB 442, 265 A.R. 201 (Alta. Q.B.) — referred to
Canadian Red Cross Society / Société Canadienne de la Croix Rouge, Re (2000), 2000 CarswellOnt 3269, 19 C.B.R.
(4th) 158 (Ont. S.C.J.) — referred to
Doré c. Verdun (Municipalité) (1997), (sub nom. Doré v. Verdun (City)) [1997] 2 S.C.R. 862, (sub nom. Doré v.
Verdun (Ville)) 215 N.R. 81, (sub nom. Doré v. Verdun (City)) 150 D.L.R. (4th) 385, 1997 CarswellQue 159, 1997
CarswellQue 850 (S.C.C.) — distinguished
Dylex Ltd., Re (1995), 31 C.B.R. (3d) 106, 1995 CarswellOnt 54 (Ont. Gen. Div. [Commercial List]) — considered
First Vancouver Finance v. Minister of National Revenue (2002), [2002] 3 C.T.C. 285, (sub nom. Minister of National
Revenue v. First Vancouver Finance) 2002 D.T.C. 6998 (Eng.), (sub nom. Minister of National Revenue v. First
Vancouver Finance) 2002 D.T.C. 7007 (Fr.), 288 N.R. 347, 212 D.L.R. (4th) 615, [2002] G.S.T.C. 23, [2003] 1
W.W.R. 1, 45 C.B.R. (4th) 213, 2002 SCC 49, 2002 CarswellSask 317, 2002 CarswellSask 318, [2002] 2 S.C.R.
720 (S.C.C.) — considered
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6
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Gauntlet Energy Corp., Re (2003), 30 Alta. L.R. (4th) 192, 2003 ABQB 894, 2003 CarswellAlta 1735, [2003]
G.S.T.C. 193, 49 C.B.R. (4th) 213, [2004] 10 W.W.R. 180, 352 A.R. 28 (Alta. Q.B.) — referred to
Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 51 B.C.L.R. (2d) 84, 1990 CarswellBC 394, 4 C.B.R.
(3d) 311, (sub nom. Chef Ready Foods Ltd. v. Hongkong Bank of Canada) [1991] 2 W.W.R. 136 (B.C. C.A.) —
referred to
Ivaco Inc., Re (2006), 2006 C.E.B. & P.G.R. 8218, 25 C.B.R. (5th) 176, 83 O.R. (3d) 108, 275 D.L.R. (4th) 132,
2006 CarswellOnt 6292, 56 C.C.P.B. 1, 26 B.L.R. (4th) 43 (Ont. C.A.) — referred to
Komunik Corp., Re (2010), 2010 CarswellQue 686, 2010 QCCA 183 (C.A. Que.) — referred to
Komunik Corp., Re (2009), 2009 QCCS 6332, 2009 CarswellQue 13962 (C.S. Que.) — referred to
Nova Metal Products Inc. v. Comiskey (Trustee of) (1990), 1990 CarswellOnt 139, 1 C.B.R. (3d) 101, (sub nom. Elan
Corp. v. Comiskey) 1 O.R. (3d) 289, (sub nom. Elan Corp. v. Comiskey) 41 O.A.C. 282 (Ont. C.A.) — considered
Ottawa Senators Hockey Club Corp., Re (2005), 2005 G.T.C. 1327 (Eng.), 6 C.B.R. (5th) 293, 2005 D.T.C. 5233
(Eng.), 2005 CarswellOnt 8, [2005] G.S.T.C. 1, 193 O.A.C. 95, 73 O.R. (3d) 737 (Ont. C.A.) — not followed
Pacific National Lease Holding Corp., Re (1992), 72 B.C.L.R. (2d) 368, 19 B.C.A.C. 134, 34 W.A.C. 134, 15 C.B.R.
(3d) 265, 1992 CarswellBC 524 (B.C. C.A. [In Chambers]) — referred to
Philip's Manufacturing Ltd., Re (1992), 9 C.B.R. (3d) 25, 67 B.C.L.R. (2d) 84, 4 B.L.R. (2d) 142, 1992 CarswellBC
542 (B.C. C.A.) — referred to
Quebec (Deputy Minister of Revenue) c. Rainville (1979), (sub nom. Bourgeault, Re) 33 C.B.R. (N.S.) 301, (sub nom.
Bourgeault's Estate v. Quebec (Deputy Minister of Revenue)) 30 N.R. 24, (sub nom. Bourgault, Re) 105 D.L.R. (3d)
270, 1979 CarswellQue 165, 1979 CarswellQue 266, (sub nom. Quebec (Deputy Minister of Revenue) v. Bourgeault
(Trustee of)) [1980] 1 S.C.R. 35 (S.C.C.) — referred to
Reference re Companies' Creditors Arrangement Act (Canada) (1934), [1934] 4 D.L.R. 75, 1934 CarswellNat 1, 16
C.B.R. 1, [1934] S.C.R. 659 (S.C.C.) — referred to
Royal Bank v. Sparrow Electric Corp. (1997), 193 A.R. 321, 135 W.A.C. 321, [1997] 2 W.W.R. 457, 208 N.R. 161,
12 P.P.S.A.C. (2d) 68, 1997 CarswellAlta 112, 1997 CarswellAlta 113, 46 Alta. L.R. (3d) 87, (sub nom. R. v. Royal
Bank) 97 D.T.C. 5089, 143 D.L.R. (4th) 385, 44 C.B.R. (3d) 1, [1997] 1 S.C.R. 411 (S.C.C.) — considered
Skeena Cellulose Inc., Re (2003), 2003 CarswellBC 1399, 2003 BCCA 344, 184 B.C.A.C. 54, 302 W.A.C. 54, 43
C.B.R. (4th) 187, 13 B.C.L.R. (4th) 236 (B.C. C.A.) — referred to
Skydome Corp., Re (1998), 16 C.B.R. (4th) 118, 1998 CarswellOnt 5922 (Ont. Gen. Div. [Commercial List]) —
referred to
Solid Resources Ltd., Re (2002), [2003] G.S.T.C. 21, 2002 CarswellAlta 1699, 40 C.B.R. (4th) 219 (Alta. Q.B.) —
referred to
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7
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Stelco Inc., Re (2005), 253 D.L.R. (4th) 109, 75 O.R. (3d) 5, 2 B.L.R. (4th) 238, 9 C.B.R. (5th) 135, 2005 CarswellOnt
1188, 196 O.A.C. 142 (Ont. C.A.) — referred to
United Used Auto & Truck Parts Ltd., Re (1999), 12 C.B.R. (4th) 144, 1999 CarswellBC 2673 (B.C. S.C. [In
Chambers]) — referred to
United Used Auto & Truck Parts Ltd., Re (2000), 2000 BCCA 146, 135 B.C.A.C. 96, 221 W.A.C. 96, 2000
CarswellBC 414, 73 B.C.L.R. (3d) 236, 16 C.B.R. (4th) 141, [2000] 5 W.W.R. 178 (B.C. C.A.) — referred to
Cases considered by Fish J.:
Ottawa Senators Hockey Club Corp., Re (2005), 2005 G.T.C. 1327 (Eng.), 6 C.B.R. (5th) 293, 2005 D.T.C. 5233
(Eng.), 2005 CarswellOnt 8, [2005] G.S.T.C. 1, 193 O.A.C. 95, 73 O.R. (3d) 737 (Ont. C.A.) — not followed
Cases considered by Abella J. (dissenting):
Canada (Attorney General) v. Canada (Public Service Staff Relations Board) (1977), [1977] 2 F.C. 663, 14 N.R. 257,
74 D.L.R. (3d) 307, 1977 CarswellNat 62, 1977 CarswellNat 62F (Fed. C.A.) — referred to
Doré c. Verdun (Municipalité) (1997), (sub nom. Doré v. Verdun (City)) [1997] 2 S.C.R. 862, (sub nom. Doré v.
Verdun (Ville)) 215 N.R. 81, (sub nom. Doré v. Verdun (City)) 150 D.L.R. (4th) 385, 1997 CarswellQue 159, 1997
CarswellQue 850 (S.C.C.) — referred to
Ottawa Senators Hockey Club Corp., Re (2005), 2005 G.T.C. 1327 (Eng.), 6 C.B.R. (5th) 293, 2005 D.T.C. 5233
(Eng.), 2005 CarswellOnt 8, [2005] G.S.T.C. 1, 193 O.A.C. 95, 73 O.R. (3d) 737 (Ont. C.A.) — considered
R. v. Tele-Mobile Co. (2008), 2008 CarswellOnt 1588, 2008 CarswellOnt 1589, 2008 SCC 12, (sub nom. Tele-Mobile
Co. v. Ontario) 372 N.R. 157, 55 C.R. (6th) 1, (sub nom. Ontario v. Tele-Mobile Co.) 229 C.C.C. (3d) 417, (sub nom.
Tele-Mobile Co. v. Ontario) 235 O.A.C. 369, (sub nom. Tele-Mobile Co. v. Ontario) [2008] 1 S.C.R. 305, (sub nom.
R. v. Tele-Mobile Company (Telus Mobility)) 92 O.R. (3d) 478 (note), (sub nom. Ontario v. Tele-Mobile Co.) 291
D.L.R. (4th) 193 (S.C.C.) — considered
Statutes considered by Deschamps J.:
Bank Act, S.C. 1991, c. 46
Generally — referred to
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
s. 67(2) — referred to
s. 67(3) — referred to
s. 81.1 [en. 1992, c. 27, s. 38(1)] — considered
s. 81.2 [en. 1992, c. 27, s. 38(1)] — considered
s. 86(1) — considered
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8
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
s. 86(3) — referred to
Bankruptcy Act and to amend the Income Tax Act in consequence thereof, Act to amend the, S.C. 1992, c. 27
Generally — referred to
s. 39 — referred to
Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Income Tax Act, Act to amend the,
S.C. 1997, c. 12
s. 73 — referred to
s. 125 — referred to
s. 126 — referred to
Canada Pension Plan, R.S.C. 1985, c. C-8
Generally — referred to
s. 23(3) — referred to
s. 23(4) — referred to
Cités et villes, Loi sur les, L.R.Q., c. C-19
en général — referred to
Code civil du Québec, L.Q. 1991, c. 64
en général — referred to
art. 2930 — referred to
Companies' Creditors Arrangement Act, Act to Amend, S.C. 1952-53, c. 3
Generally — referred to
Companies' Creditors Arrangement Act, 1933, S.C. 1932-33, c. 36
Generally — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11 — considered
s. 11(1) — considered
s. 11(3) — referred to
s. 11(4) — referred to
s. 11(6) — referred to
s. 11.02 [en. 2005, c. 47, s. 128] — referred to
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9
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
s. 11.09 [en. 2005, c. 47, s. 128] — considered
s. 11.4 [en. 1997, c. 12, s. 124] — referred to
s. 18.3 [en. 1997, c. 12, s. 125] — considered
s. 18.3(1) [en. 1997, c. 12, s. 125] — considered
s. 18.3(2) [en. 1997, c. 12, s. 125] — considered
s. 18.4 [en. 1997, c. 12, s. 125] — referred to
s. 18.4(1) [en. 1997, c. 12, s. 125] — considered
s. 18.4(3) [en. 1997, c. 12, s. 125] — considered
s. 20 — considered
s. 21 — considered
s. 37 — considered
s. 37(1) — referred to
Employment Insurance Act, S.C. 1996, c. 23
Generally — referred to
s. 86(2) — referred to
s. 86(2.1) [en. 1998, c. 19, s. 266(1)] — referred to
Excise Tax Act, R.S.C. 1985, c. E-15
Generally — referred to
s. 222(1) [en. 1990, c. 45, s. 12(1)] — referred to
s. 222(3) [en. 1990, c. 45, s. 12(1)] — considered
Fairness for the Self-Employed Act, S.C. 2009, c. 33
Generally — referred to
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
s. 227(4) — referred to
s. 227(4.1) [en. 1998, c. 19, s. 226(1)] — referred to
Interpretation Act, R.S.C. 1985, c. I-21
s. 44(f) — considered
Personal Property Security Act, S.A. 1988, c. P-4.05
Generally — referred to
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10
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Sales Tax and Excise Tax Amendments Act, 1999, S.C. 2000, c. 30
Generally — referred to
Wage Earner Protection Program Act, S.C. 2005, c. 47, s. 1
Generally — referred to
s. 69 — referred to
s. 128 — referred to
s. 131 — referred to
Statutes considered Fish J.:
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
s. 67(2) — considered
s. 67(3) — considered
Canada Pension Plan, R.S.C. 1985, c. C-8
Generally — referred to
s. 23 — considered
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11 — considered
s. 18.3(1) [en. 1997, c. 12, s. 125] — considered
s. 18.3(2) [en. 1997, c. 12, s. 125] — considered
s. 37(1) — considered
Employment Insurance Act, S.C. 1996, c. 23
Generally — referred to
s. 86(2) — referred to
s. 86(2.1) [en. 1998, c. 19, s. 266(1)] — referred to
Excise Tax Act, R.S.C. 1985, c. E-15
Generally — referred to
s. 222 [en. 1990, c. 45, s. 12(1)] — considered
s. 222(1) [en. 1990, c. 45, s. 12(1)] — considered
s. 222(3) [en. 1990, c. 45, s. 12(1)] — considered
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11
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
s. 222(3)(a) [en. 1990, c. 45, s. 12(1)] — considered
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
Generally — referred to
s. 227(4) — considered
s. 227(4.1) [en. 1998, c. 19, s. 226(1)] — considered
s. 227(4.1)(a) [en. 1998, c. 19, s. 226(1)] — considered
Statutes considered Abella J. (dissenting):
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11 — considered
s. 11(1) — considered
s. 11(3) — considered
s. 18.3(1) [en. 1997, c. 12, s. 125] — considered
s. 37(1) — considered
Excise Tax Act, R.S.C. 1985, c. E-15
Generally — referred to
s. 222 [en. 1990, c. 45, s. 12(1)] — considered
s. 222(3) [en. 1990, c. 45, s. 12(1)] — considered
Interpretation Act, R.S.C. 1985, c. I-21
s. 2(1)"enactment" — considered
s. 44(f) — considered
Winding-up and Restructuring Act, R.S.C. 1985, c. W-11
Generally — referred to
APPEAL by creditor from judgment reported at 2009 CarswellBC 1195, 2009 BCCA 205, [2009] G.S.T.C. 79, 98 B.C.L.R.
(4th) 242, [2009] 12 W.W.R. 684, 270 B.C.A.C. 167, 454 W.A.C. 167, 2009 G.T.C. 2020 (Eng.) (B.C. C.A.), allowing Crown's
appeal from dismissal of application for immediate payment of tax debt.
Deschamps J.:
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12
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
1
For the first time this Court is called upon to directly interpret the provisions of the Companies' Creditors Arrangement
Act, R.S.C. 1985, c. C-36 ("CCAA"). In that respect, two questions are raised. The first requires reconciliation of provisions
of the CCAA and the Excise Tax Act, R.S.C. 1985, c. E-15 ("ETA"), which lower courts have held to be in conflict with one
another. The second concerns the scope of a court's discretion when supervising reorganization. The relevant statutory provisions
are reproduced in the Appendix. On the first question, having considered the evolution of Crown priorities in the context of
insolvency and the wording of the various statutes creating Crown priorities, I conclude that it is the CCAA and not the ETA that
provides the rule. On the second question, I conclude that the broad discretionary jurisdiction conferred on the supervising judge
must be interpreted having regard to the remedial nature of the CCAA and insolvency legislation generally. Consequently, the
court had the discretion to partially lift a stay of proceedings to allow the debtor to make an assignment under the Bankruptcy
and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). I would allow the appeal.
1. Facts and Decisions of the Courts Below
2 Ted LeRoy Trucking Ltd. ("LeRoy Trucking") commenced proceedings under the CCAA in the Supreme Court of British
Columbia on December 13, 2007, obtaining a stay of proceedings with a view to reorganizing its financial affairs. LeRoy
Trucking sold certain redundant assets as authorized by the order.
3 Amongst the debts owed by LeRoy Trucking was an amount for Goods and Services Tax ("GST") collected but unremitted
to the Crown. The ETA creates a deemed trust in favour of the Crown for amounts collected in respect of GST. The deemed
trust extends to any property or proceeds held by the person collecting GST and any property of that person held by a secured
creditor, requiring that property to be paid to the Crown in priority to all security interests. The ETA provides that the deemed
trust operates despite any other enactment of Canada except the BIA. However, the CCAA also provides that subject to certain
exceptions, none of which mentions GST, deemed trusts in favour of the Crown do not operate under the CCAA. Accordingly,
under the CCAA the Crown ranks as an unsecured creditor in respect of GST. Nonetheless, at the time LeRoy Trucking
commenced CCAA proceedings the leading line of jurisprudence held that the ETA took precedence over the CCAA such that
the Crown enjoyed priority for GST claims under the CCAA, even though it would have lost that same priority under the BIA.
The CCAA underwent substantial amendments in 2005 in which some of the provisions at issue in this appeal were renumbered
and reformulated (S.C. 2005, c. 47). However, these amendments only came into force on September 18, 2009. I will refer to
the amended provisions only where relevant.
4 On April 29, 2008, Brenner C.J.S.C., in the context of the CCAA proceedings, approved a payment not exceeding $5 million,
the proceeds of redundant asset sales, to Century Services, the debtor's major secured creditor. LeRoy Trucking proposed to
hold back an amount equal to the GST monies collected but unremitted to the Crown and place it in the Monitor's trust account
until the outcome of the reorganization was known. In order to maintain the status quo while the success of the reorganization
was uncertain, Brenner C.J.S.C. agreed to the proposal and ordered that an amount of $305,202.30 be held by the Monitor in
its trust account.
5
On September 3, 2008, having concluded that reorganization was not possible, LeRoy Trucking sought leave to make an
assignment in bankruptcy under the BIA. The Crown sought an order that the GST monies held by the Monitor be paid to the
Receiver General of Canada. Brenner C.J.S.C. dismissed the latter application. Reasoning that the purpose of segregating the
funds with the Monitor was "to facilitate an ultimate payment of the GST monies which were owed pre-filing, but only if a
viable plan emerged", the failure of such a reorganization, followed by an assignment in bankruptcy, meant the Crown would
lose priority under the BIA (2008 BCSC 1805, [2008] G.S.T.C. 221 (B.C. S.C. [In Chambers])).
6
The Crown's appeal was allowed by the British Columbia Court of Appeal (2009 BCCA 205, [2009] G.S.T.C. 79, 270
B.C.A.C. 167 (B.C. C.A.)). Tysoe J.A. for a unanimous court found two independent bases for allowing the Crown's appeal.
7 First, the court's authority under s. 11 of the CCAA was held not to extend to staying the Crown's application for immediate
payment of the GST funds subject to the deemed trust after it was clear that reorganization efforts had failed and that bankruptcy
was inevitable. As restructuring was no longer a possibility, staying the Crown's claim to the GST funds no longer served a
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13
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
purpose under the CCAA and the court was bound under the priority scheme provided by the ETA to allow payment to the
Crown. In so holding, Tysoe J.A. adopted the reasoning in Ottawa Senators Hockey Club Corp. (Re), [2005] G.S.T.C. 1, 73
O.R. (3d) 737 (Ont. C.A.), which found that the ETA deemed trust for GST established Crown priority over secured creditors
under the CCAA.
8 Second, Tysoe J.A. concluded that by ordering the GST funds segregated in the Monitor's trust account on April 29, 2008, the
judge had created an express trust in favour of the Crown from which the monies in question could not be diverted for any other
purposes. The Court of Appeal therefore ordered that the money held by the Monitor in trust be paid to the Receiver General.
2. Issues
9
This appeal raises three broad issues which are addressed in turn:
(1) Did s. 222(3) of the ETA displace s. 18.3(1) of the CCAA and give priority to the Crown's ETA deemed trust during
CCAA proceedings as held in Ottawa Senators?
(2) Did the court exceed its CCAA authority by lifting the stay to allow the debtor to make an assignment in bankruptcy?
(3) Did the court's order of April 29, 2008 requiring segregation of the Crown's GST claim in the Monitor's trust account
create an express trust in favour of the Crown in respect of those funds?
3. Analysis
10 The first issue concerns Crown priorities in the context of insolvency. As will be seen, the ETA provides for a deemed trust
in favour of the Crown in respect of GST owed by a debtor "[d]espite ... any other enactment of Canada (except the Bankruptcy
and Insolvency Act)" (s. 222(3)), while the CCAA stated at the relevant time that "notwithstanding any provision in federal or
provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a debtor company
shall not be [so] regarded" (s. 18.3(1)). It is difficult to imagine two statutory provisions more apparently in conflict. However,
as is often the case, the apparent conflict can be resolved through interpretation.
11
In order to properly interpret the provisions, it is necessary to examine the history of the CCAA, its function amidst the
body of insolvency legislation enacted by Parliament, and the principles that have been recognized in the jurisprudence. It will
be seen that Crown priorities in the insolvency context have been significantly pared down. The resolution of the second issue
is also rooted in the context of the CCAA, but its purpose and the manner in which it has been interpreted in the case law are
also key. After examining the first two issues in this case, I will address Tysoe J.A.'s conclusion that an express trust in favour
of the Crown was created by the court's order of April 29, 2008.
3.1 Purpose and Scope of Insolvency Law
12
Insolvency is the factual situation that arises when a debtor is unable to pay creditors (see generally, R. J. Wood,
Bankruptcy and Insolvency Law (2009), at p. 16). Certain legal proceedings become available upon insolvency, which typically
allow a debtor to obtain a court order staying its creditors' enforcement actions and attempt to obtain a binding compromise
with creditors to adjust the payment conditions to something more realistic. Alternatively, the debtor's assets may be liquidated
and debts paid from the proceeds according to statutory priority rules. The former is usually referred to as reorganization or
restructuring while the latter is termed liquidation.
13
Canadian commercial insolvency law is not codified in one exhaustive statute. Instead, Parliament has enacted multiple
insolvency statutes, the main one being the BIA. The BIA offers a self-contained legal regime providing for both reorganization
and liquidation. Although bankruptcy legislation has a long history, the BIA itself is a fairly recent statute — it was enacted
in 1992. It is characterized by a rules-based approach to proceedings. The BIA is available to insolvent debtors owing $1000
or more, regardless of whether they are natural or legal persons. It contains mechanisms for debtors to make proposals to their
creditors for the adjustment of debts. If a proposal fails, the BIA contains a bridge to bankruptcy whereby the debtor's assets are
liquidated and the proceeds paid to creditors in accordance with the statutory scheme of distribution.
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14
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
14
Access to the CCAA is more restrictive. A debtor must be a company with liabilities in excess of $5 million. Unlike
the BIA, the CCAA contains no provisions for liquidation of a debtor's assets if reorganization fails. There are three ways of
exiting CCAA proceedings. The best outcome is achieved when the stay of proceedings provides the debtor with some breathing
space during which solvency is restored and the CCAA process terminates without reorganization being needed. The second
most desirable outcome occurs when the debtor's compromise or arrangement is accepted by its creditors and the reorganized
company emerges from the CCAA proceedings as a going concern. Lastly, if the compromise or arrangement fails, either the
company or its creditors usually seek to have the debtor's assets liquidated under the applicable provisions of the BIA or to
place the debtor into receivership. As discussed in greater detail below, the key difference between the reorganization regimes
under the BIA and the CCAA is that the latter offers a more flexible mechanism with greater judicial discretion, making it more
responsive to complex reorganizations.
15 As I will discuss at greater length below, the purpose of the CCAA — Canada's first reorganization statute — is to permit
the debtor to continue to carry on business and, where possible, avoid the social and economic costs of liquidating its assets.
Proposals to creditors under the BIA serve the same remedial purpose, though this is achieved through a rules-based mechanism
that offers less flexibility. Where reorganization is impossible, the BIA may be employed to provide an orderly mechanism for
the distribution of a debtor's assets to satisfy creditor claims according to predetermined priority rules.
16 Prior to the enactment of the CCAA in 1933 (S.C. 1932-33, c. 36), practice under existing commercial insolvency legislation
tended heavily towards the liquidation of a debtor company (J. Sarra, Creditor Rights and the Public Interest: Restructuring
Insolvent Corporations (2003), at p. 12). The battering visited upon Canadian businesses by the Great Depression and the
absence of an effective mechanism for reaching a compromise between debtors and creditors to avoid liquidation required
a legislative response. The CCAA was innovative as it allowed the insolvent debtor to attempt reorganization under judicial
supervision outside the existing insolvency legislation which, once engaged, almost invariably resulted in liquidation (Reference
re Companies' Creditors Arrangement Act (Canada), [1934] S.C.R. 659 (S.C.C.), at pp. 660-61; Sarra, Creditor Rights, at pp.
12-13).
17 Parliament understood when adopting the CCAA that liquidation of an insolvent company was harmful for most of those
it affected — notably creditors and employees — and that a workout which allowed the company to survive was optimal (Sarra,
Creditor Rights, at pp. 13-15).
18 Early commentary and jurisprudence also endorsed the CCAA's remedial objectives. It recognized that companies retain
more value as going concerns while underscoring that intangible losses, such as the evaporation of the companies' goodwill,
result from liquidation (S. E. Edwards, "Reorganizations Under the Companies' Creditors Arrangement Act" (1947), 25 Can.
Bar Rev. 587, at p. 592). Reorganization serves the public interest by facilitating the survival of companies supplying goods or
services crucial to the health of the economy or saving large numbers of jobs (ibid., at p. 593). Insolvency could be so widely
felt as to impact stakeholders other than creditors and employees. Variants of these views resonate today, with reorganization
justified in terms of rehabilitating companies that are key elements in a complex web of interdependent economic relationships
in order to avoid the negative consequences of liquidation.
19
The CCAA fell into disuse during the next several decades, likely because amendments to the Act in 1953 restricted its
use to companies issuing bonds (S.C. 1952-53, c. 3). During the economic downturn of the early 1980s, insolvency lawyers
and courts adapting to the resulting wave of insolvencies resurrected the statute and deployed it in response to new economic
challenges. Participants in insolvency proceedings grew to recognize and appreciate the statute's distinguishing feature: a grant
of broad and flexible authority to the supervising court to make the orders necessary to facilitate the reorganization of the
debtor and achieve the CCAA's objectives. The manner in which courts have used CCAA jurisdiction in increasingly creative
and flexible ways is explored in greater detail below.
20 Efforts to evolve insolvency law were not restricted to the courts during this period. In 1970, a government-commissioned
panel produced an extensive study recommending sweeping reform but Parliament failed to act (see Bankruptcy and Insolvency:
Report of the Study Committee on Bankruptcy and Insolvency Legislation (1970)). Another panel of experts produced more
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15
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
limited recommendations in 1986 which eventually resulted in enactment of the Bankruptcy and Insolvency Act of 1992 (S.C.
1992, c. 27) (see Proposed Bankruptcy Act Amendments: Report of the Advisory Committee on Bankruptcy and Insolvency
(1986)). Broader provisions for reorganizing insolvent debtors were then included in Canada's bankruptcy statute. Although
the 1970 and 1986 reports made no specific recommendations with respect to the CCAA, the House of Commons committee
studying the BIA's predecessor bill, C-22, seemed to accept expert testimony that the BIA's new reorganization scheme would
shortly supplant the CCAA, which could then be repealed, with commercial insolvency and bankruptcy being governed by
a single statute (Minutes of Proceedings and Evidence of the Standing Committee on Consumer and Corporate Affairs and
Government Operations, Issue No. 15, October 3, 1991, at pp. 15:15-15:16).
21
In retrospect, this conclusion by the House of Commons committee was out of step with reality. It overlooked
the renewed vitality the CCAA enjoyed in contemporary practice and the advantage that a flexible judicially supervised
reorganization process presented in the face of increasingly complex reorganizations, when compared to the stricter rulesbased scheme contained in the BIA. The "flexibility of the CCAA [was seen as] a great benefit, allowing for creative and
effective decisions" (Industry Canada, Marketplace Framework Policy Branch, Report on the Operation and Administration of
the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (2002), at p. 41). Over the past three decades,
resurrection of the CCAA has thus been the mainspring of a process through which, one author concludes, "the legal setting for
Canadian insolvency restructuring has evolved from a rather blunt instrument to one of the most sophisticated systems in the
developed world" (R. B. Jones, "The Evolution of Canadian Restructuring: Challenges for the Rule of Law", in J. P. Sarra, ed.,
Annual Review of Insolvency Law 2005 (2006), 481, at p. 481).
22
While insolvency proceedings may be governed by different statutory schemes, they share some commonalities. The
most prominent of these is the single proceeding model. The nature and purpose of the single proceeding model are described
by Professor Wood in Bankruptcy and Insolvency Law:
They all provide a collective proceeding that supersedes the usual civil process available to creditors to enforce their claims.
The creditors' remedies are collectivized in order to prevent the free-for-all that would otherwise prevail if creditors were
permitted to exercise their remedies. In the absence of a collective process, each creditor is armed with the knowledge that
if they do not strike hard and swift to seize the debtor's assets, they will be beat out by other creditors. [pp. 2-3]
The single proceeding model avoids the inefficiency and chaos that would attend insolvency if each creditor initiated
proceedings to recover its debt. Grouping all possible actions against the debtor into a single proceeding controlled in a single
forum facilitates negotiation with creditors because it places them all on an equal footing, rather than exposing them to the
risk that a more aggressive creditor will realize its claims against the debtor's limited assets while the other creditors attempt
a compromise. With a view to achieving that purpose, both the CCAA and the BIA allow a court to order all actions against a
debtor to be stayed while a compromise is sought.
23
Another point of convergence of the CCAA and the BIA relates to priorities. Because the CCAA is silent about what
happens if reorganization fails, the BIA scheme of liquidation and distribution necessarily supplies the backdrop for what will
happen if a CCAA reorganization is ultimately unsuccessful. In addition, one of the important features of legislative reform
of both statutes since the enactment of the BIA in 1992 has been a cutback in Crown priorities (S.C. 1992, c. 27, s. 39; S.C.
1997, c. 12, ss. 73 and 125; S.C. 2000, c. 30, s. 148; S.C. 2005, c. 47, ss. 69 and 131; S.C. 2009, c. 33, ss. 25 and 29; see
also Alternative granite & marbre inc., Re, 2009 SCC 49, [2009] 3 S.C.R. 286, [2009] G.S.T.C. 154 (S.C.C.); Quebec (Deputy
Minister of Revenue) c. Rainville (1979), [1980] 1 S.C.R. 35 (S.C.C.); Proposed Bankruptcy Act Amendments: Report of the
Advisory Committee on Bankruptcy and Insolvency (1986)).
24
With parallel CCAA and BIA restructuring schemes now an accepted feature of the insolvency law landscape, the
contemporary thrust of legislative reform has been towards harmonizing aspects of insolvency law common to the two statutory
schemes to the extent possible and encouraging reorganization over liquidation (see An Act to establish the Wage Earner
Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to
make consequential amendments to other Acts, S.C. 2005, c. 47; Gauntlet Energy Corp., Re, 2003 ABQB 894, [2003] G.S.T.C.
193, 30 Alta. L.R. (4th) 192 (Alta. Q.B.), at para. 19).
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16
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
25
Mindful of the historical background of the CCAA and BIA, I now turn to the first question at issue.
3.2 GST Deemed Trust Under the CCAA
26 The Court of Appeal proceeded on the basis that the ETA precluded the court from staying the Crown's enforcement of the
GST deemed trust when partially lifting the stay to allow the debtor to enter bankruptcy. In so doing, it adopted the reasoning
in a line of cases culminating in Ottawa Senators, which held that an ETA deemed trust remains enforceable during CCAA
reorganization despite language in the CCAA that suggests otherwise.
27
The Crown relies heavily on the decision of the Ontario Court of Appeal in Ottawa Senators and argues that the later
in time provision of the ETA creating the GST deemed trust trumps the provision of the CCAA purporting to nullify most
statutory deemed trusts. The Court of Appeal in this case accepted this reasoning but not all provincial courts follow it (see, e.g.,
Komunik Corp., Re, 2009 QCCS 6332 (C.S. Que.), leave to appeal granted, 2010 QCCA 183 (C.A. Que.)). Century Services
relied, in its written submissions to this Court, on the argument that the court had authority under the CCAA to continue the stay
against the Crown's claim for unremitted GST. In oral argument, the question of whether Ottawa Senators was correctly decided
nonetheless arose. After the hearing, the parties were asked to make further written submissions on this point. As appears evident
from the reasons of my colleague Abella J., this issue has become prominent before this Court. In those circumstances, this
Court needs to determine the correctness of the reasoning in Ottawa Senators.
28
The policy backdrop to this question involves the Crown's priority as a creditor in insolvency situations which, as I
mentioned above, has evolved considerably. Prior to the 1990s, Crown claims largely enjoyed priority in insolvency. This was
widely seen as unsatisfactory as shown by both the 1970 and 1986 insolvency reform proposals, which recommended that
Crown claims receive no preferential treatment. A closely related matter was whether the CCAA was binding at all upon the
Crown. Amendments to the CCAA in 1997 confirmed that it did indeed bind the Crown (see CCAA, s. 21, as am. by S.C. 1997,
c. 12, s. 126).
29
Claims of priority by the state in insolvency situations receive different treatment across jurisdictions worldwide. For
example, in Germany and Australia, the state is given no priority at all, while the state enjoys wide priority in the United States
and France (see B. K. Morgan, "Should the Sovereign be Paid First? A Comparative International Analysis of the Priority for
Tax Claims in Bankruptcy" (2000), 74 Am. Bank. L.J. 461, at p. 500). Canada adopted a middle course through legislative reform
of Crown priority initiated in 1992. The Crown retained priority for source deductions of income tax, Employment Insurance
("EI") and Canada Pension Plan ("CPP") premiums, but ranks as an ordinary unsecured creditor for most other claims.
30
Parliament has frequently enacted statutory mechanisms to secure Crown claims and permit their enforcement. The two
most common are statutory deemed trusts and powers to garnish funds third parties owe the debtor (see F. L. Lamer, Priority
of Crown Claims in Insolvency (loose-leaf), at § 2).
31
With respect to GST collected, Parliament has enacted a deemed trust. The ETA states that every person who collects
an amount on account of GST is deemed to hold that amount in trust for the Crown (s. 222(1)). The deemed trust extends to
other property of the person collecting the tax equal in value to the amount deemed to be in trust if that amount has not been
remitted in accordance with the ETA. The deemed trust also extends to property held by a secured creditor that, but for the
security interest, would be property of the person collecting the tax (s. 222(3)).
32
Parliament has created similar deemed trusts using almost identical language in respect of source deductions of income
tax, EI premiums and CPP premiums (see s. 227(4) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA"), ss. 86(2) and
(2.1) of the Employment Insurance Act, S.C. 1996, c. 23, and ss. 23(3) and (4) of the Canada Pension Plan, R.S.C. 1985, c.
C-8). I will refer to income tax, EI and CPP deductions as "source deductions".
33
In Royal Bank v. Sparrow Electric Corp., [1997] 1 S.C.R. 411 (S.C.C.), this Court addressed a priority dispute between
a deemed trust for source deductions under the ITA and security interests taken under both the Bank Act, S.C. 1991, c. 46,
and the Alberta Personal Property Security Act, S.A. 1988, c. P-4.05 ("PPSA"). As then worded, an ITA deemed trust over
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17
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
the debtor's property equivalent to the amount owing in respect of income tax became effective at the time of liquidation,
receivership, or assignment in bankruptcy. Sparrow Electric held that the ITA deemed trust could not prevail over the security
interests because, being fixed charges, the latter attached as soon as the debtor acquired rights in the property such that the ITA
deemed trust had no property on which to attach when it subsequently arose. Later, in First Vancouver Finance v. Minister of
National Revenue, 2002 SCC 49, [2002] G.S.T.C. 23, [2002] 2 S.C.R. 720 (S.C.C.), this Court observed that Parliament had
legislated to strengthen the statutory deemed trust in the ITA by deeming it to operate from the moment the deductions were
not paid to the Crown as required by the ITA, and by granting the Crown priority over all security interests (paras. 27-29) (the
"Sparrow Electric amendment").
34
The amended text of s. 227(4.1) of the ITA and concordant source deductions deemed trusts in the Canada Pension
Plan and the Employment Insurance Act state that the deemed trust operates notwithstanding any other enactment of Canada,
except ss. 81.1 and 81.2 of the BIA. The ETA deemed trust at issue in this case is similarly worded, but it excepts the BIA in
its entirety. The provision reads as follows:
222. (3) Despite any other provision of this Act (except subsection (4)), any other enactment of Canada (except the
Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed by
subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn in
the manner and at the time provided under this Part, property of the person and property held by any secured creditor of
the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to
be held in trust, is deemed ....
35
The Crown submits that the Sparrow Electric amendment, added by Parliament to the ETA in 2000, was intended to
preserve the Crown's priority over collected GST under the CCAA while subordinating the Crown to the status of an unsecured
creditor in respect of GST only under the BIA. This is because the ETA provides that the GST deemed trust is effective "despite"
any other enactment except the BIA.
36 The language used in the ETA for the GST deemed trust creates an apparent conflict with the CCAA, which provides that
subject to certain exceptions, property deemed by statute to be held in trust for the Crown shall not be so regarded.
37
Through a 1997 amendment to the CCAA (S.C. 1997, c. 12, s. 125), Parliament appears to have, subject to specific
exceptions, nullified deemed trusts in favour of the Crown once reorganization proceedings are commenced under the Act. The
relevant provision reads:
18.3 (1) Subject to subsection (2), notwithstanding any provision in federal or provincial legislation that has the effect of
deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as held in trust
for Her Majesty unless it would be so regarded in the absence of that statutory provision.
This nullification of deemed trusts was continued in further amendments to the CCAA (S.C. 2005, c. 47), where s. 18.3(1) was
renumbered and reformulated as s. 37(1):
37. (1) Subject to subsection (2), despite any provision in federal or provincial legislation that has the effect of deeming
property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as being held in trust for
Her Majesty unless it would be so regarded in the absence of that statutory provision.
38 An analogous provision exists in the BIA, which, subject to the same specific exceptions, nullifies statutory deemed trusts
and makes property of the bankrupt that would otherwise be subject to a deemed trust part of the debtor's estate and available
to creditors (S.C. 1992, c. 27, s. 39; S.C. 1997, c. 12, s. 73; BIA, s. 67(2)). It is noteworthy that in both the CCAA and the BIA,
the exceptions concern source deductions (CCAA, s. 18.3(2); BIA, s. 67(3)). The relevant provision of the CCAA reads:
18.3 (2) Subsection (1) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of
the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment
Insurance Act....
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18
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Thus, the Crown's deemed trust and corresponding priority in source deductions remain effective both in reorganization and
in bankruptcy.
39
Meanwhile, in both s. 18.4(1) of the CCAA and s. 86(1) of the BIA, other Crown claims are treated as unsecured.
These provisions, establishing the Crown's status as an unsecured creditor, explicitly exempt statutory deemed trusts in source
deductions (CCAA, s. 18.4(3); BIA, s. 86(3)). The CCAA provision reads as follows:
18.4 (3) Subsection (1) [Crown ranking as unsecured creditor] does not affect the operation of
(a) subsections 224(1.2) and (1.3) of the Income Tax Act,
(b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2)
of the Income Tax Act and provides for the collection of a contribution ....
Therefore, not only does the CCAA provide that Crown claims do not enjoy priority over the claims of other creditors (s. 18.3(1)),
but the exceptions to this rule (i.e., that Crown priority is maintained for source deductions) are repeatedly stated in the statute.
40
The apparent conflict in this case is whether the rule in the CCAA first enacted as s. 18.3 in 1997, which provides that
subject to certain explicit exceptions, statutory deemed trusts are ineffective under the CCAA, is overridden by the one in the
ETA enacted in 2000 stating that GST deemed trusts operate despite any enactment of Canada except the BIA. With respect
for my colleague Fish J., I do not think the apparent conflict can be resolved by denying it and creating a rule requiring both
a statutory provision enacting the deemed trust, and a second statutory provision confirming it. Such a rule is unknown to the
law. Courts must recognize conflicts, apparent or real, and resolve them when possible.
41 A line of jurisprudence across Canada has resolved the apparent conflict in favour of the ETA, thereby maintaining GST
deemed trusts under the CCAA. Ottawa Senators, the leading case, decided the matter by invoking the doctrine of implied repeal
to hold that the later in time provision of the ETA should take precedence over the CCAA (see also Solid Resources Ltd., Re
(2002), 40 C.B.R. (4th) 219, [2003] G.S.T.C. 21 (Alta. Q.B.); Gauntlet
42
The Ontario Court of Appeal in Ottawa Senators rested its conclusion on two considerations. First, it was persuaded
that by explicitly mentioning the BIA in ETA s. 222(3), but not the CCAA, Parliament made a deliberate choice. In the words
of MacPherson J.A.:
The BIA and the CCAA are closely related federal statutes. I cannot conceive that Parliament would specifically identify the
BIA as an exception, but accidentally fail to consider the CCAA as a possible second exception. In my view, the omission
of the CCAA from s. 222(3) of the ETA was almost certainly a considered omission. [para. 43]
43
Second, the Ontario Court of Appeal compared the conflict between the ETA and the CCAA to that before this Court in
Doré c. Verdun (Municipalité), [1997] 2 S.C.R. 862 (S.C.C.), and found them to be "identical" (para. 46). It therefore considered
Doré binding (para. 49). In Doré, a limitations provision in the more general and recently enacted Civil Code of Québec, S.Q.
1991, c. 64 ("C.C.Q."), was held to have repealed a more specific provision of the earlier Quebec Cities and Towns Act, R.S.Q.,
c. C-19, with which it conflicted. By analogy, the Ontario Court of Appeal held that the later in time and more general provision,
s. 222(3) of the ETA, impliedly repealed the more specific and earlier in time provision, s. 18.3(1) of the CCAA (paras. 47-49).
44 Viewing this issue in its entire context, several considerations lead me to conclude that neither the reasoning nor the result
in Ottawa Senators can stand. While a conflict may exist at the level of the statutes' wording, a purposive and contextual analysis
to determine Parliament's true intent yields the conclusion that Parliament could not have intended to restore the Crown's deemed
trust priority in GST claims under the CCAA when it amended the ETA in 2000 with the Sparrow Electric amendment.
45 I begin by recalling that Parliament has shown its willingness to move away from asserting priority for Crown claims in
insolvency law. Section 18.3(1) of the CCAA (subject to the s. 18.3(2) exceptions) provides that the Crown's deemed trusts have
no effect under the CCAA. Where Parliament has sought to protect certain Crown claims through statutory deemed trusts and
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19
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
intended that these deemed trusts continue in insolvency, it has legislated so explicitly and elaborately. For example, s. 18.3(2)
of the CCAA and s. 67(3) of the BIA expressly provide that deemed trusts for source deductions remain effective in insolvency.
Parliament has, therefore, clearly carved out exceptions from the general rule that deemed trusts are ineffective in insolvency.
The CCAA and BIA are in harmony, preserving deemed trusts and asserting Crown priority only in respect of source deductions.
Meanwhile, there is no express statutory basis for concluding that GST claims enjoy a preferred treatment under the CCAA or
the BIA. Unlike source deductions, which are clearly and expressly dealt with under both these insolvency statutes, no such
clear and express language exists in those Acts carving out an exception for GST claims.
46 The internal logic of the CCAA also militates against upholding the ETA deemed trust for GST. The CCAA imposes limits
on a suspension by the court of the Crown's rights in respect of source deductions but does not mention the ETA (s. 11.4). Since
source deductions deemed trusts are granted explicit protection under the CCAA, it would be inconsistent to afford a better
protection to the ETA deemed trust absent explicit language in the CCAA. Thus, the logic of the CCAA appears to subject the
ETA deemed trust to the waiver by Parliament of its priority (s. 18.4).
47
Moreover, a strange asymmetry would arise if the interpretation giving the ETA priority over the CCAA urged by the
Crown is adopted here: the Crown would retain priority over GST claims during CCAA proceedings but not in bankruptcy.
As courts have reflected, this can only encourage statute shopping by secured creditors in cases such as this one where the
debtor's assets cannot satisfy both the secured creditors' and the Crown's claims (Gauntlet, at para. 21). If creditors' claims
were better protected by liquidation under the BIA, creditors' incentives would lie overwhelmingly with avoiding proceedings
under the CCAA and not risking a failed reorganization. Giving a key player in any insolvency such skewed incentives against
reorganizing under the CCAA can only undermine that statute's remedial objectives and risk inviting the very social ills that
it was enacted to avert.
48 Arguably, the effect of Ottawa Senators is mitigated if restructuring is attempted under the BIA instead of the CCAA, but it
is not cured. If Ottawa Senators were to be followed, Crown priority over GST would differ depending on whether restructuring
took place under the CCAA or the BIA. The anomaly of this result is made manifest by the fact that it would deprive companies
of the option to restructure under the more flexible and responsive CCAA regime, which has been the statute of choice for
complex reorganizations.
49
Evidence that Parliament intended different treatments for GST claims in reorganization and bankruptcy is scant, if
it exists at all. Section 222(3) of the ETA was enacted as part of a wide-ranging budget implementation bill in 2000. The
summary accompanying that bill does not indicate that Parliament intended to elevate Crown priority over GST claims under
the CCAA to the same or a higher level than source deductions claims. Indeed, the summary for deemed trusts states only
that amendments to existing provisions are aimed at "ensuring that employment insurance premiums and Canada Pension Plan
contributions that are required to be remitted by an employer are fully recoverable by the Crown in the case of the bankruptcy of
the employer" (Summary to S.C. 2000, c. 30, at p. 4a). The wording of GST deemed trusts resembles that of statutory deemed
trusts for source deductions and incorporates the same overriding language and reference to the BIA. However, as noted above,
Parliament's express intent is that only source deductions deemed trusts remain operative. An exception for the BIA in the
statutory language establishing the source deductions deemed trusts accomplishes very little, because the explicit language
of the BIA itself (and the CCAA) carves out these source deductions deemed trusts and maintains their effect. It is however
noteworthy that no equivalent language maintaining GST deemed trusts exists under either the BIA or the CCAA.
50 It seems more likely that by adopting the same language for creating GST deemed trusts in the ETA as it did for deemed
trusts for source deductions, and by overlooking the inclusion of an exception for the CCAA alongside the BIA in s. 222(3)
of the ETA, Parliament may have inadvertently succumbed to a drafting anomaly. Because of a statutory lacuna in the ETA,
the GST deemed trust could be seen as remaining effective in the CCAA, while ceasing to have any effect under the BIA, thus
creating an apparent conflict with the wording of the CCAA. However, it should be seen for what it is: a facial conflict only,
capable of resolution by looking at the broader approach taken to Crown priorities and by giving precedence to the statutory
language of s. 18.3 of the CCAA in a manner that does not produce an anomalous outcome.
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20
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
51 Section 222(3) of the ETA evinces no explicit intention of Parliament to repeal CCAA s. 18.3. It merely creates an apparent
conflict that must be resolved by statutory interpretation. Parliament's intent when it enacted ETA s. 222(3) was therefore far
from unambiguous. Had it sought to give the Crown a priority for GST claims, it could have done so explicitly as it did for
source deductions. Instead, one is left to infer from the language of ETA s. 222(3) that the GST deemed trust was intended to
be effective under the CCAA.
52 I am not persuaded that the reasoning in Doré requires the application of the doctrine of implied repeal in the circumstances
of this case. The main issue in Doré concerned the impact of the adoption of the C.C.Q. on the administrative law rules with
respect to municipalities. While Gonthier J. concluded in that case that the limitation provision in art. 2930 C.C.Q. had repealed
by implication a limitation provision in the Cities and Towns Act, he did so on the basis of more than a textual analysis. The
conclusion in Doré was reached after thorough contextual analysis of both pieces of legislation, including an extensive review of
the relevant legislative history (paras. 31-41). Consequently, the circumstances before this Court in Doré are far from "identical"
to those in the present case, in terms of text, context and legislative history. Accordingly, Doré cannot be said to require the
automatic application of the rule of repeal by implication.
53
A noteworthy indicator of Parliament's overall intent is the fact that in subsequent amendments it has not displaced the
rule set out in the CCAA. Indeed, as indicated above, the recent amendments to the CCAA in 2005 resulted in the rule previously
found in s. 18.3 being renumbered and reformulated as s. 37. Thus, to the extent the interpretation allowing the GST deemed
trust to remain effective under the CCAA depends on ETA s. 222(3) having impliedly repealed CCAA s. 18.3(1) because it is
later in time, we have come full circle. Parliament has renumbered and reformulated the provision of the CCAA stating that,
subject to exceptions for source deductions, deemed trusts do not survive the CCAA proceedings and thus the CCAA is now the
later in time statute. This confirms that Parliament's intent with respect to GST deemed trusts is to be found in the CCAA.
54 I do not agree with my colleague Abella J. that s. 44(f) of the Interpretation Act, R.S.C. 1985, c. I-21, can be used to interpret
the 2005 amendments as having no effect. The new statute can hardly be said to be a mere re-enactment of the former statute.
Indeed, the CCAA underwent a substantial review in 2005. Notably, acting consistently with its goal of treating both the BIA
and the CCAA as sharing the same approach to insolvency, Parliament made parallel amendments to both statutes with respect
to corporate proposals. In addition, new provisions were introduced regarding the treatment of contracts, collective agreements,
interim financing and governance agreements. The appointment and role of the Monitor was also clarified. Noteworthy are the
limits imposed by CCAA s. 11.09 on the court's discretion to make an order staying the Crown's source deductions deemed
trusts, which were formerly found in s. 11.4. No mention whatsoever is made of GST deemed trusts (see Summary to S.C.
2005, c. 47). The review went as far as looking at the very expression used to describe the statutory override of deemed trusts.
The comments cited by my colleague only emphasize the clear intent of Parliament to maintain its policy that only source
deductions deemed trusts survive in CCAA proceedings.
55
In the case at bar, the legislative context informs the determination of Parliament's legislative intent and supports the
conclusion that ETA s. 222(3) was not intended to narrow the scope of the CCAA's override provision. Viewed in its entire
context, the conflict between the ETA and the CCAA is more apparent than real. I would therefore not follow the reasoning in
Ottawa Senators and affirm that CCAA s. 18.3 remained effective.
56 My conclusion is reinforced by the purpose of the CCAA as part of Canadian remedial insolvency legislation. As this aspect
is particularly relevant to the second issue, I will now discuss how courts have interpreted the scope of their discretionary powers
in supervising a CCAA reorganization and how Parliament has largely endorsed this interpretation. Indeed, the interpretation
courts have given to the CCAA helps in understanding how the CCAA grew to occupy such a prominent role in Canadian
insolvency law.
3.3 Discretionary Power of a Court Supervising a CCAA Reorganization
57 Courts frequently observe that "[t]he CCAA is skeletal in nature" and does not "contain a comprehensive code that lays out
all that is permitted or barred" (ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp., 2008 ONCA 587, 92
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21
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
O.R. (3d) 513 (Ont. C.A.), at para. 44, per Blair J.A.). Accordingly, "[t]he history of CCAA law has been an evolution of judicial
interpretation" (Dylex Ltd., Re (1995), 31 C.B.R. (3d) 106 (Ont. Gen. Div. [Commercial List])), at para. 10, per Farley J.).
58
CCAA decisions are often based on discretionary grants of jurisdiction. The incremental exercise of judicial discretion
in commercial courts under conditions one practitioner aptly describes as "the hothouse of real-time litigation" has been the
primary method by which the CCAA has been adapted and has evolved to meet contemporary business and social needs (see
Jones, at p. 484).
59
Judicial discretion must of course be exercised in furtherance of the CCAA's purposes. The remedial purpose I referred
to in the historical overview of the Act is recognized over and over again in the jurisprudence. To cite one early example:
The legislation is remedial in the purest sense in that it provides a means whereby the devastating social and economic
effects of bankruptcy or creditor initiated termination of ongoing business operations can be avoided while a courtsupervised attempt to reorganize the financial affairs of the debtor company is made.
(Nova Metal Products Inc. v. Comiskey (Trustee of) (1990), 41 O.A.C. 282 (Ont. C.A.), at para. 57, per Doherty J.A.,
dissenting)
60
Judicial decision making under the CCAA takes many forms. A court must first of all provide the conditions under
which the debtor can attempt to reorganize. This can be achieved by staying enforcement actions by creditors to allow the
debtor's business to continue, preserving the status quo while the debtor plans the compromise or arrangement to be presented to
creditors, and supervising the process and advancing it to the point where it can be determined whether it will succeed (see, e.g.,
Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 51 B.C.L.R. (2d) 84 (B.C. C.A.), at pp. 88-89; Pacific National
Lease Holding Corp., Re (1992), 19 B.C.A.C. 134 (B.C. C.A. [In Chambers]), at para. 27). In doing so, the court must often
be cognizant of the various interests at stake in the reorganization, which can extend beyond those of the debtor and creditors
to include employees, directors, shareholders, and even other parties doing business with the insolvent company (see, e.g.,
Canadian Airlines Corp., Re, 2000 ABQB 442, 84 Alta. L.R. (3d) 9 (Alta. Q.B.), at para. 144, per Paperny J. (as she then was);
Air Canada, Re (2003), 42 C.B.R. (4th) 173 (Ont. S.C.J. [Commercial List]), at para. 3; Air Canada, Re [2003 CarswellOnt
4967 (Ont. S.C.J. [Commercial List])], 2003 CanLII 49366, at para. 13, per Farley J.; Sarra, Creditor Rights, at pp. 181-92
and 217-26). In addition, courts must recognize that on occasion the broader public interest will be engaged by aspects of the
reorganization and may be a factor against which the decision of whether to allow a particular action will be weighed (see, e.g.,
Canadian Red Cross Society / Société Canadienne de la Croix Rouge, Re (2000), 19 C.B.R. (4th) 158 (Ont. S.C.J.), at para. 2,
per Blair J. (as he then was); Sarra, Creditor Rights, at pp. 195-214).
61
When large companies encounter difficulty, reorganizations become increasingly complex. CCAA courts have been
called upon to innovate accordingly in exercising their jurisdiction beyond merely staying proceedings against the debtor to
allow breathing room for reorganization. They have been asked to sanction measures for which there is no explicit authority in
the CCAA. Without exhaustively cataloguing the various measures taken under the authority of the CCAA, it is useful to refer
briefly to a few examples to illustrate the flexibility the statute affords supervising courts.
62
Perhaps the most creative use of CCAA authority has been the increasing willingness of courts to authorize post-filing
security for debtor in possession financing or super-priority charges on the debtor's assets when necessary for the continuation
of the debtor's business during the reorganization (see, e.g., Skydome Corp., Re (1998), 16 C.B.R. (4th) 118 (Ont. Gen. Div.
[Commercial List]); United Used Auto & Truck Parts Ltd., Re, 2000 BCCA 146, 135 B.C.A.C. 96 (B.C. C.A.), aff'g (1999),
12 C.B.R. (4th) 144 (B.C. S.C. [In Chambers]); and generally, J. P. Sarra, Rescue! The Companies' Creditors Arrangement Act
(2007), at pp. 93-115). The CCAA has also been used to release claims against third parties as part of approving a comprehensive
plan of arrangement and compromise, even over the objections of some dissenting creditors (see Metcalfe & Mansfield). As well,
the appointment of a Monitor to oversee the reorganization was originally a measure taken pursuant to the CCAA's supervisory
authority; Parliament responded, making the mechanism mandatory by legislative amendment.
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22
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
63
Judicial innovation during CCAA proceedings has not been without controversy. At least two questions it raises are
directly relevant to the case at bar: (1) what are the sources of a court's authority during CCAA proceedings? (2) what are the
limits of this authority?
64
The first question concerns the boundary between a court's statutory authority under the CCAA and a court's residual
authority under its inherent and equitable jurisdiction when supervising a reorganization. In authorizing measures during CCAA
proceedings, courts have on occasion purported to rely upon their equitable jurisdiction to advance the purposes of the Act or
their inherent jurisdiction to fill gaps in the statute. Recent appellate decisions have counselled against purporting to rely on
inherent jurisdiction, holding that the better view is that courts are in most cases simply construing the authority supplied by
the CCAA itself (see, e.g., Skeena Cellulose Inc., Re, 2003 BCCA 344, 13 B.C.L.R. (4th) 236 (B.C. C.A.), at paras. 45-47, per
Newbury J.A.; Stelco Inc. (Re) (2005), 75 O.R. (3d) 5 (Ont. C.A.), paras. 31-33, per Blair J.A.).
65
I agree with Justice Georgina R. Jackson and Professor Janis Sarra that the most appropriate approach is a hierarchical
one in which courts rely first on an interpretation of the provisions of the CCAA text before turning to inherent or equitable
jurisdiction to anchor measures taken in a CCAA proceeding (see G. R. Jackson and J. Sarra, "Selecting the Judicial Tool to
get the Job Done: An Examination of Statutory Interpretation, Discretionary Power and Inherent Jurisdiction in Insolvency
Matters", in J. P. Sarra, ed., Annual Review of Insolvency Law 2007 (2008), 41, at p. 42). The authors conclude that when
given an appropriately purposive and liberal interpretation, the CCAA will be sufficient in most instances to ground measures
necessary to achieve its objectives (p. 94).
66 Having examined the pertinent parts of the CCAA and the recent history of the legislation, I accept that in most instances
the issuance of an order during CCAA proceedings should be considered an exercise in statutory interpretation. Particularly
noteworthy in this regard is the expansive interpretation the language of the statute at issue is capable of supporting.
67 The initial grant of authority under the CCAA empowered a court "where an application is made under this Act in respect
of a company ... on the application of any person interested in the matter ..., subject to this Act, [to] make an order under this
section" (CCAA, s. 11(1)). The plain language of the statute was very broad.
68
In this regard, though not strictly applicable to the case at bar, I note that Parliament has in recent amendments changed
the wording contained in s. 11(1), making explicit the discretionary authority of the court under the CCAA. Thus in s. 11 of
the CCAA as currently enacted, a court may, "subject to the restrictions set out in this Act, ... make any order that it considers
appropriate in the circumstances" (S.C. 2005, c. 47, s. 128). Parliament appears to have endorsed the broad reading of CCAA
authority developed by the jurisprudence.
69
The CCAA also explicitly provides for certain orders. Both an order made on an initial application and an order on
subsequent applications may stay, restrain, or prohibit existing or new proceedings against the debtor. The burden is on the
applicant to satisfy the court that the order is appropriate in the circumstances and that the applicant has been acting in good
faith and with due diligence (CCAA, ss. 11(3), (4) and (6)).
70
The general language of the CCAA should not be read as being restricted by the availability of more specific orders.
However, the requirements of appropriateness, good faith, and due diligence are baseline considerations that a court should
always bear in mind when exercising CCAA authority. Appropriateness under the CCAA is assessed by inquiring whether the
order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully further
efforts to achieve the remedial purpose of the CCAA — avoiding the social and economic losses resulting from liquidation of
an insolvent company. I would add that appropriateness extends not only to the purpose of the order, but also to the means
it employs. Courts should be mindful that chances for successful reorganizations are enhanced where participants achieve
common ground and all stakeholders are treated as advantageously and fairly as the circumstances permit.
71
It is well-established that efforts to reorganize under the CCAA can be terminated and the stay of proceedings against
the debtor lifted if the reorganization is "doomed to failure" (see Chef Ready, at p. 88; Philip's Manufacturing Ltd., Re (1992),
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23
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
9 C.B.R. (3d) 25 (B.C. C.A.), at paras. 6-7). However, when an order is sought that does realistically advance the CCAA's
purposes, the ability to make it is within the discretion of a CCAA court.
72
The preceding discussion assists in determining whether the court had authority under the CCAA to continue the stay of
proceedings against the Crown once it was apparent that reorganization would fail and bankruptcy was the inevitable next step.
73
In the Court of Appeal, Tysoe J.A. held that no authority existed under the CCAA to continue staying the Crown's
enforcement of the GST deemed trust once efforts at reorganization had come to an end. The appellant submits that in so holding,
Tysoe J.A. failed to consider the underlying purpose of the CCAA and give the statute an appropriately purposive and liberal
interpretation under which the order was permissible. The Crown submits that Tysoe J.A. correctly held that the mandatory
language of the ETA gave the court no option but to permit enforcement of the GST deemed trust when lifting the CCAA stay
to permit the debtor to make an assignment under the BIA. Whether the ETA has a mandatory effect in the context of a CCAA
proceeding has already been discussed. I will now address the question of whether the order was authorized by the CCAA.
74 It is beyond dispute that the CCAA imposes no explicit temporal limitations upon proceedings commenced under the Act
that would prohibit ordering a continuation of the stay of the Crown's GST claims while lifting the general stay of proceedings
temporarily to allow the debtor to make an assignment in bankruptcy.
75 The question remains whether the order advanced the underlying purpose of the CCAA. The Court of Appeal held that it
did not because the reorganization efforts had come to an end and the CCAA was accordingly spent. I disagree.
76 There is no doubt that had reorganization been commenced under the BIA instead of the CCAA, the Crown's deemed trust
priority for the GST funds would have been lost. Similarly, the Crown does not dispute that under the scheme of distribution in
bankruptcy under the BIA, the deemed trust for GST ceases to have effect. Thus, after reorganization under the CCAA failed,
creditors would have had a strong incentive to seek immediate bankruptcy and distribution of the debtor's assets under the
BIA. In order to conclude that the discretion does not extend to partially lifting the stay in order to allow for an assignment
in bankruptcy, one would have to assume a gap between the CCAA and the BIA proceedings. Brenner C.J.S.C.'s order staying
Crown enforcement of the GST claim ensured that creditors would not be disadvantaged by the attempted reorganization under
the CCAA. The effect of his order was to blunt any impulse of creditors to interfere in an orderly liquidation. His order was
thus in furtherance of the CCAA's objectives to the extent that it allowed a bridge between the CCAA and BIA proceedings. This
interpretation of the tribunal's discretionary power is buttressed by s. 20 of the CCAA. That section provides that the CCAA
"may be applied together with the provisions of any Act of Parliament... that authorizes or makes provision for the sanction of
compromises or arrangements between a company and its shareholders or any class of them", such as the BIA. Section 20 clearly
indicates the intention of Parliament for the CCAA to operate in tandem with other insolvency legislation, such as the BIA.
77
The CCAA creates conditions for preserving the status quo while attempts are made to find common ground amongst
stakeholders for a reorganization that is fair to all. Because the alternative to reorganization is often bankruptcy, participants will
measure the impact of a reorganization against the position they would enjoy in liquidation. In the case at bar, the order fostered
a harmonious transition between reorganization and liquidation while meeting the objective of a single collective proceeding
that is common to both statutes.
78
Tysoe J.A. therefore erred in my view by treating the CCAA and the BIA as distinct regimes subject to a temporal gap
between the two, rather than as forming part of an integrated body of insolvency law. Parliament's decision to maintain two
statutory schemes for reorganization, the BIA and the CCAA, reflects the reality that reorganizations of differing complexity
require different legal mechanisms. By contrast, only one statutory scheme has been found to be needed to liquidate a bankrupt
debtor's estate. The transition from the CCAA to the BIA may require the partial lifting of a stay of proceedings under the CCAA
to allow commencement of the BIA proceedings. However, as Laskin J.A. for the Ontario Court of Appeal noted in a similar
competition between secured creditors and the Ontario Superintendent of Financial Services seeking to enforce a deemed trust,
"[t]he two statutes are related" and no "gap" exists between the two statutes which would allow the enforcement of property
interests at the conclusion of CCAA proceedings that would be lost in bankruptcy Ivaco Inc. (Re) (2006), 83 O.R. (3d) 108
(Ont. C.A.), at paras. 62-63).
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24
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
79
The Crown's priority in claims pursuant to source deductions deemed trusts does not undermine this conclusion. Source
deductions deemed trusts survive under both the CCAA and the BIA. Accordingly, creditors' incentives to prefer one Act over
another will not be affected. While a court has a broad discretion to stay source deductions deemed trusts in the CCAA context,
this discretion is nevertheless subject to specific limitations applicable only to source deductions deemed trusts (CCAA, s. 11.4).
Thus, if CCAA reorganization fails (e.g., either the creditors or the court refuse a proposed reorganization), the Crown can
immediately assert its claim in unremitted source deductions. But this should not be understood to affect a seamless transition
into bankruptcy or create any "gap" between the CCAA and the BIA for the simple reason that, regardless of what statute the
reorganization had been commenced under, creditors' claims in both instances would have been subject to the priority of the
Crown's source deductions deemed trust.
80
Source deductions deemed trusts aside, the comprehensive and exhaustive mechanism under the BIA must control the
distribution of the debtor's assets once liquidation is inevitable. Indeed, an orderly transition to liquidation is mandatory under
the BIA where a proposal is rejected by creditors. The CCAA is silent on the transition into liquidation but the breadth of the
court's discretion under the Act is sufficient to construct a bridge to liquidation under the BIA. The court must do so in a manner
that does not subvert the scheme of distribution under the BIA. Transition to liquidation requires partially lifting the CCAA stay
to commence proceedings under the BIA. This necessary partial lifting of the stay should not trigger a race to the courthouse
in an effort to obtain priority unavailable under the BIA.
81
I therefore conclude that Brenner C.J.S.C. had the authority under the CCAA to lift the stay to allow entry into liquidation.
3.4 Express Trust
82
The last issue in this case is whether Brenner C.J.S.C. created an express trust in favour of the Crown when he ordered
on April 29, 2008, that proceeds from the sale of LeRoy Trucking's assets equal to the amount of unremitted GST be held back
in the Monitor's trust account until the results of the reorganization were known. Tysoe J.A. in the Court of Appeal concluded
as an alternative ground for allowing the Crown's appeal that it was the beneficiary of an express trust. I disagree.
83
Creation of an express trust requires the presence of three certainties: intention, subject matter, and object. Express or
"true trusts" arise from the acts and intentions of the settlor and are distinguishable from other trusts arising by operation of
law (see D. W. M. Waters, M. R. Gillen and L. D. Smith, eds., Waters' Law of Trusts in Canada (3rd ed. 2005), at pp. 28-29
especially fn. 42).
84 Here, there is no certainty to the object (i.e. the beneficiary) inferrable from the court's order of April 29, 2008, sufficient
to support an express trust.
85 At the time of the order, there was a dispute between Century Services and the Crown over part of the proceeds from the
sale of the debtor's assets. The court's solution was to accept LeRoy Trucking's proposal to segregate those monies until that
dispute could be resolved. Thus there was no certainty that the Crown would actually be the beneficiary, or object, of the trust.
86 The fact that the location chosen to segregate those monies was the Monitor's trust account has no independent effect such
that it would overcome the lack of a clear beneficiary. In any event, under the interpretation of CCAA s. 18.3(1) established
above, no such priority dispute would even arise because the Crown's deemed trust priority over GST claims would be lost
under the CCAA and the Crown would rank as an unsecured creditor for this amount. However, Brenner C.J.S.C. may well
have been proceeding on the basis that, in accordance with Ottawa Senators, the Crown's GST claim would remain effective if
reorganization was successful, which would not be the case if transition to the liquidation process of the BIA was allowed. An
amount equivalent to that claim would accordingly be set aside pending the outcome of reorganization.
87
Thus, uncertainty surrounding the outcome of the CCAA restructuring eliminates the existence of any certainty to
permanently vest in the Crown a beneficial interest in the funds. That much is clear from the oral reasons of Brenner C.J.S.C.
on April 29, 2008, when he said: "Given the fact that [CCAA proceedings] are known to fail and filings in bankruptcy result, it
seems to me that maintaining the status quo in the case at bar supports the proposal to have the monitor hold these funds in trust."
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25
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
Exactly who might take the money in the final result was therefore evidently in doubt. Brenner C.J.S.C.'s subsequent order
of September 3, 2008, denying the Crown's application to enforce the trust once it was clear that bankruptcy was inevitable,
confirms the absence of a clear beneficiary required to ground an express trust.
4. Conclusion
88
I conclude that Brenner C.J.S.C. had the discretion under the CCAA to continue the stay of the Crown's claim for
enforcement of the GST deemed trust while otherwise lifting it to permit LeRoy Trucking to make an assignment in bankruptcy.
My conclusion that s. 18.3(1) of the CCAA nullified the GST deemed trust while proceedings under that Act were pending
confirms that the discretionary jurisdiction under s. 11 utilized by the court was not limited by the Crown's asserted GST priority,
because there is no such priority under the CCAA.
89
For these reasons, I would allow the appeal and declare that the $305,202.30 collected by LeRoy Trucking in respect of
GST but not yet remitted to the Receiver General of Canada is not subject to deemed trust or priority in favour of the Crown.
Nor is this amount subject to an express trust. Costs are awarded for this appeal and the appeal in the court below.
Fish J. (concurring):
I
90
I am in general agreement with the reasons of Justice Deschamps and would dispose of the appeal as she suggests.
91 More particularly, I share my colleague's interpretation of the scope of the judge's discretion under s. 11 of the Companies'
Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA"). And I share my colleague's conclusion that Brenner C.J.S.C. did
not create an express trust in favour of the Crown when he segregated GST funds into the Monitor's trust account (2008 BCSC
1805, [2008] G.S.T.C. 221 (B.C. S.C. [In Chambers])).
92
I nonetheless feel bound to add brief reasons of my own regarding the interaction between the CCAA and the Excise
Tax Act, R.S.C. 1985, c. E-15 ("ETA").
93
In upholding deemed trusts created by the ETA notwithstanding insolvency proceedings, Ottawa Senators Hockey Club
Corp. (Re) (2005), 73 O.R. (3d) 737, [2005] G.S.T.C. 1 (Ont. C.A.), and its progeny have been unduly protective of Crown
interests which Parliament itself has chosen to subordinate to competing prioritized claims. In my respectful view, a clearly
marked departure from that jurisprudential approach is warranted in this case.
94
Justice Deschamps develops important historical and policy reasons in support of this position and I have nothing to
add in that regard. I do wish, however, to explain why a comparative analysis of related statutory provisions adds support to
our shared conclusion.
95 Parliament has in recent years given detailed consideration to the Canadian insolvency scheme. It has declined to amend
the provisions at issue in this case. Ours is not to wonder why, but rather to treat Parliament's preservation of the relevant
provisions as a deliberate exercise of the legislative discretion that is Parliament's alone. With respect, I reject any suggestion
that we should instead characterize the apparent conflict between s. 18.3(1) (now s. 37(1)) of the CCAA and s. 222 of the ETA
as a drafting anomaly or statutory lacuna properly subject to judicial correction or repair.
II
96
In the context of the Canadian insolvency regime, a deemed trust will be found to exist only where two complementary
elements co-exist: first, a statutory provision creating the trust; and second, a CCAA or Bankruptcy and Insolvency Act, R.S.C.
1985, c. B-3 ("BIA") provision confirming — or explicitly preserving — its effective operation.
97 This interpretation is reflected in three federal statutes. Each contains a deemed trust provision framed in terms strikingly
similar to the wording of s. 222 of the ETA.
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98
The first is the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("ITA") where s. 227(4) creates a deemed trust:
227 (4) Trust for moneys deducted — Every person who deducts or withholds an amount under this Act is deemed,
notwithstanding any security interest (as defined in subsection 224(1.3)) in the amount so deducted or withheld, to hold
the amount separate and apart from the property of the person and from property held by any secured creditor (as defined
in subsection 224(1.3)) of that person that but for the security interest would be property of the person, in trust for Her
Majesty and for payment to Her Majesty in the manner and at the time provided under this Act. [Here and below, the
emphasis is of course my own.]
99
In the next subsection, Parliament has taken care to make clear that this trust is unaffected by federal or provincial
legislation to the contrary:
(4.1) Extension of trust — Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except
sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where
at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her
Majesty in the manner and at the time provided under this Act, property of the person ... equal in value to the amount so
deemed to be held in trust is deemed
(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property
of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, ...
...
... and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.
100
The continued operation of this deemed trust is expressly confirmed in s. 18.3 of the CCAA:
18.3 (1) Subject to subsection (2), notwithstanding any provision in federal or provincial legislation that has the effect of
deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as being held in
trust for Her Majesty unless it would be so regarded in the absence of that statutory provision.
(2) Subsection (1) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of
the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment
Insurance Act....
101
The operation of the ITA deemed trust is also confirmed in s. 67 of the BIA:
67 (2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of
deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her
Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision.
(3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of
the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment
Insurance Act....
102
Thus, Parliament has first created and then confirmed the continued operation of the Crown's ITA deemed trust under
both the CCAA and the BIA regimes.
103
The second federal statute for which this scheme holds true is the Canada Pension Plan, R.S.C. 1985, c. C-8 ("CPP").
At s. 23, Parliament creates a deemed trust in favour of the Crown and specifies that it exists despite all contrary provisions
in any other Canadian statute. Finally, and in almost identical terms, the Employment Insurance Act, S.C. 1996, c. 23 ("EIA"),
creates a deemed trust in favour of the Crown: see ss. 86(2) and (2.1).
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Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
104
As we have seen, the survival of the deemed trusts created under these provisions of the ITA, the CPP and the EIA is
confirmed in s. 18.3(2) the CCAA and in s. 67(3) the BIA. In all three cases, Parliament's intent to enforce the Crown's deemed
trust through insolvency proceedings is expressed in clear and unmistakable terms.
105
The same is not true with regard to the deemed trust created under the ETA. Although Parliament creates a deemed
trust in favour of the Crown to hold unremitted GST monies, and although it purports to maintain this trust notwithstanding any
contrary federal or provincial legislation, it does not confirm the trust — or expressly provide for its continued operation — in
either the BIA or the CCAA. The second of the two mandatory elements I have mentioned is thus absent reflecting Parliament's
intention to allow the deemed trust to lapse with the commencement of insolvency proceedings.
106
The language of the relevant ETA provisions is identical in substance to that of the ITA, CPP, and EIA provisions:
222. (1) [Deemed] Trust for amounts collected — Subject to subsection (1.1), every person who collects an amount
as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to
hold the amount in trust for Her Majesty in right of Canada, separate and apart from the property of the person and from
property held by any secured creditor of the person that, but for a security interest, would be property of the person, until
the amount is remitted to the Receiver General or withdrawn under subsection (2).
...
(3) Extension of trust — Despite any other provision of this Act (except subsection (4)), any other enactment of Canada
(except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed
by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn
in the manner and at the time provided under this Part, property of the person and property held by any secured creditor
of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed
to be held in trust, is deemed
(a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from
the property of the person, whether or not the property is subject to a security interest, ...
...
... and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.
107
Yet no provision of the CCAA provides for the continuation of this deemed trust after the CCAA is brought into play.
108 In short, Parliament has imposed two explicit conditions, or "building blocks", for survival under the CCAA of deemed
trusts created by the ITA, CPP, and EIA. Had Parliament intended to likewise preserve under the CCAA deemed trusts created
by the ETA, it would have included in the CCAA the sort of confirmatory provision that explicitly preserves other deemed trusts.
109
With respect, unlike Tysoe J.A., I do not find it "inconceivable that Parliament would specifically identify the BIA as
an exception when enacting the current version of s. 222(3) of the ETA without considering the CCAA as a possible second
exception" (2009 BCCA 205, 98 B.C.L.R. (4th) 242, [2009] G.S.T.C. 79 (B.C. C.A.), at para. 37). All of the deemed trust
provisions excerpted above make explicit reference to the BIA. Section 222 of the ETA does not break the pattern. Given the
near-identical wording of the four deemed trust provisions, it would have been surprising indeed had Parliament not addressed
the BIA at all in the ETA.
110 Parliament's evident intent was to render GST deemed trusts inoperative upon the institution of insolvency proceedings.
Accordingly, s. 222 mentions the BIA so as to exclude it from its ambit — rather than to include it, as do the ITA, the CPP,
and the EIA.
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111
Conversely, I note that none of these statutes mentions the CCAA expressly. Their specific reference to the BIA has no
bearing on their interaction with the CCAA. Again, it is the confirmatory provisions in the insolvency statutes that determine
whether a given deemed trust will subsist during insolvency proceedings.
112 Finally, I believe that chambers judges should not segregate GST monies into the Monitor's trust account during CCAA
proceedings, as was done in this case. The result of Justice Deschamps's reasoning is that GST claims become unsecured under
the CCAA. Parliament has deliberately chosen to nullify certain Crown super-priorities during insolvency; this is one such
instance.
III
113
For these reasons, like Justice Deschamps, I would allow the appeal with costs in this Court and in the courts below
and order that the $305,202.30 collected by LeRoy Trucking in respect of GST but not yet remitted to the Receiver General of
Canada be subject to no deemed trust or priority in favour of the Crown.
Abella J. (dissenting):
114
The central issue in this appeal is whether s. 222 of the Excise Tax Act, R.S.C. 1985, c. E-15 ("EIA"), and specifically
s. 222(3), gives priority during Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA"), proceedings to the
Crown's deemed trust in unremitted GST. I agree with Tysoe J.A. that it does. It follows, in my respectful view, that a court's
discretion under s. 11 of the CCAA is circumscribed accordingly.
115
Section 11 1 of the CCAA stated:
11. (1) Notwithstanding anything in the Bankruptcy and Insolvency Act or the Winding-up Act, where an application is
made under this Act in respect of a company, the court, on the application of any person interested in the matter, may,
subject to this Act, on notice to any other person or without notice as it may see fit, make an order under this section.
To decide the scope of the court's discretion under s. 11, it is necessary to first determine the priority issue. Section 222(3), the
provision of the ETA at issue in this case, states:
222 (3) Extension of trust — Despite any other provision of this Act (except subsection (4)), any other enactment of
Canada (except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an
amount deemed by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or
withdrawn in the manner and at the time provided under this Part, property of the person and property held by any secured
creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so
deemed to be held in trust, is deemed
(a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from
the property of the person, whether or not the property is subject to a security interest, and
(b) to form no part of the estate or property of the person from the time the amount was collected, whether or not
the property has in fact been kept separate and apart from the estate or property of the person and whether or not the
property is subject to a security interest
and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the
proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.
116 Century Services argued that the CCAA's general override provision, s. 18.3(1), prevailed, and that the deeming provisions
in s. 222 of the ETA were, accordingly, inapplicable during CCAA proceedings. Section 18.3(1) states:
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Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
18.3 (1) ... [N]otwithstanding any provision in federal or provincial legislation that has the effect of deeming property to
be held in trust for Her Majesty, property of a debtor company shall not be regarded as held in trust for Her Majesty unless
it would be so regarded in the absence of that statutory provision.
117
As MacPherson J.A. correctly observed in Ottawa Senators Hockey Club Corp. (Re) (2005), 73 O.R. (3d) 737, [2005]
G.S.T.C. 1 (Ont. C.A.), s. 222(3) of the ETA is in "clear conflict" with s. 18.3(1) of the CCAA (para. 31). Resolving the conflict
between the two provisions is, essentially, what seems to me to be a relatively uncomplicated exercise in statutory interpretation:
does the language reflect a clear legislative intention? In my view it does. The deemed trust provision, s. 222(3) of the ETA,
has unambiguous language stating that it operates notwithstanding any law except the Bankruptcy and Insolvency Act, R.S.C.
1985, c. B-3 ("BIA").
118
By expressly excluding only one statute from its legislative grasp, and by unequivocally stating that it applies despite
any other law anywhere in Canada except the BIA, s. 222(3) has defined its boundaries in the clearest possible terms. I am in
complete agreement with the following comments of MacPherson J.A. in Ottawa Senators:
The legislative intent of s. 222(3) of the ETA is clear. If there is a conflict with "any other enactment of Canada (except
the Bankruptcy and Insolvency Act)", s. 222(3) prevails. In these words Parliament did two things: it decided that s. 222(3)
should trump all other federal laws and, importantly, it addressed the topic of exceptions to its trumping decision and
identified a single exception, the Bankruptcy and Insolvency Act .... The BIA and the CCAA are closely related federal
statutes. I cannot conceive that Parliament would specifically identify the BIA as an exception, but accidentally fail to
consider the CCAA as a possible second exception. In my view, the omission of the CCAA from s. 222(3) of the ETA was
almost certainly a considered omission. [para. 43]
119
MacPherson J.A.'s view that the failure to exempt the CCAA from the operation of the ETA is a reflection of a clear
legislative intention, is borne out by how the CCAA was subsequently changed after s. 18.3(1) was enacted in 1997. In 2000,
when s. 222(3) of the ETA came into force, amendments were also introduced to the CCAA. Section 18.3(1) was not amended.
120
The failure to amend s. 18.3(1) is notable because its effect was to protect the legislative status quo, notwithstanding
repeated requests from various constituencies that s. 18.3(1) be amended to make the priorities in the CCAA consistent with those
in the BIA. In 2002, for example, when Industry Canada conducted a review of the BIA and the CCAA, the Insolvency Institute
of Canada and the Canadian Association of Insolvency and Restructuring Professionals recommended that the priority regime
under the BIA be extended to the CCAA (Joint Task Force on Business Insolvency Law Reform, Report (March 15, 2002), Sch.
B, proposal 71, at pp. 37-38). The same recommendations were made by the Standing Senate Committee on Banking, Trade and
Commerce in its 2003 report, Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and
the Companies' Creditors Arrangement Act; by the Legislative Review Task Force (Commercial) of the Insolvency Institute
of Canada and the Canadian Association of Insolvency and Restructuring Professionals in its 2005 Report on the Commercial
Provisions of Bill C-55; and in 2007 by the Insolvency Institute of Canada in a submission to the Standing Senate Committee
on Banking, Trade and Commerce commenting on reforms then under consideration.
121
Yet the BIA remains the only exempted statute under s. 222(3) of the ETA. Even after the 2005 decision in Ottawa
Senators which confirmed that the ETA took precedence over the CCAA, there was no responsive legislative revision. I see
this lack of response as relevant in this case, as it was in R. v. Tele-Mobile Co., 2008 SCC 12, [2008] 1 S.C.R. 305 (S.C.C.),
where this Court stated:
While it cannot be said that legislative silence is necessarily determinative of legislative intention, in this case the silence
is Parliament's answer to the consistent urging of Telus and other affected businesses and organizations that there be
express language in the legislation to ensure that businesses can be reimbursed for the reasonable costs of complying with
evidence-gathering orders. I see the legislative history as reflecting Parliament's intention that compensation not be paid
for compliance with production orders. [para. 42]
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122
All this leads to a clear inference of a deliberate legislative choice to protect the deemed trust in s. 222(3) from the
reach of s. 18.3(1) of the CCAA.
123
Nor do I see any "policy" justification for interfering, through interpretation, with this clarity of legislative intention.
I can do no better by way of explaining why I think the policy argument cannot succeed in this case, than to repeat the words
of Tysoe J.A. who said:
I do not dispute that there are valid policy reasons for encouraging insolvent companies to attempt to restructure their
affairs so that their business can continue with as little disruption to employees and other stakeholders as possible. It is
appropriate for the courts to take such policy considerations into account, but only if it is in connection with a matter
that has not been considered by Parliament. Here, Parliament must be taken to have weighed policy considerations when
it enacted the amendments to the CCAA and ETA described above. As Mr. Justice MacPherson observed at para. 43 of
Ottawa Senators, it is inconceivable that Parliament would specifically identify the BIA as an exception when enacting
the current version of s. 222(3) of the ETA without considering the CCAA as a possible second exception. I also make
the observation that the 1992 set of amendments to the BIA enabled proposals to be binding on secured creditors and,
while there is more flexibility under the CCAA, it is possible for an insolvent company to attempt to restructure under the
auspices of the BIA. [para. 37]
124
Despite my view that the clarity of the language in s. 222(3) is dispositive, it is also my view that even the application
of other principles of interpretation reinforces this conclusion. In their submissions, the parties raised the following as being
particularly relevant: the Crown relied on the principle that the statute which is "later in time" prevails; and Century Services
based its argument on the principle that the general provision gives way to the specific (generalia specialibus non derogani).
125 The "later in time" principle gives priority to a more recent statute, based on the theory that the legislature is presumed
to be aware of the content of existing legislation. If a new enactment is inconsistent with a prior one, therefore, the legislature
is presumed to have intended to derogate from the earlier provisions (Ruth Sullivan, Sullivan on the Construction of Statutes
(5th ed. 2008), at pp. 346-47; Pierre-André Côté, The Interpretation of Legislation in Canada (3rd ed. 2000), at p. 358).
126 The exception to this presumptive displacement of pre-existing inconsistent legislation, is the generalia specialibus non
derogant principle that "[a] more recent, general provision will not be construed as affecting an earlier, special provision" (Côté,
at p. 359). Like a Russian Doll, there is also an exception within this exception, namely, that an earlier, specific provision may
in fact be "overruled" by a subsequent general statute if the legislature indicates, through its language, an intention that the
general provision prevails (Doré c. Verdun (Municipalité), [1997] 2 S.C.R. 862 (S.C.C.)).
127 The primary purpose of these interpretive principles is to assist in the performance of the task of determining the intention
of the legislature. This was confirmed by MacPherson J.A. in Ottawa Senators, at para. 42:
[T]he overarching rule of statutory interpretation is that statutory provisions should be interpreted to give effect to the
intention of the legislature in enacting the law. This primary rule takes precedence over all maxims or canons or aids
relating to statutory interpretation, including the maxim that the specific prevails over the general (generalia specialibus
non derogant). As expressed by Hudson J. in Canada v. Williams, [1944] S.C.R. 226, ... at p. 239 ...:
The maxim generalia specialibus non derogant is relied on as a rule which should dispose of the question, but the
maxim is not a rule of law but a rule of construction and bows to the intention of the legislature, if such intention can
reasonably be gathered from all of the relevant legislation.
(See also Côté, at p. 358, and Pierre-Andre Côté, with the collaboration of S. Beaulac and M. Devinat, Interprétation des lois
(4th ed. 2009), at para. 1335.)
128
I accept the Crown's argument that the "later in time" principle is conclusive in this case. Since s. 222(3) of the ETA
was enacted in 2000 and s. 18.3(1) of the CCAA was introduced in 1997, s. 222(3) is, on its face, the later provision. This
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2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
chronological victory can be displaced, as Century Services argues, if it is shown that the more recent provision, s. 222(3) of
the ETA, is a general one, in which case the earlier, specific provision, s. 18.3(1), prevails (generalia specialibus non derogant).
But, as previously explained, the prior specific provision does not take precedence if the subsequent general provision appears
to "overrule" it. This, it seems to me, is precisely what s. 222(3) achieves through the use of language stating that it prevails
despite any law of Canada, of a province, or "any other law" other than the BIA. Section 18.3(1) of the CCAA, is thereby
rendered inoperative for purposes of s. 222(3).
129
It is true that when the CCAA was amended in 2005, 2 s. 18.3(1) was re-enacted as s. 37(1) (S.C. 2005, c. 47, s. 131).
Deschamps J. suggests that this makes s. 37(1) the new, "later in time" provision. With respect, her observation is refuted
by the operation of s. 44(f) of the Interpretation Act, R.S.C. 1985, c. I-21, which expressly deals with the (non) effect of reenacting, without significant substantive changes, a repealed provision (see Canada (Attorney General) v. Canada (Public
Service Staff Relations Board), [1977] 2 F.C. 663 (Fed. C.A.), dealing with the predecessor provision to s. 44(f)). It directs that
new enactments not be construed as "new law" unless they differ in substance from the repealed provision:
44. Where an enactment, in this section called the "former enactment", is repealed and another enactment, in this section
called the "new enactment", is substituted therefor,
...
(f) except to the extent that the provisions of the new enactment are not in substance the same as those of the former
enactment, the new enactment shall not be held to operate as new law, but shall be construed and have effect as a
consolidation and as declaratory of the law as contained in the former enactment;
Section 2 of the Interpretation Act defines an enactment as "an Act or regulation or any portion of an Act or regulation".
130 Section 37(1) of the current CCAA is almost identical to s. 18.3(1). These provisions are set out for ease of comparison,
with the differences between them underlined:
37.(1) Subject to subsection (2), despite any provision in federal or provincial legislation that has the effect of deeming
property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as being held in trust for
Her Majesty unless it would be so regarded in the absence of that statutory provision.
18.3 (1) Subject to subsection (2), notwithstanding any provision in federal or provincial legislation that has the effect of
deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as held in trust
for Her Majesty unless it would be so regarded in the absence of that statutory provision.
131
The application of s. 44(f) of the Interpretation Act simply confirms the government's clearly expressed intent, found
in Industry Canada's clause-by-clause review of Bill C-55, where s. 37(1) was identified as "a technical amendment to reorder
the provisions of this Act". During second reading, the Hon. Bill Rompkey, then the Deputy Leader of the Government in the
Senate, confirmed that s. 37(1) represented only a technical change:
On a technical note relating to the treatment of deemed trusts for taxes, the bill [sic] makes no changes to the underlying
policy intent, despite the fact that in the case of a restructuring under the CCAA, sections of the act [sic] were repealed
and substituted with renumbered versions due to the extensive reworking of the CCAA.
(Debates of the Senate, vol. 142, 1st Sess., 38th Parl., November 23, 2005, at p. 2147)
132 Had the substance of s. 18.3(1) altered in any material way when it was replaced by s. 37(1), I would share Deschamps J.'s
view that it should be considered a new provision. But since s. 18.3(1) and s. 37(1) are the same in substance, the transformation
of s. 18.3(1) into s. 37(1) has no effect on the interpretive queue, and s. 222(3) of the ETA remains the "later in time" provision
(Sullivan, at p. 347).
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133
This means that the deemed trust provision in s. 222(3) of the ETA takes precedence over s. 18.3(1) during CCAA
proceedings. The question then is how that priority affects the discretion of a court under s. 11 of the CCAA.
134
While s. 11 gives a court discretion to make orders notwithstanding the BIA and the Winding-up Act, R.S.C. 1985, c.
W-11, that discretion is not liberated from the operation of any other federal statute. Any exercise of discretion is therefore
circumscribed by whatever limits are imposed by statutes other than the BIA and the Winding-up Act. That includes the ETA.
The chambers judge in this case was, therefore, required to respect the priority regime set out in s. 222(3) of the ETA. Neither
s. 18.3(1) nor s. 11 of the CCAA gave him the authority to ignore it. He could not, as a result, deny the Crown's request for
payment of the GST funds during the CCAA proceedings.
135
Given this conclusion, it is unnecessary to consider whether there was an express trust.
136
I would dismiss the appeal.
Appeal allowed.
Pourvoi accueilli.
Appendix
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 (as at December 13, 2007)
11. (1) Powers of court — Notwithstanding anything in the Bankruptcy and Insolvency Act or the Winding-up Act, where
an application is made under this Act in respect of a company, the court, on the application of any person interested in
the matter, may, subject to this Act, on notice to any other person or without notice as it may see fit, make an order under
this section.
...
(3) Initial application court orders — A court may, on an initial application in respect of a company, make an order on
such terms as it may impose, effective for such period as the court deems necessary not exceeding thirty days,
(a) staying, until otherwise ordered by the court, all proceedings taken or that might be taken in respect of the company
under an Act referred to in subsection (i);
(b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the
company; and
(c) prohibiting, until otherwise ordered by the court, the commencement of or proceeding with any other action, suit
or proceeding against the company.
(4) Other than initial application court orders — A court may, on an application in respect of a company other than an
initial application, make an order on such terms as it may impose,
(a) staying, until otherwise ordered by the court, for such period as the court deems necessary, all proceedings taken
or that might be taken in respect of the company under an Act referred to in subsection (1);
(b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the
company; and
(c) prohibiting, until otherwise ordered by the court, the commencement of or proceeding with any other action, suit
or proceeding against the company.
...
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33
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
(6) Burden of proof on application — The court shall not make an order under subsection (3) or (4) unless
(a) the applicant satisfies the court that circumstances exist that make such an order appropriate; and
(b) in the case of an order under subsection (4), the applicant also satisfies the court that the applicant has acted, and
is acting, in good faith and with due diligence.
11.4 (1) Her Majesty affected — An order made under section 11 may provide that
(a) Her Majesty in right of Canada may not exercise rights under subsection 224(1.2) of the Income Tax Act or any
provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of
the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or
an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related
interest, penalties or other amounts, in respect of the company if the company is a tax debtor under that subsection or
provision, for such period as the court considers appropriate but ending not later than
(i) the expiration of the order,
(ii) the refusal of a proposed compromise by the creditors or the court,
(iii) six months following the court sanction of a compromise or arrangement,
(iv) the default by the company on any term of a compromise or arrangement, or
(v) the performance of a compromise or arrangement in respect of the company; and\
(b) Her Majesty in right of a province may not exercise rights under any provision of provincial legislation in respect
of the company where the company is a debtor under that legislation and the provision has a similar purpose to
subsection 224(1.2) of the Income Tax Act, or refers to that subsection, to the extent that it provides for the collection
of a sum, and of any related interest, penalties or other amounts, where the sum
(i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar
in nature to the income tax imposed on individuals under the Income Tax Act, or
(ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing
a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial
legislation establishes a "provincial pension plan" as defined in that subsection,
for such period as the court considers appropriate but ending not later than the occurrence or time referred to in whichever
of subparagraphs (a)(i) to (v) may apply.
(2) When order ceases to be in effect — An order referred to in subsection (1) ceases to be in effect if
(a) the company defaults on payment of any amount that becomes due to Her Majesty after the order is made and
could be subject to a demand under
(i) subsection 224(1.2) of the Income Tax Act,
(ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection
224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada
Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act,
and of any related interest, penalties or other amounts, or
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
34
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
(iii) under any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income
Tax Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any
related interest, penalties or other amounts, where the sum
(A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax
similar in nature to the income tax imposed on individuals under the Income Tax Act, or
(B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province
providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and
the provincial legislation establishes a "provincial pension plan" as defined in that subsection; or
(b) any other creditor is or becomes entitled to realize a security on any property that could be claimed by Her Majesty
in exercising rights under
(i) subsection 224(1.2) of the Income Tax Act,
(ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection
224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada
Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act,
and of any related interest, penalties or other amounts, or
(iii) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax
Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related
interest, penalties or other amounts, where the sum
(A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax
similar in nature to the income tax imposed on individuals under the Income Tax Act, or
(B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province
providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and
the provincial legislation establishes a "provincial pension plan" as defined in that subsection.
(3) Operation of similar legislation — An order made under section 11, other than an order referred to in subsection (1)
of this section, does not affect the operation of
(a) subsections 224(1.2) and (1.3) of the Income Tax Act,
(b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2)
of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or
an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related
interest, penalties or other amounts, or
(c) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act,
or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest,
penalties or other amounts, where the sum
(i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar
in nature to the income tax imposed on individuals under the Income Tax Act, or
(ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing
a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial
legislation establishes a "provincial pension plan" as defined in that subsection,
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35
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province
or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2)
of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension
Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts.
18.3 (1) Deemed trusts — Subject to subsection (2), notwithstanding any provision in federal or provincial legislation that
has the effect of deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded
as held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision.
(2) Exceptions — Subsection (1) does not apply in respect of amounts deemed to be held in trust under subsection 227(4)
or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the
Employment Insurance Act (each of which is in this subsection referred to as a "federal provision") nor in respect of amounts
deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure
remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where
(a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the
amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in
subsection 227(4) or (4.1) of the Income Tax Act, or
(b) the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada
Pension Plan, that law of the province establishes a "provincial pension plan" as defined in that subsection and
the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in
subsection 23(3) or (4) of the Canada Pension Plan,
and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding
any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor,
however secured, as the corresponding federal provision.
18.4 (1) Status of Crown claims — In relation to a proceeding under this Act, all claims, including secured claims, of
Her Majesty in right of Canada or a province or any body under an enactment respecting workers' compensation, in this
section and in section 18.5 called a "workers' compensation body", rank as unsecured claims.
...
(3) Operation of similar legislation — Subsection (1) does not affect the operation of
(a) subsections 224(1.2) and (1.3) of the Income Tax Act,
(b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2)
of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or
an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related
interest, penalties or other amounts, or
(c) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act,
or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest,
penalties or other amounts, where the sum
(i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar
in nature to the income tax imposed on individuals under the Income Tax Act, or
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36
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
(ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing
a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial
legislation establishes a "provincial pension plan" as defined in that subsection,
and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province
or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2)
of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension
Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts.
...
20. [Act to be applied conjointly with other Acts] — The provisions of this Act may be applied together with the
provisions of any Act of Parliament or of the legislature of any province, that authorizes or makes provision for the sanction
of compromises or arrangements between a company and its shareholders or any class of them.
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 (as at September 18, 2009)
11. General power of court — Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and
Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application
of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or
without notice as it may see fit, make any order that it considers appropriate in the circumstances.
...
11.02 (1) Stays, etc. — initial application — A court may, on an initial application in respect of a debtor company, make
an order on any terms that it may impose, effective for the period that the court considers necessary, which period may
not be more than 30 days,
(a) staying, until otherwise ordered by the court, all proceedings taken or that might be taken in respect of the company
under the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act;
(b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the
company; and
(c) prohibiting, until otherwise ordered by the court, the commencement of any action, suit or proceeding against
the company.
(2) Stays, etc. — other than initial application — A court may, on an application in respect of a debtor company other
than an initial application, make an order, on any terms that it may impose,
(a) staying, until otherwise ordered by the court, for any period that the court considers necessary, all proceedings
taken or that might be taken in respect of the company under an Act referred to in paragraph (1)(a);
(b) restraining, until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the
company; and
(c) prohibiting, until otherwise ordered by the court, the commencement of any action, suit or proceeding against
the company.
(3) Burden of proof on application — The court shall not make the order unless
(a) the applicant satisfies the court that circumstances exist that make the order appropriate; and
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
37
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
(b) in the case of an order under subsection (2), the applicant also satisfies the court that the applicant has acted, and
is acting, in good faith and with due diligence.
...
11.09 (1) Stay — Her Majesty — An order made under section 11.02 may provide that
(a) Her Majesty in right of Canada may not exercise rights under subsection 224(1.2) of the Income Tax Act or any
provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2) of
the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or
an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related
interest, penalties or other amounts, in respect of the company if the company is a tax debtor under that subsection or
provision, for the period that the court considers appropriate but ending not later than
(i) the expiry of the order,
(ii) the refusal of a proposed compromise by the creditors or the court,
(iii) six months following the court sanction of a compromise or an arrangement,
(iv) the default by the company on any term of a compromise or an arrangement, or
(v) the performance of a compromise or an arrangement in respect of the company; and
(b) Her Majesty in right of a province may not exercise rights under any provision of provincial legislation in respect
of the company if the company is a debtor under that legislation and the provision has a purpose similar to subsection
224(1.2) of the Income Tax Act, or refers to that subsection, to the extent that it provides for the collection of a sum,
and of any related interest, penalties or other amounts, and the sum
(i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar
in nature to the income tax imposed on individuals under the Income Tax Act, or
(ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing
a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial
legislation establishes a "provincial pension plan" as defined in that subsection,
for the period that the court considers appropriate but ending not later than the occurrence or time referred to in whichever
of subparagraphs (a)(i) to (v) that may apply.
(2) When order ceases to be in effect — The portions of an order made under section 11.02 that affect the exercise of
rights of Her Majesty referred to in paragraph (1)(a) or (b) cease to be in effect if
(a) the company defaults on the payment of any amount that becomes due to Her Majesty after the order is made
and could be subject to a demand under
(i) subsection 224(1.2) of the Income Tax Act,
(ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection
224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada
Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act,
and of any related interest, penalties or other amounts, or
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
38
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
(iii) any provision of provincial legislation that has a purpose similar to subsection 224(1.2) of the Income Tax
Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related
interest, penalties or other amounts, and the sum
(A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax
similar in nature to the income tax imposed on individuals under the Income Tax Act, or
(B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province
providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and
the provincial legislation establishes a "provincial pension plan" as defined in that subsection; or
(b) any other creditor is or becomes entitled to realize a security on any property that could be claimed by Her Majesty
in exercising rights under
(i) subsection 224(1.2) of the Income Tax Act,
(ii) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection
224(1.2) of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada
Pension Plan, or an employee's premium, or employer's premium, as defined in the Employment Insurance Act,
and of any related interest, penalties or other amounts, or
(iii) any provision of provincial legislation that has a purpose similar to subsection 224(1.2) of the Income Tax
Act, or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related
interest, penalties or other amounts, and the sum
(A) has been withheld or deducted by a person from a payment to another person and is in respect of a tax
similar in nature to the income tax imposed on individuals under the Income Tax Act, or
(B) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province
providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and
the provincial legislation establishes a "provincial pension plan" as defined in that subsection.
(3) Operation of similar legislation — An order made under section 11.02, other than the portions of that order that affect
the exercise of rights of Her Majesty referred to in paragraph (1)(a) or (b), does not affect the operation of
(a) subsections 224(1.2) and (1.3) of the Income Tax Act,
(b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2)
of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or
an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related
interest, penalties or other amounts, or
(c) any provision of provincial legislation that has a purpose similar to subsection 224(1.2) of the Income Tax Act,
or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest,
penalties or other amounts, and the sum
(i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar
in nature to the income tax imposed on individuals under the Income Tax Act, or
(ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing
a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial
legislation establishes a "provincial pension plan" as defined in that subsection,
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39
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province
or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2)
of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension
Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts.
37. (1) Deemed trusts — Subject to subsection (2), despite any provision in federal or provincial legislation that has the
effect of deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as being
held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision.
(2) Exceptions — Subsection (1) does not apply in respect of amounts deemed to be held in trust under subsection 227(4)
or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the
Employment Insurance Act (each of which is in this subsection referred to as a "federal provision"), nor does it apply in
respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose
of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law
of the province if
(a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the
amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in
subsection 227(4) or (4.1) of the Income Tax Act, or
(b) the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada
Pension Plan, that law of the province establishes a "provincial pension plan" as defined in that subsection and
the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in
subsection 23(3) or (4) of the Canada Pension Plan,
and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, despite any Act
of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however
secured, as the corresponding federal provision.
Excise Tax Act, R.S.C. 1985, c. E-15 (as at December 13, 2007)
222. (1) [Deemed] Trust for amounts collected — Subject to subsection (1.1), every person who collects an amount
as or on account of tax under Division II is deemed, for all purposes and despite any security interest in the amount, to
hold the amount in trust for Her Majesty in right of Canada, separate and apart from the property of the person and from
property held by any secured creditor of the person that, but for a security interest, would be property of the person, until
the amount is remitted to the Receiver General or withdrawn under subsection (2).
(1.1) Amounts collected before bankruptcy — Subsection (1) does not apply, at or after the time a person becomes a
bankrupt (within the meaning of the Bankruptcy and Insolvency Act), to any amounts that, before that time, were collected
or became collectible by the person as or on account of tax under Division II.
...
(3) Extension of trust — Despite any other provision of this Act (except subsection (4)), any other enactment of Canada
(except the Bankruptcy and Insolvency Act), any enactment of a province or any other law, if at any time an amount deemed
by subsection (1) to be held by a person in trust for Her Majesty is not remitted to the Receiver General or withdrawn
in the manner and at the time provided under this Part, property of the person and property held by any secured creditor
of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed
to be held in trust, is deemed
(a) to be held, from the time the amount was collected by the person, in trust for Her Majesty, separate and apart from
the property of the person, whether or not the property is subject to a security interest, and
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40
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
(b) to form no part of the estate or property of the person from the time the amount was collected, whether or not
the property has in fact been kept separate and apart from the estate or property of the person and whether or not the
property is subject to a security interest
and is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the
proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (as at December 13, 2007)
67. (1) Property of bankrupt — The property of a bankrupt divisible among his creditors shall not comprise
(a) property held by the bankrupt in trust for any other person,
(b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the
province within which the property is situated and within which the bankrupt resides, or
(b.1) such goods and services tax credit payments and prescribed payments relating to the essential needs of an
individual as are made in prescribed circumstances and are not property referred to in paragraph (a) or (b),
but it shall comprise
(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve
on him before his discharge, and
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own
benefit.
(2) Deemed trusts — Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that
has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as
held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that
statutory provision.
(3) Exceptions — Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4)
or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the
Employment Insurance Act (each of which is in this subsection referred to as a "federal provision") nor in respect of amounts
deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure
remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where
(a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the
amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in
subsection 227(4) or (4.1) of the Income Tax Act, or
(b) the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada
Pension Plan, that law of the province establishes a "provincial pension plan" as defined in that subsection and
the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in
subsection 23(3) or (4) of the Canada Pension Plan,
and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding
any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor,
however secured, as the corresponding federal provision.
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41
Ted Leroy Trucking [Century Services] Ltd., Re, 2010 SCC 60, 2010 CarswellBC 3419
2010 SCC 60, 2010 CarswellBC 3419, 2010 CarswellBC 3420, [2010] 3 S.C.R. 379...
86. (1) Status of Crown claims — In relation to a bankruptcy or proposal, all provable claims, including secured claims,
of Her Majesty in right of Canada or a province or of any body under an Act respecting workers' compensation, in this
section and in section 87 called a "workers' compensation body", rank as unsecured claims.
...
(3) Exceptions — Subsection (1) does not affect the operation of
(a) subsections 224(1.2) and (1.3) of the Income Tax Act;
(b) any provision of the Canada Pension Plan or of the Employment Insurance Act that refers to subsection 224(1.2)
of the Income Tax Act and provides for the collection of a contribution, as defined in the Canada Pension Plan, or
an employee's premium, or employer's premium, as defined in the Employment Insurance Act, and of any related
interest, penalties or other amounts; or
(c) any provision of provincial legislation that has a similar purpose to subsection 224(1.2) of the Income Tax Act,
or that refers to that subsection, to the extent that it provides for the collection of a sum, and of any related interest,
penalties or other amounts, where the sum
(i) has been withheld or deducted by a person from a payment to another person and is in respect of a tax similar
in nature to the income tax imposed on individuals under the Income Tax Act, or
(ii) is of the same nature as a contribution under the Canada Pension Plan if the province is a "province providing
a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan and the provincial
legislation establishes a "provincial pension plan" as defined in that subsection,
and for the purpose of paragraph (c), the provision of provincial legislation is, despite any Act of Canada or of a province
or any other law, deemed to have the same effect and scope against any creditor, however secured, as subsection 224(1.2)
of the Income Tax Act in respect of a sum referred to in subparagraph (c)(i), or as subsection 23(2) of the Canada Pension
Plan in respect of a sum referred to in subparagraph (c)(ii), and in respect of any related interest, penalties or other amounts.
Footnotes
1
Section 11 was amended, effective September 18, 2009, and now states:
11. Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under
this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the
restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers
appropriate in the circumstances.
2
The amendments did not come into force until September 18, 2009.
End of Document
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42
4
White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
2010 QCCS 1176
Cour supérieure du Québec
White Birch Paper Holding Co., Re
2010 CarswellQue 2675, 2010 QCCS 1176, [2010] Q.J. No. 1723,
190 A.C.W.S. (3d) 354, 76 C.B.R. (5th) 215, EYB 2010-171694
In the matter of plan of arrangement and compromise of : White Birch
Paper Holding Company, White Birch Paper Company, Stadacona General
Partner Inc., Black Spruce Paper Inc., F.F. Soucy General Partner Inc.,
3120772 Nova Scotia Company, Arrimage de gros Cacouna inc. and Papier
Masson ltée (Debtors) v. Ernst & Young Inc. (Monitor) and Dune Capital
LP, Dune Capital International Ltd and WTA Dune Limited (Petitioners)
Robert Mongeon, J.C.S.
Heard: March 18, 2010
Judgment: March 25, 2010
Docket: C.S. Montréal 500-11-038474-108
Counsel: Me Sylvain Rigaud for the Monitor
Me Jean Fontaine, Me Matthew Liben for Debtors
Me Denis Ferland, Me Christian Lachance, Me Marie-Paule Jeansonne for Petitioner Dune Capital
Me Marc Duchesne, Me Mathieu Lévesque for the Petitioners
Me Martin Desrosiers for the Interim Finance Parties
Subject: Insolvency; Civil Practice and Procedure
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.b Grant of stay
XIX.2.b.iii Prejudice to creditors
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.e Proceedings subject to stay
XIX.2.e.ii Contractual rights
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.h Miscellaneous
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1
White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Grant of stay —
Prejudice to creditors
Debtor companies were experiencing financial difficulties and sought protection under Companies' Creditors Arrangement
Act — Initial order provided interim financing charge ranking ahead of secured creditors, including majority lenders
— Meanwhile, administrative agent resigned and majority lenders were left out of restructuring process — Majority
lenders claimed, among other things, that they were not notified of debtor companies' initial application and that interim
financing should be rescinded — Majority lenders brought motion to revise initial order, obtain payment of their fees and
disbursements incurred both before and after issuance of initial order, and appoint new administrative agent — Motion
dismissed — List of criteria provided in Act is neither mandatory nor limitative — Court found that majority lenders were
likely to be affected by interim financing charge — However, Court also found that interim financing and corresponding
charge were required to allow debtor companies to operate their business while they underwent restructuring process and
enhanced prospects of viable compromise — Adverse effects of process on majority lenders was outweighed by positive
effects of financing on total business of debtor companies and their employees — Therefore, there was no reason to vary
or change initial order.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Proceedings subject
to stay — Contractual rights
Debtor companies were experiencing financial difficulties and sought protection under Companies' Creditors Arrangement
Act — Initial order provided interim financing charge ranking ahead of secured creditors, including majority lenders
— Meanwhile, administrative agent resigned and majority lenders were left out of restructuring process — Majority
lenders claimed, among other things, that they were not notified of debtor companies' initial application and that interim
financing should be rescinded — Majority lenders brought motion to revise initial order, obtain payment of their fees and
disbursements incurred both before and after issuance of initial order, and appoint new administrative agent — Motion
dismissed — During hearing, Court questioned legal basis upon which majority lenders relied to seek payment of fees
and disbursements but found none, nor was it presented with one — Inasmuch as stay order suspended debtor companies'
obligation to pay principal and interest under loan agreement, it followed that incidental costs due by debtor companies
under same agreement were also suspended — Therefore, majority lenders' request could not be granted.
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Miscellaneous
Debtor companies were experiencing financial difficulties and sought protection under Companies' Creditors Arrangement
Act — Initial order provided interim financing charge ranking ahead of secured creditors, including majority lenders
— Meanwhile, administrative agent resigned and majority lenders were left out of restructuring process — Majority
lenders claimed, among other things, that they were not notified of debtor companies' initial application and that interim
financing should be rescinded — Majority lenders brought motion to revise initial order, obtain payment of their fees and
disbursements incurred both before and after issuance of initial order, and appoint new administrative agent — Motion
dismissed — Majority lenders' request to appoint new administrative agent could not be granted unless all concerned
parties agreed, which was not case here — Corporation submitted by majority lenders as potential administrative agent
was not lender and, according to loan agreement, its appointment was impossible in absence of proper consent of all parties
concerned.
Faillite et insolvabilité --- Loi sur les arrangements avec les créanciers des compagnies — Demande initiale —
Suspension des recours — Préjudice causé aux créditeurs
Compagnies débitrices éprouvaient des difficultés financières et se sont mises sous la protection de la Loi sur les
arrangements avec les créanciers des compagnies — Ordonnance initiale prévoyait une sûreté pour le financement
intérimaire prenant rang devant les créanciers garantis, y compris les prêteurs principaux — Entre-temps, le mandataire
administratif s'est retiré et les prêteurs principaux n'ont pas été impliqués dans le processus de restructuration — Prêteurs
principaux ont prétendu, entre autres choses, qu'ils n'avaient pas été avertis de la demande initiale des compagnies débitrices
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White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
et que le financement intérimaire devrait être annulé — Prêteurs principaux ont déposé une requête pour revoir l'ordonnance
initiale, obtenir le paiement de leurs frais et débours encourus avant et après l'émission de l'ordonnance, et nommer
un nouveau mandataire administratif — Requête rejetée — Liste des critères prévus dans la Loi n'est ni obligatoire ni
exhaustive — Tribunal a conclu que les prêteurs principaux étaient susceptibles de subir les conséquences de la sûreté
accordée pour le financement intérimaire — Toutefois, le Tribunal a aussi conclu que le financement intérimaire et la sûreté
qui en découlait étaient nécessaires pour que les compagnies débitrices puissent poursuivre leurs affaires pendant qu'elles
se soumettaient à un processus de restructuration et amélioraient leur chance d'en arriver à un compromis acceptable —
Effets positifs du financement sur l'ensemble de l'entreprise des compagnies débitrices et leurs employés l'emportaient sur
les effets négatifs du processus subis par les prêteurs principaux — Par conséquent, il n'y avait aucune raison de modifier
l'ordonnance initiale.
Faillite et insolvabilité --- Loi sur les arrangements avec les créanciers des compagnies — Demande initiale —
Procédures assujetties à la suspension — Droits contractuels
Compagnies débitrices éprouvaient des difficultés financières et se sont mises sous la protection de la Loi sur les
arrangements avec les créanciers des compagnies — Ordonnance initiale prévoyait une sûreté pour le financement
intérimaire prenant rang devant les créanciers garantis, y compris les prêteurs principaux — Entre-temps, le mandataire
administratif s'est retiré et les prêteurs principaux n'ont pas été impliqués dans le processus de restructuration — Prêteurs
principaux ont prétendu, entre autres choses, qu'ils n'avaient pas été avertis de la demande initiale des compagnies
débitrices et que le financement intérimaire devrait être annulé — Prêteurs principaux ont déposé une requête pour revoir
l'ordonnance initiale, obtenir le paiement de leurs frais et débours encourus avant et après l'émission de l'ordonnance, et
nommer un nouveau mandataire administratif — Requête rejetée — Pendant l'audition, le Tribunal s'est demandé sur quelle
règle juridique se fondaient les prêteurs principaux pour demander le paiement des frais et débours mais n'en a trouvé
aucune pas plus qu'on ne lui en a suggéré une — Dans la mesure où l'ordonnance suspendait l'obligation des compagnies
débitrices d'acquitter le principal et l'intérêt dus en vertu du contrat de prêt, il s'ensuivait que l'obligation d'acquitter les
frais accessoires dus par celles-ci en vertu du même contrat était également suspendue — Par conséquent, la demande des
prêteurs principaux ne pouvait pas être accordée.
Faillite et insolvabilité --- Loi sur les arrangements avec les créanciers des compagnies — Demande initiale — Divers
Compagnies débitrices éprouvaient des difficultés financières et se sont mises sous la protection de la Loi sur les
arrangements avec les créanciers des compagnies — Ordonnance initiale prévoyait une sûreté pour le financement
intérimaire prenant rang devant les créanciers garantis, y compris les prêteurs principaux — Entre-temps, le mandataire
administratif s'est retiré et les prêteurs principaux n'ont pas été impliqués dans le processus de restructuration — Prêteurs
principaux ont prétendu, entre autres choses, qu'ils n'avaient pas été avertis de la demande initiale des compagnies débitrices
et que le financement intérimaire devrait être annulé — Prêteurs principaux ont déposé une requête pour revoir l'ordonnance
initiale, obtenir le paiement de leurs frais et débours encourus avant et après l'émission de l'ordonnance, et nommer un
nouveau mandataire administratif — Requête rejetée — Demande formulée par les prêteurs principaux en vue de nommer
un nouveau mandataire administratif ne pouvait pas être accordée à moins que toutes les parties concernées y consentent, ce
qui n'était pas le cas en l'espèce — Société qui a été suggérée par les prêteurs principaux à titre de mandataire administratif
potentiel n'était pas une institution de prêts et, en vertu du contrat de prêt, elle ne pouvait être nommée que si toutes les
parties concernées y consentaient de façon conforme.
Table of Authorities
Cases considered by Mongeon J.C.S.:
Boutiques San Francisco Incorporées, Re (2003), 2003 CarswellQue 13882 (C.S. Que.) — considered
Royal Oak Mines Inc., Re (1999), 1999 CarswellOnt 625, 6 C.B.R. (4th) 314, 96 O.T.C. 272 (Ont. Gen. Div.
[Commercial List]) — considered
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White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
Statutes considered:
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11 — considered
s. 11 et seq. — referred to
s. 11.01 [en. 2005, c. 47, s. 128] — considered
s. 11.02 [en. 2005, c. 47, s. 128] — considered
s. 11.2(1) [en. 2005, c. 47, s. 128] — considered
s. 11.2(4) [en. 2005, c. 47, s. 128] — considered
MOTION by majority lenders to revise initial order, obtain payment of their fees and disbursements incurred both before and
after issuance of initial order, and appoint new administrative agent.
Mongeon J.C.S.:
1
Dune Capital LP, Dune Capital International Ltd and WTA Dune Limited (collectively « Dune ») are lenders under that
certain Second Amended and Restated Second Term Loan Credit Agreement among White Birch Paper Holding company,
White Birch Paper Company (two of the Debtors herein) as borrowers, and several lenders from time to time parties thereto.
Credit Suisse Securities (USA) LLC is the Sole Lead Arranger, sole Bookrunner, Syndication Agent and Documentation Agent,
while Credit Suisse Cayman Islands Branch is the US collateral Agent and Administrative Agent. 1 Crédit Suisse Toronto
Branch (C.S. Toronto) is the Canadian Collateral Agent and Administrative Agent. This Second Lien Term Loan is dated April
8, 2005 and was amended and restated on January 27, 2006 and on May 2007.
2
This loan is for a total amount of US100 000 000,00$
3
Dune is a « Majority Lender » under the said Second Lien Term Loan, to the extent of US$61.5 million.
4
Dune is therefore an important secured creditor of the Debtors.
5
On February 24, 2010, I granted the Debtors' Motion for the Issuance of an Initial Order pursuant to Sections 11 and
following of the Companies' Creditors Arrangement Act (the « CCAA »).
6 The Initial Order provides for the usual terms and conditions, as well as Interim financing in the amount of US$140 million
together with the usual Interim Financing Charge, ranking immediately after the Administration Charge the D&O Charge, but
ahead of all other mortgages, hypothecs and other secured debts of the Debtors, including any secured debts under the Second
Lien Term Loan.
7
Dune's first contention is that its position as a secured lender of US$61.5 million is most definitely affected by the Initial
Order and Interim Financing Charge.
8
Dune alleges that it was not notified of the Originating Motion and claims that the Debtors did not respect both the letter
and spirit of section 11.2(1) CCAA which reads as follows:
11.2 (1) Interim financing - On application by a debtor company and on notice to the secured creditors who are
likely to be affected by the security or charge, a court may make an order declaring that all or part of the company's
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White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
property is subject to a security or charge - in an amount that the court considers appropriate - in favour of a person
specified in the order who agrees to lend to the company an amount approved by the court as being required by
the company, having regard to its cash-flow statement. The security or charge may not secure an obligation that
exists before the order is made.
(emphasis added)
9
This is a serious allegation. The whole substance of the CCAA is based upon the principle of having and maintaining
a « level playing field' among the various stakeholders involved in a restructuring process, especially when the restructuring
will seriously affect the rights of lenders, suppliers and other creditors of a company seeking the protection of the CCAA. As
a result, Dune takes the position that the Interim Financing Agreement should be rescinded or, alternatively limited to US$115
million. Conclusions [D], [E], [F] and [G] of its Amended Motion dated march 18, 2010 read as follows:
...
[D] RESCIND (1) the interim financing agreement provided in the Initial Order, (ii) paragraphs 28 to 36 of
the Initial Order and (iii) all references to the Interim Financing, DIP, Interim Financing Documents, Interim
Lenders Expenses and Interim Financing Charge in the Initial Order;
ALTERNATIVELY, but without prejudice to the foregoing:
AMEND para 28 of the Initial Order as follows:
ORDERS that, notwithstanding any other provision of this Order but subject to paragraph 38, the Petitioners
and the Partnership be and are hereby authorized to borrow from the interim Lenders such amounts from time
to time as the Petitioners and Partnerships may consider necessary or desirable, up to a maximum combined
principal amount of USD$[ . . . ]115 million, on the terms and conditions set forth in the Interim Financing
Credit Agreement, attached hereto in draft form as Exhibit P-3 (subject to such amendments and modifications
as the parties may agree with, provided such amendments or modifications are approved by the Monitor and do
not conflict with the provisions of this Order) and in the Interim Financing Documents (as defined hereinafter),
to fund firstly, full repayment of all amounts outstanding under the Revolving ABL Financing and thereafter,
the ongoing expenditures of the Petitioners and Partnerships and to pay such other amounts as are permitted
by the terms of this Order, the Interim Financing Credit Agreement and the Interim Financing Documents
(as defined hereinafter).
[E] ORDER a further hearing on or before April 23, 2010 as to the appropriateness to authorize further
credit on the Interim Financing;
[F] REDUCE the Interim Financing Charge to the aggregate amount of $115 million and AMEND
paragraph 32 of the Initial Order accordingly;
[G] ORDER the payment of the interests under the Interim Financing Agreement on the same basis than
the First Lien Agreement;
10
Dune seeks this conclusion not only because it allegedly did not get proper prior notice and was deprived from its right
to make representations prior to the issuance of the Initial Order and DIP Loan but also because, over the last several months,
it has allegedly been denied access to important information which, as a result, has allegedly deprived it from the possibility
of entering into forbearance and/or waiver agreements with the Debtors, with respect to the latter's obligations. Furthermore,
Dune complains that throughout the period of September 2009 until February 2010, the Second Lien Lenders have been left
out of restructuring discussions between the First Lien Lenders and the Debtors to a point where the proposed restructuring
will be detrimental to Dune's position. In other words, Dune was not given the opportunity to adequately protect its position
in the current process.
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White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
11
For a better understanding of Dune's position and to avoid any risk of misinterpreting its representation of the facts, I
reproduce below the most important excerpts of Dune's Amended Motion:
...
19. On September 22, 2009, for the first time, WB requested a comprehensive forbearance of its obligations
to pay interest due on September, 30, 2009 under the Second Lien Agreement. WB also requested that such
forbearance be executed by no later than September 29, 2009.
20. On September 25, 2009, the Majority Lenders (i.e. Dune) called CS Toronto (i.e. Crédit Suisse Toronto), in
its capacity as Administrative Agent under the Second Lien Agreement, to obtain a copy of the Register of the
lenders, as defined at Section 10.5(d) of the Second Lien Agreement (the "Register"), in order to organize the
Second Lien Agreement lenders in connection with the Debtors' request for a forbearance. CS Toronto then
requested a written request prior to providing any information, including the Register.
21. The Majority Lenders' US counsel then sent to CS Toronto a written request to obtain the Register, the
whole as appears from a copy of a letter dated September 25, 2009 communicated in support hereof as Exhibit
R-1.
22. As appears from Exhibit R-1, the Majority Lenders' US counsel also emphasized, given the deadline of
September 29, 2009 imposed by the Debtors to conclude a forbearance, that "[a]ny delay on the part of the
Administrative Agent in producing the Register could seriously prejudice the Second Lien Lenders' ability to
consider the Borrower's proposal and further compromise the Second Lien Lenders' substantial rights under the
Agreement".
23. On September 29, 2009, the day of the deadline imposed by the Debtors to execute the forbearance, the
Majority Lenders' US counsel wrote to WB, WB Holding and CS Toronto's US counsel to advise them that
despite several requests to obtain the Register, it never obtained it, the whole as appears from a copy of a letter
dated September 29, 2009 communicated in support hereof as Exhibit R-2.
24. In Exhibit R-2, the Majority Lenders' US counsel also noted the following :
As a result of the Agent's refusal to comply with this simple request, the Second Lien Lenders have
been deprived of any meaningful opportunity to consider the Borrower's last-minute request for a
comprehensive waiver/forbearance of its interest payment obligations. In contrast, we understand that the
Agent has been in substantial contact with the first Lien Lenders for weeks (including an organized lender
call last week) regarding the Borrower's proposed restructuring - a consideration yet to be extended to
the Second Lien Lenders - and that the First Lien Lenders have already retained counsel and financial
advisors in connection therewith. Given that the First Lien Lenders have hired both counsel and financial
advisors, the Second Lien Lenders anticipate having to do so as well. While the First Lien Lenders have
been actively involved in discussions concerning the proposed restructuring, the Second Lien Lenders
have been deliberately excluded from any such discussions and denied even the most fundamental
information necessary for the Second Lien Lenders to confer with one another. Engaging with the First
Lien Lenders while stonewalling the Second Lien Lenders is not only improper but wholly inconsistent
with a party acting in good faith to exact considerable concessions from the Second Lien Lenders in an
effort to avoid an Event of Default.
We hereby again request a copy of the Register immediately. Any further delay on the part of the Borrower
or Agent may further and substantially prejudice the Second Lien Lenders' substantial rights under the
Agreement. Any and all rights the Second Lien Lenders may have in connection with the Borrower's or
Agent's actions or inactions to date or in the future are hereby expressly reserved.
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White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
[our emphasis]
25. On September 30, 2009, the Majority Lenders' US counsel wrote to CS Toronto's US counsel the following :
On our call yesterday afternoon, we learned for the first time that your client, Credit Suisse (i.e., the
Second Lien Lenders' Agent in connection with the above-referenced Agreement), has withheld from
the Second Lien Lenders potentially material information regarding the Borrower or the Borrower's
proposed restructuring discussions with the First Lien Lenders. During our call, we requested all material
information provided to the First Lien Lenders that is relevant to the Borrower's current financial
condition and proposed restructuring. In response, you proposed to put us in touch with Borrower's
counsel so that we can seek such information directly from them. While we appreciate your assistance
(albeit belatedly) in putting us in touch with counsel for the Borrower, we remind you that your client
remains the Agent for the Second Lien Lenders. Accordingly, the Second Lien Lenders reiterate their
demand that the Agent turn over all relevant information relating to the Borrower's current financial
condition and proposed restructuring. We further request that the Agent provide us with a detailed
description of the actions it has taken - if any - in the last 90 days to protect the rights of the Second
Lien Lenders and provide us with proposals for how to maximize Second Lien Lenders' recovery going
forward.
[our emphasis]
the whole as appears from a copy of a letter dated September 30, 2009 communicated in support hereof
as Exhibit R-3.
26. On the same day, but after the Majority Lenders' US counsel sent Exhibit R-3, CS Toronto and
CS Cayman advised the Second Lien Agreement lenders that they immediately respectively resigned
as Administrative Agent, Canadian Collateral Agent and US Collateral Agent under the Second Lien
Agreement, the whole as appears from a copy of a letter dated September 30, 2009 communicated
in support hereof as Exhibit R-4.
27. In Exhibit R-4, CS Toronto and CS Cayman also specified that they had already advised WB of
their resignation.
28. However, CS Toronto and CS Cayman did not resign as Administrative Agent, Canadian
Collateral Agent and US Collateral Agent under the First Lien Agreement.
29. On October 1, 2009, CS Toronto and CS Cayman's US counsel advised the Majority Lenders'
US counsel that its clients resigned as Administrative Agent, Canadian Collateral Agent and US
Collateral Agent under the Second Lien Agreement, the whole as appears from a copy of a letter
dated October 1, 2009 communicated in support hereof as Exhibit R-5.
30. On the same day, the Majority Lenders' US counsel advised CS Toronto and CS Cayman's counsel
that they could not resign immediately as Administrative Agent, Canadian Collateral Agent and US
Collateral Agent given that the Second Lien Agreement provides, at Section 9.9, that the agent must
give a "30 days' notice to the Lenders and the Borrower" (our emphasis) of its resignation, the whole
as appears from a copy of a letter dated October 1, 2009 communicated in support hereof as Exhibit
R-6.
31. On October 7, 2009, the Majority Lenders' US counsel with the support of two other lenders
under the Second Lien Agreement, namely Caspian Capital Partners, L.P. and Caspian Select Credit
Master Fund, Ltd., sent to CS USA and CS Toronto a notice of default dealing with WB's failure to
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White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
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make the interest payment due on September 30, 2009 under the Second Lien Agreement, the whole
as appears from a copy of a letter dated October 7, 2009 communicated in support hereof as Exhibit
R-7.
32. On October 8, 2009, CS Toronto notified WB and WB Holding of (i) its resignation as
Administrative Agent and Canadian Collateral Agent under the Second Lien Agreement and (ii) the
resignation of CS Cayman as US Collateral Agent under the Second Lien Agreement as follows:
As you are aware, we have notified you pursuant to that certain letter dated as of September 30,
2009 of our resignation as Administrative Agent and as Canadian Collateral Agent under the
Second Lien Credit Agreement, and of the resignation of Credit Suisse, Cayman Islands Branch,
as US Collateral Agent under the Second Lien Credit Agreement, which resignations will be
effective on October 30, 2009.
[our emphasis]
the whole as appears from a copy of a letter dated October 8, 2009 communicated in support hereof
as Exhibit R-8.
33. Afterwards the Majority Lenders, through their US counsel, for some time tried to conclude a
forbearance agreement with the Debtors. However, such agreement never materialized given that the Debtors
systematically refused to assume (i) the fees of Wells as Administrative Agent under the Second Lien Agreement
and (ii) the Majority Lenders' legal fees. In a nutshell, the Debtors wanted the Majority Lenders to agree
to forbear certain defaults, but were not ready to grant any consideration whatsoever to the Second Lien
Agreement lenders.
34. During the last week of December 2009, the Majority Lenders reached out to CS Toronto on two occasions
via phone so as to confirm the contact information for audit confirmations. The Majority Lenders did not get
any response from CS Toronto.
35. On January 5, 2010, the Majority Lenders spoke with a representative of CS Toronto, namely Edith Chan,
who informed them that CS Toronto was no longer the Administrative Agent under the Second Lien Agreement
and that it could not comment or help out with any of the Majority Lenders' requests.
36. On January 26, 2010, the Majority Lenders contacted a representative from WB, namely Ed Sherrick, to
confirm their year-end position, but were told that he could not help them.
37. On February 24, 2010, the Debtors served and presented their Petition for an Initial Order. As appears from
the Notice of Presentation to said petition (the "Notice of Presentation"), neither the Majority Lenders nor any
lenders under the Second Lien Agreement were served. However, as appears from, inter alia, paras. 23 and 32
herein and Exhibits R-2 and R-8, the Debtors clearly knew (i) that the Majority Lenders were represented by
counsel and (ii) that CS Toronto and CS Cayman had resigned as Administrative Agent, Canadian Collateral
Agent and US Collateral Agent under the Second Lien Agreement as of October 30, 2009.
38. Although Credit Suisse, CS USA and CS Toronto received the Notice of Presentation, they never, verbally
or otherwise, notified the Majority Lenders of the presentation of the Petition for an Initial Order.
39. On February 24, 2010, this Court issued the Initial Order which provided for an Interim Financing of up to
a maximum combined principal amount of USD$140 million (para. 28 of the Initial Order). The Administrative
Agent and Canadian Collateral Agent under the Interim Financing Agreement is also CS Toronto as mentioned
above, the whole as appears from a copy of said Interim Financing Credit Agreement communicated in support
hereof as Exhibit R-9.
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40. After midday on February 24, 2010, the Majority Lenders learned, through the newswires, that the Debtors
filed their Petition for an Initial Order. The Majority Lenders learned the Initial Order had been entered when
it was posted by the proposed Monitor several hours later.
41. On March 4, 2010, the Majority Lenders' Canadian counsel wrote to the Debtors' Canadian counsel to
advise it that the Majority Lenders never received proper notice of the Petition for an Initial Order, the whole
as appears from a copy of a letter dated March 4, 2010 communicated in support hereof as Exhibit R-10.
42. In Exhibit R-10, the Majority Lenders' Canadian counsel also requested, inter alia, the following:
(i) a copy of the Register or other confirmation of each of the Lenders' loan position as of year-end 2009;
(ii) an unconditional undertaking from the Debtors to pay for the legal fees that the Majority Lenders
will incur to intervene in the CCAA Proceedings and the relevant proceedings in the United States, as
required to protect their position, the whole as provided for, inter alia, at Section 10.4(b) of the Second
Lien Agreement; and
(iii) the acceptance by the Debtors to the appointment of Wells or any of its affiliates, branches or
subsidiaries as Administrative Agent, Canadian Collateral Agent and US Collateral Agent under the
Second Lien Agreement, as well as an undertaking that the Debtors will do everything that is required
to render effective such appointment.
43. On March 5, 2010, the Debtors' Canadian counsel answered to the Majority Lenders' Canadian counsel.
In a nutshell, the position of the Debtors' Canadian counsel was that:
(i) the Majority Lenders received proper notice given that CS Toronto, the Administrative Agent under
the Second Lien Agreement, received notice, despite CS Toronto's resignation, given that the latter would
still act as a de facto agent;
(ii) the Majority Lenders did not need to obtain notice of the Interim Financing given that only the "secured
creditors who are likely to be affected by the security" need notification and the Majority Lenders are not
such creditors;
(iii) it would not disclose the Register or other confirmation of each of the lenders' loan position and that
the Majority Lenders should seek such information from other parties;
(iv) the Debtors will not pay for the legal fees that the Majority Lenders will incur to intervene in the
CCAA Proceedings and the relevant proceedings in the United States; and
(v) the Debtors would not contest the appointment of Wells as Administrative Agent, Canadian Collateral
Agent and US Collateral Agent, but will not pay the fees and costs of Wells;
the whole as appears from a copy of a letter dated March 5, 2010 communicated in support hereof as Exhibit
R-11.
44. On March 11, the Majority Lenders' Canadian counsel wrote to the Debtors' Canadian counsel to respond
to the latter's letter, the whole as appears from a copy of a letter dated March 11, 2010 communicated in
support hereof as Exhibit R-12. In said letter, the Majority Lenders expressed their disagreement with the
position expressed by the Debtors in the March 5 letter. In addition, the Majority Lenders advised the Debtors
of the conclusion they would be seeking in the present Motion.
12
In summary, the foregoing raises the following issues:
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• the refusal to furnish copy of the Register to Dune;
• the consequences of not including Dune in the restructuring discussions in September/October 2009;
• the consequences of the resignation of CS Toronto as Canadian Administrative Agent and its replacement by Wells
Fargo Inc;
• the payment of fees, disbursements and other charges including fees of legal advisors for both Dune and Wells Fargo Inc.;
• the lack of Notice of presentation of the Motion of Issuance of the Initial Order;
• Access to certain financial information.
13
These facts give rise to the following additional conclusions:
[H] ORDER the Debtors to pay for the legal fees of the Majority Lenders, both before and after the issuance
of the Initial Order, to intervene in the CCAA Proceedings and the relevant proceedings in the United States,
as is required to protect their position, the whole as provided for, inter alia, at Section 10.4(b) of the Second
Lien Agreement;
[I] APPOINT Wells or any sub-agent of its choosing as Administrative Agent, Canadian Collateral Agent and
US collateral agent under the Second Lien Agreement;
[J] ORDER the Debtors to pay all the fees and disbursements, both before and after the issuance of the Initial
Order, including legal fees, of Wells as Administrative Agent, Canadian Collateral Agent and US Collateral
Agent under the Second Lien Agreement as provided for in said agreement;
[K] AMEND para. 51 of the Initial Order as follows:
DECLARE that, as security for the reasonable fees, charges and disbursements incurred both before and after
the making of this Order in respect of these proceedings, the Plan and the Restructuring, the Petitioners' and
Partnerships' legal and financial advisors, the Monitor, [ . . . ]the Monitor's legal counsel, Wells Fargo, the
Majority Lenders' (namely Dune Capital LP, Dune Capital International Ltd. and WTA Dune Limited) legal
counsel and Wells Fargo's legal counsel be entitled to the benefit of and are hereby granted a hypothec on,
mortgage of, lien on, and security interest in the Property to the extent of the aggregate amount of $3,000,000
(the "Administration Charge") having the priority established by paragraphs 52 and 53 hereof.
[L] ORDER the Debtors to provide the following financial information by no later than 5:00 p.m. on March
23, 2010
(i) the Debtors' financial statements for the fourth quarter of 2009;
(ii) the Debtors' annual financial statements for the 2009 fiscal year;
(iii) financial statements for each of WB and WB Holding subsidiaries (quarterly and annual for the past
5 yrs);
(iv) the Debtors' company budget for 2010;
(v) all of the sources and uses of the Interim Financing;
(vi) fees paid to-date to advisors and lawyers, broken down between the Debtors, [ . . . ] First Lien
Agreement lenders, agents, Interim Lenders and others;
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(vii) unpaid fees, if any, to advisors and lawyers, broken down between the Debtors and First Lien
Agreement lenders;
(viii) weekly report, on an ongoing basis, of fees paid or to be paid to advisors and lawyers, broken down
between the Debtors and First Lien Agreement lenders;
(ix) the Debtors' most current working capital balances;
(x) weekly update of the Debtors' 13-week Cash Flow forecasts;
(xi) an accounting of all of the management fees paid by the Debtors to Brant Paper, Inc. for the last five
years and weekly updates, on an ongoing basis, of same; [...]
(xii) the quarterly and annual financial statements for SP Newsprint Co. for the last five (5) years;
(xiii) all information provided to Interim Lenders, as and when such information is provided, whether
verbally, in writing, by electronic access, by Intralink or otherwise; and
(xiv) all drawing notices by the Debtors under the Interim Financing Ageement.
[M] THE WHOLE with costs against any contesting party.
14
I shall deal, firstly with Dune's request to rescind and/or amend the DIP Financing and DIP Financing Charge.
15
Confronted with Dune's allegation that it was not advised of, nor served with the Motion, the Debtors strongly object.
16
The Debtors take the position that Crédit Suisse Toronto, as Canadian Administrative Agent, continues to act as « de
facto » Agent for the Second Lien Lenders until they are replaced as per the terms of the Second Lien Loan Agreement (CS-1).
As a result, by effecting service upon C.S. Toronto, service of the Originating Motion was completed in accordance with the
Law. The Debtors further add that the name of Crédit Suisse Toronto still appears as the holder of the security resulting from
the publication of the Second Lien Term Loan Agreement. Consequently, inasmuch as the name of the holder of the security
remains unchanged at the Registre des droits personnels et réels mobiliers (see Exhibit I), service upon Crédit Suisse Toronto
remains valid.
17
The Debtors further add that in any event, neither Dune nor any other Second Lien Lender had to be served, because
the DIP loan and DIP charge were not likely to affect their security by reason of the other prior ranking charges affecting the
fixed assets upon which Dune's security is granted.
18 As for C.S. Toronto, although this entity was represented by counsel at both hearings (February 24 and March 18, 2010)
before me, it had no explanation to offer either on the question of service of the Originating Motion, or on the question of what
it did (or did not do) with the notice, once it was received. What seems to be clear, however, is that C.S. Toronto did not see
appropriate to forward the notice of Originating Motion to its former principals, the Second Lien Lenders in general and Dune
in particular. Such behaviour is surprising, given the serious consequences.
19 Dune submits that the DIP should not have been granted without proper notice and representations on its part. Dune adds
that if, nonetheless, the granting of a DIP was in order, it should have been limited to an amount necessary to « keep the lights
on », as stated by Blair J. in Re: Royal Oak Mines Inc. (1999), 6 C.B.R. (4th) 314 (Ont. Gen. Div. [Commercial List]) and by
Gascon J. in Boutiques San Francisco Incorporées, Re (C.S. Que.).
20
However, Dune does not raise any additional argument to rescind the DIP, save the fact that it did not get notice. Dune
adds, however, that the Debtors' argument suggesting that notice was in any event not called for because of the fact that Dune's
security had no value and, consequently, that Dune's rights were unaffected by the DIP, is ill-founded.
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21
Dune further argues that it is currently not in a position to assess the appropriateness of the DIP nor is it in a position
to determine the value of its security without the financial information which, as at March 18, 2010 was still unavailable to it.
During the hearing of Dune's Motion on March 18, I was informed that Dune had reached an agreement in principle with the
Debtors with respect to the financial information to be furnished. This agreement will be ratified once it is reduced to writing
and forwarded to me.
22
It appears, therefore, that Dune does not wish to see a DIP charge of US$140 million rank ahead of its own security but
having been deprived of financial information, it cannot really assess the Debtors' financial position. In other words, Dune is
still in the process of analysing the financial situation of the Debtors.
23
For the foregoing facts, I draw the following conclusions:
a) the Debtors did not give notice to Dune, a « secured creditor likely to be affected by the security or charge «
contemplated » in section 11.2(1) CCAA.
b) Notice to Crédit Suisse Toronto was insufficient within the context of this particular matter, in that the Debtors
knew that the latter had resigned and, by virtue of section 9.9 2 of the Second Lien Term Loan Agreement, one of
the Lenders (if appointed by Dune as Successor Administrating Agent) or all the Lenders were successor(s) to C.S.
Toronto.
c) Crédit Suisse Toronto, although it had resigned its function as Administrative Agent, should, if not legally obliged
to do so but at least as a basic courtesy, have forwarded the said Notice to the lenders instead of ignoring it. In so
doing, CS Toronto should have realized that it was putting its former principals in a delicate situation.
d) Dune did not take any steps to ensure that the Second Lien Lenders would be adequately represented, following the
resignation of Crédit Suisse Toronto. Dune had an obligation to cause a successor agent to be appointed among the
Second Lien Lenders and if it was unable to find one willing to accept the function, it should have appointed itself.
Dune's inaction most certainly did not help establishing a proper channel of communications between the Debtors and
the Second Lien Lenders. Moreover, by insisting upon an undertaking of the Debtors to pay its fees and disbursements
as well as those of Wells before any successor agent was appointed, given the precarious financial position of the
Debtors already in default of paying interest under the First and Second Lien Loans, was a sure way to cause severe
disruptions in communications.
24
Finally, I cannot avoid mentioning that both counsel for the Debtors and counsel for the DIP Lender and CS Toronto
should have informed me of the problem at the hearing of February 24. Instead, they chose to ask the Court for a declaration
that proper and sufficient notice had been given to all interested stakeholders although both knew that service had been effected
upon the Second Lien Lenders through an Agent which had resigned and without ensuring that such agent was taking or,
alternatively, had not taken steps to forward the notice to the said Lenders. As for the argument that there was in any event no
need to serve notice to the Second Lien Lenders because they were supposedly not affected by the DIP loan and charge, this
is rather specious in the absence of a complete and thorough evaluation of all the assets and liabilities of the Debtors. To rely
strictly upon the calculation of fixed assets calculated on the basis of cost less accumulated depreciation is, to say the least, not
the most sophisticated way to determine a value of said assets. In other words, I am far from being convinced that the rights of
the Second Lien Lenders are not likely to be affected by the DIP Loan.
25
Once, as I am convinced, it appears evident that the Second Lien Lenders, in general and Dune in particular, have not
been notified as they had a right to be, what should be done to try to correct the situation?
26
Dune argues that it should be allowed to attend a new hearing where the whole issue of the opportunity of granting a
DIP loan and corresponding super-priority should be debated « de novo ». Given the above-noted facts, I agree with Dune's
submission.
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27
In order to ensure the protection of the rights of all concerned, this debate took place on March 18, 2010. The Monitor
was examined and cross-examined on the contents of his two Reports 3 . A representative of the Debtors, Mr Jay Epstein also
testified and was cross-examined. Finally, a representative of Dune, Mr. Andrew M. Cohen was cross-examined on the contents
of his Affidavit of March 12, 2010.
28 I am now in a position to re-consider the whole question of whether a DIP Loan and corresponding super-priority should
be varied, modified, rescinded or maintained on the same basis as it was authorized on February 24, 2010.
29
Firstly, the CCAA now clearly identifies the principal criteria to be considered by this Court when a DIP Loan and
Corresponding charge are required. Section 11.2(4) CCAA reads as follows:
11.2(4) Factors to be considered - In deciding whether to make an order, the court is to consider, among other things,
a) the period during which the company is expected to be subject to proceedings under this Act;
b) how the company's business and financial affairs are to be managed during the proceedings;
c) whether the company's management has the confidence of its major creditors,
d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect
of the company;
e) the nature and value of the company's property;
f) whether any creditor would be materially prejudiced as a result of the security or charge; and
g) the monitor's report referred to in paragraph 23(1)(b), if any.
30 After hearing the Monitor and the representative of the Debtors, I am satisfied that a DIP Loan and corresponding charge
are required to ensure that the business enterprise of the Debtors will continue to operate as a going concern while it undergoes
restructuring.
31
I am also satisfied that the Debtors are likely to be subject to proceedings under the CCAA for several months and the
Court's duty is to ensure that the Debtors will enjoy enough cash flow to go through with the restructuring.
32 I also believe that the DIP Loan will not only enhance the prospects of a viable compromise but I also believe that without
this loan, the Debtors will not be able to survive.
33 Even if certain creditors will be materially affected by the DIP loan, -and that may include the Petitioners herein -, I have
to look at the broader picture as it is presented to me by the Monitor, and conclude that the compromise which Dune may have
to accept is outweighed by the positive effects of the DIP Loan on the total business enterprise of the Debtors.
34
The only discordant note is that of the Petitioners herein, who suggest that they might do better with the recuperation
of their investment if the Debtors go bankrupt.
35 The above cited criteria appear to have been taken into account by the Monitor in its first two reports. It should be added
that the Court need not consider all of the said criteria nor is it compelled to read an affirmative conclusion on all seven criteria.
This list is neither mandatory nor limitative. One thing is sure: the Monitor has adequately demonstrated that the Debtors need
the US$140 million in Interim Financing and without this money, there is a strong likelyhood that the Debtors would not survive
for long, jeopardizing the livelyhood of more than a thousand employees.
36
In addition, although the amount of US$140 million is mentioned in terms of the total DIP Loan, a substantial portion,
thereof, does not seriously affect the financial position of Dune.
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37
The Monitor has clearly outlined the projected use and allocation of the US$140 million in its Report dated March 17,
4
2000 :
20. The process used to seek out a lender for the Interim Financing, the negotiations thereof, the financing
needs and the significant terms of the credit negotiated with the Black Diamond Group are all described in
the report of the Monitor, dated February 23, 2010. The contents of this report, as regards these issues, are
still relevant.
21. As indicated earlier in this Report, the Interim Financing was authorized by the Initial Order, and by a
provisional order made in the U.S. Court (Appendix B). The credit agreement and related guarantees, security
and pledge agreements necessary to document the Interim Financing were executed on March 1, 2010.
22. Contemporaneously with the execution of these documents, WB Group received a first draw against
the delayed draw term loan, of US$86.5 million. The proceeds from this first draw were used to repay the
indebtedness to General Electric Capital Corporation (US$51.2 million), to pay interest accrued on the GE
indebtedness (US$330,000) and to pay the fees provided for in the agreement that were payable at closing 5
(US$7.1 million). The balance of the funds, or US$27.8 million, was retained to enhance the cash on hand in
anticipation of having to fund negative cash flow, as provided in the WB Group's cash flow projections.
23. An additional draw of US$6.5 million was made on March 8, 2010, and these funds were retained to enhance
the cash on hand in anticipation of having to fund negative cash flow. The two draws made to date represent
total borrowings under the Interim Financing of US$93 million.
38
The Monitor further adds the following to justify the balance of unused funds (as at March 18, 2010):
27. In view of the favourable variance in results as compared with the projections prepared by WB Group
concurrently with the inception of the restructuring process (Appendix D), and the fact that to date, two draws
were made, a portion of which was used to enhance the cash position in anticipation of having to fund negative
cash flow, WB Group's cash on hand currently stands at approximately US$61.4 million, as at March 12, 2010.
28. We consider that the amount of cash reserves is reasonable in the circumstances, for the following reasons:
28.1 As indicated in paragraph Erreur ! Source du renvoi introuvable. above, we consider that the
favourable variance between the projected and actual cash flow, to date, is attributable in large part to
timing differences. The reversal of these timing differences, when they occur, could cause a substantial
drawdown of US$39.5 million in the cash reserves.
28.2 The activities of WB Group are subject to large variations in the cash balances, from one day to the
next, due to the size of the transactions with some of the customers and suppliers. For example, over a two
day period in the week ended March 5, 2010, the cash position decreased by approximately $13.5 million.
28.3 There are restrictions in the Interim Financing credit agreement, regarding the amounts that can be
borrowed, and the advance notice period to effect a draw. Under the Interim Financing credit agreement,
WB Group must notify the lender 10 days in advance, when it intends to draw funds under the Interim
Financing credit facility. In view of the long delay and the need to have cash immediately available
to pay for goods and services or to provide deposits to suppliers, WB Group must retain a large cash
reserve, to enable it to continue making payments if there is a temporary slowdown in cash receipts from
customers. Based on WB Group's cash flow projections (Appendix D), 10 days' worth of disbursements
could represent between US$15 million and US$43 million, and average US$28 million.
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28.4 The Interim Financing credit facility is structured as a term loan, while the funding needs of the WB Group
are periodic or temporary. Since the funds cannot be drawn again if there is a repayment under the term loan,
the excess funds have to be retained as a cash reserve, if the excess fund situation is expected to be temporary.
In the present case, the majority of the funds were drawn very early on in the process, before management of
WB Group could ascertain that favourable variances would occur as compared with the projections. This led to
the excess funds situation, and the excess funds cannot be returned as management of WB Group expects that
the excess funds situation is only temporary.
29. Management provided us with an updated cash flow projection for WB Group, for the 13 weeks ending June
4, 2010, and these cash flow projections are attached to this report as Appendix F 6 . The opening cash position,
on these cash flow projections, represents the actual cash on hand as of March 5, 2010, and the projection for
the week of March 6-12, 2010 reflects the actual draw of $6.5 million against the credit facility. The remainder
of the amounts presented for the week of March 12, 2010 represent a projection, as the projections have not
yet been updated to reflect the actual results for the week ended March 12, 2010. The actual results for that
week will still present a favourable variance, since the projection reflects cash on hand of US$53.5 million,
while the actual cash on hand was US$61.4 million. As indicated earlier herein, we consider these variances
are, for the most part, a timing difference.
30. These projections (Appendix F) suggest that WB Group will need to make further draws against the credit
facility in the near future, in order to maintain cash reserves sufficient to support the on-going operations.
The projections (Appendix F) suggest that notwithstanding the fact that WB Group currently has a large
cash balance, additional funds will be required as early as late March 2010, and that the term loan will be
fully drawn (i.e. borrowings of $122 million, taking into consideration the reserves and carved out amounts)
by the end of April 2010. The projections (Appendix F) indicate that based on the expected receipts and
disbursements activity, the cash reserves of WB Group would be completely depleted at the end of April 2010
without additional drawings under the Interim Financing credit facility and that even with the additional
borrowings, the cash reserves will decrease to US$18.5 million by June 4, 2010.
31. The projections (Appendix F) suggest that during the projection period, the gross carrying value of accounts
receivable and inventories is expected to vary from US$155.9 million (as at March 5, 2010) to US$169.2 million
as at June 4, 2010. As such, the projections (Appendix F) suggest that some of the cash flow is necessary to
finance an increase in accounts receivable and inventories, of approximately US$13.3 million.
32. In view of the above comments, the Monitor still believes that the Interim Financing is warranted and
required, in an amount and on terms consistent with that described in the Monitor's report dated February
23, 2010.
39 In contrast, Dune is not really concerned with the viability of the Debtors. It has only one interest: its own, as it is reflected
in a comment outlined by the Monitor at paragraph 8 of his Report of March 17, 2010:
8. On March 15, 2010, a statement was filed by the Dune Group in the proceedings under the Code in respect of
Bear Island, in view of the hearing scheduled to take place on March 22, 2010. The statement filed in the context
of the proceedings in the U.S. Court in this respect is attached as Appendix C. In the said statement, at paragraph
11 thereof, the Dune Group states that:
The Majority Second Lien Lenders do not oppose the Debtor's request to use cash collateral or obtain the DIP
Loan. Moreover, the Majority Second Lien Lenders do not object to this Court's grant of adequate protection
to the First Lien Lenders. The Majority Second Lien Lenders simply demand additional adequate protection
for their own interests.
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In essence, the statement seeks the disclosure of additional information, an increased level of "adequate protection"
and/or the payment of fees and expenses incurred and to be incurred by the lenders under the Second Term Loan,
and in consequence seeking modifications to the interim financing credit agreement.
40
On balance and having reconsidered the whole question of the DIP financing and DIP Charge as requested by Dune, I
conclude that there is no reason to vary or change the Initial Order of February 24, 2010 on this issue.
41
Accordingly, conclusions [D], [E], [F] and [G] of Dune's Motion must be dismissed.
42
Dune also seeks the payment of its professional fees, costs and expenses during the Stay period.
43
During the hearing of March 18, 2010, I questioned the legal basis upon which Dune relies to seek these reliefs. In my
opinion and with respect for the contrary view, I must say that I found none, nor was I presented with one.
44 Dune argues that theses fees, costs and expenses are due under the terms and conditions of the Second Lien Term Loan.
That may be so but inasmuch as the Stay Order of February 24, 2010, suspends the Debtors' obligation to pay principal and
interest under the said Loan Agreement, it follows that incidental additional costs due by the Debtors under the same Agreement
are also suspended.
45
Otherwise, there would be little or no interest in seeking and obtaining protection under the CCAA. 7
46
Sections 11, 11.01 and 11.02 CCAA are quite clear. The only exception to this general rule is the protection of rights
of suppliers under Section 11.02 when payment for goods and services provided after the Stay Order, or requiring the further
advance of money or credit. Clearly, the fees, costs and expenses of Dune do not fall within this exception. Dune does not ask
for payment for goods and/or services sold, delivered or rendered after the Initial Order. It is asking for the payment of a prefiling obligation, i.e. to pay for certain expenses incurred or to be incurred by Dune for its own benefit and advantage, including
but without limitation, the costs of acting against the interests of the Debtors and for the sole interests of Dune.
47
These requests of Dune simply cannot be granted.
48 In addition, Dune is seeking an Order appointing Wells Fargo (« Wells ») as Administrative Agent, Canadian Collateral
Agent and US Collateral Agent under the Second Lien Loan Agreement, together with an Order for the payment of the
professional fees costs and expenses of Wells.
49
This demand cannot be granted unless all of the parties thereto consent.
50
At this point, the consent of all concerned is not available. Some of the Second Lien Lenders are not before me. In
addition, the Debtors, although they have no objection to the appointment of Wells, are not prepared to consent to all of the
conditions of said proposed appointment, namely the payment of costs fees and expenses of Wells. Furthermore, the Second
Lien Loan Agreement contains specific provisions governing the appointment of a successor to Crédit Suisse Toronto, which
provisions must, and shall, govern such appointment in the absence of proper consent. These provisions read as follows (page
106 of Exhibit CS-1):
9.9 Successor Agents. (a) The Administrative Agent, the US Collateral Agent and the Canadian Collateral
Agent may resign as Administrative Agent, US collateral Agent or Canadian collateral Agent, respectively,
upon 30 days' notice to the Lenders and the Borrower. If the Administrative Agent, US Collateral Agent or
Canadian Collateral Agent shall resign as Administrative Agent, US Collateral Agent or Canadian Collateral
Agent, as applicable, under this Agreement and the other Loan Documents, then the Majority Lenders shall
appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an
Event of Default shall have occurred and be continuing) be subject to approval by the Borrower (which
approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to
the rights, powers and duties of the Administrative Agent, the US Collateral Agent or the Canadian collateral
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Agent, as applicable, and the term « Administrative Agent », « US Collateral Agent » or « Canadian Collateral
Agent », as applicable, shall mean such successor agent effective upon such appointment and approval, and the
former Agent's rights powers and duties as Administrative Agent, US Collateral Agent or Canadian collateral
Agent, as applicable, shall be terminated, without any other or further act or deed on the part of such former
Agent or any of the parties to this Agreement or nay holders of the Loans. If no successor agent has accepted
appointment as Administrative Agent, US a Agent or Canadian Collateral Agent, as applicable, by the date that
is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless
thereupon become effective, and the Lenders shall assume and perform all of the duties of the Administrative
Agent, US collateral Agent or Canadian collateral Agent, as applicable, hereunder until such time, if any, as
the Majority Lenders appoint a successor agent as provided for above. (emphasis added)
51
My understanding of the above citation is that in the event of resignation of the Administrative Agent, such resignation
must be preceded by a 30-day notice and then, the « Majority Lenders » under the said Second Lien Loan Agreement, namely
Dune, shall appoint a successor from among the Lenders a successor agent. Wells is not a Lender and cannot be so appointed
unless all parties consent, including all Lenders. If the majority Lenders (i.e. Dune) does not appoint either itself or another
Lender, then all of the Lenders, acting together are obliged to perform all the duties of the Administrative Agent.
52
In the context of CCAA proceedings and once again, in the absence of a consent of all parties concerned, I have no
reason to substitute my decision to the clear and unambiguous contractual dispositions cited above. It is up to Dune as a «
Majority Lender » to act and not for me to impose Wells to parties who are not prepared to agree to all the terms and conditions
of its appointment.
53 As for the payment of fees, expenses and costs of the Administrative Agent, its successor and/or replacement, be it Wells,
Dune, another Lender or anyone else, my comments are the same as those expressed previously on the same issue.
54 In the end result, this Motion is dismissed, but without costs, except for the ratification of the forthcoming agreement of
the parties with respect to the production of documents and financial information.
Motion dismissed.
Footnotes
1
See Exhibit CS-1
2
This section is cited in part below. It provides for the replacement of the Administrative Agent, once the latter resigns. The procedure
is clearly outlined and there is no apparent reason not to follow it.
3
A first pre-filing preliminary Report was filed at the hearing of February 24, 2010 and a second Report was filed in the context of
the hearing of the present Motion
4
Report of the Monitor - March 17, 2010. This is, in fact, the second Report filed. A first Report identified as a preliminary pre-filing
Report was filed at the hearing of February 24, 2010.
5
These are the fees described in the Monitor's report dated February 23, 2010, as the arranger's fee of 2.5% of the committed funds,
the initial fee of 2.5% of the committed funds and the administrative fee of US$100,000 payable at closing. These fees are described
in paragraphs 41.4.2, 41.4.3 and 41.4.7 of the said report.
6
Management has also provided us with an updated cash flow projection for WB Canada, for the 13 week period ending June 4,
2010, extracted from the above-mentioned projection for the WB Group, and prepared on the same basis. This cash flow projection
is attached as Appendix G.
7
See Janis Sarra, .Rescue! The Companies' Creditors Arrangement Act, Thorson Carswell 2007, pages 33 and 34.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
17
White Birch Paper Holding Co., Re, 2010 QCCS 1176, 2010 CarswellQue 2675
2010 QCCS 1176, 2010 CarswellQue 2675, [2010] Q.J. No. 1723...
A Stay Order . . . . Allow[s] the debtor respite from litigation and enforcement of various contractual obligations during the
proceeding . . . . Furthermore, a Stay Order . . . [has] the ability to suspend actions against the Debtor while discussions towards a
restructuring.are continuing, to avoid a race of the swiftest creditors that would deplete the debtors' assets. , . . .
End of Document
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reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
18
5
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
2009 CarswellOnt 6184
Ontario Superior Court of Justice [Commercial List]
Canwest Global Communications Corp., Re
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
IN THE MATTER OF THE COMPANIES' CREDITORS
ARRANGEMENT ACT, R.S.C. 1985, C-36. AS AMENDED
AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT OF CANWEST
GLOBAL COMMUNICATIONS CORP. AND THE OTHER APPLICANTS LISTED ON SCHEDULE "A"
Pepall J.
Judgment: October 13, 2009
Docket: CV-09-8241-OOCL
Counsel: Lyndon Barnes, Edward Sellers, Jeremy Dacks for Applicants
Alan Merskey for Special Committee of the Board of Directors
David Byers, Maria Konyukhova for Proposed Monitor, FTI Consulting Canada Inc.
Benjamin Zarnett, Robert Chadwick for Ad Hoc Committee of Noteholders
Edmond Lamek for Asper Family
Peter H. Griffin, Peter J. Osborne for Management Directors, Royal Bank of Canada
Hilary Clarke for Bank of Nova Scotia
Steve Weisz for CIT Business Credit Canada Inc.
Subject: Insolvency
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.3 Arrangements
XIX.3.e Miscellaneous
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Arrangements — Miscellaneous
Debtor companies experienced financial problems due to deteriorating economic environment in Canada — Debtor
companies took steps to improve cash flow and to strengthen their balance sheets — Economic conditions did not improve
nor did financial circumstances of debtor companies — They experienced significant tightening of credit from critical
suppliers and trade creditors, reduction of advertising commitments, demands for reduced credit terms by newsprint and
printing suppliers, and restrictions on or cancellation of credit cards for certain employees — Application was brought
for relief pursuant to Companies' Creditors Arrangement Act — Application granted — Proposed monitor was appointed
— Companies qualified as debtor companies under Act — Debtor companies were in default of their obligations —
Required statement of projected cash-flow and other financial documents required under s. 11(2) were filed — Stay of
proceedings was granted to create stability and allow debtor companies to pursue their restructuring — Partnerships in
application carried on operations that were integral and closely interrelated to business of debtor companies — It was
just and convenient to grant relief requested with respect to partnerships — Debtor-in-possession financing was approved
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1
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
— Administration charge was granted — Debtor companies' request for authorization to pay pre-filing amounts owed
to critical suppliers was granted — Directors' and officers' charge was granted — Key employee retention plans were
approved — Extension of time for calling of annual general meeting was granted.
Table of Authorities
Cases considered by Pepall J.:
Cadillac Fairview Inc., Re (1995), 1995 CarswellOnt 36, 30 C.B.R. (3d) 29 (Ont. Gen. Div. [Commercial List]) —
referred to
Calpine Canada Energy Ltd., Re (2006), 19 C.B.R. (5th) 187, 2006 ABQB 153, 2006 CarswellAlta 446 (Alta. Q.B.)
— referred to
General Publishing Co., Re (2003), 39 C.B.R. (4th) 216, 2003 CarswellOnt 275 (Ont. S.C.J.) — referred to
Global Light Telecommunications Inc., Re (2004), 2004 BCSC 745, 2004 CarswellBC 1249, 2 C.B.R. (5th) 210, 33
B.C.L.R. (4th) 155 (B.C. S.C.) — referred to
Grant Forest Products Inc., Re (2009), 2009 CarswellOnt 4699, 57 C.B.R. (5th) 128 (Ont. S.C.J. [Commercial List])
— followed
Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24, 9 B.L.R. (2d) 275, 1993 CarswellOnt 183 (Ont. Gen.
Div. [Commercial List]) — referred to
Sierra Club of Canada v. Canada (Minister of Finance) (2002), 287 N.R. 203, (sub nom. Atomic Energy of Canada
Ltd. v. Sierra Club of Canada) 18 C.P.R. (4th) 1, 44 C.E.L.R. (N.S.) 161, (sub nom. Atomic Energy of Canada Ltd. v.
Sierra Club of Canada) 211 D.L.R. (4th) 193, 223 F.T.R. 137 (note), 20 C.P.C. (5th) 1, 40 Admin. L.R. (3d) 1, 2002
SCC 41, 2002 CarswellNat 822, 2002 CarswellNat 823, (sub nom. Atomic Energy of Canada Ltd. v. Sierra Club of
Canada) 93 C.R.R. (2d) 219, [2002] 2 S.C.R. 522 (S.C.C.) — followed
Smurfit-Stone Container Canada Inc., Re (2009), 50 C.B.R. (5th) 71, 2009 CarswellOnt 391 (Ont. S.C.J. [Commercial
List]) — referred to
Stelco Inc., Re (2004), 48 C.B.R. (4th) 299, 2004 CarswellOnt 1211 (Ont. S.C.J. [Commercial List]) — referred to
Stelco Inc., Re (2004), 2004 CarswellOnt 2936 (Ont. C.A.) — referred to
Statutes considered:
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
Bankruptcy Code, 11 U.S.C.
Chapter 15 — referred to
Canada Business Corporations Act, R.S.C. 1985, c. C-44
Generally — referred to
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2
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
s. 106(6) — referred to
s. 133(1) — referred to
s. 133(1)(b) — referred to
s. 133(3) — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — considered
s. 2 "debtor company" — referred to
s. 11 — considered
s. 11(2) — referred to
s. 11.2 [en. 1997, c. 12, s. 124] — considered
s. 11.2(1) [en. 2005, c. 47, s. 128] — referred to
s. 11.2(4) [en. 2005, c. 47, s. 128] — considered
s. 11.4 [en. 1997, c. 12, s. 124] — considered
s. 11.4(1) [en. 1997, c. 12, s. 124] — referred to
s. 11.4(3) [en. 1997, c. 12, s. 124] — considered
s. 11.51 [en. 2005, c. 47, s. 128] — considered
s. 11.52 [en. 2005, c. 47, s. 128] — considered
s. 23 — considered
Courts of Justice Act, R.S.O. 1990, c. C.43
s. 137(2) — considered
Rules considered:
Rules of Civil Procedure, R.R.O. 1990, Reg. 194
R. 38.09 — referred to
APPLICATION for relief pursuant to Companies' Creditors Arrangement Act.
Pepall J.:
1
Canwest Global Communications Corp. ("Canwest Global"), its principal operating subsidiary, Canwest Media Inc.
("CMI"), and the other applicants listed on Schedule "A" of the Notice of Application apply for relief pursuant to the
Companies' Creditors Arrangement Act. 1 The applicants also seek to have the stay of proceedings and other provisions extend
to the following partnerships: Canwest Television Limited Partnership ("CTLP"), Fox Sports World Canada Partnership and
The National Post Company/La Publication National Post ("The National Post Company"). The businesses operated by the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
3
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
applicants and the aforementioned partnerships include (i) Canwest's free-to-air television broadcast business (ie. the Global
Television Network stations); (ii) certain subscription-based specialty television channels that are wholly owned and operated
by CTLP; and (iii) the National Post.
2 The Canwest Global enterprise as a whole includes the applicants, the partnerships and Canwest Global's other subsidiaries
that are not applicants. The term Canwest will be used to refer to the entire enterprise. The term CMI Entities will be used
to refer to the applicants and the three aforementioned partnerships. The following entities are not applicants nor is a stay
sought in respect of any of them: the entities in Canwest's newspaper publishing and digital media business in Canada (other
than the National Post Company) namely the Canwest Limited Partnership, Canwest Publishing Inc./Publications Canwest
Inc., Canwest Books Inc., and Canwest (Canada) Inc.; the Canadian subscription based specialty television channels acquired
from Alliance Atlantis Communications Inc. in August, 2007 which are held jointly with Goldman Sachs Capital Partners and
operated by CW Investments Co. and its subsidiaries; and subscription-based specialty television channels which are not wholly
owned by CTLP.
3
No one appearing opposed the relief requested.
Backround Facts
4 Canwest is a leading Canadian media company with interests in twelve free-to-air television stations comprising the Global
Television Network, subscription-based specialty television channels and newspaper publishing and digital media operations.
5
As of October 1, 2009, Canwest employed the full time equivalent of approximately 7,400 employees around the world.
Of that number, the full time equivalent of approximately 1,700 are employed by the CMI Entities, the vast majority of whom
work in Canada and 850 of whom work in Ontario.
6 Canwest Global owns 100% of CMI. CMI has direct or indirect ownership interests in all of the other CMI Entities. Ontario
is the chief place of business of the CMI Entities.
7
Canwest Global is a public company continued under the Canada Business Corporations Act 2 . It has authorized capital
consisting of an unlimited number of preference shares, multiple voting shares, subordinate voting shares, and non-voting
shares. It is a "constrained-share company" which means that at least 66 2/3% of its voting shares must be beneficially owned
by Canadians. The Asper family built the Canwest enterprise and family members hold various classes of shares. In April and
May, 2009, corporate decision making was consolidated and streamlined.
8 The CMI Entities generate the majority of their revenue from the sale of advertising (approximately 77% on a consolidated
basis). Fuelled by a deteriorating economic environment in Canada and elsewhere, in 2008 and 2009, they experienced a decline
in their advertising revenues. This caused problems with cash flow and circumstances were exacerbated by their high fixed
operating costs. In response to these conditions, the CMI Entities took steps to improve cash flow and to strengthen their balance
sheets. They commenced workforce reductions and cost saving measures, sold certain interests and assets, and engaged in
discussions with the CRTC and the Federal government on issues of concern.
9 Economic conditions did not improve nor did the financial circumstances of the CMI Entities. They experienced significant
tightening of credit from critical suppliers and trade creditors, a further reduction of advertising commitments, demands for
reduced credit terms by newsprint and printing suppliers, and restrictions on or cancellation of credit cards for certain employees.
10
In February, 2009, CMI breached certain of the financial covenants in its secured credit facility. It subsequently
received waivers of the borrowing conditions on six occasions. On March 15, 2009, it failed to make an interest payment
of US$30.4 million due on 8% senior subordinated notes. CMI entered into negotiations with an ad hoc committee of the
8% senior subordinated noteholders holding approximately 72% of the notes (the "Ad Hoc Committee"). An agreement was
reached wherein CMI and its subsidiary CTLP agreed to issue US$105 million in 12% secured notes to members of the Ad
Hoc Committee. At the same time, CMI entered into an agreement with CIT Business Credit Canada Inc. ("CIT") in which
CIT agreed to provide a senior secured revolving asset based loan facility of up to $75 million. CMI used the funds generated
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4
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
for operations and to repay amounts owing on the senior credit facility with a syndicate of lenders of which the Bank of Nova
Scotia was the administrative agent. These funds were also used to settle related swap obligations.
11
Canwest Global reports its financial results on a consolidated basis. As at May 31, 2009, it had total consolidated assets
with a net book value of $4.855 billion and total consolidated liabilities of $5.846 billion. The subsidiaries of Canwest Global
that are not applicants or partnerships in this proceeding had short and long term debt totalling $2.742 billion as at May 31, 2009
and the CMI Entities had indebtedness of approximately $954 million. For the 9 months ended May 31, 2009, Canwest Global's
consolidated revenues decreased by $272 million or 11% compared to the same period in 2008. In addition, operating income
before amortization decreased by $253 million or 47%. It reported a consolidated net loss of $1.578 billion compared to $22
million for the same period in 2008. CMI reported that revenues for the Canadian television operations decreased by $8 million
or 4% in the third quarter of 2009 and operating profit was $21 million compared to $39 million in the same period in 2008.
12
The board of directors of Canwest Global struck a special committee of the board ("the Special Committee") with a
mandate to explore and consider strategic alternatives in order to maximize value. That committee appointed Thomas Strike,
who is the President, Corporate Development and Strategy Implementation of Canwest Global, as Recapitalization Officer and
retained Hap Stephen, who is the Chairman and CEO of Stonecrest Capital Inc., as a Restructuring Advisor ("CRA").
13
On September 15, 2009, CMI failed to pay US$30.4 million in interest payments due on the 8% senior subordinated notes.
14 On September 22, 2009, the board of directors of Canwest Global authorized the sale of all of the shares of Ten Network
Holdings Limited (Australia) ("Ten Holdings") held by its subsidiary, Canwest Mediaworks Ireland Holdings ("CMIH"). Prior
to the sale, the CMI Entities had consolidated indebtedness totalling US$939.9 million pursuant to three facilities. CMI had
issued 8% unsecured notes in an aggregate principal amount of US$761,054,211. They were guaranteed by all of the CMI
Entities except Canwest Global, and 30109, LLC. CMI had also issued 12% secured notes in an aggregate principal amount
of US$94 million. They were guaranteed by the CMI Entities. Amongst others, Canwest's subsidiary, CMIH, was a guarantor
of both of these facilities. The 12% notes were secured by first ranking charges against all of the property of CMI, CTLP
and the guarantors. In addition, pursuant to a credit agreement dated May 22, 2009 and subsequently amended, CMI has a
senior secured revolving asset-based loan facility in the maximum amount of $75 million with CIT Business Credit Canada Inc.
("CIT"). Prior to the sale, the debt amounted to $23.4 million not including certain letters of credit. The facility is guaranteed
by CTLP, CMIH and others and secured by first ranking charges against all of the property of CMI, CTLP, CMIH and other
guarantors. Significant terms of the credit agreement are described in paragraph 37 of the proposed Monitor's report. Upon a
CCAA filing by CMI and commencement of proceedings under Chapter 15 of the Bankruptcy Code, the CIT facility converts
into a DIP financing arrangement and increases to a maximum of $100 million.
15 Consents from a majority of the 8% senior subordinated noteholders were necessary to allow the sale of the Ten Holdings
shares. A Use of Cash Collateral and Consent Agreement was entered into by CMI, CMIH, certain consenting noteholders and
others wherein CMIH was allowed to lend the proceeds of sale to CMI.
16 The sale of CMIH's interest in Ten Holdings was settled on October 1, 2009. Gross proceeds of approximately $634 million
were realized. The proceeds were applied to fund general liquidity and operating costs of CMI, pay all amounts owing under
the 12% secured notes and all amounts outstanding under the CIT facility except for certain letters of credit in an aggregate
face amount of $10.7 million. In addition, a portion of the proceeds was used to reduce the amount outstanding with respect to
the 8% senior subordinated notes leaving an outstanding indebtedness thereunder of US$393.25 million.
17 In consideration for the loan provided by CMIH to CMI, CMI issued a secured intercompany note in favour of CMIH in
the principal amount of $187.3 million and an unsecured promissory note in the principal amount of $430.6 million. The secured
note is subordinated to the CIT facility and is secured by a first ranking charge on the property of CMI and the guarantors.
The payment of all amounts owing under the unsecured promissory note are subordinated and postponed in favour of amounts
owing under the CIT facility. Canwest Global, CTLP and others have guaranteed the notes. It is contemplated that the debt that
is the subject matter of the unsecured note will be compromised.
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5
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
18
Without the funds advanced under the intercompany notes, the CMI Entities would be unable to meet their liabilities
as they come due. The consent of the noteholders to the use of the Ten Holdings proceeds was predicated on the CMI Entities
making this application for an Initial Order under the CCAA. Failure to do so and to take certain other steps constitute an
event of default under the Use of Cash Collateral and Consent Agreement, the CIT facility and other agreements. The CMI
Entities have insufficient funds to satisfy their obligations including those under the intercompany notes and the 8% senior
subordinated notes.
19
The stay of proceedings under the CCAA is sought so as to allow the CMI Entities to proceed to develop a plan of
arrangement or compromise to implement a consensual "pre-packaged" recapitalization transaction. The CMI Entities and the
Ad Hoc Committee of noteholders have agreed on the terms of a going concern recapitalization transaction which is intended
to form the basis of the plan. The terms are reflected in a support agreement and term sheet. The recapitalization transaction
contemplates amongst other things, a significant reduction of debt and a debt for equity restructuring. The applicants anticipate
that a substantial number of the businesses operated by the CMI Entities will continue as going concerns thereby preserving
enterprise value for stakeholders and maintaining employment for as many as possible. As mentioned, certain steps designed
to implement the recapitalization transaction have already been taken prior to the commencement of these proceedings.
20
CMI has agreed to maintain not more than $2.5 million as cash collateral in a deposit account with the Bank of Nova
Scotia to secure cash management obligations owed to BNS. BNS holds first ranking security against those funds and no court
ordered charge attaches to the funds in the account.
21 The CMI Entities maintain eleven defined benefit pension plans and four defined contribution pension plans. There is an
aggregate solvency deficiency of $13.3 million as at the last valuation date and a wind up deficiency of $32.8 million. There are
twelve television collective agreements eleven of which are negotiated with the Communications, Energy and Paperworkers
Union of Canada. The Canadian Union of Public Employees negotiated the twelfth television collective agreement. It expires
on December 31, 2010. The other collective agreements are in expired status. None of the approximately 250 employees of
the National Post Company are unionized. The CMI Entities propose to honour their payroll obligations to their employees,
including all pre-filing wages and employee benefits outstanding as at the date of the commencement of the CCAA proceedings
and payments in connection with their pension obligations.
Proposed Monitor
22 The applicants propose that FTI Consulting Canada Inc. serve as the Monitor in these proceedings. It is clearly qualified
to act and has provided the Court with its consent to act. Neither FTI nor any of its representatives have served in any of the
capacities prohibited by section of the amendments to the CCAA.
Proposed Order
23
I have reviewed in some detail the history that preceded this application. It culminated in the presentation of the within
application and proposed order. Having reviewed the materials and heard submissions, I was satisfied that the relief requested
should be granted.
24
This case involves a consideration of the amendments to the CCAA that were proclaimed in force on September
18, 2009. While these were long awaited, in many instances they reflect practices and principles that have been adopted by
insolvency practitioners and developed in the jurisprudence and academic writings on the subject of the CCAA. In no way do
the amendments change or detract from the underlying purpose of the CCAA, namely to provide debtor companies with the
opportunity to extract themselves from financial difficulties notwithstanding insolvency and to reorganize their affairs for the
benefit of stakeholders. In my view, the amendments should be interpreted and applied with that objective in mind.
(a) Threshhold Issues
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6
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
25
Firstly, the applicants qualify as debtor companies under the CCAA. Their chief place of business is in Ontario. The
applicants are affiliated debtor companies with total claims against them exceeding $5 million. The CMI Entities are in default
of their obligations. CMI does not have the necessary liquidity to make an interest payment in the amount of US$30.4 million
that was due on September 15, 2009 and none of the other CMI Entities who are all guarantors are able to make such a payment
either. The assets of the CMI Entities are insufficient to discharge all of the liabilities. The CMI Entities are unable to satisfy their
debts as they come due and they are insolvent. They are insolvent both under the Bankruptcy and Insolvency Act 3 definition
and under the more expansive definition of insolvency used in Stelco Inc., Re 4 . Absent these CCAA proceedings, the applicants
would lack liquidity and would be unable to continue as going concerns. The CMI Entities have acknowledged their insolvency
in the affidavit filed in support of the application.
26
Secondly, the required statement of projected cash-flow and other financial documents required under section 11(2) of
the CCAA have been filed.
(b) Stay of Proceedings
27
Under section 11 of the CCAA, the Court has broad jurisdiction to grant a stay of proceedings and to give a debtor
company a chance to develop a plan of compromise or arrangement. In my view, given the facts outlined, a stay is necessary
to create stability and to allow the CMI Entities to pursue their restructuring.
(b) Partnerships and Foreign Subsidiaries
28 The applicants seek to extend the stay of proceedings and other relief to the aforementioned partnerships. The partnerships
are intertwined with the applicants' ongoing operations. They own the National Post daily newspaper and Canadian free-to-air
television assets and certain of its specialty television channels and some other television assets. These businesses constitute
a significant portion of the overall enterprise value of the CMI Entities. The partnerships are also guarantors of the 8% senior
subordinated notes.
29
While the CCAA definition of a company does not include a partnership or limited partnership, courts have repeatedly
exercised their inherent jurisdiction to extend the scope of CCAA proceedings to encompass them. See for example Lehndorff
General Partner Ltd., Re 5 ; Smurfit-Stone Container Canada Inc., Re 6 ; and Calpine Canada Energy Ltd., Re 7 . In this case, the
partnerships carry on operations that are integral and closely interrelated to the business of the applicants. The operations and
obligations of the partnerships are so intertwined with those of the applicants that irreparable harm would ensue if the requested
stay were not granted. In my view, it is just and convenient to grant the relief requested with respect to the partnerships.
30
Certain applicants are foreign subsidiaries of CMI. Each is a guarantor under the 8% senior subordinated notes, the CIT
credit agreement (and therefore the DIP facility), the intercompany notes and is party to the support agreement and the Use
of Cash Collateral and Consent Agreement. If the stay of proceedings was not extended to these entities, creditors could seek
to enforce their guarantees. I am persuaded that the foreign subsidiary applicants as that term is defined in the affidavit filed
are debtor companies within the meaning of section 2 of the CCAA and that I have jurisdiction and ought to grant the order
requested as it relates to them. In this regard, I note that they are insolvent and each holds assets in Ontario in that they each
maintain funds on deposit at the Bank of Nova Scotia in Toronto. See in this regard Cadillac Fairview Inc., Re 8 and Global
Light Telecommunications Inc., Re 9
(C) DIP Financing
31
Turning to the DIP financing, the premise underlying approval of DIP financing is that it is a benefit to all stakeholders
as it allows the debtors to protect going-concern value while they attempt to devise a plan acceptable to creditors. While in the
past, courts relied on inherent jurisdiction to approve the terms of a DIP financing charge, the September 18, 2009 amendments
to the CCAA now expressly provide jurisdiction to grant a DIP financing charge. Section 11.2 of the Act states:
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
7
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security
or charge, a court may make an order declaring that all or part of the company's property is subject to a security or charge
— in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to
the company an amount approved by the court as being required by the company, having regard to its cash-flow statement.
The security or charge may not secure an obligation that exists before the order is made.
(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.
(3) The court may order that the security or charge rank in priority over any security or charge arising from a previous
order made under subsection (1) only with the consent of the person in whose favour the previous order was made.
(4) In deciding whether to make an order, the court is to consider, among other things,
(a) the period during which the company is expected to be subject to proceedings under this Act;
(b) how the company's business and financial affairs are to be managed during the proceedings;
(c) whether the company's management has the confidence of its major creditors;
(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of
the company;
(e) the nature and value of the company's property;
(f) whether any creditor would be materially prejudiced as a result of the security or charge; and
(g) the monitor's report referred to in paragraph 23(1)(b), if any.
32 In light of the language of section 11.2(1), the first issue to consider is whether notice has been given to secured creditors
who are likely to be affected by the security or charge. Paragraph 57 of the proposed order affords priority to the DIP charge,
the administration charge, the Directors' and Officers' charge and the KERP charge with the following exception: "any validly
perfected purchase money security interest in favour of a secured creditor or any statutory encumbrance existing on the date of
this order in favour of any person which is a "secured creditor" as defined in the CCAA in respect of any of source deductions
from wages, employer health tax, workers compensation, GST/QST, PST payables, vacation pay and banked overtime for
employees, and amounts under the Wage Earners' Protection Program that are subject to a super priority claim under the BIA".
This provision coupled with the notice that was provided satisfied me that secured creditors either were served or are unaffected
by the DIP charge. This approach is both consistent with the legislation and practical.
33 Secondly, the Court must determine that the amount of the DIP is appropriate and required having regard to the debtors'
cash-flow statement. The DIP charge is for up to $100 million. Prior to entering into the CIT facility, the CMI Entities sought
proposals from other third party lenders for a credit facility that would convert to a DIP facility should the CMI Entities be
required to file for protection under the CCAA. The CIT facility was the best proposal submitted. In this case, it is contemplated
that implementation of the plan will occur no later than April 15, 2010. The total amount of cash on hand is expected to be
down to approximately $10 million by late December, 2009 based on the cash flow forecast. The applicants state that this is an
insufficient cushion for an enterprise of this magnitude. The cash-flow statements project the need for the liquidity provided
by the DIP facility for the recapitalization transaction to be finalized. The facility is to accommodate additional liquidity
requirements during the CCAA proceedings. It will enable the CMI Entities to operate as going concerns while pursuing the
implementation and completion of a viable plan and will provide creditors with assurances of same. I also note that the proposed
facility is simply a conversion of the pre-existing CIT facility and as such, it is expected that there would be no material prejudice
to any of the creditors of the CMI Entities that arises from the granting of the DIP charge. I am persuaded that the amount is
appropriate and required.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
8
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
34
Thirdly, the DIP charge must not and does not secure an obligation that existed before the order was made. The only
amount outstanding on the CIT facility is $10.7 in outstanding letters of credit. These letters of credit are secured by existing
security and it is proposed that that security rank ahead of the DIP charge.
35 Lastly, I must consider amongst others, the enumerated factors in paragraph 11.2(4) of the Act. I have already addressed
some of them. The Management Directors of the applicants as that term is used in the materials filed will continue to manage
the CMI Entities during the CCAA proceedings. It would appear that management has the confidence of its major creditors. The
CMI Entities have appointed a CRA and a Restructuring Officer to negotiate and implement the recapitalization transaction and
the aforementioned directors will continue to manage the CMI Entities during the CCAA proceedings. The DIP facility will
enhance the prospects of a completed restructuring. CIT has stated that it will not convert the CIT facility into a DIP facility
if the DIP charge is not approved. In its report, the proposed Monitor observes that the ability to borrow funds from a court
approved DIP facility secured by the DIP charge is crucial to retain the confidence of the CMI Entities' creditors, employees
and suppliers and would enhance the prospects of a viable compromise or arrangement being made. The proposed Monitor is
supportive of the DIP facility and charge.
36
For all of these reasons, I was prepared to approve the DIP facility and charge.
(d) Administration Charge
37 While an administration charge was customarily granted by courts to secure the fees and disbursements of the professional
advisors who guided a debtor company through the CCAA process, as a result of the amendments to the CCAA, there is now
statutory authority to grant such a charge. Section 11.52 of the CCAA states:
(1) On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order
declaring that all or part of the property of a debtor company is subject to a security or charge — in an amount that the
court considers appropriate — in respect of the fees and expenses of
(a) the monitor, including the fees and expenses of any financial, legal or other experts engaged by the monitor in
the performance of the monitor's duties;
(b) any financial, legal or other experts engaged by the company for the purpose of proceedings under this Act; and
(c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security
or charge is necessary for their effective participation in proceedings under this Act.
(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.
38
I must therefore be convinced that (1) notice has been given to the secured creditors likely to be affected by the charge;
(2) the amount is appropriate; and (3) the charge should extend to all of the proposed beneficiaries.
39 As with the DIP charge, the issue relating to notice to affected secured creditors has been addressed appropriately by the
applicants. The amount requested is up to $15 million. The beneficiaries of the charge are: the Monitor and its counsel; counsel
to the CMI Entities; the financial advisor to the Special Committee and its counsel; counsel to the Management Directors; the
CRA; the financial advisor to the Ad Hoc Committee; and RBC Capital Markets and its counsel. The proposed Monitor supports
the aforementioned charge and considers it to be required and reasonable in the circumstances in order to preserve the going
concern operations of the CMI Entities. The applicants submit that the above-note professionals who have played a necessary
and integral role in the restructuring activities to date are necessary to implement the recapitalization transaction.
40 Estimating quantum is an inexact exercise but I am prepared to accept the amount as being appropriate. There has obviously
been extensive negotiation by stakeholders and the restructuring is of considerable magnitude and complexity. I was prepared to
accept the submissions relating to the administration charge. I have not included any requirement that all of these professionals
be required to have their accounts scrutinized and approved by the Court but they should not preclude this possibility.
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9
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
(e) Critical Suppliers
41 The next issue to consider is the applicants' request for authorization to pay pre-filing amounts owed to critical suppliers.
In recognition that one of the purposes of the CCAA is to permit an insolvent corporation to remain in business, typically courts
exercised their inherent jurisdiction to grant such authorization and a charge with respect to the provision of essential goods
and services. In the recent amendments, Parliament codified the practice of permitting the payment of pre-filing amounts to
critical suppliers and the provision of a charge. Specifically, section 11.4 provides:
(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security
or charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied
that the person is a supplier of goods or services to the company and that the goods or services that are supplied are critical
to the company's continued operation.
(2) If the court declares a person to be a critical supplier, the court may make an order requiring the person to supply any
goods or services specified by the court to the company on any terms and conditions that are consistent with the supply
relationship or that the court considers appropriate.
(3) If the court makes an order under subsection (2), the court shall, in the order, declare that all or part of the property of
the company is subject to a security or charge in favour of the person declared to be a critical supplier, in an amount equal
to the value of the goods or services supplied under the terms of the order.
(4) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.
42
Under these provisions, the Court must be satisfied that there has been notice to creditors likely to be affected by the
charge, the person is a supplier of goods or services to the company, and that the goods or services that are supplied are critical
to the company's continued operation. While one might interpret section 11.4 (3) as requiring a charge any time a person is
declared to be a critical supplier, in my view, this provision only applies when a court is compelling a person to supply. The
charge then provides protection to the unwilling supplier.
43
In this case, no charge is requested and no additional notice is therefore required. Indeed, there is an issue as to whether
in the absence of a request for a charge, section 11.4 is even applicable and the Court is left to rely on inherent jurisdiction. The
section seems to be primarily directed to the conditions surrounding the granting of a charge to secure critical suppliers. That
said, even if it is applicable, I am satisfied that the applicants have met the requirements. The CMI Entities seek authorization
to make certain payments to third parties that provide goods and services integral to their business. These include television
programming suppliers given the need for continuous and undisturbed flow of programming, newsprint suppliers given the
dependency of the National Post on a continuous and uninterrupted supply of newsprint to enable it to publish and on newspaper
distributors, and the American Express Corporate Card Program and Central Billed Accounts that are required for CMI Entity
employees to perform their job functions. No payment would be made without the consent of the Monitor. I accept that these
suppliers are critical in nature. The CMI Entities also seek more general authorization allowing them to pay other suppliers if in
the opinion of the CMI Entities, the supplier is critical. Again, no payment would be made without the consent of the Monitor.
In addition, again no charge securing any payments is sought. This is not contrary to the language of section 11.4 (1) or to its
purpose. The CMI Entities seek the ability to pay other suppliers if in their opinion the supplier is critical to their business and
ongoing operations. The order requested is facilitative and practical in nature. The proposed Monitor supports the applicants'
request and states that it will work to ensure that payments to suppliers in respect of pre-filing liabilities are minimized. The
Monitor is of course an officer of the Court and is always able to seek direction from the Court if necessary. In addition, it
will report on any such additional payments when it files its reports for Court approval. In the circumstances outlined, I am
prepared to grant the relief requested in this regard.
(f) Directors' and Officers' Charge
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10
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
44
The applicants also seek a directors' and officers' ("D &O") charge in the amount of $20 million. The proposed charge
would rank after the administration charge, the existing CIT security, and the DIP charge. It would rank pari passu with the
KERP charge discussed subsequently in this endorsement but postponed in right of payment to the extent of the first $85 million
payable under the secured intercompany note.
45
Again, the recent amendments to the CCAA allow for such a charge. Section 11.51 provides that:
(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security
or charge, the court may make an order declaring that all or part of the property of the company is subject to a security
or charge — in an amount that the court considers appropriate — in favour of any director or officer of the company to
indemnify the director or officer against obligations and liabilities that they may incur as a director or officer of the company
(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.
(3) The court may not make the order if in its opinion the company could obtain adequate indemnification insurance for
the director or officer at a reasonable cost.
(4) The court shall make an order declaring that the security or charge does not apply in respect of a specific obligation or
liability incurred by a director or officer if in its opinion the obligation or liability was incurred as a result of the director's
or officer's gross negligence or wilful misconduct or, in Quebec, the director's or officer's gross or intentional fault.
46
I have already addressed the issue of notice to affected secured creditors. I must also be satisfied with the amount and
that the charge is for obligations and liabilities the directors and officers may incur after the commencement of proceedings.
It is not to extend to coverage of wilful misconduct or gross negligence and no order should be granted if adequate insurance
at a reasonable cost could be obtained.
47 The proposed Monitor reports that the amount of $20 million was estimated taking into consideration the existing D&O
insurance and the potential liabilities which may attach including certain employee related and tax related obligations. The
amount was negotiated with the DIP lender and the Ad Hoc Committee. The order proposed speaks of indemnification relating
to the failure of any of the CMI Entities, after the date of the order, to make certain payments. It also excludes gross negligence
and wilful misconduct. The D&O insurance provides for $30 million in coverage and $10 million in excess coverage for a total
of $40 million. It will expire in a matter of weeks and Canwest Global has been unable to obtain additional or replacement
coverage. I am advised that it also extends to others in the Canwest enterprise and not just to the CMI Entities. The directors
and senior management are described as highly experienced, fully functional and qualified. The directors have indicated that
they cannot continue in the restructuring effort unless the order includes the requested directors' charge.
48
The purpose of such a charge is to keep the directors and officers in place during the restructuring by providing them
with protection against liabilities they could incur during the restructuring: General Publishing Co., Re 10 Retaining the current
directors and officers of the applicants would avoid destabilization and would assist in the restructuring. The proposed charge
would enable the applicants to keep the experienced board of directors supported by experienced senior management. The
proposed Monitor believes that the charge is required and is reasonable in the circumstances and also observes that it will not
cover all of the directors' and officers' liabilities in the worst case scenario. In all of these circumstances, I approved the request.
(g) Key Employee Retention Plans
49 Approval of a KERP and a KERP charge are matters of discretion. In this case, the CMI Entities have developed KERPs
that are designed to facilitate and encourage the continued participation of certain of the CMI Entities' senior executives and
other key employees who are required to guide the CMI Entities through a successful restructuring with a view to preserving
enterprise value. There are 20 KERP participants all of whom are described by the applicants as being critical to the successful
restructuring of the CMI Entities. Details of the KERPs are outlined in the materials and the proposed Monitor's report. A
charge of $5.9 million is requested. The three Management Directors are seasoned executives with extensive experience in
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11
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
the broadcasting and publishing industries. They have played critical roles in the restructuring initiatives taken to date. The
applicants state that it is probable that they would consider other employment opportunities if the KERPs were not secured by a
KERP charge. The other proposed participants are also described as being crucial to the restructuring and it would be extremely
difficult to find replacements for them
50
Significantly in my view, the Monitor who has scrutinized the proposed KERPs and charge is supportive. Furthermore,
they have been approved by the Board, the Special Committee, the Human Resources Committee of Canwest Global and the
Ad Hoc Committee. The factors enumerated in Grant Forest Products Inc., Re 11 have all been met and I am persuaded that
the relief in this regard should be granted.
51 The applicants ask that the Confidential Supplement containing unredacted copies of the KERPs that reveal individually
identifiable information and compensation information be sealed. Generally speaking, judges are most reluctant to grant sealing
orders. An open court and public access are fundamental to our system of justice. Section 137(2) of the Courts of Justice Act
provides authority to grant a sealing order and the Supreme Court of Canada's decision in Sierra Club of Canada v. Canada
(Minister of Finance) 12 provides guidance on the appropriate legal principles to be applied. Firstly, the Court must be satisfied
that the order is necessary in order to prevent a serious risk to an important interest, including a commercial interest, in the
context of litigation because reasonable alternative measures will not prevent the risk. Secondly, the salutary effects of the order
should outweigh its deleterious effects including the effects on the right to free expression which includes the public interest
in open and accessible court proceedings.
52
In this case, the unredacted KERPs reveal individually identifiable information including compensation information.
Protection of sensitive personal and compensation information the disclosure of which could cause harm to the individuals and
to the CMI Entities is an important commercial interest that should be protected. The KERP participants have a reasonable
expectation that their personal information would be kept confidential. As to the second branch of the test, the aggregate amount
of the KERPs has been disclosed and the individual personal information adds nothing. It seems to me that this second branch
of the test has been met. The relief requested is granted.
Annual Meeting
53
The CMI Entities seek an order postponing the annual general meeting of shareholders of Canwest Global. Pursuant to
section 133 (1)(b) of the CBCA, a corporation is required to call an annual meeting by no later than February 28, 2010, being
six months after the end of its preceding financial year which ended on August 31, 2009. Pursuant to section 133 (3), despite
subsection (1), the corporation may apply to the court for an order extending the time for calling an annual meeting.
54
CCAA courts have commonly granted extensions of time for the calling of an annual general meeting. In this case,
the CMI Entities including Canwest Global are devoting their time to stabilizing business and implementing a plan. Time and
resources would be diverted if the time was not extended as requested and the preparation for and the holding of the annual
meeting would likely impede the timely and desirable restructuring of the CMI Entities. Under section 106(6) of the CBCA, if
directors of a corporation are not elected, the incumbent directors continue. Financial and other information will be available
on the proposed Monitor's website. An extension is properly granted.
Other
55
The applicants request authorization to commence Chapter 15 proceedings in the U.S. Continued timely supply of U.S.
network and other programming is necessary to preserve going concern value. Commencement of Chapter 15 proceedings to
have the CCAA proceedings recognized as "foreign main proceedings" is a prerequisite to the conversion of the CIT facility
into the DIP facility. Authorization is granted.
56
Canwest's various corporate and other entities share certain business services. They are seeking to continue to provide
and receive inter-company services in the ordinary course during the CCAA proceedings. This is supported by the proposed
Monitor and FTI will monitor and report to the Court on matters pertaining to the provision of inter-company services.
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12
Canwest Global Communications Corp., Re, 2009 CarswellOnt 6184
2009 CarswellOnt 6184, [2009] O.J. No. 4286, 181 A.C.W.S. (3d) 853, 59 C.B.R. (5th) 72
57
Section 23 of the amended CCAA now addresses certain duties and functions of the Monitor including the provision
of notice of an Initial Order although the Court may order otherwise. Here the financial threshold for notice to creditors has
been increased from $1000 to $5000 so as to reduce the burden and cost of such a process. The proceedings will be widely
published in the media and the Initial Order is to be posted on the Monitor's website. Other meritorious adjustments were also
made to the notice provisions.
58 This is a "pre-packaged" restructuring and as such, stakeholders have negotiated and agreed on the terms of the requested
order. That said, not every stakeholder was before me. For this reason, interested parties are reminded that the order includes
the usual come back provision. The return date of any motion to vary, rescind or affect the provisions relating to the CIT credit
agreement or the CMI DIP must be no later than November 5, 2009.
59 I have obviously not addressed every provision in the order but have attempted to address some key provisions. In support
of the requested relief, the applicants filed a factum and the proposed Monitor filed a report. These were most helpful. A factum
is required under Rule 38.09 of the Rules of Civil Procedure. Both a factum and a proposed Monitor's report should customarily
be filed with a request for an Initial Order under the CCAA.
Conclusion
60
Weak economic conditions and a high debt load do not a happy couple make but clearly many of the stakeholders have
been working hard to produce as desirable an outcome as possible in the circumstances. Hopefully the cooperation will persist.
Application granted.
Footnotes
1
R.S.C. 1985, c. C. 36, as amended
2
R.S.C. 1985, c.C.44.
3
R.S.C. 1985, c. B-3, as amended.
4
(2004), 48 C.B.R. (4th) 299 (Ont. S.C.J. [Commercial List]); leave to appeal refused 2004 CarswellOnt 2936 (Ont. C.A.).
5
(1993), 9 B.L.R. (2d) 275 (Ont. Gen. Div. [Commercial List]).
6
[2009] O.J. No. 349 (Ont. S.C.J. [Commercial List]).
7
(2006), 19 C.B.R. (5th) 187 (Alta. Q.B.).
8
(1995), 30 C.B.R. (3d) 29 (Ont. Gen. Div. [Commercial List]).
9
(2004), 33 B.C.L.R. (4th) 155 (B.C. S.C.).
10
(2003), 39 C.B.R. (4th) 216 (Ont. S.C.J.).
11
[2009] O.J. No. 3344 (Ont. S.C.J. [Commercial List]). That said, given the nature of the relationship between a board of directors
and senior management, it may not always be appropriate to give undue consideration to the principle of business judgment.
12
[2002] 2 S.C.R. 522 (S.C.C.).
End of Document
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reserved.
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
13
6
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
2013 ONSC 6167
Ontario Superior Court of Justice [Commercial List]
8440522 Canada Inc., Re
2013 CarswellOnt 13921, 2013 ONSC 6167, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
In Matter of the Companies' Creditors Arrangement Act, 1985, c.C-36 as Amended
In the Matter of a Plan of Compromise or Arrangement of 8440522 Canada Inc., Data & AudioVisual Enterprises Wireless Inc., and Data & Audio-Visual Enterprises Holdings Incorporation
Newbould J.
Heard: September 30, 2013
Judgment: October 4, 2013
Docket: 13-CV-16274-OOCL
Counsel: Robert Frank, Virginie Gauthier, Evan Cobb for Applicants
David C. Moore for Catalyst Capital Group Inc.
John Porter, Leanne M. Williams for Ernst & Young Inc, the proposed Monitor
Robert J. Chadwick for proposed DIP lender and the ad hoc Committee of Noteholders
Kevin P. McElcheran, James D. Gage for Quadrangle, a shareholder and, for subordinated note holders
Subject: Insolvency
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.h Miscellaneous
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Miscellaneous
Applicants consisted of operating company and holding company who carried on business as Canadian wireless
telecommunications carrier — Applicants raised in excess of $400 million in debt financing to fund capital expenditures
and operations since 2008 — Indebtedness consisted of second lien notes, senior unsecured debentures and convertible
unsecured notes — Cash interest payment under indebtedness was payment of over $9 million on first lien notes
which became due on September 30, 2013, date of Initial Order — Applicants continued to engage with potential
acquirers — In two weeks preceding application applicants developed transaction structure for proposed transaction with
prospective purchaser, which was currently being considered by Industry Canada — Applicants applied for protection
under Companies' Creditors Arrangement Act (CCAA) — Application granted — Initial Order signed — It was clear
applicants were insolvent and that without protection of CCAA, shutdown of operations would be inevitable as applicants
would cease to be able to pay trade creditors in ordinary course and would cease to be able to make interest payments
on outstanding debt securities — As part of Initial Order, court approved debtor-in-possession financing and appointment
of chief restructuring officer.
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1
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
Table of Authorities
Cases considered by Newbould J.:
Crystallex International Corp., Re (2012), 2012 CarswellOnt 7329, 2012 ONCA 404, 91 C.B.R. (5th) 207, 293 O.A.C.
102, 4 B.L.R. (5th) 1 (Ont. C.A.) — referred to
Royal Oak Mines Inc., Re (1999), 1999 CarswellOnt 625, 6 C.B.R. (4th) 314, 96 O.T.C. 272 (Ont. Gen. Div.
[Commercial List]) — distinguished
Sino-Forest Corp., Re (May 8, 2012), Doc. CV-12-9667-00CL (Ont. S.C.J.) — referred to
Timminco Ltd., Re (2012), 2012 ONSC 2515, 2012 CarswellOnt 5390 (Ont. S.C.J. [Commercial List]) — referred to
Statutes considered:
Canada Business Corporations Act, R.S.C. 1985, c. C-44
Generally — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11.2(4) [en. 2005, c. 47, s. 128] — considered
APPLICATION for protection under Companies' Creditors Arrangements Act.
Newbould J.:
1
On September 30, the applicants ("Mobilicity Group") applied for protection under the CCAA. At the conclusion of the
hearing I ordered that the application should be granted for reasons to follow, and an Initial Order was signed. These are my
reasons.
Background facts
2
The Mobilicity Group consists of Data & Audio-Visual Enterprises Wireless Inc., the operating company ("Wireless" or
"Mobilicity"), its holding company Data & Audio-Visual Enterprises Holdings Inc. ("Holdings") and 8440522 Canada Inc.,
wholly owned by Wireless and which has no material assets or liabilities.
3 Mobilicity carries on business as a Canadian wireless telecommunications carrier. It provides cellular service to Canadians
in five urban markets: Ottawa, Toronto, Calgary, Edmonton and Vancouver and has roaming agreements with third party service
providers to provide continuity of service outside of these markets. Mobilicity also offers hardware (handsets and accessories)
to its customers.
4
Mobilicity was founded on the concept of offering low cost cellular services to value-conscious consumers seeking
less expensive cellular services than those offered by the established players in the market, being Bell Canada Inc., TELUS
Corporation and Rogers Communications Inc.
5
In addition to four corporately-owned stores, the Mobilicity dealer network consists of approximately 314 points of
distribution which include approximately 94 "platinum-level" stores that exclusively sell Mobilicity-branded services and only
offer wireless-related products at their stores, and approximately 150 "gold" and "silver" level stores that sell Mobilicity-branded
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
2
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
services, but also sell non-wireless related products. With the exception of the four corporately owned stores, these points of
distribution are operated independently from the Mobilicity Group and are compensated for sales on a commission basis 45
days after the end of the month in which a subscriber is signed on, subject to certain customer retention requirements. These
dealers often operate with very low liquidity and any disruption to the stream of revenue derived from commissions would
cause many of them to cease operations due to a lack of funding
6 Mobilicity operates on a "pay in advance" billing system which provides set monthly plans for its subscribers. Mobilicity
has approximately 194,000 subscribers who together generate gross revenues of approximately $6.3 million per month.
7
Mobilicity's business model provides for outsourcing of certain business functions: network building and maintenance,
real-time billing and rating, provisioning systems, handset logistics and distribution and call centre operations. Suppliers of
such business functions include: Ericsson Canada Inc., Amdocs Canadian Managed Services Inc. and Ingram Micro Inc.
8 The single most significant capital expenditure made by Mobilicity was the acquisition of its 10 spectrum licenses from the
Government of Canada effective in 2009. Mobilicity acquired the spectrum licenses for $243 million using funds contributed
by Holdings.
9 After purchasing the spectrum licences, Mobilicity incurred significant costs by establishing an office, hiring a management
team to develop the wireless carrier business, and contracting with Ericsson Canada Inc. to build a network system.
Outstanding indebtedness
10
In aggregate, the Mobilicity Group has raised in excess of $400 million in debt financing to fund capital expenditures
and operations since 2008. A description of that indebtedness is below:
a. Wireless is the borrower under certain first lien notes issued in a principal amount of $195,000,000 due April
29, 2018. Holdings is a guarantor of the first lien notes and each of Wireless and Holdings has entered into a
general security agreement in connection with the first lien notes. The Catalyst Capital Group Inc. ("Catalyst") holds
approximately 32% of the first lien notes.
b. Wireless is the borrower of $43.25 million in second lien notes (the "Bridge Notes") due September 30, 2013. These
Bridge Notes are also guaranteed by Holdings and the obligations thereunder are secured by the assets of Wireless
and Holdings. The Bridge Notes rank behind the first lien notes in right of payment and the security on the Bridge
Notes is subordinate to the first lien notes security.
c. Holdings has issued 15% Senior Unsecured Debentures in the total principal amount of $95 million due September
25, 2018. As of July 31, 2013, the amount outstanding on the Unsecured Senior Notes (including payment in kind
interest) was approximately $154.4 million.
d. Holdings has also issued 12% Convertible Unsecured Notes due September 25, 2018. Initially, convertible notes
in the principal amount of $59,741,000 were issued (the "Unsecured Pari Passu Notes"). Subsequently, additional
convertible notes in the principal amount of $35,000,000 were issued (the "Unsecured Subordinated Notes").
The Unsecured Subordinated Notes rank subordinate in right of payment to the Unsecured Pari Passu Notes and
the Unsecured Senior Notes and the Unsecured Pari Passu Notes rank pari passu in right of payment with the
Unsecured Senior Notes. As of July 31, 2013, the amount outstanding on the Unsecured Pari Passu Notes and the
Unsecured Subordinated Notes (including payment in kind interest) respectively, was approximately $88.4 million
and approximately $38.6 million.
11 The cash interest payment under the above described indebtedness is a payment of over $9 million on the first lien notes
which became due on September 30, 2013, the date of the Initial Order.
Mobilicity Group's financial difficulties
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3
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
12
Wireless telecom start-ups are highly capital-intensive. As indicated by the substantial indebtedness incurred by the
Mobilicity Group to date, significant fixed costs must be incurred before revenue can be generated. During the period where
a wireless carrier is building its customer base, revenue is typically insufficient to cover previously incurred investments and
ongoing operating costs. It can take several years for a customer base to be adequately built to provide profitability. The
applicants submit that Mobilicity ran out of "financial runway" before profitability was achieved and it now faces an imminent
liquidity crisis.
13 For the seven months ended July 31, 2013, the Mobilicity Group recognized revenue of $46,864,490. During that period,
the Mobilicity Group recorded a net loss of $71,958,543. As of July 31, 2013, the Mobilicity Group had on a consolidated basis
accumulated a net deficit of $431,807,958.
14
In July 2012, the Mobilicity Group engaged National Bank and Canaccord Genuity (together, the "financial advisors")
as their financial advisors in an effort to raise additional financing.
15 With the assistance of the financial advisors, the Mobilicity Group solicited more than 30 potential investors in an attempt
to raise financing. In this regard, an investor roadshow was completed in August and September of 2012 without success.
16 The Bridge Notes facility was entered into on February 6, 2013 to allow Mobilicity to continue operations while it pursued
strategic alternatives. The Bridge note lenders are the first lien note holders other than Catalyst, and certain existing holders of
Unsecured Senior Notes. Catalyst has started oppression proceedings attacking the Bridge Notes facility.
17 Mr. William Aziz was retained in late April of 2013 through BlueTree Advisors II Inc. as Chief Restructuring Officer to
provide assistance in dealing with restructuring matters. Mr. Aziz has extensive experience in the area of corporate restructuring.
18 The Mobilicity Group proposed alternative plans of arrangement earlier this year. During the course of those proceedings,
a transaction was agreed to sell the Mobilicity Group to TELUS Corporation for $380 million pursuant to a plan of arrangement
under the Canada Business Corporations Act. The plan of arrangement was approved on May 28, 2013. However, On June 4,
2013, the Minister of Industry announced that TELUS Corporation's application to transfer the spectrum licenses would not be
approved at that time. Accordingly, the TELUS transaction was not completed.
19
The Mobilicity Group has continued to engage with potential acquirers. As part of those efforts, the Mobilicity Group
solicited and received an expression of interest and engaged in detailed discussions with a significant U.S.-based wireless
service provider. However, after significant due diligence these discussions did not ultimately result in a binding offer due to
uncertainty surrounding the Government's upcoming spectrum auction.
20
In the two weeks preceding this application the Mobilicity Group developed a transaction structure for a proposed
transaction with a prospective purchaser, which is currently being considered by Industry Canada. The government's assent to
the proposed transaction was not obtained prior to this application being made.
Analysis
21
It is clear from the affidavit of Mr. Aziz that the Mobilicity Group is insolvent and that without the protection of the
CCAA, a shutdown of operations would be inevitable as the Mobilicity Group will cease to be able to pay its trade creditors in
the ordinary course and will cease to be able to make interest payments on its outstanding debt securities. Thus the applicants
are entitled to relief under the CCAA.
22
The Initial Order contained provisions permitting a charge for directors and an administration charge. These were not
opposed except as to part of the administrative charge discussed below. The applicants also sought authorization to continue the
engagement of the financial advisors who had initially been retained in 2012, which was not opposed, and approval of KERP
agreements for a small number of employees, also not opposed. The Monitor supported these provisions and they appeared to
be reasonable, and were approved.
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4
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
23
I will deal with issues that were raised by Catalyst, not in opposition to the Initial Order, but in opposition to certain
parts of it.
DIP financing
24
The Mobilicity Group has obtained a $30 million DIP facility available in five tranches, to be used only in accordance
with the cash flow forecasts of the applicants. They seek approval of this facility and a charge to secure the facility. The
facility was obtained after a solicitation process undertaken by the Mobilicity Group and its financial advisors, described in
some particularity in Mr. Aziz's affidavit. The lenders are the holders of the second lien notes under the Bridge Loan and other
unsecured lenders of the Mobilicity Group.
25
The DIP financing ranks pari passu with the Bridge Notes, and subordinate to the first lien notes, with the exception of
cash interest payments under the DIP Financing. Since the DIP financing ranks subordinate to the first lien notes, the holders
of the first lien notes, including Catalyst, will not be adversely affected by the DIP Financing.
26 In the solicitation process, the Mobilicity Group received DIP financing proposals from not less than four parties, including
existing creditors as well as third parties with no prior financial involvement with the Mobilicity Group. One such proposal was
provided by the holders of the Bridge Notes and another was provided by Catalyst. The Mobilicity Group engaged its financial
advisors and legal counsel to assist in the evaluation of the DIP Financing options that were presented.
27
Upon review, the Mobilicity Group determined, with advice from its advisors, that the proposals provided by the noncreditor third parties likely could not be implemented. Therefore, the financial advisors held discussions with the holders of the
Bridge Notes and Catalyst to obtain what the Mobilicity Group believed to be the best available offer from each party either in
the form of a final definitive term sheet or definitive agreements. These discussions occurred over the course of several weeks.
28 The financial advisors and counsel to the Mobilicity Group evaluated these DIP financing options, including the Catalyst
DIP term sheet, based upon, among other things, quantum, conditions, price, ranking and execution risk and provided their
expert views to the board of directors of the Mobilicity Group. After consideration of the DIP financing options, and after
considering the advice of its legal and financial advisors, the board of directors of the Mobilicity Group concluded that the DIP
financing option presented by the holders of the Bridge Notes was the best available option.
29
Catalyst contends that the DIP lending should not be approved at this time. It points to the cash flow forecast of the
applicants that indicates that no DIP borrowing will be required until the week ending November 8, 2013 and says that there is
time to give consideration to other DIP facilities that might be available. Mr. Moore said that he expects to obtain instructions
from Catalyst to propose DIP financing that will rank equally as the DIP lending proposed by the applicants but provide more
money and on better terms than that provided for in the proposal before the court.
30
Mr. Moore relies on the statement of Blair. J. (as he then was) in Royal Oak Mines Inc., Re (1999), 6 C.B.R. (4th) 314
(Ont. Gen. Div. [Commercial List]) that extraordinary relief such as DIP financing with super priority status should be kept in
the Initial Order to what is reasonably necessary to meet the debtor's urgent needs during the sorting out period. Each case, of
course, depends on its particular facts. Unlike Royal Oak Mines Inc., the proposed DIP financing does not give the DIP lender
super priority of the kind in Royal Oak Mines Inc.. It will rank behind the first lien notes held by Mr. Moore's client. The issue
is whether approval of DIP financing is necessary at this time.
31
As to that question, I accept the position of Mobilicity that it is important that now that the CCAA proceedings have
commenced, approving a DIP facility will provide some assurance of stability to the market place, including the customers of
Mobilicity and its suppliers and dealers. If no DIP financing were approved, there is a serious risk that customers of Mobilicity,
who do not have long term contracts, will go elsewhere. That would negatively affect the cash flow of Mobilicity and the
assumption that advances under the DIP loan would not be required until November.
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5
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
32 Should this DIP facility be approved with its proposed security? In my view it should. On the record before me, the facility
was approved by the board of directors of the Mobilicity Group with the benefit of expert advice after a process undertaken to
obtain bids for the loan. I recognize that board approval is a factor that may be taken into account but it is not determinative.
See Crystallex International Corp., Re (2012), 91 C.B.R. (5th) 207 (Ont. C.A.) at para. 85.
33
The factors in s.11.2 (4) of the CCAA must be considered. I will deal with each of them.
(a) The period during which the company is expected to be subject to the CCAA proceedings.
34 Mobilicity hopes to be able to enter into a transaction with a proposed purchaser within a relatively short period of time.
The applicants submit that it is reasonable to estimate that the proceedings could last to February, 2014 and that subject to its
conditions, the DIP facility can provide funding until that time.
(b) How the company's business and financial affairs are to be managed during the proceedings.
35
The Mobilicity Group retained Mr. Aziz in April, 2013 as its CRO, and he will continue in that capacity. He is a person
of known ability. The business will continue to be run on a day to day basis by management who are looking for stability to
enable it to keep its customer base.
(c) Whether the company's management has the confidence of its major creditors.
36 Catalyst, as the holder of approximately 34% of the first lien notes, says it has no confidence in Mr. Aziz or the way that it
alleges the Mobilicity Group has ignored the different interests of Mobilicity and its holding company. That is the subject of its
claim for oppression. However, the balance of first lien note holders, all of the Bridge Note holders, approximately 92% of the
unsecured debenture holders and all of the holders of the pari passu notes support the company's management and the approval
of the DIP facility. That is, holders of $444 million of the Mobilicity Group's debt, or 88% of that debt, support management
and the DIP facility.
(d) Whether the loan would enhance the prospects of a viable compromise or arrangement.
37 The Mobilicity Group's preferred course is to achieve a going concern transaction that will be of benefit to all stakeholders,
including the first lien note holders. The DIP facility permits some stability and breathing room to enable this to happen.
(e) The nature and value of the company's property.
38
The earlier TELUS deal was for $380 plus assumption of obligations of the company. If the value of the Mobilicity
Group is anywhere near that size, the $30 million DIP facility appears reasonable, particularly as it is to be drawn down in
tranches when needed.
(f) Whether any creditor would be materially prejudiced as a result of the security.
39 No creditors will be materially prejudiced as a result of the DIP facility charge. The secured creditors likely to be affected
by the charge have consented to it. The charge is junior to the security granted to the holders of first lien notes and is subordinate
to any encumbrances that may have priority over the first lien notes either by contract or by operation of law.
(g) The position of the Monitor as set out in its report.
40
In its pre-filing report, E & Y, the proposed Monitor, has reviewed the process leading to the DIP facility and its terms.
It states that it is of the view that the DIP facility charge is required and is reasonable in the circumstances in view of the
applicants' liquidity needs.
41
In all of the circumstances, I approved the DIP facility and its charge. There is a come-back clause in the Initial Order,
which Catalyst may or may not wish to utilize. I would observe that if Catalyst seeks to have a DIP facility proposed by it
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6
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
to replace the approved DIP facility, some consideration of the Soundair and Crown Trust Co. v. Rosenberg principles may
be appropriate.
Stay of oppression action
42 The Initial Order sought by the applicants contained a usual stay order preventing the commencement or continuance of
proceedings against or in respect of the applicants and the Monitor. Included in the protection were the DIP lenders, the holders
of Bridge Notes and the Collateral Agent under the Bridge notes. The applicants submitted, and I agree with them, that this
expanded group was appropriate in the circumstances as the holders of Bridge Notes and the Trustee have each been named in
the oppression application brought by Catalyst. The holders of the Bridge Notes and the Trustee are parties to the oppression
application by Catalyst solely due to their lending arrangements with the applicants and, as a result, the applicants are central
parties to that litigation and would need to participate actively in any steps taken in that litigation. Further, any continuation
of the oppression application against the holders of the Bridge Notes and the Trustee would distract from the goals of these
proceedings and also result in unwarranted expenditure of resources by the holders of the Bridge Notes and the Trustee, each
of which are indemnified in a customary manner by the applicants for these types of expenditures. As the DIP lenders are also
Bridge Note holders and as such parties are stepping into a similar financial position as the Bridge Note holders, the extension
of the stay to those parties is appropriate and reasonable. See Sino-Forest Corp., Re (May 8, 2012), Doc. CV-12-9667-00CL
(Ont. S.C.J.); Timminco Ltd., Re, 2012 ONSC 2515 (Ont. S.C.J. [Commercial List]) at paras. 23 and 24.
43
Catalyst contended, however, that the stay provisions should exclude its oppression application. Why this is so is not
clear. Mr. Moore said there had been no steps taken in the application since the August cross-examination of Mr. Aziz, and
that Catalyst would undertake not to take further steps until the come-back date. I see no reason why the oppression application
should be excluded from the stay contained in the Initial Order. It may be that Catalyst will be paid out in the near future if the
transaction now on the table can be concluded. In any event, it is open to any party to apply to lift a stay on proper grounds.
Catalyst is no different.
Ad hoc committee charge
44
The Initial Order contains an administration charge to cover fees and disbursements to be paid out to the Monitor and
its counsel, counsel to the applicants, counsel to the DIP lenders and counsel to the ad hoc committee of Noteholders. Catalyst
contends that there is no basis for counsel for the ad hoc committee of Noteholders to be included in this charge or to be paid
by the applicant.
45 In this case, counsel to the DIP lenders is also counsel to the ad hoc committee of noteholders. That committee includes the
balance of the first lien noteholders other than Catalyst who are the Bridge Note holders. It was the Bridge Notes that permitted
the Mobilicity Group to continue since February of this year. Those noteholders making up the ad hoc committee have been
working in a supportive capacity in an attempt to have the Mobilicity Group re-organized in a constructive way. I am satisfied
that the ad hoc committee has been of assistance to the process and that the charge is appropriate and necessary. I would also
note that the administrative charge is junior to the first lien notes and thus the security position of Catalyst is not affected by
the charge. As well the administrative charge is supported by the proposed Monitor.
Appointment of chief restructuring officer
46 The Initial Order authorizes the applicants to continue the engagement of William Aziz as the chief restructuring officer
of the Mobilicity Group on the terms set out in the CRO engagement letter. This letter has been sealed as confidential. Catalyst
said it should see the letter and until then no order should be made. On the day before this application was heard, counsel for
the Mobilicity Group offered to send the complete record to counsel for Catalyst if an undertaking was given that the material
would be kept confidential prior to the hearing. Mr. Moore objected to such a pre-condition and was served shortly before the
hearing with the application record without the confidential documents.
47
Catalyst contends that no order should be made until it has had a chance to see the terms of the engagement letter. I do
not think this wise. To proceed with the CCAA process without the continuation of Mr. Aziz as the chief restructuring officer
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7
8440522 Canada Inc., Re, 2013 ONSC 6167, 2013 CarswellOnt 13921
2013 ONSC 6167, 2013 CarswellOnt 13921, 233 A.C.W.S. (3d) 286, 8 C.B.R. (6th) 86
would send the entirely wrong signal to all stakeholders, let alone the Government of Canada with whom Mr. Aziz has been
dealing regarding a proposed transaction.
48 Mr. Aziz has a thorough knowledge of the affairs of the Mobilicity Group, having been its chief restructuring officer since
April of this year. He has been central to the efforts of the applicants to restructure. He is very knowledgeable and experienced.
In is appropriate that his engagement now be continued. The proposed Monitor has reviewed the engagement letter and is of
the view that the fee arrangement is reasonable and consistent with the fee arrangements in other engagements of similar size,
scope and complexity.
49 Counsel for the applicants and Catalyst were agreeable to working out an appropriate confidentiality arrangement. Once
Catalyst has seen the engagement letter for Mr. Aziz, it will be entitled if so advised to bring whatever come-back motion it
thinks appropriate.
50
The Initial Order as signed contains provisions as discussed in this endorsement.
Application granted.
End of Document
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reserved.
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8
7
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
2013 ONSC 5461
Ontario Superior Court of Justice [Commercial List]
Tamerlane Ventures Inc., Re
2013 CarswellOnt 12213, 2013 ONSC 5461, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
In the Matter of the Companies' Creditors
Arrangement Act, R.S.C. 1985, c. C-36, as Amended
In the Matter of a Plan of Compromise or Arrangement of Tamerlane Ventures Inc. and Pine Point Holding Corp.
Newbould J.
Heard: August 23, 2013
Judgment: August 28, 2013
Docket: CV-13-10228-00CL
Counsel: S. Richard Orzy, Derek J. Bell, Sean H. Zweig for Applicants
Robert J. Chadwick, Logan Willis for Proposed Monitor, Duff & Phelps Canada Restructuring Inc.
Joseph Bellissimo for Renvest Mercantile Bankcorp Inc.
Subject: Insolvency; Contracts; Corporate and Commercial
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.2 Initial application
XIX.2.b Grant of stay
XIX.2.b.viii Miscellaneous
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Initial application — Grant of stay —
Miscellaneous
Terms of order — T Inc. and its subsidiaries were engaged in mining activity in Canada and Peru — T Inc. defaulted on
loan from secured lender — Parties negotiated consensual filing under Companies' Creditors Arrangement Act (CCAA),
under which secured lender agreed to provide DIP financing and to forbear from exercising its rights — DIP loan was to
mature approximately four months after date application at bar was heard — Order drafted by parties contained clause
preventing extension of stay beyond maturity date of DIP loan unless secured debt and DIP loan were repaid or secured
lender and monitor consented (original sunset clause) — T Inc. and one of its subsidiaries brought application for initial
order and stay under s. 11 of CCAA — Application granted — There was no doubt that applicants were insolvent and
qualified for filing under CCAA and obtaining stay — It was appropriate that stay extend to T Inc.'s American subsidiary,
which had guaranteed secured loans, and to T Inc.'s Peruvian subsidiary, which held valuable mining property — Courts
have inherent jurisdiction to impose stays against non-applicant third parties where it is important to reorganization and
restructuring process, and where it is just and reasonable to do so — Proposed sale and solicitation process and its terms
were appropriate, and it was approved — Proposed charges of $300,000 for monitor, its counsel and applicants' counsel,
$300,000 for financial advisor and $45,000 for directors were reasonable and were approved — DIP facility and charge
was supported by factors listed in s. 11.2(4) of CCAA — At court's direction, parties modified original sunset clause by
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1
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
adding clause that order was subject in all respects to discretion of court — Original sunset clause removed discretion of
court to do what it considered appropriate, and counsel were unable to provide any case in which such order had been made.
Table of Authorities
Cases considered by Newbould J.:
Bank of Montreal v. Carnival National Leasing Ltd. (2011), 74 C.B.R. (5th) 300, 2011 ONSC 1007, 2011 CarswellOnt
896 (Ont. S.C.J.) — referred to
Canwest Publishing Inc./Publications Canwest Inc., Re (2010), 63 C.B.R. (5th) 115, 2010 CarswellOnt 212, 2010
ONSC 222 (Ont. S.C.J. [Commercial List]) — referred to
Cinram International Inc., Re (2012), 91 C.B.R. (5th) 46, 2012 CarswellOnt 8413, 2012 ONSC 3767 (Ont. S.C.J.
[Commercial List]) — considered
Crystallex International Corp., Re (2012), 2012 CarswellOnt 7329, 2012 ONCA 404, 91 C.B.R. (5th) 207, 293 O.A.C.
102, 4 B.L.R. (5th) 1 (Ont. C.A.) — referred to
Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24, 9 B.L.R. (2d) 275, 1993 CarswellOnt 183 (Ont. Gen.
Div. [Commercial List]) — referred to
Sino-Forest Corp., Re (2012), 2012 CarswellOnt 4117, 2012 ONSC 2063 (Ont. S.C.J. [Commercial List]) —
considered
SkyLink Aviation Inc., Re (2013), 2013 CarswellOnt 2785, 2013 ONSC 1500 (Ont. S.C.J. [Commercial List]) —
considered
Ted Leroy Trucking Ltd., Re (2010), (sub nom. Century Services Inc. v. Canada (A.G.)) [2010] 3 S.C.R. 379, [2010]
G.S.T.C. 186, 12 B.C.L.R. (5th) 1, (sub nom. Century Services Inc. v. A.G. of Canada) 2011 G.T.C. 2006 (Eng.),
(sub nom. Century Services Inc. v. A.G. of Canada) 2011 D.T.C. 5006 (Eng.), (sub nom. Leroy (Ted) Trucking Ltd.,
Re) 503 W.A.C. 1, (sub nom. Leroy (Ted) Trucking Ltd., Re) 296 B.C.A.C. 1, 2010 SCC 60, 2010 CarswellBC 3419,
2010 CarswellBC 3420, 409 N.R. 201, (sub nom. Ted LeRoy Trucking Ltd., Re) 326 D.L.R. (4th) 577, 72 C.B.R.
(5th) 170, [2011] 2 W.W.R. 383 (S.C.C.) — considered
Statutes considered:
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11 — considered
s. 11.2(4) [en. 2005, c. 47, s. 128] — considered
Personal Property Security Act, R.S.O. 1990, c. P.10
s. 63 — considered
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2
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
APPLICATION by insolvent corporations for initial order and stay under s. 11 of Companies' Creditors Arrangement Act.
Newbould J.:
1
The applicants applied on August 23, 2013 for protection under the CCAA, at which time an Initial Order was granted
containing several provisions. These are my reasons for the granting of the order.
Tamerlane business
2
At the time of the application, Tamerlane Ventures Inc. ("Tamerlane") was a publicly traded company whose shares
were listed and posted for trading on the TSX Venture Exchange. Tamerlane and its subsidiaries (collectively, the "Tamerlane
Group"), including Pine Point Holding Corp. ("Tamerlane Pine Point"), Tamerlane Ventures USA Inc. ("Tamerlane USA")
and Tamerlane Ventures Peru SAC ("Tamerlane Peru") are engaged in the acquisition, exploration and development of base
metal projects in Canada and Peru.
3
The applicants' flagship property is the Pine Point Property, a project located near Hay River in the South Slave Lake
area of the Northwest Territories of Canada. It at one time was an operating mine. The applicants firmly believe that there
is substantial value in the Pine Point Property and have completed a NI 43-101 Technical Report which shows 10.9 million
tonnes of measured and indicated resources in the "R-190" zinc-lead deposit. The project has been determined to be feasible
and licences have been obtained to put the first deposit into production. All of the expensive infrastructure, such as roads, power
lines and railheads, are already in place, minimizing the capital cost necessary to commence operations. The applicants only
need to raise the financing necessary to be able to exploit the value of the project, a task made more difficult by, among other
things, the problems experienced generally in the mining sector thus far in 2013.
4 The Tamerlane Group's other significant assets are the Los Pinos mining concessions south of Lima in Peru, which host a
historic copper resource. The Tamerlane Group acquired the Los Pinos assets in 2007 through one of its subsidiaries, Tamerlane
Peru, and it currently holds the mining concessions through another of its subsidiaries, Tamerlane Minera.
5
The Los Pinos deposit is a 790 hectare porphyry (a type of igneous rock) copper deposit. Originally investigated in the
1990s when the price of copper was a quarter of its price today, Los Pinos has historically been viewed as a valuable property.
With rising copper prices, it is now viewed as being even more valuable.
6
The exploration and development activities have been generally carried out by employees of Tamerlane USA. The
applicants' management team consists of four individuals who are employees of Tamerlane USA, which provides management
services by contract to the applicants.
7 As at March 31, 2013 the Tamerlane Group had total consolidated assets with a net book value of $24,814,433. The assets
included consolidated current assets of $2,007,406, and consolidated non-current assets with a net book value of $22,807,027.
Non-current assets included primarily the investment in the Pine Point property of $20,729,551 and the Los Pinos property
of $1,314,936.
8
Tamerlane has obtained valuations of Los Pinos and the Pine Point Property. The Los Pinos valuation was completed in
May 2013 and indicates a preliminary valuation of $12 to $15 million using a 0.3% copper cut-off grade, or $17 to $21 million
using a 0.2% copper cut-off grade. The Pine Point valuation was completed in July 2013 and indicates a valuation of $30 to
$56 million based on market comparables, with a value as high as $229 million considering precedent transactions.
Secured and unsecured debt
9
Pursuant to a credit agreement between Tamerlane and Global Resource Fund, a fund managed by Renvest Mercantile
Bancorp Inc. ("Global Resource Fund" or "secured lender") made as of December 16, 2010, as amended by a first amending
agreement dated June 30, 2011 and a second amending agreement dated July 29, 2011, Tamerlane became indebted to the
Copyright © Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.
3
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
Secured Lender for USD $10,000,000. The secured indebtedness under the credit agreement is guaranteed by both Tamerlane
Pine Point and Tamerlane USA, and each of Tamerlane, Tamerlane Pine Point and Tamerlane USA has executed a general
security agreement in favour of the secured lender in respect of the secured debt.
10 The only other secured creditors are the applicants' counsel, the Monitor and the Monitor's counsel in respect of the fees
and disbursements owing to each.
11
The applicants' unsecured creditors are principally trade creditors. Collectively, the applicants' accounts payable were
approximately CAD $850,000 as at August 13, 2013, in addition to accrued professional fees in connection with issues related
to the secured debt and this proceeding.
Events leading to filing
12
Given that the Tamerlane Group is in the exploration stage with its assets, it does not yet generate cash flow from
operations. Accordingly, its only potential source of cash is from financing activities, which have been problematic in light of
the current market for junior mining companies.
13
It was contemplated when the credit agreement with Global Resource Fund was entered into that the take-out financing
would be in the form of construction financing for Pine Point. However Tamerlane was unsuccessful in arranging that.
Tamerlane was successful in late 2012 in arranging a small flow-through financing from a director and in early 2013 a share
issuance for $1.7 million dollars. Negotiations with various parties for to raise more funds by debt or asset sales have so far
been unsuccessful.
14
As a result of liquidity constraints facing Tamerlane in the fall of 2012, it failed to make regularly scheduled monthly
interest payments in respect of the secured debt beginning on September 25, 2012 and failed to repay the principal balance
on the maturity date of October 16, 2012, each of which was an event of default under the credit agreement with the secured
lender Global Resource Fund.
15 Tamerlane and Global Resource Fund then entered into a forbearance agreement made as of December 31, 2012 in which
Tamerlane agreed to make certain payments to Global Resource Fund, including a $1,500,000 principal repayment on March
31, 2013. As a result of liquidity constraints, Tamerlane was unable to make the March 31 payment, an event of default under
the credit and forbearance agreements. On May 24, 2013, Tamerlane failed to make the May interest payment, and on May
29, 2013, the applicants received a letter from Global Resource Fund's counsel enclosing a NITES notice under the BIA and a
notice of intention to dispose of collateral pursuant to section 63 of the PPSA. The total secured debt was $11,631,948.90.
16
On June 10, 2013, Global Resource Fund and Tamerlane entered into an amendment to the forbearance agreement
pursuant to which Global Resource Fund withdrew its statutory notices and agreed to capitalize the May interest payment in
exchange for Tamerlane agreeing to pay certain fees to the Global Resource Fund that were capitalized and resuming making
cash interest payments to the Secured Lender with the June 25, 2013 interest payment. Tamerlane was unable to make the July
25 payment, which resulted in an event of default under the credit and forbearance amendment agreements.
17
On July 26, 2013, Global Resource Fund served a new NITES notice and a notice of intention to dispose of collateral
pursuant to section 63 the PPSA, at which time the total of the secured debt was $12,100,254.26.
18
Thereafter the parties negotiated a consensual CCAA filing, under which Global Resource Fund has agreed to provide
DIP financing and to forbear from exercising its rights until January 7, 2014. The terms of the stay of proceedings and DIP
financing are unusual, to be discussed.
Discussion
19
There is no doubt that the applicants are insolvent and qualify for filing under the CCAA and obtaining a stay of
proceedings. I am satisfied from the record, including the report from the proposed Monitor, that an Initial Order and a stay
under section 11 of the CCAA should be made.
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4
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
20
The applicants request that the stay apply to Tamerlane USA and Tamerlane Peru, non-parties to this application. The
business operations of the applicants, Tamerlane USA and Tamerlane Peru are intertwined, and the request to extend the stay
of proceedings to Tamerlane USA and Tamerlane Peru is to maintain stability and value during the CCAA process.
21
Courts have an inherent jurisdiction to impose stays of proceedings against non-applicant third parties where it is
important to the reorganization and restructuring process, and where it is just and reasonable to do so. See Farley J. in Lehndorff
General Partner Ltd., Re (1993), 9 B.L.R. (2d) 275 (Ont. Gen. Div. [Commercial List]) and Pepall J. (as she then was) in
Canwest Publishing Inc./Publications Canwest Inc., Re (2010), 63 C.B.R. (5th) 115 (Ont. S.C.J. [Commercial List]). Recently
Morawetz J. has made such orders in Cinram International Inc., Re, 2012 ONSC 3767 (Ont. S.C.J. [Commercial List]), SinoForest Corp., Re, 2012 ONSC 2063 (Ont. S.C.J. [Commercial List]) and SkyLink Aviation Inc., Re, 2013 ONSC 1500 (Ont.
S.C.J. [Commercial List]). I am satisfied that it is appropriate that the stay of proceedings extend to Tamerlane USA, which has
guaranteed the secured loans and to Tamerlane Peru, which holds the valuable Los Pinos assets in Peru.
22
Under the Initial Order, PricewaterhouseCoopers Corporate Finance Inc. is to be appointed a financial advisor. PWC is
under the oversight of the Monitor to implement a Sale and Solicitation Process, under which PWC will seek to identify one
or more financiers or purchasers of, and/or investors in, the key entities that comprise the Tamerlane Group. The SISP will
include broad marketing to all potential financiers, purchasers and investors and will consider offers for proposed financing
to repay the secured debt, an investment in the applicants' business and/or a purchase of some or all of the applicants' assets.
The proposed Monitor supports the SIST and is of the view that it is in the interests of the applicants' stakeholders. The SISP
and its terms are appropriate and it is approved.
23
The Initial Order contains provisions for an administration charge for the Monitor, its counsel and for counsel to the
applicants in the amount of $300,000, a financial advisor charge of $300,000, a directors' charge of $45,000 to the extent the
directors are not covered under their D&O policy and a subordinated administration charge subordinated to the secured loans
and the proposed DIP charge for expenses not covered by the administration and financial advisor charges. These charges
appear reasonable and the proposed Monitor is of the same view. They are approved.
DIP facility and charge
24
The applicants' principal use of cash during these proceedings will consist of the payment of ongoing, but minimized,
day-to-day operational expenses, such as regular remuneration for those individuals providing services to the applicants, office
related expenses, and professional fees and disbursements in connection with these CCAA proceedings. The applicants will
require additional borrowing to do this. It is apparent that given the lack of alternate financing, any restructuring will not be
possible without DIP financing.
25 The DIP lender is Global Resource Fund, the secured lender to the applicants. The DIP loan is for a net $1,017,500 with
simple 12% interest. It is to mature on January 7, 2014, by which time it is anticipated that the SISP process will have resulted
in a successful raising of funds to repay the secured loan and the DIP facility.
26
Section 11.2(4) of the CCAA lists factors, among other things, that the court is to consider when a request for a DIP
financing charge is made. A review of those factors in this case supports the DIP facility and charge. The facility is required to
continue during the CCAA process, the assets are sufficient to support the charge, the secured lender supports the applicants'
management remaining in possession of the business, albeit with PWC being engaged to run the SISP, the loan is a fraction of
the applicants' total assets and the proposed Monitor is of the view that the DIP facility and charge are fair and reasonable. The
one factor that gives me pause is the first listed in section 11.2(4), being the period during which the applicants are expected to
be subject to the CCAA proceedings. That involves the sunset clause, to which I now turn.
Sunset clause
27 During the negotiations leading to this consensual CCAA application, Global Resource Fund, the secured lender, expressed
a willingness to negotiate with the applicants but firmly stated that as a key term of consenting to any CCAA initial order,
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5
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
it required (i) a fixed "sunset date" of January 7, 2014 for the CCAA proceeding beyond which stay extensions could not be
sought without the its consent and the consent of the Monitor unless both the outstanding secured debt and the DIP loan had
been repaid in full, and (ii) a provision in the initial order directing that a receiver selected by Global Resource Fund would
be appointed after that date.
28
The Initial Order as drafted contains language preventing the applicants from seeking or obtaining any extension of the
stay period beyond January 7, 2014 unless it has repaid the outstanding secured debt and the DIP loan or received the consent
of Global Resource Fund and the Monitor, and that immediately following January 7, 2013 (i) the CCAA proceedings shall
terminate, (ii) the Monitor shall be discharged, (iii) the Initial Order (with some exceptions) shall be of no force and effect and
(iv) a receiver selected by Global Resource Fund shall be appointed.
29
Ms. Kent, the executive chair and CFO of Tamerlane, has sworn in her affidavit that Global Resource Fund insisted on
these terms and that given the financial circumstances of the applicants, there were significant cost-savings and other benefits
to them and all of the stakeholders for this proceeding to be consensual rather than contentious. Accordingly, the directors of
the applicants exercised their business judgment to agree to the terms. The proposed Monitor states its understanding as well
is that the consent of Global Resource Fund to these CCAA proceedings is conditional on these terms.
30
Section 11 of the CCAA authorizes a court to make any order "that it considers appropriate in the circumstances." In
considering what may be appropriate, Deschamps J. stated in Ted Leroy Trucking Ltd., Re, [2010] 3 S.C.R. 379 (S.C.C.):
70. ...Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives
underlying the CCAA. The question is whether the order will usefully further efforts to achieve the remedial purpose of the
CCAA — avoiding the social and economic losses resulting from liquidation of an insolvent company. I would add that
appropriateness extends not only to the purpose of the order, but also to the means it employs. Courts should be mindful
that chances for successful reorganizations are enhanced where participants achieve common ground and all stakeholders
are treated as advantageously and fairly as the circumstances permit.
31
There is no doubt that CCAA proceedings can be terminated when the prospects of a restructuring are at an end. In
Century Services, Deschamps J. recognized this in stating:
71. It is well established that efforts to reorganize under the CCAA can be terminated and the stay of proceedings against
the debtor lifted if the reorganization is "doomed to failure" (see Chef Ready, at p. 88; Philip's Manufacturing Ltd., Re
(1992), 9 C.B.R. (3d) 25 (B.C.C.A.), at paras. 6-7). However, when an order is sought that does realistically advance the
CCAA's purposes, the ability to make it is within the discretion of a CCAA court.
32
The fact that the board of directors of the applicants exercised their business judgment in agreeing to the terms imposed
by Global Resource Fund in order to achieve a consensual outcome is a factor I can and do take into account, with the caution
that in the case of interim financing, the court must make an independent determination, and arrive at an appropriate order,
having regard to the factors in s. 11.2(4). The court may consider, but not defer to or be fettered by, the recommendation of the
board. See Crystallex International Corp., Re (2012), 91 C.B.R. (5th) 207 (Ont. C.A.) at para 85.
33 It is apparent from looking at the history of the matter that Global Resource Fund had every intention of exercising its rights
under its security to apply to court to have a receiver appointed, and with the passage of time during which there were defaults,
including defaults in forbearance agreements, the result would likely have been inevitable. See Bank of Montreal v. Carnival
National Leasing Ltd. (2011), 74 C.B.R. (5th) 300 (Ont. S.C.J.) and the authorities therein discussed. Thus it is understandable
that the directors agreed to the terms required by Global Resource Fund. If Global Resource Fund had refused to fund the DIP
facility or had refused to agree to any further extension for payment of the secured loan, the prospects of financing the payout
of Global Resource Fund through a SISP process would in all likelihood not been available to the applicants or its stakeholders.
34 What is unusual in the proposed Initial Order is that the discretion of the court on January 7, 2014 to do what it considers
appropriate is removed. Counsel have been unable to provide any case in which such an order has been made. I did not think
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6
Tamerlane Ventures Inc., Re, 2013 ONSC 5461, 2013 CarswellOnt 12213
2013 ONSC 5461, 2013 CarswellOnt 12213, 232 A.C.W.S. (3d) 32, 6 C.B.R. (6th) 328
it appropriate for such an order to be made. At my direction, the parties agreed to add a clause that the order was subject in all
respects to the discretion of the Court. With that change, I approved the Initial Order.
Application granted.
End of Document
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reserved.
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7
8
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
1991 CarswellOnt 205
Ontario Court of Appeal
Royal Bank v. Soundair Corp.
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178,
46 O.A.C. 321, 4 O.R. (3d) 1, 7 C.B.R. (3d) 1, 83 D.L.R. (4th) 76
ROYAL BANK OF CANADA (plaintiff/respondent) v. SOUNDAIR CORPORATION
(respondent), CANADIAN PENSION CAPITAL LIMITED (appellant)
and CANADIAN INSURERS' CAPITAL CORPORATION (appellant)
Goodman, McKinlay and Galligan JJ.A.
Heard: June 11, 12, 13 and 14, 1991
Judgment: July 3, 1991
Docket: Doc. CA 318/91
Counsel: J. B. Berkow and S. H. Goldman , for appellants Canadian Pension Capital Limited and Canadian Insurers' Capital
Corporation.
J. T. Morin, Q.C. , for Air Canada.
L.A.J. Barnes and L.E. Ritchie , for plaintiff/respondent Royal Bank of Canada.
S.F. Dunphy and G.K. Ketcheson , for Ernst & Young Inc., receiver of respondent Soundair Corporation.
W.G. Horton , for Ontario Express Limited.
N.J. Spies , for Frontier Air Limited.
Subject: Corporate and Commercial; Insolvency
Headnote
Receivers --- Conduct and liability of receiver — General conduct of receiver
Court considering its position when approving sale recommended by receiver.
S Corp., which engaged in the air transport business, had a division known as AT. When S Corp. experienced financial
difficulties, one of the secured creditors, who had an interest in the assets of AT, brought a motion for the appointment of a
receiver. The receiver was ordered to operate AT and to sell it as a going concern. The receiver had two offers. It accepted
the offer made by OEL and rejected an offer by 922 which contained an unacceptable condition. Subsequently, 922 obtained
an order allowing it to make a second offer removing the condition. The secured creditors supported acceptance of the
922 offer. The court approved the sale to OEL and dismissed the motion to approve the 922 offer. An appeal was brought
from this order.
Held:
The appeal was dismissed.
Per Galligan J.A.: When a court appoints a receiver to use its commercial expertise to sell an airline, it is inescapable that
it intends to rely upon the receiver's expertise and not upon its own. The court should be reluctant to second-guess, with
the benefit of hindsight, the considered business decisions made by its receiver.
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1
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
The conduct of the receiver should be reviewed in the light of the specific mandate given to him by the court. The order
appointing the receiver did not say how the receiver was to negotiate the sale. The order obviously intended, because of
the unusual nature of the asset being sold, to leave the method of sale substantially to the discretion of the receiver.
To determine whether a receiver has acted providently, the conduct of the receiver should be examined in light of the
information the receiver had when it agreed to accept an offer. On the date the receiver accepted the OEL offer, it had
only two offers: that of OEL, which was acceptable, and that of 922, which contained an unacceptable condition. The
decision made was a sound one in the circumstances. The receiver made a sufficient effort to obtain the best price, and
did not act improvidently.
The court must exercise extreme caution before it interferes with the process adopted by a receiver to sell an unusual asset.
It is important that prospective purchasers know that, if they are acting in good faith, bargain seriously with a receiver
and enter into an agreement with it, a court will not lightly interfere with the commercial judgment of the receiver to sell
the assets to them.
Per McKinlay J.A. (concurring in the result): It is most important that the integrity of procedures followed by courtappointed receivers be protected in the interests of both commercial morality and the future confidence of business persons
in their dealings with receivers. In all cases, the court should carefully scrutinize the procedure followed by the receiver.
While the procedure carried out by the receiver in this case was appropriate, given the unfolding of events and the unique
nature of the asset involved, it may not be a procedure that is likely to be appropriate in many receivership sales.
Per Goodman J.A. (dissenting): It was imprudent and unfair on the part of the receiver to ignore an offer from an interested
party which offered approximately triple the cash down payment without giving a chance to the offeror to remove the
conditions or other terms which made the offer unacceptable to the receiver. The offer accepted by the receiver was
improvident and unfair insofar as two creditors were concerned.
Table of Authorities
Cases considered:
Beauty Counsellors of Canada Ltd., Re (1986), 58 C.B.R. (N.S.) 237 (Ont. S.C.) — referred to
British Columbia Development Corp. v. Spun Cast Industries Ltd. (1977), 26 C.B.R. (N.S.) 28, 5 B.C.L.R. 94 (S.C.)
— referred to
Cameron v. Bank of Nova Scotia (1981), 38 C.B.R. (N.S.) 1, 45 N.S.R. (2d) 303, 86 A.P.R. 303 (C.A.) — referred to
Crown Trust Co. v. Rosenburg (1986), 67 C.B.R. (N.S.) 320n, 60 O.R. (2d) 87, 22 C.P.C. (2d) 131, 39 D.L.R. (4th)
526 (H.C.) — applied
Salima Investments Ltd. v. Bank of Montreal (1985), 59 C.B.R. (N.S.) 242, 41 Alta. L.R. (2d) 58, 65 A.R. 372 , 21
D.L.R. (4th) (C.A.) — referred to
Selkirk, Re (1986), 58 C.B.R. (N.S.) 245 (Ont. S.C.) — referred to
Selkirk, Re (1987), 64 C.B.R. (N.S.) 140 (Ont. S.C.) — referred to
Statutes considered:
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2
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
Employment Standards Act, R.S.O. 1980, c. 137.
Environmental Protection Act, R.S.O. 1980, c. 141.
Appeal from order approving sale of assets by receiver.
Galligan J.A. :
1 This is an appeal from the order of Rosenberg J. made on May 1, 1991. By that order, he approved the sale of Air Toronto
to Ontario Express Limited and Frontier Air Limited, and he dismissed a motion to approve an offer to purchase Air Toronto
by 922246 Ontario Limited.
2
It is necessary at the outset to give some background to the dispute. Soundair Corporation ("Soundair") is a corporation
engaged in the air transport business. It has three divisions. One of them is Air Toronto. Air Toronto operates a scheduled
airline from Toronto to a number of mid-sized cities in the United States of America. Its routes serve as feeders to several of
Air Canada's routes. Pursuant to a connector agreement, Air Canada provides some services to Air Toronto and benefits from
the feeder traffic provided by it. The operational relationship between Air Canada and Air Toronto is a close one.
3
In the latter part of 1989 and the early part of 1990, Soundair was in financial difficulty. Soundair has two secured
creditors who have an interest in the assets of Air Toronto. The Royal Bank of Canada (the "Royal Bank") is owed at least
$65 million dollars. The appellants Canadian Pension Capital Limited and Canadian Insurers' Capital Corporation (collectively
called "CCFL") are owed approximately $9,500,000. Those creditors will have a deficiency expected to be in excess of $50
million on the winding up of Soundair.
4 On April 26, 1990, upon the motion of the Royal Bank, O'Brien J. appointed Ernst & Young Inc. (the "receiver") as receiver
of all of the assets, property and undertakings of Soundair. The order required the receiver to operate Air Toronto and sell it as
a going concern. Because of the close relationship between Air Toronto and Air Canada, it was contemplated that the receiver
would obtain the assistance of Air Canada to operate Air Toronto. The order authorized the receiver:
(b) to enter into contractual arrangements with Air Canada to retain a manager or operator, including Air Canada, to manage
and operate Air Toronto under the supervision of Ernst & Young Inc. until the completion of the sale of Air Toronto to
Air Canada or other person.
Also because of the close relationship, it was expected that Air Canada would purchase Air Toronto. To that end, the order
of O'Brien J. authorized the Receiver:
(c) to negotiate and do all things necessary or desirable to complete a sale of Air Toronto to Air Canada and, if a sale
to Air Canada cannot be completed, to negotiate and sell Air Toronto to another person, subject to terms and conditions
approved by this Court.
5
Over a period of several weeks following that order, negotiations directed towards the sale of Air Toronto took place
between the receiver and Air Canada. Air Canada had an agreement with the receiver that it would have exclusive negotiating
rights during that period. I do not think it is necessary to review those negotiations, but I note that Air Canada had complete
access to all of the operations of Air Toronto and conducted due diligence examinations. It became thoroughly acquainted with
every aspect of Air Toronto's operations.
6
Those negotiations came to an end when an offer made by Air Canada on June 19, 1990, was considered unsatisfactory
by the receiver. The offer was not accepted and lapsed. Having regard to the tenor of Air Canada's negotiating stance and a
letter sent by its solicitors on July 20, 1990, I think that the receiver was eminently reasonable when it decided that there was
no realistic possibility of selling Air Toronto to Air Canada.
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3
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
7
The receiver then looked elsewhere. Air Toronto's feeder business is very attractive, but it only has value to a national
airline. The receiver concluded reasonably, therefore, that it was commercially necessary for one of Canada's two national
airlines to be involved in any sale of Air Toronto. Realistically, there were only two possible purchasers, whether direct or
indirect. They were Air Canada and Canadian Airlines International.
8 It was well known in the air transport industry that Air Toronto was for sale. During the months following the collapse of
the negotiations with Air Canada, the receiver tried unsuccessfully to find viable purchasers. In late 1990, the receiver turned
to Canadian Airlines International, the only realistic alternative. Negotiations began between them. Those negotiations led to
a letter of intent dated February 11, 1990. On March 6, 1991, the receiver received an offer from Ontario Express Limited and
Frontier Airlines Limited, who are subsidiaries of Canadian Airlines International. This offer is called the OEL offer.
9
In the meantime, Air Canada and CCFL were having discussions about making an offer for the purchase of Air Toronto.
They formed 922246 Ontario Limited ("922") for the purpose of purchasing Air Toronto. On March 1, 1991, CCFL wrote to the
receiver saying that it proposed to make an offer. On March 7, 1991, Air Canada and CCFL presented an offer to the receiver
in the name of 922. For convenience, its offers are called the "922 offers."
10
The first 922 offer contained a condition which was unacceptable to the receiver. I will refer to that condition in more
detail later. The receiver declined the 922 offer and on March 8, 1991, accepted the OEL offer. Subsequently, 922 obtained
an order allowing it to make a second offer. It then submitted an offer which was virtually identical to that of March 7, 1991,
except that the unacceptable condition had been removed.
11
The proceedings before Rosenberg J. then followed. He approved the sale to OEL and dismissed a motion for the
acceptance of the 922 offer. Before Rosenberg J., and in this court, both CCFL and the Royal Bank supported the acceptance
of the second 922 offer.
12
There are only two issues which must be resolved in this appeal. They are:
(1) Did the receiver act properly when it entered into an agreement to sell Air Toronto to OEL?
(2) What effect does the support of the 922 offer by the secured creditors have on the result?
13
I will deal with the two issues separately.
1. Did the Receiver Act Properly in Agreeing to Sell to OEL?
14 Before dealing with that issue, there are three general observations which I think I should make. The first is that the sale
of an airline as a going concern is a very complex process. The best method of selling an airline at the best price is something
far removed from the expertise of a court. When a court appoints a receiver to use its commercial expertise to sell an airline, it
is inescapable that it intends to rely upon the receiver's expertise and not upon its own. Therefore, the court must place a great
deal of confidence in the actions taken and in the opinions formed by the receiver. It should also assume that the receiver is
acting properly unless the contrary is clearly shown. The second observation is that the court should be reluctant to secondguess, with the benefit of hindsight, the considered business decisions made by its receiver. The third observation which I wish
to make is that the conduct of the receiver should be reviewed in the light of the specific mandate given to him by the court.
15
The order of O'Brien J. provided that if the receiver could not complete the sale to Air Canada that it was "to negotiate
and sell Air Toronto to another person." The court did not say how the receiver was to negotiate the sale. It did not say it was
to call for bids or conduct an auction. It told the receiver to negotiate and sell. It obviously intended, because of the unusual
nature of the asset being sold, to leave the method of sale substantially in the discretion of the receiver. I think, therefore, that
the court should not review minutely the process of the sale when, broadly speaking, it appears to the court to be a just process.
16
As did Rosenberg J., I adopt as correct the statement made by Anderson J. in Crown Trust Co. v. Rosenberg (1986), 60
O.R. (2d) 87, 67 C.B.R. (N.S.) 320n, 22 C.P.C. (2d) 131, 39 D.L.R. (4th) 526 (H.C.) , at pp. 92-94 [O.R.], of the duties which
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4
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
a court must perform when deciding whether a receiver who has sold a property acted properly. When he set out the court's
duties, he did not put them in any order of priority, nor do I. I summarize those duties as follows:
1. It should consider whether the receiver has made a sufficient effort to get the best price and has not acted improvidently.
2. It should consider the interests of all parties.
3. It should consider the efficacy and integrity of the process by which offers are obtained.
4. It should consider whether there has been unfairness in the working out of the process.
17
I intend to discuss the performance of those duties separately.
1. Did the Receiver make a sufficient effort to get the best price and did it act providently?
18 Having regard to the fact that it was highly unlikely that a commercially viable sale could be made to anyone but the two
national airlines, or to someone supported by either of them, it is my view that the receiver acted wisely and reasonably when it
negotiated only with Air Canada and Canadian Airlines International. Furthermore, when Air Canada said that it would submit
no further offers and gave the impression that it would not participate further in the receiver's efforts to sell, the only course
reasonably open to the receiver was to negotiate with Canadian Airlines International. Realistically, there was nowhere else to
go but to Canadian Airlines International. In do ing so, it is my opinion that the receiver made sufficient efforts to sell the airline.
19
When the receiver got the OEL offer on March 6, 1991, it was over 10 months since it had been charged with the
responsibility of selling Air Toronto. Until then, the receiver had not received one offer which it thought was acceptable. After
substantial efforts to sell the airline over that period, I find it difficult to think that the receiver acted improvidently in accepting
the only acceptable offer which it had.
20
On March 8, 1991, the date when the receiver accepted the OEL offer, it had only two offers, the OEL offer, which
was acceptable, and the 922 offer, which contained an unacceptable condition. I cannot see how the receiver, assuming for the
moment that the price was reasonable, could have done anything but accept the OEL offer.
21 When deciding whether a receiver had acted providently, the court should examine the conduct of the receiver in light of
the information the receiver had when it agreed to accept an offer. In this case, the court should look at the receiver's conduct
in the light of the information it had when it made its decision on March 8, 1991. The court should be very cautious before
deciding that the receiver's conduct was improvident based upon information which has come to light after it made its decision.
To do so, in my view, would derogate from the mandate to sell given to the receiver by the order of O'Brien J. I agree with and
adopt what was said by Anderson J. in Crown Trust Co. v. Rosenberg , supra, at p. 112 [O.R.]:
Its decision was made as a matter of business judgment on the elements then available to it . It is of the very essence
of a receiver's function to make such judgments and in the making of them to act seriously and responsibly so as to be
prepared to stand behind them.
If the court were to reject the recommendation of the Receiver in any but the most exceptional circumstances, it would
materially diminish and weaken the role and function of the Receiver both in the perception of receivers and in the
perception of any others who might have occasion to deal with them. It would lead to the conclusion that the decision of
the Receiver was of little weight and that the real decision was always made upon the motion for approval. That would be
a consequence susceptible of immensely damaging results to the disposition of assets by court-appointed receivers.
[Emphasis added.]
22
I also agree with and adopt what was said by Macdonald J.A. in Cameron v. Bank of Nova Scotia (1981), 38 C.B.R.
(N.S.) 1, 45 N.S.R. (2d) 303, 86 A.P.R. 303 (C.A.) , at p. 11 [C.B.R.]:
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5
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
In my opinion if the decision of the receiver to enter into an agreement of sale, subject to court approval, with respect to
certain assets is reasonable and sound under the circumstances at the time existing it should not be set aside simply because
a later and higher bid is made. To do so would literally create chaos in the commercial world and receivers and purchasers
would never be sure they had a binding agreement.
[Emphasis added.]
23 On March 8, 1991, the receiver had two offers. One was the OEL offer, which it considered satisfactory but which could
be withdrawn by OEL at any time before it was accepted. The receiver also had the 922 offer, which contained a condition
that was totally unacceptable. It had no other offers. It was faced with the dilemma of whether it should decline to accept the
OEL offer and run the risk of it being withdrawn, in the hope that an acceptable offer would be forthcoming from 922. An
affidavit filed by the president of the receiver describes the dilemma which the receiver faced, and the judgment made in the
light of that dilemma:
24. An asset purchase agreement was received by Ernst & Young on March 7, 1991 which was dated March 6, 1991. This
agreement was received from CCFL in respect of their offer to purchase the assets and undertaking of Air Toronto. Apart
from financial considerations, which will be considered in a subsequent affidavit, the Receiver determined that it would not
be prudent to delay acceptance of the OEL agreement to negotiate a highly uncertain arrangement with Air Canada and
CCFL . Air Canada had the benefit of an 'exclusive' in negotiations for Air Toronto and had clearly indicated its intention
take itself out of the running while ensuring that no other party could seek to purchase Air Toronto and maintain the Air
Canada connector arrangement vital to its survival. The CCFL offer represented a radical reversal of this position by Air
Canada at the eleventh hour. However, it contained a significant number of conditions to closing which were entirely
beyond the control of the Receiver. As well, the CCFL offer came less than 24 hours before signing of the agreement with
OEL which had been negotiated over a period of months, at great time and expense.
[Emphasis added.] I am convinced that the decision made was a sound one in the circumstances faced by the receiver on March
8, 1991.
24
I now turn to consider whether the price contained in the OEL offer was one which it was provident to accept. At the
outset, I think that the fact that the OEL offer was the only acceptable one available to the receiver on March 8, 1991, after 10
months of trying to sell the airline, is strong evidence that the price in it was reasonable. In a deteriorating economy, I doubt
that it would have been wise to wait any longer.
25
I mentioned earlier that, pursuant to an order, 922 was permitted to present a second offer. During the hearing of the
appeal, counsel compared at great length the price contained in the second 922 offer with the price contained in the OEL offer.
Counsel put forth various hypotheses supporting their contentions that one offer was better than the other.
26 It is my opinion that the price contained in the 922 offer is relevant only if it shows that the price obtained by the receiver
in the OEL offer was not a reasonable one. In Crown Trust Co. v. Rosenberg , supra, Anderson J., at p. 113 [O.R.], discussed
the comparison of offers in the following way:
No doubt, as the cases have indicated, situations might arise where the disparity was so great as to call in question the
adequacy of the mechanism which had produced the offers. It is not so here, and in my view that is substantially an end
of the matter.
27 In two judgments, Saunders J. considered the circumstances in which an offer submitted after the receiver had agreed to
a sale should be considered by the court. The first is Re Selkirk (1986), 58 C.B.R. (N.S.) 245 (Ont. S.C.) , at p. 247:
If, for example, in this case there had been a second offer of a substantially higher amount, then the court would have to
take that offer into consideration in assessing whether the receiver had properly carried out his function of endeavouring
to obtain the best price for the property.
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1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
28
The second is Re Beauty Counsellors of Canada Ltd. (1986), 58 C.B.R. (N.S.) 237 (Ont. S.C.) , at p. 243:
If a substantially higher bid turns up at the approval stage, the court should consider it. Such a bid may indicate, for
example, that the trustee has not properly carried out its duty to endeavour to obtain the best price for the estate.
29
In Re Selkirk (1987), 64 C.B.R. (N.S.) 140 (Ont. S.C.) , at p. 142, McRae J. expressed a similar view:
The court will not lightly withhold approval of a sale by the receiver, particularly in a case such as this where the receiver
is given rather wide discretionary authority as per the order of Mr. Justice Trainor and, of course, where the receiver is an
officer of this court. Only in a case where there seems to be some unfairness in the process of the sale or where there are
substantially higher offers which would tend to show that the sale was improvident will the court withhold approval. It
is important that the court recognize the commercial exigencies that would flow if prospective purchasers are allowed to
wait until the sale is in court for approval before submitting their final offer. This is something that must be discouraged.
[Emphasis added.]
30
What those cases show is that the prices in other offers have relevance only if they show that the price contained in the
offer accepted by the receiver was so unreasonably low as to demonstrate that the receiver was improvident in accepting it. I
am of the opinion, therefore, that if they do not tend to show that the receiver was improvident, they should not be considered
upon a motion to confirm a sale recommended by a court-appointed receiver. If they were, the process would be changed from
a sale by a receiver, subject to court approval, into an auction conducted by the court at the time approval is sought. In my
opinion, the latter course is unfair to the person who has entered bona fide into an agreement with the receiver, can only lead
to chaos, and must be discouraged.
31
If, however, the subsequent offer is so substantially higher than the sale recommended by the receiver, then it may be
that the receiver has not conducted the sale properly. In such circumstances, the court would be justified itself in entering into
the sale process by considering competitive bids. However, I think that that process should be entered into only if the court is
satisfied that the receiver has not properly conducted the sale which it has recommended to the court.
32 It is necessary to consider the two offers. Rosenberg J. held that the 922 offer was slightly better or marginally better than
the OEL offer. He concluded that the difference in the two offers did not show that the sale process adopted by the receiver
was inadequate or improvident.
33
Counsel for the appellants complained about the manner in which Rosenberg J. conducted the hearing of the motion to
confirm the OEL sale. The complaint was that when they began to discuss a comparison of the two offers, Rosenberg J. said that
he considered the 922 offer to be better than the OEL offer. Counsel said that when that comment was made, they did not think it
necessary to argue further the question of the difference in value between the two offers. They complain that the finding that the
922 offer was only marginally better or slightly better than the OEL offer was made without them having had the opportunity to
argue that the 922 offer was substantially better or significantly better than the OEL offer. I cannot understand how counsel could
have thought that by expressing the opinion that the 922 offer was better, Rosenberg J. was saying that it was a significantly or
substantially better one. Nor can I comprehend how counsel took the comment to mean that they were foreclosed from arguing
that the offer was significantly or substantially better. If there was some misunderstanding on the part of counsel, it should have
been raised before Rosenberg J. at the time. I am sure that if it had been, the misunderstanding would have been cleared up
quickly. Nevertheless, this court permitted extensive argument dealing with the comparison of the two offers.
34
The 922 offer provided for $6 million cash to be paid on closing with a royalty based upon a percentage of Air Toronto
profits over a period of 5 years up to a maximum of $3 million. The OEL offer provided for a payment of $2 million on closing
with a royalty paid on gross revenues over a 5-year period. In the short term, the 922 offer is obviously better because there is
substantially more cash up front. The chances of future returns are substantially greater in the OEL offer because royalties are
paid on gross revenues, while the royalties under the 922 offer are paid only on profits. There is an element of risk involved
in each offer.
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1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
35 The receiver studied the two offers. It compared them and took into account the risks, the advantages and the disadvantages
of each. It considered the appropriate contingencies. It is not necessary to outline the factors which were taken into account by
the receiver because the manager of its insolvency practice filed an affidavit outlining the considerations which were weighed in
its evaluation of the two offers. They seem to me to be reasonable ones. That affidavit concluded with the following paragraph:
24. On the basis of these considerations the Receiver has approved the OEL offer and has concluded that it represents the
achievement of the highest possible value at this time for the Air Toronto division of SoundAir.
36
The court appointed the receiver to conduct the sale of Air Toronto, and entrusted it with the responsibility of deciding
what is the best offer. I put great weight upon the opinion of the receiver. It swore to the court which appointed it that the OEL
offer represents the achievement of the highest possible value at this time for Air Toronto. I have not been convinced that the
receiver was wrong when he made that assessment. I am, therefore, of the opinion that the 922 offer does not demonstrate any
failure upon the part of the receiver to act properly and providently.
37
It follows that if Rosenberg J. was correct when he found that the 922 offer was in fact better, I agree with him that it
could only have been slightly or marginally better. The 922 offer does not lead to an inference that the disposition strategy of
the receiver was inadequate, unsuccessful or improvident, nor that the price was unreasonable.
38
I am, therefore, of the opinion the the receiver made a sufficient effort to get the best price, and has not acted improvidently.
2. Consideration of the Interests of all Parties
39
It is well established that the primary interest is that of the creditors of the debtor: see Crown Trust Co. v. Rosenberg
, supra, and Re Selkirk , supra (Saunders J.). However, as Saunders J. pointed out in Re Beauty Counsellors , supra at p. 244
[C.B.R.], "it is not the only or overriding consideration."
40
In my opinion, there are other persons whose interests require consideration. In an appropriate case, the interests of the
debtor must be taken into account. I think also, in a case such as this, where a purchaser has bargained at some length and
doubtless at considerable expense with the receiver, the interests of the purchaser ought to be taken into account. While it is not
explicitly stated in such cases as Crown Trust Co. v. Rosenberg , supra, Re Selkirk (1986), supra, Re Beauty Counsellors , supra,
Re Selkirk (1987), supra, and (Cameron ), supra, I think they clearly imply that the interests of a person who has negotiated an
agreement with a court-appointed receiver are very important.
41
In this case, the interests of all parties who would have an interest in the process were considered by the receiver and
by Rosenberg J.
3. Consideration of the Efficacy and Integrity of the Process by which the Offer was Obtained
42
While it is accepted that the primary concern of a receiver is the protecting of the interests of the creditors, there is
a secondary but very important consideration, and that is the integrity of the process by which the sale is effected. This is
particularly so in the case of a sale of such a unique asset as an airline as a going concern.
43
The importance of a court protecting the integrity of the process has been stated in a number of cases. First, I refer to
Re Selkirk , supra, where Saunders J. said at p. 246 [C.B.R.]:
In dealing with the request for approval, the court has to be concerned primarily with protecting the interest of the creditors
of the former bankrupt. A secondary but important considera tion is that the process under which the sale agreement is
arrived at should be consistent with commercial efficacy and integrity.
In that connection I adopt the principles stated by Macdonald J.A. of the Nova Scotia Supreme Court (Appeal Division)
in Cameron v. Bank of N.S. (1981), 38 C.B.R. (N.S.) 1, 45 N.S.R. (2d) 303, 86 A.P.R. 303 (C.A.) , where he said at p. 11:
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1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
In my opinion if the decision of the receiver to enter into an agreement of sale, subject to court approval, with respect
to certain assets is reasonable and sound under the circumstances at the time existing it should not be set aside simply
because a later and higher bid is made. To do so would literally create chaos in the commercial world and receivers
and purchasers would never be sure they had a binding agreement. On the contrary, they would know that other bids
could be received and considered up until the application for court approval is heard — this would be an intolerable
situation.
While those remarks may have been made in the context of a bidding situation rather than a private sale, I consider them to
be equally applicable to a negotiation process leading to a private sale. Where the court is concerned with the disposition of
property, the purpose of appointing a receiver is to have the receiver do the work that the court would otherwise have to do.
44
In Salima Investments Ltd. v. Bank of Montreal (1985), 59 C.B.R. (N.S.) 242, 41 Alta. L.R. (2d) 58, 65 A.R. 372, 21
D.L.R. (4th) 473 at p. 476 [D.L.R.], the Alberta Court of Appeal said that sale by tender is not necessarily the best way to sell
a business as an ongoing concern. It went on to say that when some other method is used which is provident, the court should
not undermine the process by refusing to confirm the sale.
45
Finally, I refer to the reasoning of Anderson J. in Crown Trust Co. v. Rosenberg , supra, at p. 124 [O.R.]:
While every proper effort must always be made to assure maximum recovery consistent with the limitations inherent in the
process, no method has yet been devised to entirely eliminate those limitations or to avoid their consequences. Certainly it
is not to be found in loosening the entire foundation of the system. Thus to compare the results of the process in this case
with what might have been recovered in some other set of circumstances is neither logical nor practical .
[Emphasis added.]
46 It is my opinion that the court must exercise extreme caution before it interferes with the process adopted by a receiver to
sell an unusual asset. It is important that prospective purchasers know that, if they are acting in good faith, bargain seriously with
a receiver and enter into an agreement with it, a court will not lightly interfere with the commercial judgment of the receiver
to sell the asset to them.
47 Before this court, counsel for those opposing the confirmation of the sale to OEL suggested many different ways in which
the receiver could have conducted the process other than the way which he did. However, the evidence does not convince me
that the receiver used an improper method of attempting to sell the airline. The answer to those submissions is found in the
comment of Anderson J. in Crown Trust Co. v. Rosenberg , supra, at p. 109 [O.R.]:
The court ought not to sit as on appeal from the decision of the Receiver, reviewing in minute detail every element of the
process by which the decision is reached. To do so would be a futile and duplicitous exercise.
48
It would be a futile and duplicitous exercise for this court to examine in minute detail all of circumstances leading up
to the acceptance of the OEL offer. Having considered the process adopted by the receiver, it is my opinion that the process
adopted was a reasonable and prudent one.
4. Was there unfairness in the process?
49 As a general rule, I do not think it appropriate for the court to go into the minutia of the process or of the selling strategy
adopted by the receiver. However, the court has a responsibility to decide whether the process was fair. The only part of this
process which I could find that might give even a superficial impression of unfairness is the failure of the receiver to give an
offering memorandum to those who expressed an interest in the purchase of Air Toronto.
50 I will outline the circumstances which relate to the allegation that the receiver was unfair in failing to provide an offering
memorandum. In the latter part of 1990, as part of its selling strategy, the receiver was in the process of preparing an offering
memorandum to give to persons who expressed an interest in the purchase of Air Toronto. The offering memorandum got as
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far as draft form, but was never released to anyone, although a copy of the draft eventually got into the hands of CCFL before
it submitted the first 922 offer on March 7, 1991. A copy of the offering memorandum forms part of the record, and it seems
to me to be little more than puffery, without any hard information which a sophisticated purchaser would require in or der to
make a serious bid.
51 The offering memorandum had not been completed by February11, 1991. On that date, the receiver entered into the letter of
intent to negotiate with OEL. The letter of intent contained a provision that during its currency the receiver would not negotiate
with any other party. The letter of intent was renewed from time to time until the OEL offer was received on March 6, 1991.
52
The receiver did not proceed with the offering memorandum because to do so would violate the spirit, if not the letter,
of its letter of intent with OEL.
53
I do not think that the conduct of the receiver shows any unfairness towards 922. When I speak of 922, I do so in the
context that Air Canada and CCFL are identified with it. I start by saying that the receiver acted reasonably when it entered into
exclusive negotiations with OEL. I find it strange that a company, with which Air Canada is closely and intimately involved,
would say that it was unfair for the receiver to enter into a time-limited agreement to negotiate exclusively with OEL. That is
precisely the arrangement which Air Canada insisted upon when it negotiated with the receiver in the spring and summer of
1990. If it was not unfair for Air Canada to have such an agreement, I do not understand why it was unfair for OEL to have a
similar one. In fact, both Air Canada and OEL in its turn were acting reasonably when they required exclusive negotiating rights
to prevent their negotiations from being used as a bargaining lever with other potential purchasers. The fact that Air Canada
insisted upon an exclusive negotiating right while it was negotiating with the receiver demonstrates the commercial efficacy of
OEL being given the same right during its negotiations with the receiver. I see no unfairness on the part of the receiver when it
honoured its letter of intent with OEL by not releasing the offering memorandum during the negotiations with OEL.
54
Moreover, I am not prepared to find that 922 was in any way prejudiced by the fact that it did not have an offering
memorandum. It made an offer on March 7, 1991, which it contends to this day was a better offer than that of OEL. 922 has not
convinced me that if it had an offering memorandum, its offer would have been any different or any better than it actually was.
The fatal problem with the first 922 offer was that it contained a condition which was completely unacceptable to the receiver.
The receiver, properly, in my opinion, rejected the offer out of hand because of that condition. That condition did not relate
to any information which could have conceivably been in an offering memorandum prepared by the receiver. It was about the
resolution of a dispute between CCFL and the Royal Bank, something the receiver knew nothing about.
55
Further evidence of the lack of prejudice which the absence of an offering memorandum has caused 922 is found in
CCFL's stance before this court. During argument, its counsel suggested as a possible resolution of this appeal that this court
should call for new bids, evaluate them and then order a sale to the party who put in the better bid. In such a case, counsel for
CCFL said that 922 would be prepared to bid within 7 days of the court's decision. I would have thought that, if there were
anything to CCFL's suggestion that the failure to provide an offering memorandum was unfair to 922, that it would have told
the court that it needed more information before it would be able to make a bid.
56 I am satisfied that Air Canada and CCFL have, and at all times had, all of the information which they would have needed
to make what to them would be a commercially viable offer to the receiver. I think that an offering memorandum was of no
commercial consequence to them, but the absence of one has since become a valuable tactical weapon.
57
It is my opinion that there is no convincing proof that if an offering memorandum had been widely distributed among
persons qualified to have purchased Air Toronto, a viable offer would have come forth from a party other than 922 or OEL.
Therefore, the failure to provide an offering memorandum was neither unfair, nor did it prejudice the obtaining of a better price
on March 8, 1991, than that contained in the OEL offer. I would not give effect to the contention that the process adopted by
the receiver was an unfair one.
58
There are two statements by Anderson J. contained in Crown Trust Co. v. Rosenberg , supra, which I adopt as my own.
The first is at p. 109 [O.R.]:
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Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
The court should not proceed against the recommendations of its Receiver except in special circumstances and where the
necessity and propriety of doing so are plain. Any other rule or approach would emasculate the role of the Receiver and
make it almost inevitable that the final negotiation of every sale would take place on the motion for approval.
The second is at p. 111 [O.R.]:
It is equally clear, in my view, though perhaps not so clearly enunciated, that it is only in an exceptional case that the court
will intervene and proceed contrary to the Receiver's recommendations if satisfied, as I am, that the Receiver has acted
reasonably, prudently and fairly and not arbitrarily.
In this case the receiver acted reasonably, prudently, fairly and not arbitrarily. I am of the opinion, therefore, that the process
adopted by the receiver in reaching an agreement was a just one.
59
In his reasons for judgment, after discussing the circumstances leading to the 922 offer, Rosenberg J. said this:
They created a situation as of March 8th, where the Receiver was faced with two offers, one of which was in acceptable
form and one of which could not possibly be accepted in its present form. The Receiver acted appropriately in accepting
the OEL offer.
I agree.
60 The receiver made proper and sufficient efforts to get the best price that it could for the assets of Air Toronto. It adopted
a reasonable and effective process to sell the airline which was fair to all persons who might be interested in purchasing it. It
is my opinion, therefore, that the receiver properly carried out the mandate which was given to it by the order of O'Brien J. It
follows that Rosenberg J. was correct when he confirmed the sale to OEL.
II. The effect of the support of the 922 offer by the two secured creditors.
61
As I noted earlier, the 922 offer was supported before Rosenberg J., and in this court, by CCFL and by the Royal Bank,
the two secured creditors. It was argued that, because the interests of the creditors are primary, the court ought to give effect to
their wish that the 922 offer be accepted. I would not accede to that suggestion for two reasons.
62 The first reason is related to the fact that the creditors chose to have a receiver appointed by the court. It was open to them
to appoint a private receiver pursuant to the authority of their security documents. Had they done so, then they would have had
control of the process and could have sold Air Toronto to whom they wished. However, acting privately and controlling the
process involves some risks. The appointment of a receiver by the court insulates the creditors from those risks. But, insulation
from those risks carries with it the loss of control over the process of disposition of the assets. As I have attempted to explain in
these reasons, when a receiver's sale is before the court for confirmation, the only issues are the propriety of the conduct of the
receiver and whether it acted providently. The function of the court at that stage is not to step in and do the receiver's work, or
change the sale strategy adopted by the receiver. Creditors who asked the court to appoint a receiver to dispose of assets should
not be allowed to take over control of the process by the simple expedient of supporting another purchaser if they do not agree
with the sale made by the receiver. That would take away all respect for the process of sale by a court-appointed receiver.
63 There can be no doubt that the interests of the creditor are an important consideration in determining whether the receiver
has properly conducted a sale. The opinion of the creditors as to which offer ought to be accepted is something to be taken
into account. But if the court decides that the receiver has acted properly and providently, those views are not necessarily
determinative. Because, in this case, the receiver acted properly and providently, I do not think that the views of the creditors
should override the considered judgment of the receiver.
64
The second reason is that, in the particular circumstances of this case, I do not think the support of CCFL and the Royal
Bank of the 922 offer is entitled to any weight. The support given by CCFL can be dealt with summarily. It is a co-owner of
922. It is hardly surprising and not very impressive to hear that it supports the offer which it is making for the debtor's assets.
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65 The support by the Royal Bank requires more consideration and involves some reference to the circumstances. On March
6, 1991, when the first 922 offer was made, there was in existence an inter-lender agreement between the Royal Bank and
CCFL. That agreement dealt with the share of the proceeds of the sale of Air Toronto which each creditor would receive. At
the time, a dispute between the Royal Bank and CCFL about the interpretation of that agreement was pending in the courts.
The unacceptable condition in the first 922 offer related to the settlement of the inter-lender dispute. The condition required
that the dispute be resolved in a way which would substantially favour CCFL. It required that CCFL receive $3,375,000 of the
$6 million cash payment and the balance, including the royalties, if any, be paid to the Royal Bank. The Royal Bank did not
agree with that split of the sale proceeds.
66
On April 5, 1991, the Royal Bank and CCFL agreed to settle the inter-lender dispute. The settlement was that if the 922
offer was accepted by the court, CCFL would receive only $1 million, and the Royal Bank would receive $5 million plus any
royalties which might be paid. It was only in consideration of that settlement that the Royal Bank agreed to support the 922 offer.
67
The Royal Bank's support of the 922 offer is so affected by the very substantial benefit which it wanted to obtain from
the settlement of the inter-lender dispute that, in my opinion, its support is devoid of any objectivity. I think it has no weight.
68 While there may be circumstances where the unanimous support by the creditors of a particular offer could conceivably
override the proper and provident conduct of a sale by a receiver, I do not think that this is such a case. This is a case where
the receiver has acted properly and in a provident way. It would make a mockery out of the judicial process, under which a
mandate was given to this receiver to sell this airline if the support by these creditors of the 922 offer were permitted to carry
the day. I give no weight to the support which they give to the 922 offer.
69 In its factum, the receiver pointed out that, because of greater liabilities imposed upon private receivers by various statutes
such as the Employment Standards Act , R.S.O. 1980, c. 137, and the Environmental Protection Act , R.S.O. 1980, c. 141, it
is likely that more and more the courts will be asked to appoint receivers in insolvencies. In those circumstances, I think that
creditors who ask for court-appointed receivers and business people who choose to deal with those receivers should know that
if those receivers act properly and providently, their decisions and judgments will be given great weight by the courts who
appoint them. I have decided this appeal in the way I have in order to assure business people who deal with court-appointed
receivers that they can have confidence that an agreement which they make with a court-appointed receiver will be far more
than a platform upon which others may bargain at the court approval stage. I think that persons who enter into agreements with
court-appointed receivers, following a disposition procedure that is appropriate given the nature of the assets involved, should
expect that their bargain will be confirmed by the court.
70 The process is very important. It should be carefully protected so that the ability of court-appointed receivers to negotiate
the best price possible is strengthened and supported. Because this receiver acted properly and providently in entering into the
OEL agreement, I am of the opinion that Rosenberg J. was right when he approved the sale to OEL and dismissed the motion
to approve the 922 offer.
71
I would, accordingly, dismiss the appeal. I would award the receiver, OEL and Frontier Airlines Limited their costs
out of the Soundair estate, those of the receiver on a solicitor-client scale. I would make no order as to the costs of any of the
other parties or intervenors.
McKinlay J.A. :
72
I agree with Galligan J.A. in result, but wish to emphasize that I do so on the basis that the undertaking being sold
in this case was of a very special and unusual nature. It is most important that the integrity of procedures followed by courtappointed receivers be protected in the interests of both commercial morality and the future confidence of business persons in
their dealings with receivers. Consequently, in all cases, the court should carefully scrutinize the procedure followed by the
receiver to determine whether it satisfies the tests set out by Anderson J. in Crown Trust Co. v. Rosenberg (1986), 67 C.B.R.
(N.S.) 320n, 60 O.R. (2d) 87, 22 C.P.C. (2d) 131, 39 D.L.R. (4th) 526 (H.C.) . While the procedure carried out by the receiver
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in this case, as described by Galligan J.A., was appropriate, given the unfolding of events and the unique nature of the assets
involved, it is not a procedure that is likely to be appropriate in many receivership sales.
73
I should like to add that where there is a small number of creditors who are the only parties with a real interest in the
proceeds of the sale (i.e., where it is clear that the highest price attainable would result in recovery so low that no other creditors,
shareholders, guarantors, etc., could possibly benefit therefore), the wishes of the interested creditors should be very seriously
considered by the receiver. It is true, as Galligan J.A. points out, that in seeking the court appointment of a receiver, the moving
parties also seek the protection of the court in carrying out the receiver's functions. However, it is also true that in utilizing
the court process, the moving parties have opened the whole process to detailed scrutiny by all involved, and have probably
added significantly to their costs and consequent shortfall as a result of so doing. The adoption of the court process should in no
way diminish the rights of any party, and most certainly not the rights of the only parties with a real interest. Where a receiver
asks for court approval of a sale which is opposed by the only parties in interest, the court should scrutinize with great care the
procedure followed by the receiver. I agree with Galligan J.A. that in this case that was done. I am satisfied that the rights of
all parties were properly considered by the receiver, by the learned motions court judge, and by Galligan J.A.
Goodman J.A. (dissenting):
74
I have had the opportunity of reading the reasons for judgment herein of Galligan and McKinlay JJ.A. Respectfully, I
am unable to agree with their conclusion.
75 The case at bar is an exceptional one in the sense that upon the application made for approval of the sale of the assets of Air
Toronto, two competing offers were placed before Rosenberg J. Those two offers were that of OEL and that of 922, a company
incorporated for the purpose of acquiring Air Toronto. Its shares were owned equally by CCFL and Air Canada. It was conceded
by all parties to these proceedings that the only persons who had any interest in the proceeds of the sale were two secured
creditors, viz., CCFL and the Royal Bank of Canada. Those two creditors were unanimous in their position that they desired
the court to approve the sale to 922. We were not referred to, nor am I aware of, any case where a court has refused to abide by
the unanimous wishes of the only interested creditors for the approval of a specific offer made in receivership proceedings.
76 In British Columbia Developments Corp. v. Spun Cast Industries Ltd. (1977), 26 C.B.R. (N.S.) 28, 5 B.C.L.R. 94 (S.C.) ,
Berger J. said at p. 30 [C.B.R.]:
Here all of those with a financial stake in the plant have joined in seeking the court's approval of the sale to Fincas. This
court does not have a roving commission to decide what is best for investors and businessmen when they have agreed
among themselves what course of action they should follow. It is their money.
77
I agree with that statement. It is particularly apt to this case. The two secured creditors will suffer a shortfall of
approximately $50 million. They have a tremendous interest in the sale of assets which form part of their security. I agree
with the finding of Rosenberg J. that the offer of 922 is superior to that of OEL. He concluded that the 922 offer is marginally
superior. If by that he meant that mathematically it was likely to provide slightly more in the way of proceeds, it is difficult
to take issue with that finding. If, on the other hand, he meant that having regard to all considerations it was only marginally
superior, I cannot agree. He said in his reasons:
I have come to the conclusion that knowledgeable creditors such as the Royal Bank would prefer the 922 offer even if the
other factors influencing their decision were not present. No matter what adjustments had to be made, the 922 offer results
in more cash immediately. Creditors facing the type of loss the Royal Bank is taking in this case would not be anxious to
rely on contingencies especially in the present circumstances surrounding the airline industry.
78 I agree with that statement completely. It is apparent that the difference between the two offers insofar as cash on closing
is concerned amounts to approximately $3 million to $4 million. The bank submitted that it did not wish to gamble any further
with respect to its investment, and that the acceptance and court approval of the OEL offer in effect supplanted its position as
a secured creditor with respect to the amount owing over and above the down payment and placed it in the position of a joint
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13
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
entrepreneur, but one with no control. This results from the fact that the OEL offer did not provide for any security for any
funds which might be forthcoming over and above the initial down payment on closing.
79
In Cameron v. Bank of Nova Scotia (1981), 38 C.B.R. (N.S.) 1, 45 N.S.R. (2d) 303, 86 A.P.R. 303 (C.A.) , Hart J.A.,
speaking for the majority of the court, said at p. 10 [C.B.R.]:
Here we are dealing with a receiver appointed at the instance of one major creditor, who chose to insert in the contract
of sale a provision making it subject to the approval of the court. This, in my opinion, shows an intention on behalf of
the parties to invoke the normal equitable doctrines which place the court in the position of looking to the interests of all
persons concerned before giving its blessing to a particular transaction submitted for approval. In these circumstances the
court would not consider itself bound by the contract entered into in good faith by the receiver but would have to look to
the broader picture to see that that contract was for the benefit of the creditors as a whole. When there was evidence that
a higher price was readily available for the property the chambers judge was, in my opinion, justified in exercising his
discretion as he did. Otherwise he could have deprived the creditors of a substantial sum of money.
80
This statement is apposite to the circumstances of the case at bar. I hasten to add that in my opinion it is not only price
which is to be considered in the exercise of the judge's discretion. It may very well be, as I believe to be so in this case, that
the amount of cash is the most important element in determining which of the two offers is for the benefit and in the best
interest of the creditors.
81
It is my view, and the statement of Hart J.A. is consistent therewith, that the fact that a creditor has requested an order
of the court appointing a receiver does not in any way diminish or derogate from his right to obtain the maximum benefit to
be derived from any disposition of the debtor's assets. I agree completely with the views expressed by McKinlay J.A. in that
regard in her reasons.
82
It is my further view that any negotiations which took place between the only two interested creditors in deciding to
support the approval of the 922 offer were not relevant to the determination by the presiding judge of the issues involved in
the motion for approval of either one of the two offers, nor are they relevant in determining the outcome of this appeal. It is
sufficient that the two creditors have decided unanimously what is in their best interest, and the appeal must be considered in
the light of that decision. It so happens, however, that there is ample evidence to support their conclusion that the approval of
the 922 offer is in their best interests.
83
I am satisfied that the interests of the creditors are the prime consideration for both the receiver and the court. In Re
Beauty Counsellors of Canada Ltd. (1986), 58 C.B.R. (N.S.) 237 (Ont. S.C.) , Saunders J. said at p. 243:
This does not mean that a court should ignore a new and higher bid made after acceptance where there has been no
unfairness in the process. The interests of the creditors, while not the only consideration, are the prime consideration.
84
I agree with that statement of the law. In Re Selkirk (1986), 58 C.B.R. (N.S.) 245 (Ont. S.C.) , Saunders J. heard
an application for court approval of the sale by the sheriff of real property in bankruptcy proceedings. The sheriff had been
previously ordered to list the property for sale subject to approval of the court. Saunders J. said at p. 246:
In dealing with the request for approval, the court has to be concerned primarily with protecting the interests of the creditors
of the former bankrupt. A secondary but important consideration is that the process under which the sale agreement is
arrived at should be consistent with commercial efficacy and integrity.
85
I am in agreement with that statement as a matter of general principle. Saunders J. further stated that he adopted the
principles stated by Macdonald J.A. in Cameron , supra, quoted by Galligan J.A. in his reasons. In Cameron , the remarks of
Macdonald J.A. related to situations involving the calling of bids and fixing a time limit for the making of such bids. In those
circumstances the process is so clear as a matter of commercial practice that an interference by the court in such process might
have a deleterious effect on the efficacy of receivership proceedings in other cases. But Macdonald J.A. recognized that even
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Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
in bid or tender cases where the offeror for whose bid approval is sought has complied with all requirements, a court might not
approve the agreement of purchase and sale entered into by the receiver. He said at pp. 11-12 [C.B.R.]:
There are, of course, many reasons why a court might not approve an agreement of purchase and sale, viz., where the
offer accepted is so low in relation to the appraised value as to be unrealistic; or, where the circumstances indicate that
insufficient time was allowed for the making of bids or that inadequate notice of sale by bid was given (where the receiver
sells property by the bid method); or, where it can be said that the proposed sale is not in the best interest of either
the creditors or the owner. Court approval must involve the delicate balancing of competing interests and not simply a
consideration of the interests of the creditors.
86
The deficiency in the present case is so large that there has been no suggestion of a competing interest between the
owner and the creditors.
87 I agree that the same reasoning may apply to a negotiation process leading to a private sale, but the procedure and process
applicable to private sales of a wide variety of businesses and undertakings with the multiplicity of individual considerations
applicable and perhaps peculiar to the particular business is not so clearly established that a departure by the court from the
process adopted by the receiver in a particular case will result in commercial chaos to the detriment of future receivership
proceedings. Each case must be decided on its own merits, and it is necessary to consider the process used by the receiver in
the present proceedings and to determine whether it was unfair, improvident or inadequate.
88
It is important to note at the outset that Rosenberg J. made the following statement in his reasons:
On March 8, 1991 the trustee accepted the OEL offer subject to court approval. The Receiver at that time had no other offer
before it that was in final form or could possibly be accepted. The Receiver had at the time the knowledge that Air Canada
with CCFL had not bargained in good faith and had not fulfilled the promise of its letter of March 1st. The Receiver was
justified in assuming that Air Canada and CCFL's offer was a long way from being in an acceptable form and that Air
Canada and CCFL's objective was to interrupt the finalizing of the OEL agreement and to retain as long as possible the
Air Toronto connector traffic flowing into Terminal 2 for the benefit of Air Canada.
89
In my opinion there was no evidence before him or before this court to indicate that Air Canada, with CCFL, had not
bargained in good faith, and that the receiver had knowledge of such lack of good faith. Indeed, on his appeal, counsel for
the receiver stated that he was not alleging Air Canada and CCFL had not bargained in good faith. Air Canada had frankly
stated at the time that it had made its offer to purchase, which was eventually refused by the receiver, that it would not become
involved in an "auction" to purchase the undertaking of Air Canada and that, although it would fulfil its contractual obligations
to provide connecting services to Air Toronto, it would do no more than it was legally required to do insofar as facilitating
the purchase of Air Toronto by any other person. In so doing, Air Canada may have been playing "hardball," as its behaviour
was characterized by some of the counsel for opposing parties. It was nevertheless merely openly asserting its legal position,
as it was entitled to do.
90 Furthermore, there was no evidence before Rosenberg J. or this court that the receiver had assumed that Air Canada and
CCFL's objective in making an offer was to interrupt the finalizing of the OEL agreement and to retain as long as possible the
Air Toronto connector traffic flowing into Terminal 2 for the benefit of Air Canada. Indeed, there was no evidence to support
such an assumption in any event, although it is clear that 922, and through it CCFL and Air Canada, were endeavouring to
present an offer to purchase which would be accepted and/or approved by the court in preference to the offer made by OEL.
91 To the extent that approval of the OEL agreement by Rosenberg J. was based on the alleged lack of good faith in bargaining
and improper motivation with respect to connector traffic on the part of Air Canada and CCFL, it cannot be supported.
92 I would also point out that rather than saying there was no other offer before it that was final in form, it would have been
more accurate to have said that there was no unconditional offer before it.
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15
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
93
In considering the material and evidence placed before the court, I am satisfied that the receiver was at all times acting
in good faith. I have reached the conclusion, however, that the process which he used was unfair insofar as 922 is concerned,
and improvident insofar as the two secured creditors are concerned.
94
Air Canada had been negotiating with Soundair Corporation for the purchase from it of Air Toronto for a considerable
period of time prior to the appointment of a receiver by the court. It had given a letter of intent indicating a prospective sale price
of $18 million. After the appointment of the receiver, by agreement dated April 30, 1990, Air Canada continued its negotiations
for the purchase of Air Toronto with the receiver. Although this agreement contained a clause which provided that the receiver
"shall not negotiate for the sale ... of Air Toronto with any person except Air Canada," it further provided that the receiver
would not be in breach of that provision merely by receiving unsolicited offers for all or any of the assets of Air Toronto.
In addition, the agreement, which had a term commencing on April 30, 1990, could be terminated on the fifth business day
following the delivery of a written notice of termination by one party to the other. I point out this provision merely to indicate
that the exclusivity privilege extended by the receiver to Air Canada was of short duration at the receiver's option.
95 As a result of due negligence investigations carried out by Air Canada during the months of April, May and June of 1990,
Air Canada reduced its offer to $8.1 million conditional upon there being $4 million in tangible assets. The offer was made on
June 14, 1990, and was open for acceptance until June 29, 1990.
96 By amending agreement dated June 19, 1990, the receiver was released from its covenant to refrain from negotiating for
the sale of the Air Toronto business and assets to any person other than Air Canada. By virtue of this amending agreement, the
receiver had put itself in the position of having a firm offer in hand, with the right to negotiate and accept offers from other
persons. Air Canada, in these circumstances, was in the subservient position. The receiver, in the exercise of its judgment and
discretion, allowed the Air Canada offer to lapse. On July 20, 1990, Air Canada served a notice of termination of the April
30, 1990 agreement.
97
Apparently as a result of advice received from the receiver to the effect that the receiver intended to conduct an auction
for the sale of the assets and business of the Air Toronto division of Soundair Corporation, the solicitors for Air Canada advised
the receiver by letter dated July 20, 1990, in part as follows:
Air Canada has instructed us to advise you that it does not intend to submit a further offer in the auction process.
98
This statement, together with other statements set forth in the letter, was sufficient to indicate that Air Canada was not
interested in purchasing Air Toronto in the process apparently contemplated by the receiver at that time. It did not form a proper
foundation for the receiver to conclude that there was no realistic possibility of selling Air Toronto [to] Air Canada, either alone
or in conjunction with some other person, in different circumstances. In June 1990, the receiver was of the opinion that the fair
value of Air Toronto was between $10 million and $12 million.
99 In August 1990, the receiver contacted a number of interested parties. A number of offers were received which were not
deemed to be satisfactory. One such offer, received on August 20, 1990, came as a joint offer from OEL and Air Ontario (an
Air Canada connector). It was for the sum of $3 million for the good will relating to certain Air Toronto routes, but did not
include the purchase of any tangible assets or leasehold interests.
100
In December 1990, the receiver was approached by the management of Canadian Partner (operated by OEL) for the
purpose of evaluating the benefits of an amalgamated Air Toronto/Air Partner operation. The negotiations continued from
December of 1990 to February of 1991, culminating in the OEL agreement dated March 8, 1991.
101
On or before December 1990, CCFL advised the receiver that it intended to make a bid for the Air Toronto assets.
The receiver, in August of 1990, for the purpose of facilitating the sale of Air Toronto assets, commenced the preparation of
an operating memorandum. He prepared no less than six draft operating memoranda with dates from October 1990 through
March 1, 1991. None of these were distributed to any prospective bidder despite requests having been received therefor, with
the exception of an early draft provided to CCFL without the receiver's knowledge.
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Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
102 During the period December 1990 to the end of January 1991, the receiver advised CCFL that the offering memorandum
was in the process of being prepared and would be ready soon for distribution. He further advised CCFL that it should await
the receipt of the memorandum before submitting a formal offer to purchase the Air Toronto assets.
103
By late January, CCFL had become aware that the receiver was negotiating with OEL for the sale of Air Toronto. In
fact, on February 11, 1991, the receiver signed a letter of intent with OEL wherein it had specifically agreed not to negotiate
with any other potential bidders or solicit any offers from others.
104
By letter dated February 25, 1991, the solicitors for CCFL made a written request to the receiver for the offering
memorandum. The receiver did not reply to the letter because he felt he was precluded from so doing by the provisions of
the letter of intent dated February 11, 1991. Other prospective purchasers were also unsuccessful in obtaining the promised
memorandum to assist them in preparing their bids. It should be noted that, exclusivity provision of the letter of intent expired
on February 20, 1991. This provision was extended on three occasions, viz., February 19, 22 and March 5, 1991. It is clear
that from a legal standpoint the receiver, by refusing to extend the time, could have dealt with other prospective purchasers,
and specifically with 922.
105
It was not until March 1, 1991, that CCFL had obtained sufficient information to enable it to make a bid through 922.
It succeeded in so doing through its own efforts through sources other than the receiver. By that time the receiver had already
entered into the letter of intent with OEL. Notwithstanding the fact that the receiver knew since December of 1990 that CCFL
wished to make a bid for the assets of Air Toronto (and there is no evidence to suggest that at that time such a bid would be
in conjunction with Air Canada or that Air Canada was in any way connected with CCFL), it took no steps to provide CCFL
with information necessary to enable it to make an intelligent bid, and indeed suggested delaying the making of the bid until an
offering memorandum had been prepared and provided. In the meantime, by entering into the letter of intent with OEL, it put
itself in a position where it could not negotiate with CCFL or provide the information requested.
106
On February 28, 1991, the solicitors for CCFL telephoned the receiver and were advised for the first time that the
receiver had made a business decision to negotiate solely with OEL and would not negotiate with anyone else in the interim.
107 By letter dated March 1, 1991, CCFL advised the receiver that it intended to submit a bid. It set forth the essential terms
of the bid and stated that it would be subject to customary commercial provisions. On March 7, 1991 CCFL and Air Canada,
jointly through 922, submitted an offer to purchase Air Toronto upon the terms set forth in the letter dated March 1, 1991. It
included a provision that the offer was conditional upon the interpretation of an inter-lender agreement which set out the relative
distribution of proceeds as between CCFL and the Royal Bank. It is common ground that it was a condition over which the
receiver had no control, and accordingly would not have been acceptable on that ground alone. The receiver did not, however,
contact CCFL in order to negotiate or request the removal of the condition, although it appears that its agreement with OEL
not to negotiate with any person other than OEL expired on March 6, 1991.
108
The fact of the matter is that by March 7, 1991, the receiver had received the offer from OEL which was subsequently
approved by Rosenberg J. That offer was accepted by the receiver on March 8, 1991. Notwithstanding the fact that OEL had
been negotiating the purchase for a period of approximately 3 months, the offer contained a provision for the sole benefit of
the purchaser that it was subject to the purchaser obtaining "a financing commitment within 45 days of the date hereof in an
amount not less than the Purchase Price from the Royal Bank of Canada or other financial institution upon terms and conditions
acceptable to them. In the event that such a financing commitment is not obtained within such 45 day period, the purchaser
or OEL shall have the right to terminate this agreement upon giving written notice of termination to the vendor on the first
Business Day following the expiry of the said period." The purchaser was also given the right to waive the condition.
109
In effect, the agreement was tantamount to a 45-day option to purchase, excluding the right of any other person to
purchase Air Toronto during that period of time and thereafter if the condition was fulfilled or waived. The agreement was,
of course, stated to be subject to court approval.
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Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
110
In my opinion, the process and procedure adopted by the receiver was unfair to CCFL. Although it was aware from
December 1990 that CCFL was interested in making an offer, it effectively delayed the making of such offer by continually
referring to the preparation of the offering memorandum. It did not endeavour during the period December 1990 to March 7,
1991, to negotiate with CCFL in any way the possible terms of purchase and sale agreement. In the result, no offer was sought
from CCFL by the receiver prior to February 11, 1991, and thereafter it put itself in the position of being unable to negotiate
with anyone other than OEL. The receiver then, on March 8, 1991, chose to accept an offer which was conditional in nature
without prior consultation with CCFL (922) to see whether it was prepared to remove the condition in its offer.
111
I do not doubt that the receiver felt that it was more likely that the condition in the OEL offer would be fulfilled than
the condition in the 922 offer. It may be that the receiver, having negotiated for a period of 3 months with OEL, was fearful
that it might lose the offer if OEL discovered that it was negotiating with another person. Nevertheless, it seems to me that it
was imprudent and unfair on the part of the receiver to ignore an offer from an interested party which offered approximately
triple the cash down payment without giving a chance to the offeror to remove the conditions or other terms which made the
offer unacceptable to it. The potential loss was that of an agreement which amounted to little more than an option in favour
of the offeror.
112 In my opinion the procedure adopted by the receiver was unfair to CCFL in that, in effect, it gave OEL the opportunity
of engaging in exclusive negotiations for a period of 3 months, notwithstanding the fact that it knew CCFL was interested in
making an offer. The receiver did not indicate a deadline by which offers were to be submitted, and it did not at any time indicate
the structure or nature of an offer which might be acceptable to it.
113
In his reasons, Rosenberg J. stated that as of March 1, CCFL and Air Canada had all the information that they needed,
and any allegations of unfairness in the negotiating process by the receiver had disappeared. He said:
They created a situation as of March 8, where the receiver was faced with two offers, one of which was acceptable in
form and one of which could not possibly be accepted in its present form. The Receiver acted appropriately in accepting
the OEL offer.
If he meant by "acceptable in form" that it was acceptable to the receiver, then obviously OEL had the unfair advantage of its
lengthy negotiations with the receiver to ascertain what kind of an offer would be acceptable to the receiver. If, on the other hand,
he meant that the 922 offer was unacceptable in its form because it was conditional, it can hardly be said that the OEL offer was
more acceptable in this regard, as it contained a condition with respect to financing terms and conditions "acceptable to them ."
114
It should be noted that on March 13, 1991, the representatives of 922 first met with the receiver to review its offer of
March 7, 1991, and at the request of the receiver, withdrew the inter-lender condition from its offer. On March 14, 1991, OEL
removed the financing condition from its offer. By order of Rosenberg J. dated March 26, 1991, CCFL was given until April
5, 1991, to submit a bid, and on April 5, 1991, 922 submitted its offer with the inter-lender condition removed.
115 In my opinion, the offer accepted by the receiver is improvident and unfair insofar as the two creditors are concerned. It
is not improvident in the sense that the price offered by 922 greatly exceeded that offered by OEL. In the final analysis it may
not be greater at all. The salient fact is that the cash down payment in the 922 offer con stitutes proximately two thirds of the
contemplated sale price, whereas the cash down payment in the OEL transaction constitutes approximately 20 to 25 per cent of
the contemplated sale price. In terms of absolute dollars, the down payment in the 922 offer would likely exceed that provided
for in the OEL agreement by approximately $3 million to $4 million.
116
In Re Beauty Counsellors of Canada Ltd. , supra, Saunders J. said at p. 243 [C.B.R.]:
If a substantially higher bid turns up at the approval stage, the court should consider it. Such a bid may indicate, for
example, that the trustee has not properly carried out its duty to endeavour to obtain the best price for the estate. In such a
case the proper course might be to refuse approval and to ask the trustee to recommence the process.
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18
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
117 I accept that statement as being an accurate statement of the law. I would add, however, as previously indicated, that in
determining what is the best price for the estate, the receiver or court should not limit its consideration to which offer provides
for the greater sale price. The amount of down payment and the provision or lack thereof to secure payment of the balance of
the purchase price over and above the down payment may be the most important factor to be considered, and I am of the view
that is so in the present case. It is clear that that was the view of the only creditors who can benefit from the sale of Air Toronto.
118
I note that in the case at bar the 922 offer in conditional form was presented to the receiver before it accepted the OEL
offer. The receiver, in good faith, although I believe mistakenly, decided that the OEL offer was the better offer. At that time
the receiver did not have the benefit of the views of the two secured creditors in that regard. At the time of the application for
approval before Rosenberg J., the stated preference of the two interested creditors was made quite clear. He found as fact that
knowledgeable creditors would not be anxious to rely on contingencies in the present circumstances surrounding the airline
industry. It is reasonable to expect that a receiver would be no less knowledgeable in that regard, and it is his primary duty
to protect the interests of the creditors. In my view, it was an improvident act on the part of the receiver to have accepted
the conditional offer made by OEL, and Rosenberg J. erred in failing to dismiss the application of the receiver for approval
of the OEL offer. It would be most inequitable to foist upon the two creditors, who have already been seriously hurt, more
unnecessary contingencies.
119 Although in other circumstances it might be appropriate to ask the receiver to recommence the process, in my opinion,
it would not be appropriate to do so in this case. The only two interested creditors support the acceptance of the 922 offer,
and the court should so order.
120
Although I would be prepared to dispose of the case on the grounds stated above, some comment should be addressed
to the question of interference by the court with the process and procedure adopted by the receiver.
121
I am in agreement with the view expressed by McKinlay J.A. in her reasons that the undertaking being sold in this
case was of a very special and unusual nature. As a result, the procedure adopted by the receiver was somewhat unusual.
At the outset, in accordance with the terms of the receiving order, it dealt solely with Air Canada. It then appears that the
receiver contemplated a sale of the assets by way of auction, and still later contemplated the preparation and distribution of an
offering memorandum inviting bids. At some point, without advice to CCFL, it abandoned that idea and reverted to exclusive
negotiations with one interested party. This entire process is not one which is customary or widely accepted as a general practice
in the commercial world. It was somewhat unique, having regard to the circumstances of this case. In my opinion, the refusal
of the court to approve the offer accepted by the receiver would not reflect on the integrity of procedures followed by courtappointed receivers, and is not the type of refusal which will have a tendency to undermine the future confidence of business
persons in dealing with receivers.
122 Rosenberg J. stated that the Royal Bank was aware of the process used and tacitly approved it. He said it knew the terms
of the letter of intent in February 1991, and made no comment. The Royal Bank did, however, indicate to the receiver that it
was not satisfied with the contemplated price, nor the amount of the down payment. It did not, however, tell the receiver to
adopt a different process in endeavouring to sell the Air Toronto assets. It is not clear from the material filed that at the time it
became aware of the letter of intent that it knew that CCFl was interested in purchasing Air Toronto.
123
I am further of the opinion that a prospective purchaser who has been given an opportunity to engage in exclusive
negotiations with a receiver for relatively short periods of time which are extended from time to time by the receiver, and who
then makes a conditional offer, the condition of which is for his sole benefit and must be fulfilled to his satisfaction unless
waived by him, and which he knows is to be subject to court approval, cannot legitimately claim to have been unfairly dealt
with if the court refuses to approve the offer and approves a substantially better one.
124
In conclusion, I feel that I must comment on the statement made by Galligan J.A. in his reasons to the effect that
the suggestion made by counsel for 922 constitutes evidence of lack of prejudice resulting from the absence of an offering
memorandum. It should be pointed out that the court invited counsel to indicate the manner in which the problem should be
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19
Royal Bank v. Soundair Corp., 1991 CarswellOnt 205
1991 CarswellOnt 205, [1991] O.J. No. 1137, 27 A.C.W.S. (3d) 1178, 46 O.A.C. 321...
resolved in the event that the court concluded that the order approving the OEL offer should be set aside. There was no evidence
before the court with respect to what additional information may have been acquired by CCFL since March 8, 1991, and no
inquiry was made in that regard. Accordingly, I am of the view that no adverse inference should be drawn from the proposal
made as a result of the court's invitation.
125 For the above reasons I would allow the appeal one set of costs to CCFL-922, set aside the order of Rosenberg J., dismiss
the receiver's motion with one set of costs to CCFL-922 and order that the assets of Air Toronto be sold to numbered corporation
922246 on the terms set forth in its offer with appropriate adjustments to provide for the delay in its execution. Costs awarded
shall be payable out of the estate of Soundair Corporation. The costs incurred by the receiver in making the application and
responding to the appeal shall be paid to him out of the assets of the estate of Soundair Corporation on a solicitor-client basis.
I would make no order as to costs of any of the other parties or intervenors.
Appeal dismissed.
End of Document
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reserved.
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20
9
Nortel Networks Corp., Re, 2009 CarswellOnt 4839
2009 CarswellOnt 4839, [2009] O.J. No. 4293, 56 C.B.R. (5th) 74
2009 CarswellOnt 4839
Ontario Superior Court of Justice [Commercial List]
Nortel Networks Corp., Re
2009 CarswellOnt 4839, [2009] O.J. No. 4293, 56 C.B.R. (5th) 74
In the matter of the Companies' Creditors Arrangement
Act, R.S.C. 1985, c. C-36, as Amended (Applicants)
And In the Matter of a Plan of Compromise or Arrangement of Nortel Networks
Corporation, Nortel Networks Limited, Nortel Networks Global Corporation, Nortel
Networks International Corporation and Nortel Networks Technology Corporation
Morawetz J.
Heard: August 4, 2009
Judgment: August 4, 2009
Docket: 09-CL-7950
Counsel: Mr. D. Tay, Mr. M. Kotrly for Nortel Networks Corporation et al.
Mr. J.A. Carfagnini, Mr. C.G. Armstrong for Monitor, Ernst and Young Incorporated
Mr. J. Bunting for Nortel Networks UK Limited (In Administration)
Mr. S.R. Orzy for Noteholders
Mr. S. Kukulowiz for Canadian Lawyers, for Unsecured Creditors' Committee
Ms T. Lie for Superintendent of Financial Services of Ontario
Mr. C. Thorburn for Canadian Lawyers, for Matlin Patterson
Mr. K. McElcheran for Avaya Inc.
Ms F. Baloo for CAW Canada Legal Department
Mr. D. Yiokaris for Former Employees
Ms L. Pillon for Enterprise Network Holdings Bv
Subject: Insolvency
Headnote
Bankruptcy and insolvency --- Proposal — Companies' Creditors Arrangement Act — Miscellaneous issues
Telecommunications company entered protection under Companies' Creditors Arrangement Act — Telecommunications
company wished to execute sale agreement for certain assets and undertake auction regarding other assets —
Telecommunications company brought motion for approval of process and sale, and to seal certain records, with parallel
motion brought in United States — Motion granted — Court had jurisdiction to authorize sale agreement — Approving
sale was appropriate — Fact that plan was absent did not prevent sale — Sale was subject to further court approval —
Informal objections in United States had been resolved.
Table of Authorities
Cases considered by Morawetz J.:
Nortel Networks Corp., Re (2009), 2009 CarswellOnt 4467 (Ont. S.C.J. [Commercial List]) — referred to
Statutes considered:
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1
Nortel Networks Corp., Re, 2009 CarswellOnt 4839
2009 CarswellOnt 4839, [2009] O.J. No. 4293, 56 C.B.R. (5th) 74
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
MOTION by debtor for approval of sale of business under protection of Companies' Creditors Arrangement Act.
Morawetz J.:
1 This Hearing was conducted by way of video conference with a parallel motion being heard in the United States Bankruptcy
Court with His Honor Judge Gross presiding over the Hearing in the U.S. Court.
2
This Joint Hearing was conducted in accordance with the provisions of the Cross-Border Protocol which has previously
been approved by both the U.S. Court and by this court.
3 Nortel brings this motion for the approval of the Bidding Procedures relating to the Enterprise Solutions Business. It also
seeks approval of the Sale Agreement among Nortel Networks Corporation ("NNC"), Nortel Networks Limited ("NNL") and
Nortel Networks Inc. ("NNI") and their affiliates as "Sellers" and Avaya Inc. as "Purchaser."
4
In addition, the Applicants also request the approval of a Side Agreement among the Sellers and the court appointed
administrators, which Side Agreement is attached to the Eighteenth Report filed by Ernst and Young Inc., the Monitor.
5
Finally, the Applicants seek a Sealing Order to seal the Confidential Appendix to the Eighteenth Report pending further
Order of this court.
6
The Bidding Procedures and Sale Agreement are described in the affidavit of Mr. George Riedel, Chief Strategy Officer
of Nortel, sworn July 30, 2009 and they are also described in the Eighteenth Report of the Monitor.
7 Nine formal and informal objections were filed in the U.S. Proceedings. These objections have been resolved and in some
cases minor modifications have been made to the Bidding Procedures.
8
I am satisfied that no further comment is required in this Endorsement with respect to the objections filed in the U.S.
Proceedings.
9
The transaction described in the Sale Agreement is very complex. The Monitor has made specific reference to the
transaction. The Enterprise Solutions business involved addresses the communications needs of large and small businesses
across various industries by providing products and services that integrate voice, E-mail, conferencing, video and instant
messaging. Competitors to the business include Cisco, Avaya, Alcatel-Lucent, Siemens Enterprise Communications, NEC and
others.
10 This business operates globally in approximately 121 countries. The Monitor has indicated that the business has an installed
base with over 75 million voice lines and 75 million data ports. The fiscal revenues in 2008 were $2.8 billion representing
approximately 27% of Nortel's 2008 revenues.
11
With respect to the Canadian aspect, the fiscal 2008 revenues in Canada were $183 million representing approximately
26% of Nortel's 2008 Canadian revenue.
12 The base purchase price as set out in the Stalking Horse Agreement is $475 million. It also provides for a Break-Up-Fee
of $14.25 million and an Expense Reimbursement cap of $9.5 million.
13
The materials indicate that Bids are to be received by September 4, 2009 with the Sellers to conduct an auction on
September 11, 2009 followed by a motion to approve any transaction both before this court and the U.S. Court.
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2
Nortel Networks Corp., Re, 2009 CarswellOnt 4839
2009 CarswellOnt 4839, [2009] O.J. No. 4293, 56 C.B.R. (5th) 74
14
With respect to the evidence in support of the transaction, I refer to the conclusions of Mr. Riedel at paragraphs 38 to
40 of his affidavit where he states as follows:
38. "I believe that the Sale Agreement is the product of a vigorous, comprehensive and fair process. The proposed Auction
Sale Process for the Enterprise Solutions Business, based on the Sale Agreement as a stalking horse bid, is the best way to
preserve the business as a going concern and to maximize value and preserve as many jobs as possible for the Applicants'
employees. I further believe that exploration of the sale of the other businesses as a going concern through this process
will provide the greatest chances for further value and maximization and job preservation."
39. "Based on the Applicants' previous consideration of potential transactions involving the Enterprise Solutions Business
and after re-canvassing the marketplace since the commencement of these proceedings, I believe that the proposed
transaction with the Purchaser represents the highest and best proposal available for the Enterprise Solutions Business,
subject to the receipt of a better bid through the auction process contemplated in this motion."
40. "The Sale Agreement also requires an expeditious sale process and provides the Purchaser the right to terminate the Sale
Agreement if certain milestones in the sale process are not timely met. For these reasons, the expeditious sale of the Assets
is critical to the maximization of the value of the Applicants' assets and, in turn, to a recovery for the Applicants' estates."
15 The Monitor has similarly provided extensive background to the transaction and reports its analysis and recommendations
at paragraph 92 of the Eighteenth Report where it states as follows:
92. "The Monitor has reviewed Nortel's efforts to divest its Enterprise Solutions Business and is of the view that the
Company is acting in good faith to maximize the value. The Monitor recommends approval of the Avaya Agreement as
a "stalking horse" bid, approval of the Bidding Procedures as described and approval of the Side Agreement. In so doing,
the Monitor considers the potential payment of the Break Fee and Expense Reimbursement to Avaya as reasonable in
the circumstances."
16 The Bidding Procedures, as proposed, are not unlike the Bidding Procedures which have previously been approved in the
sale of the CMDA Business and the LTE Business. The Bidding Procedures in respect of these businesses were approved by
this court on June 29, 2009 with Reasons released on July 23, 2009 [2009 CarswellOnt 4467 (Ont. S.C.J. [Commercial List])].
17 Likewise, as with the previous transaction, I am satisfied that this court has the jurisdiction to authorize the Sale Agreement.
(See Reasons from July 23, 2009.)
18
Turning now to a consideration of whether it is appropriate in this case to approve the sale process.
19
The factors to consider on a sales process under the CCAA, in the absence of a plan, has been previously considered in
these proceedings, and again, I refer to the Nortel Reasons of July 23, 2009 at paragraph 49. Those factors are as follows:
1) Is a sales transaction warranted at this time?
2) Will the sale benefit the whole "economic community?"
3) Do any of the debtor's creditors have a bona fide reason to object to a sale of the business?
4) Is there a better viable alternative?
20 In this case the details of the transaction and the sales process, as described in Mr. Riedel's affidavit and in the Monitor's
Eighteenth Report, establish, in my view, that it is appropriate to approve the Sale Agreement. The factors, as set out and
previously accepted in the Reasons of July 23, are equally applicable in this transaction.
21
I also note that there were no objections with respect to the sale process.
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3
Nortel Networks Corp., Re, 2009 CarswellOnt 4839
2009 CarswellOnt 4839, [2009] O.J. No. 4293, 56 C.B.R. (5th) 74
22 I also note that the sale is subject to further court approval, and, again, the court will expect that the Applicants will make
reference to the Soundair principles at such time.
23
As it was previously noted in the Reasons of July 23, the Applicants are part of a complicated corporate group, they
carry on an active international business, and I accept that an important fact to consider in the CCAA process is whether the
case can be made to continue the business as a going concern.
24
I am satisfied, having considered the factors referenced above, as well as the facts summarized in the affidavit of Mr.
Riedel, and in the Eighteenth Report, that the Applicants have met the test and I am therefore satisfied that this motion should
be granted.
25 Accordingly I approve the Bidding Procedures as described in Mr. Riedel's affidavit and in the Eighteenth Report which
procedures have also been approved this morning by Judge Gross in the U.S. Court.
26
I am also satisfied that the Sale Agreement and Side Agreement should be approved.
27
Further, that the Sale Agreement be accepted for purposes of conducting the Stalking Horse Bid in accordance with the
Bidding Procedures including, without limitation the Break Up Fee, and the Expense Reimbursement.
28 Further, I have also been satisfied that Appendix B to the Eighteenth Report contains information which is commercially
sensitive, the dissemination of which could be detrimental to the stakeholders, and accordingly, I Order that this document be
sealed pending further Order of the court.
29
In approving the Bidding Procedures, I have also taken into account that the auction will be conducted prior to the Sale
Approval motion. This process is consistent with the practice of this court.
30
This concludes my Endorsement in respect of the Bidding Procedures and the Sale Agreement.
Motion granted.
End of Document
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reserved.
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4
10
Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
2015 ONSC 5557
Ontario Superior Court of Justice [Commercial List]
Nelson Education Ltd., Re
2015 CarswellOnt 13576, 2015 ONSC 5557, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
In the Matter of the Companies' Lenders
Arrangement Act, R.S.C. 1985, c. C-36, as Amended
In the Matter of a Plan of Compromise or Arrangement of Nelson
Education Ltd. and Nelson Education Holdings Ltd., Applicants
Newbould J.
Heard: August 13, 27, 2015
Judgment: September 8, 2015
Docket: CV15-10961-00CL
Counsel: Benjamin Zarnett, Jessica Kimmel, Caroline Descours for Applicants
Robert W. Staley, Kevin J. Zych, Sean Zweig for First Lien Agent and the First Lien Steering Committee
John L. Finnigan, D.J. Miller, Kyla E.M. Mahar for Royal Bank of Canada
Orestes Pasparaskis for Monitor
Subject: Insolvency
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.5 Miscellaneous
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Miscellaneous
Education publishing company obtained protection under Companies' Creditors Arrangement Act ("CCAA") — Bank was
one of 22 first lien lenders, second lien lender and agent for second lien lenders — Credit bid for sale of substantially
all assets to newly incorporated entity owned by first ranked secured lenders, if approved, would results in second lien
lenders receiving nothing on outstanding loans — Company brought motion for approval of sale; bank brought motion for
order that amounts owing to it and portion of consent fee be paid by company prior to sale — Company's motion granted;
bank's motion dismissed — Normally, sale process is undertaken after court approves proposed sale methodology with
monitor participating in process and reporting to court — While none of this occurred, sale or investment sales process
("SISP") and credit bid sale transaction met requirements of CCAA — SISP was typical and consistent with processes that
had been approved by court in many CCAA proceedings — Results of SISP showed that no interested parties could offer
price sufficient to repay amounts owing to first lien lenders — Intercreditor agreement governed, and led to conclusion
that order in favour of bank as second lien agent was not appropriate as payment would reduce collateral subject to rights
of first lien lenders in that collateral.
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1
Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
Table of Authorities
Cases considered by Newbould J.:
ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp. (2008), 2008 ONCA 587, 2008 CarswellOnt
4811, 45 C.B.R. (5th) 163, 47 B.L.R. (4th) 123, (sub nom. Metcalfe & Mansfield Alternative Investments II Corp.,
Re) 296 D.L.R. (4th) 135, (sub nom. Metcalfe & Mansfield Alternative Investments II Corp., Re) 240 O.A.C. 245,
(sub nom. Metcalfe & Mansfield Alternative Investments II Corp., Re) 92 O.R. (3d) 513 (Ont. C.A.) — followed
Brainhunter Inc., Re (2009), 2009 CarswellOnt 7627 (Ont. S.C.J. [Commercial List]) — referred to
Cruden v. Bank of New York (1992), 957 F.2d 961 (U.S. C.A. 2nd Cir.) — referred to
Nortel Networks Corp., Re (2009), 2009 CarswellOnt 4467, 55 C.B.R. (5th) 229 (Ont. S.C.J. [Commercial List]) —
considered
Nortel Networks Corp., Re (2014), 2014 ONSC 6973, 2014 CarswellOnt 17291, 20 C.B.R. (6th) 171, 17 C.C.P.B.
(2nd) 10 (Ont. S.C.J. [Commercial List]) — referred to
Rainbow v. Swisher (1988), 72 N.Y.2d 106, 531 N.Y.S. 775, 527 N.E.2d 258 (U.S. N.Y. Ct. App.) — referred to
Royal Bank v. Soundair Corp. (1991), 7 C.B.R. (3d) 1, 83 D.L.R. (4th) 76, 46 O.A.C. 321, 4 O.R. (3d) 1, 1991
CarswellOnt 205 (Ont. C.A.) — followed
Statutes considered:
Bankruptcy Code, 11 U.S.C.
Generally — referred to
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
s. 11 — considered
s. 36(3) — considered
MOTION by company for approval of sale; MOTION by bank for order that amounts owing to it and portion of consent fee
be paid by company prior to sale.
Newbould J.:
1
The applicants Nelson Education Ltd. ("Nelson") and Nelson Education Holdings Ltd. sought and obtained protection
under the CCAA on May 12, 2015. They now apply for approval of the sale of substantially all of the assets and business of
Nelson to a newly incorporated entity to be owned indirectly by Nelson's first ranked secured lenders (the "first lien lenders")
pursuant to a credit bid made by the first lien agent. Nelson also seeks ancillary orders relating to the sale. The effect of the
credit bid, if approved, is that the second lien lenders will receive nothing for their outstanding loans.
2
RBC is one of 22 first lien lenders, a second lien lender and agent for the second lien lenders. At the time of its motion
to replace the Monitor, RBC did not accept that the proposed sale should be approved. RBC now takes no position on the sale
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2
Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
approval motion other than to oppose certain ancillary relief sought by the applicants. RBC also has moved for an order that
certain amounts said to be owing to it and their portion of a consent fee should be paid by Nelson prior to the completion of the
sale. The applicants and the first lien lenders oppose the relief sought by RBC.
Nelson business
3
Nelson is a Canadian education publishing company, providing learning solutions to universities, colleges, students,
teachers, professors, libraries, government agencies, schools, professionals and corporations across the country.
4
The business and assets of Nelson were acquired by an OMERS entity and certain other funds from the Thomson
Corporation in 2007 together with U.S. assets of Thomson for U.S. $7.75 billion, of which US$550 million was attributed to
the Canadian business. The purchase was financed with first lien debt of approximately US$311.5 million and second lien debt
of approximately US$171.3 million.
5 The maturity date under the first lien credit agreement was July 3, 2014 and the maturity date under the second lien credit
agreement was July 3, 2015. Nelson has not paid the principal balances owing under either loan. It paid interest on the first lien
credit up to the filing of this CCAA application. It has paid no interest on the second lien credit since April 2014. As of the
filing date, Nelson was indebted in the aggregate principal amounts of approximately US$269 million, plus accrued interest,
costs and fees, under the first lien credit agreement and approximately US$153 million, plus accrued interest, costs and fees,
under the second lien credit agreement.
6
Because these loans are denominated in U.S. dollars, the recent decline in the Canadian dollar against the United States
dollar has significantly increased the Canadian dollar balance of the loans. Nelson generates substantially all of its revenue
in Canadian dollars and is not hedged against currency fluctuations. Based on an exchange rate of CAD/USD of 1.313, as of
August 10, 2015, the Canadian dollar principal balances of the first and second lien loans are $352,873,910 and $201,176,237.
7
According to Mr. Greg Nordal, the CEO of Nelson, the business of Nelson has been affected by a general decline in the
education markets over the past few years. Notwithstanding the industry decline over the past few years, Nelson has maintained
strong EBITDA over each of the last several years.
Discussions leading to the sale to the first lien lenders
8
In March 2013, Nelson engaged Alvarez & Marsal Canada Securities ULC ("A&M"), the Canadian corporate finance
arm of Alvarez & Marsal to assist it in reviewing and considering potential strategic alternatives. RBC, the second lien agent
also engaged a financial advisor in March 2013 and the first lien steering committee engaged a financial advisor in June 2013.
RBC held approximately 85% of the second lien debt.
9 Commencing in April 2013, Nelson and its advisors entered into discussions with stakeholders including the RBC as second
lien agent, the first lien steering committee and their advisors. Nelson sought to achieve as its primary objective a consensual
transaction that would be supported by all of the first lien lenders and second lien lenders. These discussions took place until
September 2014. No agreement with the first lien lenders and second lien lenders was reached.
10
In April 2014, Nelson and the second lien lenders agreed to two extensions of the cure period under the second lien
credit agreement in respect of the second lien interest payment due on March 31, 2014, to May 30, 2014. In connection with
these extensions, Nelson made a partial payment of US$350,000 in respect of the March interest payment and paid certain
professional fees of the second lien lenders. Nelson requested a further extension of the second lien cure period beyond May
30, 2014, but the second lien lenders did not agree. Thereafter, Nelson defaulted under the second lien credit agreement and
failed to make further interest payments to the second lien lenders.
11 The first lien credit agreement matured on July 3, 2014. On July 7, 2014, Nelson proposed an amendment and extension
of that agreement and solicited consent from its first lien lenders. RBC, as one of the first lien lenders was prepared to consent
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3
Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
to the Nelson proposal, being a consent and support agreement, but no agreement was reached with the other first lien lenders
and it did not proceed.
12
In September, 2014, Nelson proposed in a term sheet to the first lien lenders a transaction framework for a sale or
restructuring of the business on the terms set out in a term sheet dated September 10, 2014 and sought their support. In connection
with the first lien term sheet, Nelson entered into a first lien support agreement with first lien lenders representing approximately
88% of the principal amounts outstanding under the first lien credit agreement. The consenting first lien lenders comprised 21
of the 22 first lien lenders, the only first lien lender not consenting being RBC. Consent fees of approximately US$12 million
have been paid to the consenting first lien lenders.
13 The first lien term sheet provided that Nelson would conduct a comprehensive and open sale or investment sales process
(SISP) to attempt to identify one or more potential purchasers of, or investors in, the Nelson business on terms that would
provide for net sale or investment proceeds sufficient to pay in full all obligations under the first lien credit agreement or that
was otherwise acceptable to first lien lenders holding at least 66 2/3% of the outstanding obligations under the first lien credit
agreement. If such a superior offer was not identified pursuant to the SISP, the first lien lenders would become the purchaser and
purchase substantially all of the assets of Nelson in exchange for the conversion by all of the first lien lenders of all of the debt
owing to them under the first lien credit agreement into a new first lien term facility and for common shares of the purchaser.
14
In September 2014, the company engaged A&M to assist with the SISP. By that time, A&M had been advising the
Company for over 17 months and had gained an understanding of the Nelson Business and the educational publishing industry.
The SISP was structured as a two-phase process.
15 Phase 1 involved (i) contacting 168 potential purchasers, including both financial and strategic parties located in Canada,
the United States and Europe, and 11 potential lenders to ascertain their potential interest in a transaction, (ii) initial due diligence
and (iii) receipt by Nelson of non-binding letters of interest ("LOIs"). The SISP provided that interested parties could propose
a purchase of the whole or parts of the business or an investment in Nelson.
16
Seven potential purchasers submitted LOIs under phase 1, six of which were offers to purchase substantially all of the
Nelson business and one of which was an offer to acquire only the K-12 business. Nelson reviewed the LOIs with the assistance
of its advisors, and following consultation with the first lien steering committee and its advisors, invited five of the parties that
submitted LOIs to phase 2 of the SISP. Phase 2 of the SISP involved additional due diligence, data room access and management
presentations aimed at completion of binding documentation for a superior offer.
17
Three participants submitted non-binding offers by the deadline of December 19, 2014, two of which were for the
purchase of substantially all of the Nelson business and one of which was for the acquisition of the K-12 business. All three
offers remained subject to further due diligence and reflected values that were significantly below the value of the obligations
under the first lien credit agreement.
18 On December 19, 2014, one of the participants advised A&M that it required additional time to complete and submit its
offer, which additional time was granted. An offer was subsequently submitted but not ultimately advanced by the bidder.
19 Nelson, with the assistance of its advisors, maintained communications throughout its restructuring efforts with Cengage
Learnings, the company that has the U.S. business that was sold by Thomson and which is a key business partner of Nelson.
Cengage submitted an expression of interest for the higher education business that, even in combination with the offer received
for the K-12 business, was substantially lower than the amount of the first lien debt. In February 2015, Cengage and Nelson
terminated discussions about a potential sale transaction.
20
Ultimately, phase 2 of the SISP did not result in a transaction that would generate proceeds sufficient to repay the
obligations under the first lien credit agreement in full or would otherwise be supported by the first lien lenders. Accordingly,
with the assistance of A&M and its legal advisors, and in consultation with the first lien steering committee, Nelson determined
that it should proceed with the sale transaction pursuant to the first lien support agreement.
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4
Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
Sale transaction
21
The sale transaction is an asset purchase. It will enable the Nelson business to continue as a going concern. It includes:
(a) the transfer of substantially all of Nelson's assets to a newly incorporated entity to be owned indirectly by the
first lien lenders;
(b) the assumption by the purchaser of substantially all of Nelson's trade payables, contractual obligations and
employment obligations incurred in the ordinary course and as reflected in its balance sheet, excluding some
obligations including the obligations under the second lien credit agreement and an intercompany promissory note of
approximately $102.3 million owing by Nelson to Nelson Education Holdings Ltd.;
(c) an offer of employment by the purchaser to all of Nelson's employees; and
(d) a release by the first lien lenders of all of the indebtedness owing under the first lien credit agreement in exchange
for: (i) 100% of the common shares of a newly incorporated entity that will own 100% of the common shares of
the purchaser, and (ii) the obligations under a new US$200 million first lien term facility to be entered into by the
Purchaser.
22
The relief sought by the applicants apart from the approval of the sale transaction involves ancillary relief, including
authorizing the distribution from Nelson's cash on hand to the first lien lenders of outstanding fees and interest, effecting mutual
releases of parties associated with the sale transaction, and deeming a shareholders' rights agreement to bind all shareholders
of the purchaser. This ancillary relief is opposed by RBC.
Analysis
(i) Sale approval
23 RBC says it takes no position on the sale, although it opposes some of the terms and seeks an order paying the second lien
lenders their pre-filing interest and expense claims. Whether RBC is entitled to raise the issues that it has requires a consideration
of the intercreditor agreement of July 5, 2007 made between the agents for the first lien lenders and the second lien lenders.
24 Section 6.1(a) of the intercreditor agreement provides that the second lien lenders shall not object to or oppose a sale and
of the collateral and shall be deemed to have consented to it if the first lien claimholders have consented to it. It provides:
The Second Lien Collateral Agent on behalf of the Second Lien Claimholders agrees that it will raise no objection or
oppose a sale or other disposition of any Collateral free and clear of its Liens and other claims under Section 363 of the
Bankruptcy Code (or any similar provision of any other Bankruptcy Law or any order of a court of competent jurisdiction)
if the First Lien Claimholders have consented to such sale or disposition of such assets and the Second Lien Collateral
Agent and each other Second Lien Claimholder will be deemed to have consented under Section 363 of the Bankruptcy
Code (or any similar provision of any other Bankruptcy Law or any order of a court of competent jurisdiction) to any sale
supported by the First Lien Claimholders and to have released their Liens in such assets.
(underlining added)
25 Section 6.11 of the intercreditor agreement contained a similar provision. RBC raises the point that for these two sections
to be applicable, the first lien claimholders must have consented to the sale, and that the definition of first lien claimholders
means that all of the first lien lenders must have consented to the sale. In this case, only 88% of the first lien lenders consented
to the sale, the lone holdout being RBC. The definition in the intercreditor agreement of first lien claimholder is as follows:
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5
Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
"First Lien Claimholders" means, at any relevant time, the holders of First Lien Obligations at that time, including
the First Lien Collateral Agent, the First Lien Lenders, any other "Secured Party" (as defined in the First Lien Credit
Agreement) and the agents under the First Lien Loan Documents.
26 The intercreditor agreement is governed by the New York law and is to be construed and enforced in accordance with that
law. The first lien agent filed an opinion of Allan L. Gropper, a former bankruptcy judge in the Southern District of New York
and undoubtedly highly qualified to express proper expert opinions regarding the matters in issue. Mr. Gropper did not, however,
discuss the principles of interpretation of a commercial contract under New York law, and in the absence of such evidence, I
am to take the law of New York so far as contract interpretation is concerned as the same as our law. In any event, New York
law regarding the interpretation of a contract would appear to be the same as our law. See Cruden v. Bank of New York, 957
F.2d 961 (U.S. C.A. 2nd Cir. 1992) and Rainbow v. Swisher, 72 N.Y.2d 106, 531 N.Y.S. 775, 527 N.E.2d 258 (U.S. N.Y. Ct.
App. 1988). Mr. Gropper did opine that the sections in question are valid and enforceable in accordance with their terms. 1
27 The intercreditor agreement, like a lot of complex commercial contracts, appears to have a hodgepodge of terms piled on,
or added to, one another, with many definitions and exceptions to exceptions. That is what too often appears to happen when
too many lawyers are involved in stirring the broth. It is clear that there are many definitions, including a reference to First
Lien Lenders, which is defined to be the Lenders as defined in the First Lien Loan Documents, which is itself a defined term,
meaning the First Lien Credit Agreement and the Loan Documents. The provisions of the first lien credit agreement make clear
that the Lenders include all those who have lent under that agreement, including obviously RBC.
28 Under section 8.02(d) of the first lien credit agreement, more than 50% of the first lien lenders (the "Required Lenders")
may direct the first lien agent to exercise on behalf of the first lien lenders all rights and remedies available to. In this case 88%
of the first lien lenders, being all except RBC, directed the first lien agent to credit bid all of the first lien debt. This credit bid
was thus made on behalf of all of the first lien lenders, including RBC.
29
While the definition of First Lien Claimholders is expansive and refers to both the First Lien Collateral Agent (the first
lien agent) and the First Lien Lenders, suggesting a distinction between the two, once the Required Lenders have caused a credit
bid to be made by the First Lien Collateral Agent, RBC in my view is taken to have supported the sale that is contemplated
by the credit bid.
30
It follows that RBC is deemed under section 6.11 of the intercreditor agreement to have consented to the sale supported
by the first lien claimholders. It is nevertheless required that I determine whether the sale and its terms should be approved. It
is also important to note that no sale agreement has been signed and it awaits an order approving the form of Asset Purchase
Agreement submitted by Nelson in its motion materials.
31
This is an unusual CCAA case. It involves the acquisition of the Nelson business by its senior secured creditors under
a credit bid made after a SISP conducted before any CCAA process and without any prior court approval of the SISP terms.
The result of the credit bid in this case will be the continuation of the Nelson business in the hands of the first lien lenders, a
business that is generating a substantial EBITDA each year and which has been paying its unsecured creditors in the normal
course, but with the extinguishment of the US $153 million plus interest owed to the second lien lenders.
32
Liquidating CCAA proceedings without a plan of arrangement are now a part of the insolvency landscape in Canada,
but it is usual that the sale process be undertaken after a court has blessed the proposed sale methodology with a monitor fully
participating in the sale process and reporting to the court with its views on the process that was carried out 2 . None of this
has occurred in this case. One issue therefore is whether the SISP carried out before credit bid sale that has occurred involving
an out of court process can be said to meet the Soundair 3 principles and that the credit bid sale meets the requirements of
section 36(3) of the CCAA.
33
I have concluded that the SISP and the credit bid sale transaction in this case does meet those requirements, for the
reasons that follow.
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2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
34
Alvarez & Marsal Canada Inc. was named the Monitor in the Initial Order over the objections of RBC, but shortly
afterwards on the come-back motion by RBC, was replaced as Monitor by FTI Consulting Inc. The reasons for this change
are contained in my endorsement of June 2, 2015. There was no suggestion of a lack of integrity or competence on the part of
A&M or Alvarez & Marsal Canada Inc. In brief, the reason was that A&M had been retained by Nelson in 2013 as a financial
advisor in connection with its debt situation, and in September 2014 had been retained to undertake the SISP process that has
led to the sale transaction to the first lien lenders. I did not consider it right to put Alvarez & Marsal Canada Inc. in the position
of providing independent advice to the Court on the SISP process that its affiliate had conducted, and that it would be fairer
to all concerned that a different Monitor be appointed in light of the fact that the validity of the SISP process was going to be
front and centre in the application of Nelson to have the sale agreement to the first lien lenders approved. Accordingly FTI
was appointed to be the Monitor.
35
FTI did a thorough review of all relevant facts, including interviewing a large number of people involved. In its report
to the Court the Monitor expressed the following views:
(a) The design of the SISP was typical of such marketing processes and was consistent with processes that have been
approved by the courts in many CCAA proceedings;
(b) The SISP allowed interested parties adequate opportunity to conduct due diligence, both A&M and management
appear to have been responsive to all requests from potentially interested parties and the timelines provided for in
the SISP were reasonable in the circumstances;
(c) The activities undertaken by A&M were consistent with the activities that any investment banker or sale advisor
engaged to assist in the sale of a business would be expected to undertake;
(d) The selection of A&M as investment banker would not have had a detrimental effect on the SISP or the value
of offers;
(e) Both key senior management and A&M were incentivised to achieve the best value available and there was no
impediment to doing so;
(f) The SISP was undertaken in a thorough and professional manner;
(g) The results of the SISP clearly demonstrate that none of the interested parties would, or would be likely to, offer
a price for the Nelson business that would be sufficient to repay the amounts owing to the first lien lenders under
the first lien credit agreement
(h) The SISP was a thorough market test and can be relied on to establish that there is no value beyond the first
lien debt.
36
The Monitor expressed the further view that:
(a) There is no realistic prospect that Nelson could obtain a new source of financing sufficient to repay the first lien
debt;
(b) An alternative debt restructuring that might create value for the second lien lenders is not a viable alternative
at this time;
(c) There is no reasonable prospect of a new sale process generating a transaction at a value in excess of the first
lien debt;
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Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
(d) It does not appear that there are significant operational improvements reasonably available that would materially
improve profitability in the short-term such that the value of the Nelson business would increase to the extent necessary
to repay the first lien debt and, accordingly, there is no apparent benefit from delaying the sale of the business.
37
Soundair established factors to be considered in an application to approve a sale in a receivership. These factors have
widely been considered in such applications in a CCAA proceeding. They are:
(a) whether sufficient effort has been made to obtain the best price and that the receiver or debtor (as applicable)
has not acted improvidently;
(b) whether the interests of all parties have been considered;
(c) the efficacy and integrity of the process by which offers have been obtained; and
(d) whether there has been unfairness in the working out of the process.
38 These factors are now largely mirrored in section 36(3) of the CCAA that requires a court to consider a number of factors,
among other things, in deciding to authorize a sale of a debtor's assets. It is necessary to deal briefly with them.
(a) Whether the process leading to the proposed sale or disposition was reasonable in the circumstances. In this case,
despite the fact that there was no prior court approval to the SISP, I accept the Monitor's view that the process was
reasonable.
(b) Whether the monitor approved the process leading to the proposed sale or disposition. In this case there was no
monitor at the time of the SISP. This factor is thus not strictly applicable as it assumes a sale process undertaken in a
CCAA proceeding. However, the report of FTI blessing the SISP that took place is an important factor to consider.
(c) Whether the monitor filed with the court a report stating that in its opinion the sale or disposition would be more
beneficial to the creditors than a sale or disposition under a bankruptcy. The Monitor did not make such a statement in
its report. However, there is no reason to think that a sale or disposition under a bankruptcy would be more beneficial
to the creditors. The creditors negatively affected could not expect to fare better in a bankruptcy.
(d) The extent to which the creditors were consulted. The first lien steering committee was obviously consulted.
Before the SISP, RBC, the second lien lenders' agent, was consulted and actively participated in the reconstruction
discussions. I take it from the evidence that RBC did not actively participate in the SISP, a decision of its choosing,
but was provided some updates.
(e) The effects of the proposed sale or disposition on the creditors and other interested parties. The positive effect
is that all ordinary course creditors, employees, suppliers and customers will be protected. The effect on the second
lien lenders is to wipe out their security and any chance of their loans being repaid. However, apart from their being
deemed to have consented to the sale, it is clear that the second lien lenders have no economic interest in the Nelson
assets except as might be the case some years away if Nelson were able to improve its profitability to the point that
the second lien lenders could be paid something towards the debt owed to them. RBC puts this time line as perhaps
five years and it is clearly conjecture. The first lien lenders however are not obliged to wait in the hopes of some
future result. As the senior secured creditor, they have priority over the interests of the second lien lenders.
There are some excluded liabilities and a small amount owing to former terminated employees that will not be paid.
As to these the Monitor points out that there is no reasonable prospect of any alternative solution that would provide
a recovery for those creditors, all of whom rank subordinate to the first lien lenders.
(f) Whether the consideration to be received for the assets is reasonable and fair, taking into account their market
value. The Monitor is of the view that the results of the SISP indicate that the consideration is fair and reasonable in
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Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
the circumstances and that the SISP can, and should, be relied on for the purposes of such a determination. There is
no evidence to the contrary and I accept the view of the Monitor.
39
In the circumstances, taking into account the Soundair factors and the matters to be considered in section 36(3) of the
CCAA, I am satisfied that the sale transaction should be approved. Whether the ancillary relief should be granted is a separate
issue, to which I now turn.
(ii) Ancillary claimed relief
(a) Vesting order
40
The applicants seek a vesting order vesting all of Nelson's right, title and interest in and to the purchased assets in the
purchaser, free and clear of all interests, liens, charges and encumbrances, other than the permitted encumbrances and assumed
liabilities contemplated in the Asset Purchase Agreement. It is normal relief given in an asset sale under the CCAA and it is
appropriate in this case.
(b) Payment of amounts to first lien lenders
41
As a condition to the completion of the transaction, Nelson is to pay all accrued and unpaid interest owing to the first
lien lenders and all unpaid professional fees of the first lien agent and the first lien lenders outstanding under the first lien credit
agreement. RBC does not oppose this relief.
42
If the cash is not paid out before the closing, it will be an asset of the purchaser as all cash on hand is being acquired
by the purchaser. Thus the first lien lenders will have the cash. However, because the applicant is requesting a court ordered
release by the first lien lenders of all obligations under the first lien credit agreement, the unpaid professional fees of the first
lien agent and the first lien lenders that are outstanding under the first lien credit agreement would no longer be payable after
the closing of the transaction. Presumably this is the reason for the payment of these prior to the closing.
43
These amounts are owed under the provisions of the first lien credit agreement and have priority over the interests of
the second lien lenders under the intercreditor agreement. However, on June 2, 2015 it was ordered that pending further order,
Nelson was prevented from paying any interest or other expenses to the first lien lenders unless the same payments owing to
the second lien lenders. Nelson then chose not to make any payments to the first lien lenders. It is in effect now asking for
an order nunc pro tunc permitting the payments to be made. I have some reluctance to make such an order, but in light of no
opposition to it and that fact that it is clear from the report of the Monitor that there is no value in the collateral for the second
lien lenders, the payment is approved.
(c) Releases
44
The applicants request an order that would include a broad release of the parties to the Asset Purchase Agreement as
well as well as other persons including the first lien lenders.
45
The Asset Purchase Agreement has not been executed. In accordance with the draft approval and vesting order sought
by the applicants, it is to be entered into upon the entry of the approval and vesting order. The release contained in the draft
Asset Purchase Agreement in section 5.12 provides that the parties release each other from claims in connection with Nelson,
the Nelson business, the Asset Purchase Agreement, the transaction, these proceedings, the first lien support agreement, the
supplemental support agreement, the payment and settlement agreement, the first lien credit agreement and the other loan
documents or the transactions contemplated by them. Released parties are not released from their other obligations or from
claims of fraud. The release also does not deal with the second lien credit agreement or the second lien lenders.
46
The first lien term sheet made a part of the support agreement contained terms and conditions, but it stated that they
would not be effective until definitive agreements were made by the applicable parties and until they became effective. One of
the terms was that there would be a release "usual and customary for transactions of this nature", including a release by the first
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Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
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lien lenders in connection with "all matters related to the Existing First Lien Credit Agreement, the other Loan Documents and
the transactions contemplated herein". RBC was not a party to the support agreement or the first lien term sheet.
47
The release in the Asset Purchase Agreement at section 5.12 provides that "each of the Parties on behalf of
itself and its Affiliates does hereby forever release...". "Affiliates" is defined to include "any other Person that directly or
indirectly...controls...such Person". The party that is the purchaser is a New Brunswick numbered company that will be owned
indirectly by the first lien lenders. What instructions will or have been given by the first lien lenders to the numbered company
to sign the Asset Purchase Agreement are not in the record, but I will assume that the First Lien Agent has or will authorize it
and that RBC as a first lien lenders has not and will not authorize it.
48
Releases are a feature of approved plans of compromise and arrangement under the CCAA. The conditions for such
a release have been laid down in ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp., 2008 ONCA 587
(Ont. C.A.) at paras. 43 and 70. Third party releases are authorized under the CCAA if there is a reasonable connection between
the third party claim being compromised in the plan and the restructuring achieved by the plan. In Metcalfe, Blair J.A. found
compelling that the claims to be released were rationally related to the purpose of the plan and necessary for it and that the
parties who were to have claims against them released were contributing in a tangible and realistic way to the plan 4 .
49
While there is no CCAA plan in this case, I see no reason not to consider the principles established in Metcalfe when
considering a sale such as this under the CCAA, with any necessary modifications due to the fact that it is not a sale pursuant
to a plan. The application of those principles dictates in my view that the requested release by the first lien lenders should
not be ordered.
50
The beneficiaries of the release by the first lien lenders are providing nothing to the first lien lenders in return for the
release. The substance of the support agreement was that Nelson agreed to try to fetch as much as it could through a SISP but
that if it could not get enough to satisfy the first lien lenders, it agreed to a credit bid by the first lien lenders. Neither Nelson nor
the first lien agent or supplemental first lien agent or any other party gave up anything in return for a release from the first lien
lenders. So far as RBC releasing a claim that it may have as a first lien lender against the other first lien lenders, nothing has
been provided to RBC by the other first lien lenders in return for such a release. RBC as a first lien lender would be required
to give up any claim it might have against the other parties to the release for any matters arising prior to or after the support
agreement while receiving nothing in return for its release.
In the circumstances, I decline to approve the release by the first lien lenders requested by the applicants to be included in the
approval and vesting order.
(d) Stockholders and Registration Rights Agreement
51
The applicants seek to have a Stockholders and Registration Rights Agreement declared effective and binding on all
persons entitled to receive common shares of Purchaser Holdco in connection with the transaction as though such persons were
signatories to the Stockholders and Registration Rights Agreement.
52
The Stockholders and Registration Rights Agreement is a contract among the purchaser's parent company, Purchaser
Holdco, and the holders of Purchaser Holdco's common shares. After implementation of the transaction, the first lien lenders will
be the holders of 100% of the shares of Purchaser Holdco. The Stockholders and Registration Rights Agreement was negotiated
and agreed to by Purchaser Holdco and the First Lien Steering Committee (all first lien lenders except RBC). The First Lien
Steering Committee would like RBC to be bound by the agreement. The evidence of this is in the affidavit of Mr. Nordal,
the President and CEO of Nelson, who says that based on discussions with Mr. Chadwick, the First Lien Steering Committee
requires that all of the first lien lenders to be bound to the terms of the Stockholders and Registration Rights Agreement. This
is of course double hearsay as Mr. Chadwick acts for Nelson and not the First Lien Steering Committee.
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The effect of what is being requested is that RBC as a shareholder of Purchaser Holdco would be bound to some shareholder
agreement amongst the shareholders of Purchaser Holdco. While the remaining 88% of the shareholders of Purchaser Holdco
might want to bind RBC, I see nothing in the record that would justify such a confiscation of such shareholder rights. I agree
with RBC that extending the Court's jurisdiction in these CCAA proceedings and exercising it to assist the purchaser's parent
company with its corporate governance is not appropriate. The purchaser and its parent company either have the contractual
right to bind all first lien lenders to terms as future shareholders, or they do not.
RBC Motion
(a) Second lenders' pre-filing interest and second lien agent's fees
53
RBC seeks an order that directing Nelson to pay to RBC in its capacity as the second lien agent the second lien
interest outstanding at the filing date of CDN$1,316,181.73 and the second lien fees incurred prior to the filing date of US
$15,365,998.83.
54 Mr. Zarnett in argument conceded that these amounts are owed under the second lien credit agreement. There are further
issues, however, being (i) whether they continue to be owed due to the intercreditor agreement (ii) whether RBC is entitled under
the intercreditor agreement to request the payment and (iii) whether RBC is entitled to be paid these under the intercreditor
agreement before the first lien lenders are paid in full.
55 There is a distinction between a lien subordination agreement and a payment subordination agreement. Lien subordination
is limited to dealings with the collateral over which both groups of lenders hold security. It gives the senior lender a head
start with respect to any enforcement actions in respect of the collateral and ensures a priority waterfall from the proceeds
of enforcement over collateral. It entitles second lien lenders to receive and retain payments of interest, principal and other
amounts in respect of a second lien obligation unless the receipt results from an enforcement step in respect of the collateral.
By contrast, payment subordination means that subordinate lenders have also subordinated in favour of the senior lender their
right to payment and have agreed to turn over all money received, whether or not derived from the proceeds of the common
collateral 5 . The intercreditor agreement is a lien subordination agreement, as stated in section 8.2.
56
Nelson and the first lien agent say that RBC has no right to ask the Court to order any payments to it from the cash
on hand prior to the closing of the transaction. They rely on the language of section 3.1(a)(1) that provides that until the
discharge of the first lien obligations, the second lien collateral agent will not exercise any rights or remedies with respect to
any collateral, institute any action or proceeding with respect to such remedies including any enforcement step under the second
lien documents. RBC says it is not asking to enforce its security rights but merely asking that it be paid what it is owed and is
permitted to receive under the intercreditor agreement, which does not subordinate payments but only liens. It points to section
3.1(c) that provides that:
(c) Notwithstanding the foregoing (i.e. section 3.1(a)(1)) the Second Lien Collateral Agent and any Second Lien
Claimholder may (1)... and may take such other action as it deems in good faith to be necessary to protect its rights in an
insolvency proceeding" and (4) may file any... motions... which assert rights... available to unsecured creditors...arising
under any insolvency... proceeding.
57 My view of the intercreditor agreement language and what has occurred is that RBC has not taken enforcement steps with
respect to collateral. It has asked that payments owing to it under the second lien credit agreement up to the date of filing be paid.
58
Payment of what the second lien lenders are entitled to under the second lien credit agreement is protected under the
intercreditor agreement unless it is as the result of action taken by the second lien lenders to enforce their security. Section
3.1(f) of the intercreditor agreement provides as follows:
(f) Except as set forth is section 3.1(a) and section 4 to the extent applicable, nothing in this Agreement shall prohibit
the receipt by the Second Lien Collateral Agent or any Second Lien Claimholders of the required payments of interest,
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Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
2015 ONSC 5557, 2015 CarswellOnt 13576, 258 A.C.W.S. (3d) 465, 29 C.B.R. (6th) 140
principal and other amounts owed in respect of the Second Lien Obligations or receipt of payments permitted under the
First Lien Loan Documents, including without limitation, under section 7.09(a) of the First Lien Credit Agreement, so
long as such receipt is not the direct or indirect result of the exercise by the Second Lien Collateral Agent or any Second
Lien Claimholders of rights or remedies as a secured creditor (including set off) or enforcement in contravention of this
Agreement. ... (underlining added).
59 Section 3.1(a) prohibits the second lien lenders from exercising any rights or remedies with respect to the collateral before
the first liens have been discharged. Section 4 requires any collateral or proceeds thereof received by the first lien collateral
agent from a sale of collateral to be first applied to the first lien obligations and requires any payments received by the second
lien lenders from collateral in connection with the exercise of any right or remedy in contravention of the agreement must be
paid over to the first lien collateral agent.
60 It do not agree with the first lien collateral agent that payment to RBC before the sale closes of amounts owing pre-filing
under the second lien credit agreement would be in contravention of section 4.1. That section deals with cash from collateral
being received by the first lien collateral agent in connection with a sale of collateral, and provides that it shall be applied to
the first lien obligations until those obligations have been discharged. In this case, the cash on hand before any closing will not
be received by the first lien collateral agent at all. It will be received after the closing by the purchaser.
61 The first lien collateral agent has made a credit bid on behalf of the first lien lenders. Pursuant to section 3.1(b), that credit
bid is deemed to be an exercise of remedies with respect to the collateral held by the first lien lenders. Under the last paragraph
of section 3.1(c), until the discharge of the first lien obligations has occurred, the sole right of the second lien collateral agent
and the second lien claimholders with respect to the collateral is to hold a lien on the collateral pursuant to the second lien
collateral documents and to receive a share of the proceeds thereof, if any, after the discharge of the first lien obligations has
occurred. That provision is as follows:
Without limiting the generality of the foregoing, unless and until the discharge of the First Lien Obligations has occurred,
except as expressly provided in Sections 3.1(a), 6.3(b) and this Section 3.1(c), the sole right of the Second Lien Collateral
Agent and the Second Lien Claimholders with respect to the Collateral is to hold a Lien of the Collateral pursuant to the
Second Lien Collateral Documents for the period and to the extend granted therein and to receive a share of the proceeds
thereof, if any, after the Discharge of First Lien Obligations has occurred.
62 RBC points out that its rights under section 3.1(f) to receive payment of amounts owing to the second lien lenders is not
subject to section 3.1(c) at all. It is not suggested by the first lien collateral agent that this is a drafting error, but it strikes me
that it may be. The provision at the end of section 3.1(c) is inconsistent with section 3.1(f) as section 3.1(c) is not an exception
to section 3.1(f).
63
Both the liens of the first lien lenders and the second lien lenders are over all of the assets of Nelson. Cash is one of
those assets. Therefore if payment were now made to RBC from that cash, the cash would be paid to RBC from the collateral
for amounts owing under the second lien credit agreement before the obligations to the first lien lenders were discharged. The
obligations to the first lien lenders will be discharged when the sale to the purchaser takes place and the first lien obligations
are cancelled.
64 There is yet another provision of the intercreditor agreement that must be considered. It appears to say that if a judgment
is obtained in favour of a second lien lender after exercising rights as an unsecured creditor, the judgment is to be considered
a judgment lien subject to the intercreditor agreement for all purposes. Section 3.1(e) provides:
(e) Except as otherwise specifically set forth in Sections 3.1(a) and (d), the Second Lien Collateral Agent and the Second
Lien Claimholders may exercise rights and remedies as unsecured creditors against the Company or any other Grantor that
has guaranteed or granted Liens to secure the Second Lien Obligations in accordance with the terms of the Second Lien
Loan Documents and applicable law; provided that in the event that any Second Lien Claimholder becomes a judgment
creditor in respect of Collateral as a result of its enforcement of its rights as an unsecured creditor with respect to the
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Nelson Education Ltd., Re, 2015 ONSC 5557, 2015 CarswellOnt 13576
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Second Lien Obligations, such judgment Lien shall be subject to the terms of this Agreement for all purposes (including in
relation to the First Lien Obligations) as the other Liens securing the Second Lien Obligations are subject to this Agreement.
(Emphasis added).
65
What exactly is meant by a "judgment Lien" is not stated in the intercreditor agreement and is not a defined term. If an
order is made in this CCAA proceeding that the pre-filing obligations to the second lien collateral agent are to be paid from the
cash on hand that Nelson holds, is that a "judgment Lien" meaning that it cannot be exercised before the first lien obligations
are discharged? In this case, as the first lien obligations will be discharged as part of the closing of the transaction, does that
mean that once the order is made approving the sale and the transaction closes, the cash on hand will go to the purchaser and
the judgment Lien will not be paid? It is not entirely clear. But the section gives some indication that a judgment held as a result
of the second lien agent exercising rights as an unsecured creditor cannot be used to attach collateral contrary to the agreement
if the first lien obligations have not been discharged.
66
I have been referred to a number of cases in which statements have been made as to the need for the priority of secured
creditors to be recognized in CCAA proceedings, particularly when distributions have been ordered. While in this case we are
not dealing with a distribution generally to creditors, the principles are well known and undisputed. However, in considering
the priorities between the first and second lien holders in this case, the intercreditor agreement is what must govern, even with
all of its warts.
67 In this case, the cash on hand held by Nelson is collateral, and subject to the rights of the first lien lenders in that collateral.
An order made in favour of RBC as second lien agent would reduce that collateral. The overall tenor of the intercreditor
agreement, including section 3.1(e), leads me to the conclusion that such an order in favour of RBC should not be made. I do
say, however, that the issue is not at all free from doubt and that no credit should be given to those who drafted and settled the
intercreditor agreement as it is far from a model of clarity. I decline to make the order sought by RBC.
68
I should note that RBC has made a claim that that Nelson and the first lien lenders who signed the First Lien Support
Agreement acted in bad faith and disregarded the interests of the second lien lenders under the intercreditor agreement. RBC
claims that the first lien lenders induced Nelson to breach the second lien credit agreement and that this breach resulted in
damages to the second lien agent in the amounts of US$15,365,998.83 on account of interest and CDN$1,316,181.73 on account
of fees. RBC says that these wrongs should be taken into account in considering whether the credit bid should be accepted and
that the powers under section 11 of the CCAA should be exercised to order these amounts to be paid to RBC as second lien agent.
69
I decline to do so. No decision on this record could be possibly be made as to whether these wrongs took place. The
claim for inducing breach of contract surfaced in the RBC factum filed just two days before the hearing and it would be unfair
to Nelson or the first lien lenders to have to respond without the chance to fully contest these issues. Moreover, even the release
sought by the applicants would not prevent RBC or any second lien lender from bringing an action for wrongs committed. RBC
is able to pursue relief for these alleged wrongs in a separate action.
(b) Consent fee
70
The first lien lenders who signed the First Lien Support Agreement were paid a consent fee. That agreement, and
particularly the term sheet made a part of it, provided that those first lien lenders who signed the agreement would be paid
a consent fee.
71
RBC contends that because the consent fee was calculated for each first lien lender that signed the First Lien Support
Agreement on the amount of the loans that any consenting first lien lenders held under the first lien credit agreement, the consent
fee was paid on account of the loans and thus because all first lien lenders were to be paid equally on their loans on a pro rata
basis, RBC is entitled to be paid its share of the consent fees.
72
Section 2.14 of the first lien credit agreement provides in part, as follows:
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If, other than as expressly provided elsewhere herein, any Lender shall obtain on account of the Loans made by it,
or the participations in L/C Obligations and Swing Line Loans held by it, any payment (whether voluntary, involuntary,
through the exercise of any right of setoff, or otherwise) in excess of its ratable share (or other share contemplated
hereunder) thereof, such Lender shall immediately (a) notify the Administrative Agent of such fact, and (b) purchase from
the other Lenders such participations in the Loans made by them and/or such subparticipations in the participations in
L/C Obligations or Swing Line Loans held by them, as the case may be, as shall be necessary to cause such purchasing
Lender to share the excess payment in respect of such Loans or such participations, as the case may be, pro rata with each
of them ... [emphasis added].
73 RBC says that while the section refers to a first lien lender obtaining a payment "on account" of its loan, U.S. authorities
under the U.S. Bankruptcy Code have held that the words "on account of" do not mean "in exchange for" but rather mean
"because of." As the consent payments are calculated on the amount of the loan of any first lien lender who signed the term
sheet, RBC says that they were made because of their loan and thus RBC is entitled to its share of the consent fees that were
paid by virtue of section 2.14 of the first lien credit agreement.
74
I do not accept that argument. The consent fees were paid because the consenting first lien lenders signed the First
Lien Support Agreement. The fact that their calculation depended on the amount of the loan made by each consenting first
lien lender does not mean they were made because of the loan. RBC declined to sign the First Lien Support Agreement and
is not entitled to a consent fee.
Conclusion
75
An order is to go in accordance with these reasons. As there has been mixed success, there shall be no order as to costs.
Company's motion granted; bank's motion dismissed.
Footnotes
1
I do not think that Mr. Gropper's views on what particular sections of the agreement meant is the proper subject of expert opinion
on foreign law. Such an expert should confine his evidence to a statement of what the law is and how it applies generally and not
express his opinion on the very facts in issue before the court. See my comments in Nortel Networks Corp., Re (2014), 20 C.B.R.
(6th) 171 (Ont. S.C.J. [Commercial List]) para. 103.
2
See Nortel Networks Corp., Re (2009), 55 C.B.R. (5th) 229 (Ont. S.C.J. [Commercial List]) at paras. 35-40 and Brainhunter Inc.,
Re, [2009] O.J. No. 5207 (Ont. S.C.J. [Commercial List]) at paras. 12-13.
3
Royal Bank v. Soundair Corp. (1991), 7 C.B.R. (3d) 1 (Ont. C.A.).
4
This case does not involve a plan under the CCAA. One of the reasons for this may be that pursuant to section 6.9(b) of the intercreditor
agreement, in the event the applicants commence any restructuring proceeding in Canada and put forward a plan, the applicants, the
first lien lenders and the second lien lenders agreed that the first lien lenders and the second lien lenders should be classified together
in one class. The second lien lenders agreed that they would only vote in favour of a plan if it satisfied one of two conditions, there
was no contractual restriction on their ability to vote against a plan.
5
See 65 A.B.A. Bus Law. 809-883 (May 2010).
End of Document
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14
11
White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
2010 QCCS 764, 2010 CarswellQue 1780, [2010] Q.J. No. 1723, 186 A.C.W.S. (3d) 595...
2010 QCCS 764
Cour supérieure du Québec
White Birch Paper Holding Co., Re
2010 CarswellQue 1780, 2010 QCCS 764, [2010] Q.J. No.
1723, 186 A.C.W.S. (3d) 595, J.E. 2010-711, EYB 2010-170526
In the matter of the plan of arrangement and compromise of : White
Birch Paper Holding Company, White Birch Paper Company, Stadacona
General Partner Inc., Black Spruce Paper Inc., F.F. Soucy General Partner
Inc., 3120772 Nova Scotia Company, Arrimage de gros Cacouna inc.
and Papier Masson ltée, Petitioners, v. Ernst & Young Inc., Monitor,
and Stadacona Limited Partnership, F.F. Soucy Limited Partnership
and F.F. Soucy, Inc. & Partners, Limited Partnership, Mises en cause
Mongeon J.C.S.
Heard: 24 february 2010
Judgment: 4 march 2010
Docket: C.S. Qué. Montréal 500-11-038474-108
Counsel: Me Jean Fontaine, Me Mathew Liben, for Petitioners
Me Louis Gouin, for Monitor
Me Sylvain Vauclair, for GE Capital Corporation
Me Sandra Abitan, for Interim Lender (DIP)
Subject: Insolvency
Mongeon J.C.S.:
ON PETITIONERS' MOTION FOR THE ISSUANCE OF AN INITIAL ORDER
Sections 11 and following Companies Creditors' Arrangement Act (« CCAA »)
______________________________________________________________________
1
On February 24, 2010, I granted the Petitioners' Motion for the Issuance of an Initial Order pursuant to Sections 11 and
following of the CCAA, with reasons to follow.
2
Here are my reasons.
I. INTRODUCTION
(A) PETITIONERS
3 Petitioner White Birch Paper Company ("WB") is a Nova Scotia company with holdings principally situated in the Province
of Québec;
4 WB is owned by a partnership, White Birch Partners L.P., which in turn is fully owned (both directly and through further
intermediaries) by Petitioner White Birch Paper Holding Company ("WB Holding");
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1
White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
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5
WB is the parent company of Petitioners Stadacona General Partner Inc. ("Stadacona GP"), F.F. Soucy General Partner
Inc. ("FF Soucy GP"), Black Spruce Paper Inc. ("Black Spruce") and 3120772 Nova Scotia Company ("3120772");
6
Bear Island Paper Company LLC ("Bear Island"), a Virginia company, is also a subsidiary of WB, but is not a Petitioner
hereunder as its assets and operations are located in the United States;
7
WB is also the ultimate parent company of Petitioners Papier Masson Ltée ("Papier Masson") and Arrimage de Gros
Cacouna Inc. ("Arrimage");
8
The Mises en Cause, Stadacona Limited Partnership ("Stadacona LP"), F.F. Soucy Limited Partnership ("FF Soucy
LP") and F.F. Soucy, Inc. & Partners, Limited Partnership ("FF Soucy & Partners LP") (referred to collectively herein as the
"Partnerships") are not petitioners in these proceedings;
9
WB and the other Petitioners seek to have the stay of proceedings sought hereunder extended to the Partnerships as they
form an integral and intimately interconnected part of the business of the Petitioners. They represent that the operations of the
Partnerships are so integral to and intertwined with those of the Petitioners that failure to extend the stay to them would have a
negative impact on the value of the Petitioners and would make it impossible to the Petitioners to successfully restructure;
10
WB, Stadacona GP, FF Soucy GP, Black Spruce, Papier Masson, 3120772, Arrimage, Bear Island and the Partnerships
will be referred to collectively herein as the "WB Group";
11
WB Holding is privately owned and has its executive office in Greenwich, Connecticut, U.S.A.;
12 The WB Group operates three pulp and paper mills in the province of Québec, which, together with a fourth mill situated
in Virginia and operated by Bear Island, collectively have a yearly production capacity of 1.3 million metric tons of newsprint
and directory paper with up to 50% recycled content;
13
Each of the Petitioners and Partnerships has its chief place of business in the Province of Québec;
(B) ORDER SOUGHT
14
The Petitioners seek, inter alia, the following conclusions:
a) a declaration that Petitioners are companies to which the CCAA applies;
b) a declaration that the protection of the CCAA extends to the Partnerships;
c) a declaration authorizing each of the Petitioners or the WB Group as a whole to file a plan of arrangement under the
CCAA;
d) a declaration ordering that all proceedings against the Petitioners, the Partnerships and their assets be stayed and
suspended;
e) a declaration authorizing the borrowers set out in the Interim Financing Credit Agreement to borrow a maximum amount
of USD$140 million under an interim financing facility secured by a priming charge;
f) the appointment of Ernst & Young Inc. ("Ernst") as monitor (the "Monitor") pursuant to Section 11.7 of the CCAA;
g) such further order and/or relief as this Court may deem just.
II. OPERATIONS
(A) OVERVIEW
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White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
2010 QCCS 764, 2010 CarswellQue 1780, [2010] Q.J. No. 1723, 186 A.C.W.S. (3d) 595...
15
The WB Group is a major owner and operator of newsprint mills, principally in the province of Québec;
16
As of December 31, 2009, it has the second-greatest newsprint production capacity in North America, with a market
share of approximately 12%;
17
It has annual net sales of approximately US$667 million as of December 31, 2009;
18
As of January 2010, the WB Group has approximately 1,278 employees;
19
The WB Group's Canadian newsprint mills are situated at Québec City (the "Stadacona Mill"), Rivière-du-Loup (the
"Soucy Mill") and Masson-Angers, Québec (the "Papier Masson Mill"), and its United States mill is situated in Ashland, Virginia
(the "Bear Island Mill");
20
Stadacona LP also owns and operates a sawmill, under the name of Scierie Leduc ("Leduc Sawmill");
(B) THE STADACONA MILL
21
The Stadacona Mill was purchased by the WB Group in 2004, and is owned and operated by Stadacona LP;
22 It features five (5) paper machines capable of producing 410,000 metric tons of newsprint per year, 95,000 tons per year
of directory paper and 45,000 tons per year of paperboard;
23
The workforce at the Stadacona Mill has recently been significantly reduced, from a total of 1,014 in 2004 to a current
total of 585 employees;
(C) LEDUC SAWMILL
24
The Leduc Sawmill is located in St-Émile, Québec and employs approximately 20 people;
(D) THE SOUCY MILL
25
The Soucy Mill was acquired by the WB Group in 1973, and is jointly owned and operated by FF Soucy LP and FF
Soucy & Partners LP;
26
The Soucy Mill features two (2) newsprint machines, which together have an annual newsprint production capacity of
265,000 metric tons;
27
The Soucy Mill also produces uncoated ground wood specialty paper;
28
The Soucy Mill currently employs 231 people;
(E) ARRIMAGE GROS CACOUNA
29
Arrimage provides stevedoring services, specializing in paper products, at the Gros-Cacouna Seaport, near Rivière-duLoup, Québec;
30
Its primary purpose is to load WB Group paper products on ships, for marine shipment to foreign clients;
(F) THE PAPIER MASSON MILL
31
The Papier Masson Mill was purchased by the WB Group in 2006, and is owned and operated by Papier Masson;
32
The Papier Masson Mill has one newsprint machine capable of producing 245,000 metric tons of newsprint per year;
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White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
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33
Following WB Group's acquisition of the Papier Masson Mill, the workforce was significantly reduced from 287, and
currently stands at 186 employees;
(G) THE BEAR ISLAND MILL
34
The Bear Island Mill was built by the WB Group in 1979;
35
It is owned by Bear Island, which is not a Petitioner in the present proceedings;
36
It operates a single newsprint paper machine, which has a capacity of 235,000 metric tons per year;
37
The Bear Island Mill currently employs 199 people;
(H) EMPLOYEES
38
As stated above, the WB Group presently employs 1,278 people.
39
With the exception of the Bear Island staff, all such employees are situated in the Province of Québec, such that the
Petitioners and Partnerships employ approximately 1,100 people in Québec. These employees are, for the most part, unionized.
40
Unionized employees of the Stadacona Mill, the Soucy Mill and the Papier Masson Mill are members of the
Communications, Energy and Paperworkers Union:
a) For the Stadacona Mill: Locals 137, 200, 250 and 299;
b) For the Soucy Mill: Locals 625, 627 and 905;
c) For the Papier Masson Mill: Locals 11 and 1104;
41 The unionized employees of Stadacona LP's Leduc Sawmill are members of a distinct union, the Syndicat Démocratique
des Salariés de la Scierie Leduc;
42
At Arrimage, the unionized employees are members of the Syndicat des Employés d'Arrimage Gros-Cacouna;
III. FINANCIAL SITUATION
A) OVERVIEW AND CAUSES OF FINANCIAL DIFFICULTIES
43
The Petitioners and the Partnerships are currently confronted with an unprecedented combination of negative
circumstances;
44
In addition to the worldwide economic downturn, the newsprint industry is experiencing a particular harsh decline in
demand as electronic alternatives replace printed media;
45 Newsprint prices dropped nearly $330 per metric ton from the fourth quarter of 2008 until August 2009, a negative impact
of approximately $380 million for the WB Group, on the basis of full capacity operation;
46 Moreover, the increased strength of the Canadian dollar and the weakness of the United States dollar has exacerbated the
negative impact of the decline, as most of the WB Group's clients are in the United States and remit payment in United States
currency, while most expenses are payable in Canadian currency;
47 In sum, the Petitioners' and Partnerships' financial and operational challenges are principally attributable to the following
factors :
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a) the overall decline in the world economy and its impact on demand for and price and inventories of newsprint;
b) fundamental decline in demand for newsprint as consumers move away from print media;
c) increased strength of the Canadian dollar and corresponding weakness of the American dollar;
d) significant debt service obligations;
e) the detrimental effect of low floating interest rates on the WB Group's position in certain major interest rate swap
transactions;
48
These factors have led to a significant liquidity shortfall, such that the Petitioners and Partnerships are unable to respect
their debt service obligations;
49
EBITDA (earnings before interest, taxes, depreciation and amortization) will not be sufficient to service the Petitioners'
and Partnerships' debt and to fund required expenditures within the upcoming months;
50
This liquidity crisis demands an urgent solution, in light of the following payments that became due on September 30,
2009 and which remain unpaid:
(a) interest payment on the First Term Loan Facility: US$3,666,672.19;
(b) interest payment on the Second Term Loan Facility: US$1,380,000.00;
(c) accelerated payments under the Swap Agreements (as defined below): approximately US$58,000,000;
51
In addition, between February 24 and March 31, 2010, the Petitioners and the Partnerships would have to make a total
of approximately Cdn$4,391,000 1 in pension fund contributions;
52
Of this amount, a significant amount relates to "past service cost contributions" (also known as "special payments" or
"amortization payments"), in light of the existence of solvency deficits, as set out in a report detailing such deficits prepared
by Mercer (Canada) Ltd. ("Mercer"), and filed as Exhibit P-2;
53
Indeed, in 2009, a total of Cdn$1,413,110 per month is attributable to such amortization payments, as appears from an
actuarial report also prepared by Mercer, and also forming part of Exhibit P-2;
54
In light of their significant liquidity shortfall, and the size of the amounts currently due as set out above (as well as all
other current operational obligations, notably payroll and payment of utilities and raw materials expenses), the Petitioners and
Partnerships are not in a position to make such payments;
55
In view of the above, the Petitioners and the Partnerships are now insolvent;
B) INDEBTEDNESS
56
The WB Group's principal debt obligations consist of three major credit facilities:
a) A First Lien Term Loan facility under which a total of approximately US$438 million in principal and interest
are owing;
b) A Second Lien Term Loan facility under which a total of approximately US$104 million in principal and interest
are owing;
c) A Revolving Asset-Based Facility under which US$50 million in principal and interest are outstanding;
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White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
2010 QCCS 764, 2010 CarswellQue 1780, [2010] Q.J. No. 1723, 186 A.C.W.S. (3d) 595...
57 In addition, the WB Group is party to various interest rate swaps, which are out of the money to the extent of approximately
US$58 million in total as of the present date, which swaps rank pari passu to the lenders under the First Term Loan Facility;
C) PENSION PLANS AND RETIREMENT BENEFITS
58
The WB Group has created and contributes to various pension plans for its unionized and non-unionized employees;
59
It has also established Supplement Executive Retirement Plans ("SERP's") for certain management employees;
60
In addition, the Petitioners fund certain Other Post-Employment Benefits ("OPEB's");
61
Many of the plans are currently in a position of significant solvency deficit;
62
As stated, the Petitioners and Partnerships are in a major and urgent liquidity crisis and are therefore not in a position to
make all payments due under the pension and retirement plans, in particular, those which are in respect of pre-filing obligations;
63
In view of this fact, the Petitioners and Partnerships seek an order suspending payment of amounts relating to "past
service cost contributions" (i.e. amortization payments), which account for approximately Cdn$1,413,110 per month, including
any amounts accrued prior to the present CCAA filing 2 ;
64
The Petitioners submit that such an order is justified during the stay period, as all available liquidity must be utilized to
sustain the operations of the Petitioners and Partnerships, and to meet their ongoing post-filing obligations;
65 Consequently, the Petitioners In view of this fact, the Petitioners and Partnerships seek an order and Partnerships propose
to continue making all current contributions to pension plans, SERP's and OPEB's;
D) UTILITIES AND TRADE CREDITORS
66 The Petitioners and Partnerships, in addition to employee expenses and debt-service obligations, have monthly expenses of
approximately Cdn$40 million, including approximately Cdn$10.5 million in utilities expenses (principally electricity, natural
gas and steam);
V) INTERIM FINANCING (« DIP »)
67
In order to continue to operate, the WB Group, therefore, needs significant additional liquidity. To this end, the WB
Group retained the services of Lazard Frères & Co LLC as financial advisors, who were able to convince a group of First Term
Loan lenders to advance and cover said liquidity requirements in the form of a « DIP » loan secured by a priming charge. A
copy of the Interim Financing Credit Agreement was filed as Exhibit P-3 (the « DIP Loan »).
68
Essentially, the DIP Loan is for an aggregate amount of US$140 million, from which an amount of approximately US
$50 million will be deducted and applied to the full payment and discharge of the Asset Based Revolving Credit Facility.
69
After earmarking a further amount of approximately US$16 million 3 to cover the Administrative and D&O priming
charge (as explained below), the DIP Loan will provide some US$74 million in additional liquidity which, according to the
Monitor, should permit a orderly and appropriate restructuring. The DIP Loan will bear interest at the rate of approximately
17.5% to 19% per annum and is entirely supported by the Monitor (see Monitor's Initial Report Exhibit P-4).
70
After reviewing the allegations of paragraphs 128 to 159 of the Petition as well as the evidence of the representative of
the Petitioners and the Monitor, the undersigned is satisfied that:
d) the priming charge will not secure any obligations that were owing prior to the filing;
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e) the interim financing proposed is intended to permit the WB Group to restructure over a period of approximately
nine to twelve months;
f) the interim financing is crucial to the survival of the Petitioners and Partnerships over the said restructuring period;
g) the sizing of the interim financing, cost of borrowing and fees are reasonable and have been minimized in order
to reduce the impact on all other secured creditors;
h) the interim financing will enhance the prospects of a viable restructuring;
71
Furthermore, I am advised that management has the confidence of its major creditors and shall remain in place over
the restructuring period;
72
As a result, I am prepared to approve same.
VI) DIRECTORS' INDEMNIFICATION AND CHARGE
73 A successful restructuring of the Petitioners and Partnerships will only be possible with the continued participation of the
Petitioners' directors and officers. These executives are essential to the ongoing viability of the Petitioners' and Partnerships'
businesses, and the successful restructuring thereof;
74
Even though the Petitioners intend to comply with all applicable laws and regulations, the Petitioners' directors and
officers may nevertheless be concerned about the potential for their personal liability in the context of the present restructuring;
75 Given the allegations of paragraphs 162 to 167 of the Petition, I am also satisfied that the D&O Charge sought is reasonable
and in the best interests of the Petitioners. Accordingly, I am prepared to approve same.
VII) QUESTIONS OF PARTICULAR INTEREST
76
Three questions raised by the present proceedings require more particular comment.
A) Confidentiality of certain documents
77
The first issue has to do with the WB Group's request to put all sensitive financial information filed in support of its
Petition to be put under seal. More particularly, the WB Group seeks the protection of its financial statements and cash flow
statements from general access by the public in general and by the Group's competitors in particular.
78
Paragraphs 170 to 175 of the Petition outline the factual basis for such order.
79
I note two specific allegations which are pertinent:
a) the fact that the WB Group is privately owned and that it does not wish to share this information with its competitors;
b) the fact that the public disclosure of such sensitive information would be very prejudicial to the Group because of
its potential use by its competitors in a manner which may jeopardize the restructuring.
80
These allegations are not supported with additional detailed facts. Consequently, I raised the question of sufficiency of
these arguments to grant the requested confidentiality order.
81
I quote from the 2010 Annotated Bankruptcy and Insolvency Act of Houlden, Morawetz and Sarra at pages 1125 and 1126:
. . . "There had been some issue over what information should or should not be sealed during a CCAA proceeding.
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7
White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
2010 QCCS 764, 2010 CarswellQue 1780, [2010] Q.J. No. 1723, 186 A.C.W.S. (3d) 595...
The Supreme Court of Canada 4 considered the confidentiality of commercial information in context of judicial
proceedings, finding that a confidentiality order should only be granted when such an order is necessary in order to
prevent a serious risk to an important interest, including a commercial interest, in the context of litigation because
reasonably alternative measures will not prevent the risk . . . The Court held that the risk in question must be
real and substantial, in that the risk is well grounded in the evidence, and poses a serious threat to the commercial
interest in question. In order to qualify as an « important commercial interest », the interest in question cannot
merely be specific to the party requesting the order . . . « Reasonably alternative measures » requires the judge to
consider not only whether reasonable alternatives to a confidentiality order are available, but also to restrict the
order as much as is reasonably possible while preserving the commercial interest in question.
In another judgment 5 , the Supreme Court of Canada held that the « administration of justice thrives on exposure
to light, and withers under a cloud of secrecy » . . .
(underlining added)
82
The burden of establishing that the order is necessary bears upon the applicant.
83
However, section 10(3) CCAA now reads as follows (in force since September 18, 2009):
3) Publication ban - The court may make an order prohibiting the release to the public of any cash-flow statement,
or any part of a cash-flow statement, if it is satisfied that the release would unduly prejudice the debtor company
and the making of the order would not unduly prejudice the company's creditors, but the court may, in the order,
direct that the cash-flow statement or any part of it be made available to any person specified in the order on any
terms or conditions that the court considers appropriate.
(underlining added)
84 In the present instance, I was not convinced that the allegations of the Petition were elaborate and complete enough to meet
the tests enunciated in « Sierra Club » and « Toronto Star Newspapers ». It seems that a Petitioner seeking such order would have
to explain in more detail the necessity of derogating from the general rule imposing publicity and public access to all evidentiary
material in CCAA proceedings. In short, the exception of confidentiality (now codified in section 10(3) CCAA) will always
have to be restrictively interpreted and applied only when the underlying facts are strong enough to warrant such an order.
85 But for the comments stated below, and if I were to base by decision only upon the contents of the Petition, I would have
denied this request on the basis of incomplete and insufficient evidence to support it.
86
However, the Petitioners have suggested in paragraph 175 of the Petition, that the said financial information could be
made available to « certain creditors upon signature of a confidentiality agreement ».
87
At my suggestion, the WB Group agreed to furnish unfettered access to the said documentation to all creditors without
further distinction or limitation, upon signing of a confidentiality agreement.
88
Such a position is in line with the wording and intent of section 10(3) CCAA. Consequently, I was prepared to grant
the WB Group's request and keep confidential and under seal the financial data filed by the Petitioners except for those
creditors (regardless of their importance) who would be agreable to signing a confidentiality agreement in exchange for the said
information. Such a « modus operandi » ensures that the confidentiality order and will not « unduly prejudice the company's
creditors ».
B) Past service pension contributions
89
The second issue has to do with the Group's obligation to effect certain pension contributions.
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90
The WB Group takes the position that « past service pension contributions » are the result of a pre-filing obligation and
requests a confirmation of this position.
91 This issue is specifically covered in sections 103 to 110 of the Petition, which I have summarized in paragraphs 58 to 65
of the present Reasons. In addition, I have heard the testimony of Mr. Jay Epstein, Vice-President finance, of the WB Group.
92
Mr. Epstein's testimony has clearly identified the nature and specificity of the payments which cannot be met at the
present time and in respect of which the Group requests a stay of its obligations.
93
The Group's monthly payments to the various pension funds and plans are approximately US$2.2 million per month.
They consist mainly of « past service pension contributions » of approximately US$1.4 million per month and « current service
pension contributions » of approximately US$800 000,00 per month.
94 Past service contributions are due by the Group as a result of its obligation to make up for the actuarial deficit of the funds
and/or plans. They are not the result of the Group's failure or negligence to pay its current service contributions or past service
contributions, the said contributions having been paid by the Group up to December 31 st , 2009. Past service contributions are
calculated every year-end by Mercer, the Group's Advisor and Pension Plan Manager and Exhibit P-2 (A) and (B) establishes
with greater accuracy the exact nature and amounts currently due.
95
On the whole of the evidence presented before me, I am satisfied that the relief sought by the WB Group falls squarely
within the definition of « past service contributions » or « cotisations d'équilibre », as those words were defined by my colleagues
Madam Justice Danièle Mayrand in Re: AbitibiBowater Inc. 6 and Justice Paul Chaput in Re: Papiers Gaspésia 7 . Madame
Justice Mayrand wrote:
[37] Aux termes de l'article 11(3) de la LACC, l'ordonnance initiale ne peut suspendre les droits ou créances
qui résultent d'obligations relatives à la fourniture de services ou de biens après l'ordonnance initiale.
[38] Les syndicats prétendent que les cotisations d'équilibre visent à combler des obligations qui découlent de
services rendus par les employés après le dépôt de la demande initiale.
[39] Avec respect, cet argument n'est pas fondé.
[40] Les syndicats prennent appui sur un commentaire du juge Farley de la Cour supérieure de l'Ontario qui,
dans la cause de Ivaco 8 en première instance, dit ce qui suit :
Notwithstanding that past service contributions could be characterized as functionally a pre-filed obligation,
legally, the obligation pursuant to the applicable pension legislation is a « fresh obligation ».
[41] Avec égards, cette assertion n'est pas déterminante et a d'ailleurs été écartée par le juge Spence dans la
cause de Collins 9 , alors qu'il s'exprime ainsi :
The amount of the outstanding special payments in the present case appears to have been determined prior to
the initial order based on information relating to the pre-filing period.
[42] Plus loin, il ajoute :
It is not apparent that the continuation of the operation of the applicant in the post-filing period has given
rise to the increase in the amount of the special payments from the amount that would otherwise have been
applicable by reason of the pre-filing experience.
Consequently, it seems tendentious to characterize the outstanding special payments as the cost of operating
in the post-filing period.
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[43] Dans le présent dossier, les évaluations actuarielles, qui ont déterminé les montants des cotisations
d'équilibre et dont on demande la suspension, sont toutes antérieures au dépôt de la demande initiale.
D'ailleurs, l'évaluation actuarielle du « Régime de retraite applicable aux employés syndiqués de la compagnie
Abitibi-Consolidated du Canada », de loin le plus important, date du 2 décembre 2006.
[44] Tout comme dans les dossiers de Papiers Gaspésia et Mine Jeffrey, les cotisations d'équilibre suspendues
ont été identifiées avant le dépôt de la demande initiale et ne sont pas dues pour des services rendus après le
dépôt de celle-ci.
96
See also Houlden Morawetz and Sarra. The 2010 Annotated BIA, paragraph N§54, pages 1121 and 1122 on the same issue.
97 The mere fact that those past service contributions are considered to be pre-filing obligations is, however, not the only issue
to consider. I must also analyse if, in the absence of a consent of all affected stakeholders, I should authorize the suspension of
past service contributions. In AbitibiBowater, the situation was relatively simple and clear: the past service contributions due,
as at the date of the Initial Order, was close to $1.4 billion and monthly contributions to correct the situation were estimated at
approximately $13 million per month. The Monitor was therefore able to convince the Court that it would be illusory to expect
that AbitibiBowater would be able to complete a successful restructuring if it would remain obligated to continue to fund past
service contributions during the period of restructuration. Accordingly, Madam Justice Mayrand exercised her discretion in
favor of the suspension.
98
In the present instance, there has been no debate before me on this specific question. Unlike AbitibiBowater, we are
not talking about $13 million per month but approximately $1.4 million, or approximately $16.8 million per year. The total
actuarial deficit is not nearly as high as $1.4 billion but closer to US$129 000 000,00.
99 No evidence challenging the Group's position (that it would be unable to complete a successful restructuring and continue
to pay past service contributions during the restructuring period) was submitted, despite the fact that the Petition was duly
served upon all the Unions representing the unionized employees in Quebec 10 . Furthermore, I insisted that Petitioners' counsel
attempt, during the lunch break of the hearing on February 24, 2010, to communicate with the said Unions and/or Union
Representatives, to inquire as to their position. At the resumption of the hearing, no one appeared or manifested oneself 11 .
100 Faced with only a one-sided argument, albeit convincing and well supported by the jurisprudence (to which the decision
of madam Justice Peppall of the Ontario Superior Court of Justice in Re: Fraser Papers Inc. et al (Court file CT-09-8241OOCL dated 2009-06-30) must be added), I also chose to exercise my discretion in favor of the Petitioners' and Partnerships'
requests. I also wish to point out that we are now more than a full week later and the stakeholders affected by this issue, namely
the employees, have not indicated any willingness of intention to challenge the same.
C) Extension of the initial order and protection of the CCAA to the partnerships
101
One last point: I am asked to extend the Initial Order not only to the Petitioner companies but also to the Partnerships.
Although the CCAA does not deal with this issue specifically, I am prepared to exercise my discretion and to rely on the Court's
inherent jurisdiction to grant a stay of proceedings against the partnerships, given that the structure of the WB Group is such
that it would be impossible to proceed otherwise.
102 See Re: Calpine Canada Energy Ltd (2006), [2006] Carswell-Alta 446; 19 C.B.R. (5 th ) 187. See also Houlden Morawetz
and Sarra, op.cit. paragraph N§ 63, page 1135.
102
CONCLUSION
103
As for the rest of the conclusions sought, there seemed to be no major difficulties needing particular comment. In any
event, any dissatisfied stakeholder may at any time avail itself of the « come back » clause if need be. The Order was therefore
granted accordingly, without costs.
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10
White Birch Paper Holding Co., Re, 2010 QCCS 764, 2010 CarswellQue 1780
2010 QCCS 764, 2010 CarswellQue 1780, [2010] Q.J. No. 1723, 186 A.C.W.S. (3d) 595...
Footnotes
1
Representing payments for January 2010, due at the end of February and for February 2010, due at the end of March
2
I am informed that all pension contributions, for either past service or current service have been made up to December 31 st , 2009
3
The D&O charge is for an amount of US$10 million and a further amount of US$3 million may have to be reserved to cover the
liability of employers pursuant to sections 81.3 and 136(1)(d) BIA. Finally, a US$3 million Administrative Charge is also required.
4
Sierra Club of Canada v. Canada (Minister of Finance) [2002], 2002 CarswellNat 822, 2002 CarswellNat 823, [2002] 2 S.C.R. 522.
See also Marcotte c. Banque de Montréal (2008), 2008 CarswellQue 8627 (C.S. Que.).
5
Toronto Star Newspapers Ltd. v. Ontario (2005), 2005 CarswellOnt 2613, 2005 CarswellOnt 2614, [2005] 2 S.C.R. 188 (S.C.C.).
6
[2009] QCCS, 2028 (CanLii)
7
[2004] CanLii 40296 (QCCS)
8
Re: Ivaco Inc. [2005] 47 C.C.B.P. 62 Canada Inc. (ON. S.C.); [2006] 275 D.L.R. (4 th ) 132 (ON. C.A.)
9
Re: Collins & Aikman Automotive Canada Inc. [2007] CanLii 45908 (ON. S.C.)
10
Syndicat canadien des communications, de l'énergie et du papier, Locals 200, 250, 137, 625, 905, 627, 1104 and 11; Fraternité
nationale des forestiers et travailleurs d'usine, Local 299; Syndicat des employés d'Arrimage de Gros Cacouna Inc., Syndicat
démocratique des salariés de la scierie Leduc.
11
These Reasons are delivered more than one week after the hearing. To this date, no one has asked to be heard on this point.
End of Document
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reserved.
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11
12
SkyLink Aviation Inc., Re, 2013 ONSC 1500, 2013 CarswellOnt 2785
2013 ONSC 1500, 2013 CarswellOnt 2785, 226 A.C.W.S. (3d) 641
2013 ONSC 1500
Ontario Superior Court of Justice [Commercial List]
SkyLink Aviation Inc., Re
2013 CarswellOnt 2785, 2013 ONSC 1500, 226 A.C.W.S. (3d) 641
In the Matter of the Companies' Creditors
Arrangement Act, R.S.C. 1985, c. C-36, as Amended
And In the Matter of a Plan of Compromise and Arrangement of Skylink Aviation Inc. Applicant
Morawetz J.
Heard: March 8, 2013
Judgment: March 12, 2013
Docket: CV-13-1003300CL
Counsel: Robert Chadwick, Logan Willis for Applicant
S.R. Orzy, Sean H. Zweig for Noteholders
M.P. Gottlieb for Proposed Monitor, Duff & Phelps Canada Restructuring Inc.
C. Prophet for Royal Bank of Canada
R.S. Kukulowicz for Directors and Officers
Subject: Insolvency; Civil Practice and Procedure
Related Abridgment Classifications
For all relevant Canadian Abridgment Classifications refer to highest level of case via History.
Bankruptcy and insolvency
XIX Companies' Creditors Arrangement Act
XIX.3 Arrangements
XIX.3.b Approval by court
XIX.3.b.i "Fair and reasonable"
Headnote
Bankruptcy and insolvency --- Companies' Creditors Arrangement Act — Arrangements — Approval by court —
"Fair and reasonable"
Debtors were related companies providing global aviation transportation and logistics services — Any disruption to
debtors' ability to provide either core services or ancillary life-supporting functions could put safety and security of
deployed personnel at risk — Debtors experienced financial challenge — Consensual going-concern recapitalization
transaction was developed for implementation pursuant to plan of compromise and arrangement under Companies'
Creditors Arrangement Act — Debtors brought application for protection under Act — Application granted — It was
appropriate to authorize certain pre-filing payments to be made — Granting of various charges including debtor-inpossession lenders' charge was appropriate — It was appropriate to appoint monitor as foreign representative of debtors
— Postponement of annual shareholders' meeting was reasonable — Sealing order was granted for certain financial
information — Claims procedure order and meetings order were granted in order to effectuate recapitalization on
expeditious basis since proposed restructuring appeared to have achieved significant support.
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1
SkyLink Aviation Inc., Re, 2013 ONSC 1500, 2013 CarswellOnt 2785
2013 ONSC 1500, 2013 CarswellOnt 2785, 226 A.C.W.S. (3d) 641
Table of Authorities
Cases considered by Morawetz J.:
Sierra Club of Canada v. Canada (Minister of Finance) (2002), 287 N.R. 203, (sub nom. Atomic Energy of Canada
Ltd. v. Sierra Club of Canada) 18 C.P.R. (4th) 1, 44 C.E.L.R. (N.S.) 161, (sub nom. Atomic Energy of Canada Ltd. v.
Sierra Club of Canada) 211 D.L.R. (4th) 193, 223 F.T.R. 137 (note), 20 C.P.C. (5th) 1, 40 Admin. L.R. (3d) 1, 2002
SCC 41, 2002 CarswellNat 822, 2002 CarswellNat 823, (sub nom. Atomic Energy of Canada Ltd. v. Sierra Club of
Canada) 93 C.R.R. (2d) 219, [2002] 2 S.C.R. 522 (S.C.C.) — followed
Statutes considered:
Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36
Generally — referred to
APPLICATION by debtors for protection.
Morawetz J.:
1
SkyLink Aviation Inc. ("SkyLink Aviation", the "Company" or the "Applicant"), together with the SkyLink Subsidiaries
(collectively, "SkyLink"), is a provider of global aviation transportation and logistics services (the "SkyLink Business").
SkyLink specializes in providing non-combatant aviation services and supporting activities in conflict-associated regions
around the world. The customers who rely on SkyLink's services include governmental agencies, intergovernmental agencies,
commercial organizations and humanitarian relief organizations.
2
SkyLink is responsible for providing non-combat life-supporting functions to both its own personnel and those of its
suppliers and clients in high-risk areas. Any disruption to SkyLink's ability to provide either its core services or its ancillary lifesupporting functions to deployed personnel, could put the safety and security of those personnel at risk, including by potentially
leaving them without life-supporting services in conflict zones.
3
As set out in the affidavit of Jan Ottens and, as summarized in the comprehensive factum filed by the Applicant, it is
apparent that SkyLink Aviation has experienced financial challenges that have necessitated a recapitalization of the company.
SkyLink has chosen to do this under the Companies' Creditors Arrangement Act ("CCAA").
4
At this time, SkyLink Aviation's secured debts significantly exceed the value of the SkyLink Business. SkyLink is in
default of its first lien secured credit facility (the "Credit Facility") in favour of the first lien lenders (the "First Lien Lenders")
and the Indenture in respect of its senior secured second lien notes (the "Secured Notes"). The indenture trustee in respect of
the Secured Notes (the "Trustee") has accelerated all amounts owing under the Secured Notes and has issued a demand for
payment by SkyLink Aviation and SkyLink Aviation USA II.
5
After an extended period of extensive negotiations with representatives of the Company's secured creditors regarding
a recapitalization of the Company, a consensual going-concern recapitalization transaction (the "Recapitalization") has been
developed for implementation pursuant to a plan of compromise and arrangement under the CCAA (the "Plan").
6 The Applicant takes the position that the Recapitalization is a positive development for the Company and its stakeholders.
The Recapitalization involves:
(i) the refinancing of the Company's first lien debt;
(ii) the cancellation of the Secured Notes in exchange for the issuance by the Company of consideration that includes
new common shares and new debt; and
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2
SkyLink Aviation Inc., Re, 2013 ONSC 1500, 2013 CarswellOnt 2785
2013 ONSC 1500, 2013 CarswellOnt 2785, 226 A.C.W.S. (3d) 641
(iii) the compromise of certain unsecured liabilities, including the portion of the Noteholders' claims that is to be
treated as unsecured under the Plan.
7 The Company also contends that if implemented, the Recapitalization would result in SkyLink Aviation having an improved
capital structure, stable working capital liquidity and enhanced flexibility to respond to volatility in the industry.
8
The terms of the Recapitalization are supported by a significant majority of the creditors who have an economic interest
in the Company. In particular, the First Lien Lenders have affirmed their support, and the holders of approximately 64% of the
value of the outstanding Secured Notes (the "Initial Consenting Noteholders") have signed the Support Agreement pursuant to
which they have agreed to support the Recapitalization and to vote in favour of the Plan.
9
The remaining Noteholders will be entitled to sign a joinder to the Support Agreement following the commencement of
these proceedings. SkyLink Aviation anticipates that additional Noteholders will execute a joinder to the Support Agreement.
10 It is noted that support of the First Lien Lenders and the Initial Consenting Noteholders is conditional upon the completion
of the Recapitalization under the CCAA prior to April 23, 2013.
11
A detailed summary of the salient facts is set out at paragraphs 11-42 of the factum.
12
SkyLink Aviation is a privately held corporation under the laws of Ontario, with a registered head office located in
Toronto, Ontario. Its central administrative functions are carried out at its Toronto headquarters.
13
SkyLink Aviation is the direct or indirect parent company of a number of subsidiaries as detailed in the organization
chart attached to Mr. Ottens' affidavit.
14
The SkyLink Subsidiaries are non-applicants. However, SkyLink Aviation seeks to have a stay of proceedings under
the Initial Order and certain other relief extended to those SkyLink Subsidiaries that are also party to contracts with SkyLink
Aviation (the "Subsidiary Counterparties") so as to maintain the stability of the enterprise.
15
SkyLink Aviation's liabilities amount to approximately $149.42 million which includes the First Lien Indebtedness of
$14.749 million, Secured Notes in the aggregate principal amount of $110 million, together with accrued but unpaid interest
of approximately $6.4 million, and amounts owing to Noteholders under the Interest Payment Support Agreement totalling
approximately $6.6 million.
16
Material claims against the Company of which SkyLink Aviation is aware of include:
(i) approximately $3.45 million in respect of the exercise of various warrants and options issued to several members
of the senior management team in May 2012; and
(ii) six pending litigation claims against the Company that collectively allege approximately $16.6 million in
contingent claims or damages.
17 As of March 6, 2013, SkyLink Aviation owed approximately $7.7 million in accounts payable relating to ordinary course
trade and employee obligations.
18 As a result of the existing Events of Default, the First Lien Lenders are now in a position to terminate the Credit Facility
and proceed to enforce their rights and remedies against SkyLink Aviation and Loan Guarantors, including the acceleration of
all amounts owing under the Credit Facility. In addition, the Company does not have the funds required to make payments now
due to the Participating Noteholders under the Interest Payment Support Agreement.
19
In light of its financial circumstances, SkyLink Aviation contends that it is not able to obtain additional or alternative
financing and there is no reasonable expectation that the Company, in the near term, will be able to generate sufficient cash flow
through its operations to support its existing debt obligations. In addition, the Company contends that as further evidenced by
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3
SkyLink Aviation Inc., Re, 2013 ONSC 1500, 2013 CarswellOnt 2785
2013 ONSC 1500, 2013 CarswellOnt 2785, 226 A.C.W.S. (3d) 641
the valuation performed by Duff & Phelps Valuations, the aggregate value of the Company's assets, property and undertaking,
taken at fair value, is not sufficient to enable payment of all of its obligations, due and accruing due. Consequently, the Applicant
takes the position that it is insolvent.
20
The Applicant requests a stay of proceedings.
21 The Applicant also requests authorization to make payments in the ordinary course in respect of employee compensation,
rent, procurement, utility services and other supplier obligations, all with a view to maintaining operations.
22
The Company has also negotiated for a DIP Loan and the concurrent granting of a DIP Lenders' Charge. Details in
respect of the DIP Loan and the DIP Lenders' Charge are set out at paragraphs 29-32 of the factum. A proposed Monitor and
Administration Charge as well as a Directors' and Officers' Charge is also requested. These requests are set out at paragraphs
33-37 of the factum. A KERP and a KERP Charge is also contemplated and the reasons for this are detailed at paragraphs 38
and 39 of the factum. There is no opposition to this requested relief.
23
The Applicant also seeks the appointment of the Monitor as the Foreign Representative, should recognition of these
proceedings in the United States pursuant to Chapter 15 of the United States Bankruptcy Code, become necessary.
24
Having reviewed the record and hearing submissions, I am satisfied that the Applicant is a "debtor company" to which
the CCAA applies. The basis for this finding is set out at paragraphs 43-52 of the factum.
25
For the reasons set out at paragraphs 56-60 of the factum, I have been persuaded that it is appropriate in this application
to include a stay of proceedings in favour of the Subsidiary Companies.
26
I am also satisfied for the reasons set forth at paragraphs 61-65 of the factum that it is appropriate to authorize certain
pre-filing payments to be made.
27
The basis for the granting of the DIP Lenders' Charge, the Administration Charge, Directors' Charge and KERP Charge
is set out at paragraphs 66-84 of the factum. I have been persuaded that, in the circumstances, the granting of these charges
on the terms set out is appropriate.
28 I have also been satisfied that it is appropriate to the appoint the Monitor as the Foreign Representative of the Applicant,
for the reasons set out at paragraphs 85-87.
29
The Applicant also requests a postponement of the Annual Shareholders' Meeting. For the reasons set out at paragraphs
88-91 of the factum, I am in agreement that this request is reasonable in the circumstances.
30
The Applicant has requested that the "Confidential Supplement" to the Monitor's Prefiling Report be sealed. This
Confidential Supplement contains copies of:
(i) the financial statements of SkyLink containing the confidential financial information of SkyLink;
(ii) the Duff & Phelps Valuation Report (the "Valuation Report") which the Company contends contains sensitive
competitive and confidential information of the Applicant; and
(iii) the KERP letters containing individually identifiable information and confidential information of eligible
employees.
31
With respect to the financial information, I am satisfied that adequate information is contained in the public record that
would enable the affected parties to make an informed decision as to the financial circumstances facing the Company.
32 For the reasons set out at paragraphs 92-100 of the factum, I have been persuaded that it is appropriate to issue a sealing
order at this time. In arriving at this determination, I have taken into account the principals set out in Sierra Club of Canada
v. Canada (Minister of Finance), 2002 SCC 41 (S.C.C.).
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4
SkyLink Aviation Inc., Re, 2013 ONSC 1500, 2013 CarswellOnt 2785
2013 ONSC 1500, 2013 CarswellOnt 2785, 226 A.C.W.S. (3d) 641
33
For the above reasons, I have been persuaded that an Initial Order should be granted in respect of the Applicant.
34
SkyLink also brought a motion for the Claims Procedure Order and Meetings Order. The Company is seeking these
orders at this time because it wishes to effectuate the Recapitalization on an expeditious basis. The basis for the request for
these two orders is set out in the second factum submitted by the Applicant. The basis for the requested relief is set out at
paragraphs 11- 34 of the factum.
35
The legal basis for proceeding with the motion for the Claims Procedure Order and the Meetings Order is set out at
the factum commencing at paragraph 43. I recognize that it is unusual to request such relief at this stage of the proceeding.
However, in the circumstances of this case, and considering the significant support that the proposed restructuring appears to
have achieved, I accept the submissions and grant the requested relief. In doing so, I am mindful that a full come-back hearing
has been scheduled for March 20, 2013, at which time these issues can be revisited.
36
The motions for the Claims Procedure Order and Meetings Order are granted and the orders have been signed.
Application granted.
End of Document
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5
IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
Court File No: CV-16-11363-00CL
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF PACIFIC EXPLORATION &
PRODUCTION CORPORATION, PACIFIC E&P HOLDINGS CORP., META PETROLEUM CORP., PACIFIC
STRATUS INTERNATIONAL ENERGY LTD., PACIFIC STRATUS ENERGY COLOMBIA CORP., PACIFIC
STRATUS ENERGY S.A., PACIFIC OFF SHORE PERU S.R.L., PACIFIC RUBIALES GUATEMALA S.A., PACIFIC
GUATEMALA ENERGY CORP., PRE-PSIE COÖPERATIEF U.A., PETROMINERALES COLOMBIA CORP., AND
GRUPO C&C ENERGIA (BARBADOS) LTD.
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Proceeding commenced at Toronto
BOOK OF AUTHORITIES OF THE AD HOC
COMMITTEE OF SENIOR UNSECURED
NOTEHOLDERS
GOODMANS LLP
Bay Adelaide Centre
333 Bay Street, Suite 3400
Toronto, ON M5H 2S7
Brendan D. O’Neill LSUC#: 43331J
[email protected]
Ryan Baulke LSUC#: 66189O
[email protected]
Tel: 416.979.2211
Fax: 416.979.1234
Lawyers for the Ad Hoc Committee of Senior
Unsecured Noteholders