In 2021, several significant judicial decisions were rendered across Canada relevant to commercial lenders, businesses and restructuring professionals. This comprehensive report summarizes the key facts and core issues of importance in each case and provides status updates on the cases reported on in our February 2021 bulletin, Key Developments in Canadian Insolvency Case Law in 2020.
The following cases and topics are covered in this bulletin:
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Case Name |
Topic |
Court |
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Claims in bankruptcy and environmental remediation costs |
Court of Appeal of Yukon |
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Companion decisions on disclaimers and good faith |
Ontario Superior Court of Justice |
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Statute barred claims in an insolvency context |
Ontario Superior Court of Justice |
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DGDP-BC Holdings Ltd v Third Eye Capital Corporation 2021 ABCA 226 |
Priority of charges |
Court of Appeal of Alberta |
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Bar orders in insolvency |
Ontario Superior Court of Justice |
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Litigation funding agreements |
Ontario Superior Court of Justice |
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Restructuration de Fortress Global Enterprises Inc., 2021 QCCS 4613 |
Litigation funding agreements |
Superior Court of Quebec |
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Jurisdiction of the CCAA Court |
Superior Court of Quebec |
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In the matter of a plan of compromise or arrangement of Abbey Resources Corp. |
Bad faith in CCAA proceedings |
Court of Queen’s Bench for Saskatchewan |
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RVO and tax refund entitlement |
Ontario Superior Court of Justice |
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Port Capital Development (EV) Inc. v 1296371 BC Ltd., 2021 BCCA 382 |
Competing options in CCAA proceedings |
Court of Appeal for British Columbia |
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In the matter of the plan of compromise or arrangement of Bloom Lake et al. |
Pre-post set-off |
Superior Court of Quebec |
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Pre-post set-off |
Supreme Court of Canada |
|
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Bellatrix Exploration Ltd (Re), 2021 ABCA 85 and 2021 ABCA 148 |
Treatment and disclaimer of eligible financial contracts |
Court of Appeal of Alberta |
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Partial disclaimer of a contract |
Court of Appeal of Yukon |
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Appointment of a receiver pursuant to section 243 of the BIA and interaction with the Civil Code of Quebec |
Supreme Court of Canada |
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Court confirms autonomy of letters of credit, rules landlord may draw for full claim amount |
Supreme Court of Canada |
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Reverse vesting orders |
Supreme Court of Canada |
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Priority of DIP charges |
Supreme Court of Canada |
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Distributions to creditors of proceeds impressed with a deemed trust under the Excise Tax Act (Canada) |
Supreme Court of Canada |
CLAIMS IN BANKRUPTCY & ENVIRONMENTAL REMEDIATION COSTS
Yukon (Government of) v. Yukon Zinc, 2021 YKCA 2
Date of Decision: March 5, 2021
A number of important decisions have come out of the receivership proceeding of Yukon Zinc Corporation (Yukon Zinc) since it was commenced in September 2019, including the appeal of the lower court decision relating to environmental remediation costs. This appeal was one of four appeals heard collectively.
Yukon Zinc is a mining company whose principal asset is a mine located in Yukon Territory (the Mine). Yukon Zinc held certain licenses in connection with the operation of the Mine, including licenses under the Yukon’s Mining Act.
Pursuant to the Mining Act¸ the Minister of the Department of Energy, Mines and Resources (Minister) may require a licensee to furnish security for adverse environmental effects from a licensee’s activities. Yukon Zinc furnished such security (Reclamation Security) at the time its license was issued.
In 2017, the Mine flooded and contaminated water was diverted to a storage facility. No water treatment was available and the situation created a risk of untreated water being released into the environment. As a result, the Yukon government revised the Mine’s reclamation and closure plan and recalculated the Reclamation Security required. Yukon Zinc was not able to pay the increased recalculated Reclamation Security.
As a result of deteriorating environmental conditions at the Mine, the Yukon government began using the Reclamation Security to deal with the influx of contaminated water. The Reclamation Security was not anticipated to be sufficient to carry out the remaining remediation work, as Yukon Zinc had never paid the increased, recalculated Reclamation Security.
In July 2019, the Yukon government commenced a proceeding for appointment of a receiver. On July 31, 2019, Yukon Zinc filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act (BIA). On August 7, 2019, the Supreme Court of Yukon lifted the stay of proceedings resulting from the notice of intention and allowed the receivership application to proceed. On September 19, 2019, a receiver was appointed over all the assets and undertakings of Yukon Zinc. On October 11, 2019, Yukon Zinc was deemed to have made an assignment into bankruptcy as a result of a failure to file a proposal in the time required under the BIA.
The Yukon government then sought declarations that it had a provable claim in bankruptcy for the anticipated future costs of remediating the Mine. It asserted that such claim constituted a first-ranking secured claim against Yukon Zinc’s mineral claims on the basis of subsection 14.06(7) of the BIA, which provides the federal or provincial government with a secured priority claim in respect of environmental remediation costs over the real or immovable property of the debtor affected by the environmental damage.
The lower court concluded that subsection 14.06(7) of the BIA applies once the Yukon government has incurred costs in remediating land, not before. On appeal, the Yukon government argued that the “sufficiently certain” test, developed by the Supreme Court of Canada (SCC) in Newfoundland and Labrador v AbitibiBowater Inc., should apply to subsection 14.06(7) of the BIA. The sufficiently certain test provides that claims for environmental liabilities are claims provable in bankruptcy when it is sufficiently certain that a cost will be incurred.
The Court of Appeal of Yukon (YKCA) affirmed the lower court decision and found that the priority claim under subsection 14.06(7) is only created after costs have actually been incurred and does not secure costs that may be incurred in the future. The “sufficiently certain” test has no bearing on whether a super priority claim exists under subsection 14.06(7) of the BIA.
In respect of the mineral claims, which provide a right to develop and extract minerals on a particular section of land, the YKCA found that mineral claims are not real property belonging to Yukon Zinc, but rather an interest in real property. The wording of subsection 14.06(7) limits the attachment of the secured claim only to the real property of the debtor, and accordingly, other interests in real property, such as mineral claims, cannot be the subject of subsection 14.06(7) security.
Status:
Leave to appeal to the SCC was dismissed on November 4, 2021. Care and maintenance of the Mine has now been transferred to the Yukon government following a sale of a small portion of Yukon Zinc’s assets to Almaden Minerals Ltd. in the receivership proceeding.
Takeaway:
This decision clarifies the priority claim set out in subsection 14.06(7) of the BIA which may compete with the priorities afforded to secured creditors and other claimants in proceedings under the BIA. The claim is limited to environmental remediation costs actually incurred and does not cover prospective remediation costs. Furthermore, the secured claim attaches only to the ownership interests of the debtor in real property, and not to other interests in real property, such as mineral claims. This is an important distinction. In the mining sector, it is typically the mineral rights that constitute the valuable asset of the debtor, not the real property itself.
COMPANION DECISIONS ON DISCLAIMERS AND GOOD FAITH
Laurentian University v. Sudbury University, 2021 ONSC 3392 & Laurentian University of Sudbury, 2021 ONSC 3272
Date of decisions: May 7, 2021
Laurentian University (Laurentian) obtained protection under the Companies’ Creditors Arrangement Act (CCAA) in February 2021 before the Ontario Superior Court of Justice (ONSC). At the time of the CCAA filing, Laurentian operated within a structure whereby it had agreements with three universities: the University of Sudbury (USudbury), Thornloe University (Thornloe) and Huntington University (Huntington, collectively the Federated Universities). The Federated Universities agreed to suspend their degree-granting authority (other than Theology in the case of Thornloe and Huntington). Students enrolled in a program at Laurentian could take courses at any of the Federated Universities for credit at Laurentian. Funding from the provincial government was provided to the Federated Universities through Laurentian.
In April 2021, Laurentian sought to disclaim its agreements with the Federated Universities which resulted in lost tuition revenue to Laurentian for elective courses it could provide directly to its students. Huntington accepted its disclaimer; however, Thornloe and USudbury each filed motions opposing the disclaimers. Chief Justice Morawetz heard Thornloe’s motion in English, while Justice Gilmore heard USudbury’s in French. Both Chief Justice Morawetz and Justice Gilmore dismissed the respective motion opposing the disclaimer, independently and on similar reasoning.
Pursuant to section 32(4) of the CCAA, in deciding whether to permit or reject the disclaimer of an agreement, the court will consider the following non-exhaustive factors:
(b) whether the disclaimer would enhance the prospects of a viable compromise or arrangement being made in respect of the company; and
(c) whether the disclaimer would likely cause significant financial hardship to a party to the agreement.
In considering the above-mentioned factors, courts must balance the benefit of the disclaimer against the impact to the other parties.
Both USudbury and Thornloe argued that, in issuing the disclaimers, Laurentian was acting in bad faith contrary to subsection 18.6 of the CCAA. Subsection 18.6 was added to the CCAA to create a standalone duty of good faith on the part of all interested persons involved in an insolvency proceeding. They also submitted, among other things, the disclaimer would result in significant financial hardship.
In respect of the duty of good faith, Justice Gilmore found that the purpose of the disclaimer was not to eliminate competition as argued by USudbury, but rather to end an unsustainable financial model. Justice Gilmore was of the view that Laurentian’s failure to achieve a resolution with USudbury and Thornloe did not imply that it was not making good faith attempts at a resolution. Lastly, Justice Gilmore found that the financial projections by the Monitor make it clear that the revenue Laurentian would gain from the disclaimers was essential for its survival and that disallowing the disclaimer would jeopardize further debtor-in-possession funding.
Chief Justice Morawetz also did not accept Thornloe’s argument that Laurentian acted in bad faith. He acknowledged that restructurings are not easy and often result in treatment that a party may consider to be extremely harsh, but such harsh treatment does not necessarily mean that the other party has not been acting in good faith. He also noted that the Monitor made no statement which would suggest any bad faith conduct on the part of Laurentian. Chief Justice Morawetz found that the revenue gained from the disclaimers would provide a real source of annual financial relief to Laurentian, the absence of which could lead to an unraveling of Laurentian’s restructuring plan.
Both Chief Justice Morawetz and Justice Gilmore noted that (i) the Monitor approved the disclaimer, (ii) the disclaimer would enhance the prospects of a viable plan, and (iii) while the disclaimer would cause financial consequences to the party to the agreement, that was not a sufficient reason to disallow the disclaimer.
Status:
Leave to appeal Justice Morawetz’s decision to the Court of Appeal for Ontario (ONCA) was denied on June 23, 2021 (Laurentian University of Sudbury (Re), 2021 ONCA 448).
Leave was not sought to appeal Justice Gilmore’s decision.
Takeaway:
When a court must decide whether to permit or reject the disclaimer of an agreement pursuant to subsection 32(4) of the CCAA, it will balance the benefit of the disclaimer against the potentially harsh economic consequences of a disclaimer on a party and may have to consider allegations of bad faith in that analysis.
STATUTE-BARRED CLAIMS IN AN INSOLVENCY CONTEXT
John Trevor Eyton (Re), 2021 ONSC 3646
Date of decision: May 19, 2021
The ONSC considered whether claims unenforceable due to expiry of limitation periods nevertheless constitute provable claims in bankruptcy.
In April 2019, Mr. Eyton filed a notice of intention to file a proposal and was ultimately deemed bankrupt due to the failure of his proposal. In July 2020, Forty-One Peter Street Inc. (Forty-One) filed an unsecured proof of claim in the bankruptcy in the amount of C$888,620.67, which included interest. The trustee disallowed Forty-One’s unsecured claim on the basis that the last payment by the bankrupt under the agreement entered into between Mr. Eyton and Forty-One was made in April 2016. The trustee concluded that this was more than two years prior to the bankruptcy and the claim was thus barred by section 4 of Ontario’s Limitations Act, 2002. Forty-One appealed the disallowance of the claim to the Registrar pursuant to subsection 135(4) of the BIA, who upheld the decision by the trustee. The decision of the Registrar was then appealed to the ONSC.
Forty-One argued that its unsecured claim was listed in the statement of affairs signed by the bankrupt and as a result the claim did not require any further evidence to be accepted by the trustee. Secondly, it submitted that subsection 121(1) of the BIA defines provable claims without any reference to being affected by provincial limitation periods. Thirdly, Forty-One argued that section 4 of the Limitations Act, 2002, does not extinguish a debt, but rather provides that a proceeding in respect of the debt shall not be commenced. The ONSC found that these grounds of appeal had no merit and as a result dismissed the appeal.
Pursuant to subsection 124(1) of the BIA, every creditor is required to prove its claim to share in any distribution that is made. The ONSC was of the view that the statement of affairs of the debtor does not operate as proof of such a claim. Although the ONSC agreed with Forty-One that its claim has not actually been extinguished and continues to exist, the ONSC characterized a claim that is statute-barred by reason of section 4 of the Limitations Act, 2002 as a claim that is unenforceable at law at the time of a bankruptcy. Therefore, it is not a provable claim under subsection 121(1) of the BIA since it is not a claim to which the bankrupt is subject. This conclusion is in line with the underlying policy of the BIA, which is to provide equitable distribution among all creditors of the same rank. A creditor cannot enforce payment of a statute-barred claim and thus it is not of the same rank as an enforceable claim. The ONSC was of the view that if Forty-One’s arguments were accepted it would lead to the result that a statute-barred claim that is unenforceable becomes enforceable by reason of a bankruptcy. Such reasoning runs contrary to the applicable provisions of the BIA.
Status:
No further appeal was taken of this decision of the ONSC.
Takeaway:
In Ontario, a claim that is statute-barred under the Limitations Act, 2002 prior to bankruptcy is unenforceable at law and therefore not provable in bankruptcy, as it is not a claim to which the bankrupt is subject under subsection 121(1) of the BIA.
PRIORITY OF CHARGES
DGDP-BC Holdings Ltd v Third Eye Capital Corporation 2021 ABCA 226
Date of Decision: June 17, 2021
The Court of Appeal of Alberta (ABCA) affirmed the broad discretion of a supervising judge on a receivership application, in appropriate circumstances, to vary the priority of court-ordered charges granted within a prior CCAA proceeding.
Two related appeals arose out of the insolvency proceeding of Accel Canada Holdings Limited (Accel Holdings) and Accel Energy Canada Limited (Accel Energy, together Accel). In October 2019, Accel filed Notices of Intention to make a proposal under the BIA. By November, the proceeding evolved into a CCAA proceeding and the court approved an interim financing loan secured by a charge on a superpriority basis (the DIP charge).
The Monitor was able to negotiate a sale of Accel Energy’s assets to Third Eye Capital, the primary secured creditor of Accel Holdings, one of the interim lenders, and the agent for the interim lenders.
As part of the sales process, Third Eye Capital applied for the appointment of a receiver to facilitate the sale of Accel Energy’s assets. A receiver was appointed with the power to borrow and to have the receiver’s borrowings charge take priority over all other charges against the assets of Accel, including the prior DIP charge, over the objections of one of the other interim lenders, DGDP-BC Holdings (DGDP).
DGDP appealed the decision of the supervising judge on the basis that the supervising judge had neither the jurisdiction nor the discretion to restructure the priorities as between the DIP charge and the receiver’s borrowings charge without the consent of the interim lenders. DGDP relied on subsection 11.2(3) of the CCAA which provides that the court may make an order declaring that all or part of the debtor’s property is subject to a charge, but that the court may only order that the charge ranks in priority to a charge arising under a previous order with the consent of the person in whose favour the previous order was made.
The ABCA dismissed this appeal. The receiver’s borrowings charge was granted under section 243 of the BIA, not subsection 11.2 of the CCAA. It was thus not subject to the prohibition found in the CCAA on priming DIP charges, without the consent of the DIP lender. Moreover, subsection 243(1)(c) of the BIA confers a broad discretion on the supervising judge to “take any other action that the court considers advisable.” The ABCA found that exercise of this wide discretion should not be disturbed on appeal in absence of an error in principle of law or a wholly unreasonable decision.
The ABCA noted that a component of being an interim lender in a CCAA proceeding is the risk that the interim lender will not actually be repaid if the CCAA proceeding is not successful. At the time of the receivership application, Accel was in dire financial circumstances and required additional funding to keep operating. If a liquidation had occurred, all creditors would have suffered a loss, including the interim lenders. It was therefore reasonable in the circumstances to give the receiver the power to borrow and to establish the priority of the receiver’s borrowing charge.
Ultimately, the sale of Accel Energy’s assets closed. The DIP charge was not repaid in full and was instead repaid only to the extent of borrowings specifically allocated to Accel Energy. DGDP argued that the supervising judge did not have the discretion to bifurcate the DIP charge between the two borrowers and appealed this decision as well.
The ABCA, again, noted the wide discretion of a supervising judge in a receivership proceeding, and that such discretion includes a mandate to sell some of the assets of an insolvent corporation while only paying out a portion of the interim financing and dismissed the appeal.
Status:
No appeal was sought to the SCC.
Takeaway:
In the unique factual circumstances of this case, the ABCA found that it was appropriate for the supervising judge in the receivership proceeding to exercise its broad discretion to grant priority to a subsequent receiver’s borrowings charge over a previously granted interim lender’s charge in a CCAA proceeding.
BAR ORDERS IN INSOLVENCY
CannTrust Holdings Inc., et al. (Re), 2021 ONSC 4408
Date of Decision: June 24, 2021
The ONSC considered the fairness and reasonableness of a plan of arrangement that was designed to resolve mass tort litigation but did not include a Pierringer Order, also known as a “bar order”.
CannTrust Holdings Inc., a regulated cannabis company, and its affiliates (CannTrust) commenced a CCAA proceeding in March 2020. The proceeding was precipitated by audits by Health Canada at CannTrust’s facilities which revealed that CannTrust was growing cannabis in unlicensed rooms in breach of federal law. Multiple securities class actions were commenced against CannTrust and other defendants, including CannTrust’s auditor, alleging securities misrepresentation in CannTrust’s public disclosures.
CannTrust’s CCAA proceeding culminated in a proposed plan of arrangement (Plan) pursuant to which CannTrust and all of its co-defendants, with the exception of the Auditor, would resolve their liability to the plaintiffs in the securities class actions. The Plan was, in essence, a settlement.
The Auditor opposed court approval of the Plan primarily on the basis that it failed to include a proper bar order provision. Absent the Plan, the Auditor could be held jointly and severally liable with CannTrust and other defendants for the damages suffered by the class action plaintiffs (to the extent the Auditor was liable at all—the Auditor denied all liability). This meant that, at first instance, the Auditor could be required to pay up to 100% of the plaintiffs’ damages, irrespective of the portion of those damages that were actually attributable to the Auditor’s degree of fault. However, in the absence of the Plan, the Auditor would also have the ability to pursue a contribution and indemnity claim against CannTrust and other defendants to recover the portion of any damages paid by the Auditor that were attributable to the fault of those other defendants.
The Plan, however, provided that any right for contribution and indemnity that the Auditor had against CannTrust and other settling co-defendants would be extinguished and released. At the same time, the Plan failed to provide for a Pierringer Order. A Pierringer Order is designed to ensure that a non-settling co-defendant in multi-party litigation can only be held responsible to a plaintiff for its “several liability”, meaning that portion of the damages attributable to its own conduct. The Pierringer Order prevents the plaintiff from continuing to pursue that portion of the damages that are attributable to the conduct of the settling defendants against the non-settling defendant.
Instead, the Plan provided for a judgment reduction mechanism that would reduce any award of damages made against the Auditor in the class action by an amount the court determines the Auditor could have recovered from CannTrust in a claim for contribution and indemnity immediately prior to the effective date of the Plan. CannTrust submitted that the judgment reduction provision placed the Auditor in an economically neutral position by ensuring that the Auditor could still obtain a reduction based on the amount it could have recovered from an insolvent CannTrust immediately prior to the effective date of the Plan.
The ONSC declined to sanction the Plan on the basis that it was not fair or reasonable to the Auditor as a non-settling defendant. Having elected to settle with CannTrust, the plaintiffs bear the risk of an inadequate settlement. In the absence of a Pierringer Order provision, the plaintiffs retained their right to pursue the non-settling Auditor for the full amount of the claim and recover 100% of their damages while the Auditor would have no ability to seek contribution or indemnity from the settling defendants. The judgment reduction provision therefore failed to balance the interests of stakeholders, favouring the interests of the plaintiffs over those of the Auditor. The ONSC affirmed that a true Pierringer Order has no regard to settlement amount and is not a credit for settlement against 100% of the liability. Its purpose is to protect the non-settling defendant by the plaintiff’s agreement to limit its claim to several liability.
Status:
No appeal was sought of this decision. A revised plan of arrangement was sanctioned in the CannTrust CCAA proceeding on July 16, 2021, which included a Pierringer Order which provides for the several liability of the Auditor. CannTrust completed a financing transaction in March and subsequently emerged from CCAA.
Takeaway:
A Pierringer Order is essential to a plan of arrangement where a debtor corporation seeks to settle multiparty litigation with some but not all defendants. Such a provision ensures that the interests of stakeholders are appropriately balanced and provides adequate protection for non-settling defendants on a go-forward basis.
Blakes acts for the Auditor in this proceeding.
LITIGATION FUNDING AGREEMENTS
JMX Contracting Inc. (Re), 2021 ONSC 5142
Date of Decision: July 22, 2021
The ONSC considered circumstances in which a court will decline to approve a litigation funding agreement.
In July 2018, JMX Contracting Inc. (JMX) entered into a contract (Demolition Contract) with Ontario Power Generation (OPG) for demolition of the Lambton Thermal Generating Station (Project). In February 2020, OPG formally notified JMX that it was in default of the Demolition Contract, which allegation JMX denied. In April 2020, JMX and certain related companies filed a notice of intention to file a proposal and ceased all work on the Project. The proceeding was subsequently converted to a CCAA proceeding.
The Demolition Contract was terminated by OPG on September 30, 2020, with leave of the court, without prejudice to the position of either party as to whether JMX was in default. JMX filed a claim against OPG alleging breach of contract, among other things, and registered a construction lien against the Project (Lien Action). With leave of the court, OPG counterclaimed seeking damages from JMX for breach of the Demolition Contract (together with the Lien Action, the OPG Litigation).
JMX conducted a sales process in the CCAA proceeding which resulted in a sale of JMX and its related entities to certain of the existing shareholders of JMX. The transaction was structured as a reverse vesting order to permit the acquiror of JMX and its affiliate to continue to enjoy certain tax and COVID-19 grant benefits. The new applicant in the CCAA proceeding, a numbered company (ResidualCo) acquired the Lien Action and assumed the liabilities of JMX associated with the Project.
ResidualCo had no assets apart from the potential recovery in the Lien Action and a similar litigation claim against another project and therefore required litigation funding to pursue these claims. It was proposed by ResidualCo that such funding be provided by the recapitalized JMX pursuant to a Funding Agreement. The proposed Funding Agreement specifically provided that it would terminate upon the making of an order by a court requiring payment of monies or granting of an indemnity by JMX in relation to an award of costs or damages in the OPG Litigation.
The ONSC set out the general test for approval of third-party funding agreements: “it should not be champertous or illegal and must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of defendants.” Applying this test is an exercise of judicial discretion that involves the balancing of various factors to determine what is fair and reasonable in each particular case. Courts have articulated five factors in considering whether a litigation funding agreement should be approved within a CCAA proceeding:
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The funding agreement should not diminish the plaintiff’s right to instruct and control the litigation.
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The funding agreement must not compromise or impair the lawyer-client relationship or the lawyer’s duties of loyalty and confidentiality.
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The compensation under the funding agreement must be fair and reasonable.
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The funder must undertake to keep confidential any confidential or privileged information.
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The funding agreement must be necessary to provide access to justice to the plaintiff.
In considering whether the funding agreement was necessary, the fifth factor articulated above, the ONSC found that ResidualCo had failed to establish that approval of this particular Funding Agreement was necessary and that it could not obtain alternative financing that would include funding for any adverse cost award that may be ordered in the OPG Litigation. No evidence was presented that JMX would be unable to fund an adverse cost award if required to do so.
The terms of the Funding Agreement did not satisfactorily balance ResidualCo’s interest in access to justice and protection of the legitimate interests of the defendant, OPG. ResidualCo had no assets available to satisfy any adverse costs award in the OPG Litigation. The ONSC found that the exclusion of any obligation to not only fund an order for security for costs, but also any adverse costs award, was abusive to OPG as the defendant. The only justification for such exclusion would be that ResidualCo was impecunious, meaning that the Funding Agreement, as drafted, was the sole possible source of litigation financing. The ONSC was not satisfied that such alternative litigation financing could not be obtained.
The ONSC dismissed ResidualCo’s motion for approval of the Funding Agreement.
Status:
Leave to appeal the decision was not sought.
Takeaway:
Courts have established a test for approval of litigation funding agreements. In this particular case, the litigation funding agreement was not fair and reasonable as, generally, litigation funding agreements must provide for satisfaction of any adverse costs award.
Blakes acts for OPG in this proceeding.
Restructuration de Fortress Global Enterprises Inc., 2021 QCCS 4613
Date of Decision: November 1, 2021
Following the ONSC decision in the JMX matter discussed above, the Superior Court of Quebec (QSC) also considered circumstances in which a court will decline to approve a litigation funding agreement.
Fortress Global Enterprises Inc. and certain affiliates (Fortress) commenced a CCAA proceeding in 2019. In the context of the CCAA proceeding, Fortress sought approval of a litigation funding agreement (the LFA) to provide financing to continue a C$17-million litigation claim commenced by Fortress prior to the CCAA restructuring. A main condition of the LFA was that the financing be subject to a first ranking charge for litigation costs in favour of the funder and, thereafter, the lawyers representing Fortress in the litigation.
The defendant in the litigation opposed approval of the LFA on the basis that it would (i) vest the funder with excessive control over the proceeding; (ii) interfere with the relationship between Fortress and its lawyers; (iii) secure payment of pre-filing litigation costs of Fortress, which the CCAA prohibits; and (iv) not secure payment of an adverse costs award, if Fortress was unsuccessful in the litigation.
The QSC noted that, to be approved, a litigation funding agreement must serve the overarching remedial objectives of the CCAA, and identified the following relevant considerations: whether the LFA will (i) meaningfully facilitate access to justice; (ii) meaningfully advance the policy objectives underlying the CCAA; (iii) enhance the prospect of a viable CCAA plan of arrangement; (iv) secure an obligation that existed before the present order; (v) preserve the solicitor-client relationship; and (vi) protect the administration of justice from abuse.
The QSC found that factors (i) and (ii) favoured approval of the LFA. In the context of the CCAA proceeding of Fortress, approval of the LFA was not dependent on whether or not it would enhance a viable CCAA plan. The QSC noted that presentation of a viable plan of arrangement with the view of continuing the operations of the debtor is not always the goal which the CCAA purports to achieve. While the proposed litigation financing charge would secure pre-filing litigation costs, the only creditor affected by the charge was supportive of the litigation funding agreement. In the circumstances, the QSC found that it would be illogical to bar approval of the LFA on the basis that pre-filing cost obligations were secured. The fourth factor was found not to be an issue in this case.
The limits to the funder’s obligation to fund an eventual adverse costs award were, however, fatal to approval of the LFA. The QSC noted that similar concerns were raised in the ONSC decision in JMX and form part of the analysis when third party litigation funding is considered in insolvency matters.
Pursuant to the proposed LFA, the funder had no obligation to pay an adverse costs award relating to costs incurred prior to approval of the LFA and after its termination. In particular, the litigation was approximately seven years old at the time approval of the LFA was sought and, as such, a substantial portion of costs which could form part of an adverse costs award against Fortress would be unsatisfied by the terms of the LFA. The LFA also vested in the funder a discretionary power to terminate the agreement, raising concern that the LFA could be terminated in advance of an adverse costs award and thereby avoid all such costs entirely. In the event, however, of an adverse costs award against the defendant, its obligation to pay would be unaltered by the insolvency of Fortress. The QSC found that this asymmetry was impermissible and declined to approve the LFA.
Status:
No appeal was sought of this decision. The QSC subsequently rejected an amended litigation funding agreement on December 30, 2021 on the basis that the litigation funding agreement, and consequently the requirement to fund an adverse costs award, could be terminated without notice to the defendant. The QSC later approved a further amended litigation funding agreement on February 11, 2022, which addressed the QSC’s concerns regarding funding of an adverse costs award and notice.
Takeaway:
As in the ONSC decision in JMX, insufficient provision for satisfaction of an adverse costs award in a litigation funding agreement may prove to be fatal to approval of a litigation funding agreement due to the imbalance it creates between the rights of an insolvent plaintiff and a defendant to litigation.
JURISDICTION OF THE CCAA COURT
Arrangement relatif à Bloom Lake, 2021 QCCS 3402
Date: August 12, 2021
The QSC considered the jurisdiction of a CCAA court to hear a motion seeking the winding up and dissolution of a solvent non-debtor corporation.
Bloom Lake and certain affiliated entities filed for CCAA protection before the QSC in 2015. Twin Falls Power Corporation (Twin Falls) is an incorporated joint venture formed under the Canada Business Corporations Act (CBCA) in which certain of the CCAA debtors held a minority interest. Twin Falls' registered office is located in Newfoundland and Labrador. At the time of the motion, Twin Falls had not been in operation for over 40 years.
For years, both prior to and after the commencement of the CCAA proceeding, the CCAA debtors sought a distribution from Twin Falls of the remaining cash in Twin Falls to Twin Falls' shareholders. The CCAA debtors filed a motion before the supervising CCAA court seeking the issuance of an order, among other things, directing the winding up and dissolution of Twin Falls and a distribution to shareholders, pro rata, of the remaining Twin Falls cash (CBCA Motion). Twin Falls and the majority shareholder both opposed the motion, asserting that the CCAA court lacked the jurisdiction to hear and determine the CBCA Motion as Twin Falls and the majority shareholder reside in Newfoundland and Labrador and have no place of business or assets in Quebec. They also argued that based on the doctrine of forum non conveniens the CCAA court should decline to take jurisdiction in favour of the Supreme Court of Newfoundland and Labrador, where in response to the CBCA Motion, the majority shareholder had commenced a separate application for a court-supervised liquidation and dissolution of Twin Falls.
The QSC, in its capacity as a supervising CCAA court, affirmed its jurisdiction to hear and determine the CBCA Motion on the basis that the CCAA court is a national court. Across Canada, CCAA courts have relied on section 11 of the CCAA to "make any order that [they consider] appropriate in the circumstances" and section 42 of the CCAA to "import remedies from other statutory schemes" to make orders comparable to that requested by the CCAA debtors in the CBCA Motion.
The QSC also affirmed the importance of maintaining the single-control model set out by the SCC in insolvency proceedings and that, when hearing CCAA matters and pursuing the objectives of a federal statute, the QSC sits as a national court in matters related to the debtor.
Status:
Leave to appeal was filed by the majority shareholder but was discontinued pursuant to a settlement entered into between the parties that was approved by the CCAA court on January 25, 2022. Accordingly, this decision is now final.
Takeaway:
This case is an example of the CCAA court exercising its national jurisdiction and utilizing its discretion to import remedies from other statutory schemes to craft appropriate remedies within a CCAA proceeding under the single-control model umbrella.
BAD FAITH IN CCAA PROCEEDINGS
In the matter of a plan of compromise or arrangement of Abbey Resources Corp.
Date of decision: August 13, 2021
The Court of Queen’s Bench for Saskatchewan (SKQB) considered, among other things, whether bad faith on the part of a debtor company prior to its CCAA application precluded the granting of relief under the CCAA.
Abbey Resources Corp. (Abbey) sought an initial order under the CCAA. The CCAA application was opposed by a number of parties. Opponents argued that Abbey was not acting in good faith for a number of reasons including because: (1) Abbey was aware from the outset of commencing its business operations that its operations would not generate sufficient cash flow to pay its debts as they became due and (2) in its initial application for CCAA relief, Abbey failed to disclose the questionable sale of operating assets by Abbey to a related company. Indeed, Abbey ended up unwinding the transaction.
The SCC has previously determined in Century Services that good faith must exist when an initial order is granted. While the SKQB found that Abbey’s conduct prior to the application and in the application itself may have had an element of bad faith, it nevertheless determined that, when considering what was in the interest of all stakeholders as a whole and the interest of avoiding a liquidation, appropriate circumstances existed to grant an initial order.
The SKQB noted that Abbey had diligently attempted to pursue solutions to its financial difficulties and had spent the three years prior to the CCAA proceeding attempting to informally restructure its debts. At the time of the CCAA application, Abbey had developed a “germ” of a restructuring plan that had viable possibilities and had therefore satisfied its onus, as required by case law. As such, on balance, the circumstances were appropriate to grant the initial order.
Status:
No leave to appeal this decision has been sought. Abbey continues its efforts to restructure under the CCAA.
Takeaway:
Although good faith must exist when an initial order is sought, a finding that there may have been an element of bad faith conduct on the part of the applicant will not necessarily prohibit access to the CCAA if it is determined that appropriate circumstances exist and it is otherwise in the best interest of all stakeholders as a whole, to grant the requested relief.
RVO AND TAX REFUND ENTITLEMENT
Re 12463873 Canada Inc. 2021 ONSC 5895
Date of Decision: September 3, 2021
The ONSC considered entitlement to HST refunds in the context of a transaction pursuant to a reverse vesting order under the CCAA.
Green Relief Inc. (Green Relief) commenced a CCAA proceeding in early 2020. On November 9, 2020, the court approved a reverse vesting order and transaction pursuant to which the purchaser became the new sole shareholder of Green Relief, and all of Green Relief’s liabilities were vested in the numbered company, 12463873 Canada Inc. (124). One of the liabilities assumed by 124 was any pre-closing liabilities related to HST. On closing of the transaction on November 20, 2020, Green Relief exited CCAA protection, and the former Monitor of Green Relief became Monitor of 124. The Monitor and 124 were then to continue to administer the claims process for claims against Green Relief, now against 124 by virtue of the reverse vesting order.
After the transaction closed, the Canada Revenue Agency (CRA) paid 124 an HST refund on account of HST payments that arose before November 20, 2020. The restructured Green Relief took the position that the HST refund was not listed as an excluded asset in the share purchase agreement (the SPA) and it was an asset that was intended to remain with Green Relief. 124 took the position that the proper interpretation of the SPA entitled it to retain the HST refund.
The ONSC found that the proper interpretation of the SPA entitled 124 to retain the HST refund. The ONSC noted that the contract must be read as a whole and not interpreted by simply looking at individual clauses in isolation. The contract must also be read in a manner consistent with the surrounding circumstances known to the parties. Courts, however, should consider only objective evidence of the background facts at the time of the SPA’s execution.
The effect of the SPA was to make Green Relief responsible for tax liabilities up until closing and to transfer that liability to 124 on closing. It is common practice for the CRA and businesses to offset HST liabilities against HST refunds and pay or refund a net amount. The ONSC found that it was appropriate to view the refunds and liabilities as a whole, set them off against each other, and characterize the net result of the two as either a refund or a liability. The evidence demonstrated that the concept of HST liabilities and HST refunds appeared to have been treated by the parties as a single net concept.
Accordingly, 124 was entitled to any HST refunds it received from the CRA on account of any transactions that occurred before November 20, 2020.
Status:
This decision was not appealed.
Takeaway:
Generally speaking, HST refunds and liabilities are treated as a single concept with a net amount being paid to or by the tax debtor. Where, as in this case, the surrounding circumstances and evidence indicate that the parties treated HST refunds and liabilities as a single concept, it is appropriate to treat them as such in the context of a sale.
COMPETING OPTIONS IN CCAA PROCEEDINGS
Port Capital Development (EV) Inc. v 1296371 BC Ltd., 2021 BCCA 382
Date of Decision: October 8, 2021
The Court of Appeal for British Columbia (BCCA) overturned a CCAA judge’s discretionary decision to approve the purchase of a development project. The BCCA instead approved a conditional refinancing proposal that would provide a better outcome to stakeholders if it was successful. In doing so, the BCCA determined that a proposed restructuring is not required to contemplate a plan of arrangement voted on by creditors in order to be considered “appropriate” relief under the CCAA.
In May 2020, Port Capital Development (EV) inc. and Evergreen House Development Limited Partnership, the developers of a luxury residential and commercial development located in Vancouver, British Columbia known as Terrace House, commenced proceedings under the CCAA.
A dual track sales and investment solicitation process resulted in competing offers before the CCAA judge. These included multiple third-party offers to purchase the project and a highly conditional proposal to refinance the project by the developers’ principal through a numbered company (FinanceCo). The goal of the refinancing proposal was to secure construction financing with the intention of exiting the CCAA proceeding and completing construction of Terrace House. If successful, the financial proposal would result in a materially better outcome for stakeholders, including pre-sale purchasers and lien claimants.
Relying on a previous BCCA decision, Cliffs Over Maple Bay Investments Ltd. v Fisgard Capital Corp. (Maple Bay), the CCAA judge determined that the refinancing proposal was not appropriate relief to grant under section 11 of the CCAA. Section 11 gives the court broad jurisdiction to make any order it considers appropriate. In Maple Bay, the BCCA found that in order to obtain a CCAA stay of proceedings, the debtor must intend to propose a plan of arrangement or compromise to its creditors. In this case, and on the basis of the ruling in Maple Bay, the CCAA judge determined that the refinancing proposal was not an appropriate use of the court’s discretion under section 11, as there was no evidence of an intention to propose a plan of arrangement or to allow creditors to vote. The BCSC found that the highest third-party offer to purchase Terrace House represented the best outcome for stakeholders and approved the offer.
FinanceCo appealed the decision. In light of the “dynamic” nature of CCAA proceedings, the BCCA admitted new evidence on appeal which, among other things, provided an update on FinanceCo’s attempt to advance the restructuring proposal and reflected improved prospects of success.
The BCCA found that the CCAA judge’s focus on a requirement that the proposed restructuring provide for a plan of arrangement or compromise was contrary to the evolution of the complex and innovative solutions that now characterize CCAA proceedings. It did not overturn the Maple Bay decision but suggested that its focus on a requirement to propose a vote of creditors and compromise of debt as part of a CCAA restructuring may be outdated.
The BCCA ultimately determined that the CCAA judge erred in its exercise of discretion under section 11 of the CCAA and overturned her decision, instead approving FinanceCo’s refinancing proposal.
Status:
No appeal was sought of this decision. The transaction with FinanceCo closed on October 28, 2021.
Takeaway:
Whether there is a prospect of a plan of arrangement may be relevant in assessing appropriateness of relief sought in certain CCAA cases, as it was in Maple Bay, but the objectives of the CCAA can be achieved trough various means. A plan of arrangement is one of those means, but it is not a necessary prerequisite in all circumstances where a restructuring proposal is being considered by a CCAA court. Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives of the CCAA. The BCCA expressed a preference in this case for CCAA relief that provides the best outcome for stakeholders as a whole, even though a formal plan and creditor vote was not contemplated.
PRE-POST SET-OFF
In the matter of the plan of compromise or arrangement of Bloom Lake et al.
Date of Decision: November 8, 2021
The QSC considered whether certain federal and Quebec sales tax refunds claimed by a CCAA debtor on account of payments made to certain suppliers in respect of their damage claims arising from the disclaimer of their contracts are subject to set-off (or compensation under Quebec law) against pre-filing federal and Quebec sales tax claims owed by such debtor.
As described above, Bloom Lake and certain affiliated entities filed for CCAA protection before the QSC in 2015. In 2018, a plan of arrangement (Plan) was sanctioned by the QSC which provided that the net proceeds of realization by the debtors would be distributed to their creditors in accordance with the Plan.
Pursuant to the Plan, the Monitor made its first interim distributions to unsecured creditors, including four creditors who had claimed damages arising from the disclaimer of their pre-filing contracts. Pursuant to specific deeming rules in the Excise Tax Act (ETA) and the Act respecting the Quebec sales tax (QSTA), damage payments are deemed to be consideration for a taxable supply, and federal goods and services tax (GST) and Quebec sales tax (QST) are deemed to be included and paid by the debtor and collected by such suppliers at the time damage payments are made to the suppliers. As it is entitled to do under the ETA and QSTA, to recover the GST and QST deemed to have been paid by the debtor, the debtor claimed corresponding input tax credits and input tax refunds in respect of the payments (Damage Payment ITCs).
Revenu Québec (RQ), acting for itself and as administrator for the Canada Revenue Agency (CRA) in respect of GST, sought to offset the Damage Payment ITCs against pre-filing claims RQ and the CRA had against the debtor for unpaid GST and QST. The Monitor then brought a motion for advice and directions, seeking the court's determination of the validity of the purported set-off.
The Monitor and the debtor contended that the Damage Payment ITCs are post-filing claims, because, among other reasons, the debtor's right to claim the Damage Payment ITCs only arose and became payable upon actual payment made by the debtor to the applicable suppliers under the Plan. In their view, the clear and unambiguous wording of the relevant provision of the ETA and QSTA are dispositive of the issue. They also asserted, based on the case law, including the Court of Appeal of Quebec 's decision in Quebec (Agence du revenue) v Kitco Metals Inc. (Kitco), that pre/post set-off or compensation should generally not be permitted under the CCAA as it would offend the principle that unsecured creditors are to be treated on a pari passu basis.
RQ took the position that pre/post set-off or compensation should be permitted given the very close and direct connection between the payments made that generated the Damage Payment ITCs and the disclaimed pre-filing contracts and because the damage claims arising from a disclaimer are deemed by the CCAA to be provable claims in a CCAA plan. RQ also argued that the principle articulated by the Court of Appeal of Quebec in Kitco is only applicable to restructuring proceedings under the CCAA, not liquidating CCAA proceedings, which they asserted to be the case in these proceedings.
The QSC determined that the Damage Payment ITCs are post-filing claims that may not be set-off against RQ's pre-filing claims, agreeing with the Monitor and the debtor that the clear wording of the relevant provisions of the ETA and QSTA are dispositive of the issue. The QSC also stated that the RQ's position if accepted would defeat the fundamental objectives of insolvency law and run contrary to the pari passu principle. Thus, in this case, the QSC came to the conclusion that it would be improper to use the discretion granted to a CCAA judge by section 11 of the CCAA to allow set-off between a pre and a post-filing claim.
The QSC rejected RQ's argument that the restriction on pre/post set-off or compensation articulated in Kitco only applies to restructuring proceedings under the CCAA and concluded that there was no valid reason in fact or at law to allow pre/post set-off or compensation in this case.
Since this decision was rendered, the SCC issued its decision on pre/post set-off or compensation in Montreal (City) v Deloitte Restructuring Inc., which is discussed below.
Status:
Leave to appeal this decision granted on December 3, 2021.
Takeaway:
This decision determined that federal and Quebec sales tax refund claims relating to damage payments made by a debtor in respect of pre-filing contracts disclaimed in the course of CCAA proceedings are post-filing in nature and may not be subject to set-off against pre-filing claims of the taxing authorities. The decision is subject to a pending appeal.
Montréal (City) v Deloitte Restructuring Inc., 2021 SCC 53
Date of Decision: December 10, 2021
On December 10, 2021, the SCC released a decision providing clarity across Canada that a CCAA court has the broad discretion, in furtherance of the CCAA’s remedial objectives, to stay a right to compensation or set-off of pre-filing and post-filing claims under civil and common law and that such discretion should be exercised in the vast majority of cases. In coming to this decision, the SCC tempered the Court of Appeal of Quebec (QCA) decision in Kitco that pre-post compensation is never available in CCAA proceedings.
This decision arose in the context of the CCAA proceeding of a debtor engineering company, Groupe SM and its affiliates (Group SM), that had been involved in alleged fraud in public works contracts. The creditor, the City of Montreal (City), continued to receive services from Groupe SM post-filing, then sought to exercise compensation or set-off against the amounts owed to Group SM for such post-filing services in respect of two pre-filing claims the City alleged against Group SM.
In response to the City’s assertion of pre-post compensation, which would have deprived Group SM of payment for post-filing services, the Monitor brought an application for a declaratory judgment that compensation could not be effected with respect to the amounts owed by the City to Groupe SM.
Both the supervising judge and the QCA granted the Monitor’s application for declaratory judgment on the basis of the principles in the QCA’s decision in Kitco. The City appealed the decisions to the SCC.
The SCC characterized the broad discretion afforded to supervising judges to grant orders to “ensure that the restructuring is successful and that the CCAA’s objectives are achieved” as the “fundamental feature” of the CCAA and the true “engine” driving the statutory scheme. Specifically, the SCC concluded that pursuant to sections 11 and 11.02, which set out the stay power under the CCAA, the supervising judge is permitted to stay rights held by creditors if the exercise of those rights could jeopardize the restructuring process.
The SCC, however, rejected the absolute prohibition against pre-post compensation set out in Kitco, concluding instead that the CCAA court has the authority to stay, but also the discretion to allow, pre-post compensation in rare circumstances, in furtherance of the CCAA’s remedial objectives. The SCC noted, however, that in the vast majority of CCAA cases, pre-post compensation should be stayed. In order to assist supervising judges in determining where it is appropriate to exercise their discretion in allowing pre-post compensation, the SCC set out three baseline considerations: (1) the appropriateness of the order being sought; (2) due diligence; and (3) good faith on the applicant’s part.
Applying these considerations to the circumstances in Groupe SM, the majority of the SCC concluded that it was not appropriate in the circumstances to permit pre-post compensation.
The SCC also specifically addressed the application of section 21 of the CCAA, which protects compensation rights, finding that it only applies to pre-pre compensation or set-off. Section 21 neither authorizes nor prohibits pre-post compensation or set-off. Accordingly, a supervising judge retains the discretion to stay or authorize the exercise of a right of pre-post compensation.
Takeaway:
The SCC has provided clarity and confirmed a CCAA court’s discretion to stay pre-post filing compensation and set-off, noting that the court should generally exercise this discretion and, only in rare cases, refuse such a stay.
For more information, please see our December 2021 Blakes Bulletin: Supreme Court of Canada confirms CCAA Court’s discretion to stay Pre-Post Set-off/Compensation.
UPDATE ON 2020 CASE LAW BULLETIN
TREATMENT AND DISCLAIMER OF ELIGIBLE FINANCIAL CONTRACTS
Bellatrix Exploration Ltd (Re), 2021 ABCA 85 and 2021 ABCA 148
Date of Decision: March 5, 2021, and April 29, 2021
The energy producer (EP) sought leave to appeal the decision of Justice Romaine of the Court of Queen’s Bench of Alberta wherein she rejected various of its submissions concerning the validity of a disclaimer of its contract with Bellatrix Exploration Ltd. (Bellatrix) within Bellatrix’s CCAA proceeding. The contract (Contract) at issue was for the purchase and sale of natural gas. Bellatrix sought to disclaim the contract and cease delivery of natural gas to the EP. The EP argued that the disclaimer notice was invalid because the Contract constituted an eligible financial contract (EFC) for the purposes of the CCAA and, under subsection 32(9) of the CCAA, a debtor company is not permitted to disclaim contracts that are EFCs.
It was acknowledged by both parties that the Contract was an EFC. Bellatrix submitted, however, that the court should apply a “fair results” test to the disclaimer, under which it may determine that, even if the form of contract constitutes an EFC, the court may decline to characterize an EFC if it would be unfair to do so. The lower court found that the Contract was an EFC and was therefore exempt from disclaimer. While fairness may enter the analysis when deciding the threshold question as to whether an agreement is an EFC, where a contract clearly meets the definition of an EFC, it is not open to the court to declare it not to be one on the basis of fairness.
Leave to appeal this decision of the Court of Queen’s Bench of Alberta was granted on May 1, 2020. The ABCA determined, however, that the appeal of this decision was moot due to the outcome of the ABCA’s decision in 2021 ABCA 85 described below and the finding that the EP was not entitled to any priority for damages over and above Bellatrix’s secured creditor, meaning that the EP would receive no distribution regardless of the status of the Contract as an EFC and whether it could be disclaimed or not.
As noted in our 2021 bulletin, following a finding that Bellatrix was precluded from disclaiming the Contract, Bellatrix ceased delivery of natural gas under the Contract. The EP argued that this failure to perform the terms of the Contract constituted a post-filing breach by Bellatrix. The EP contended that it was a creditor who agreed to advance services or funds to the debtor after the CCAA filing to keep the debtor in operation and, consequently, was entitled to compensation in priority to the secured creditor.
The lower court found that the CCAA does not compel a CCAA debtor to perform an EFC that has not been terminated, nor does it provide the counterparty with any priority for its claim. The additional protection afforded to counterparties to an EFC is that such counterparty has the ability to terminate the EFC and crystallize its resulting loss, despite the stay provisions of the CCAA.
The ABCA dismissed the appeal, finding that the appeal was without merit and would delay the distribution of Bellatrix’s moneys to creditors based on a doomed claim.
Status:
The foregoing decisions were not appealed to the SCC.
Takeaway:
Where a contract meets the definition of an EFC, a court does not have the discretion to recharacterize the agreement to permit a disclaimer on the basis of fairness. Where an insolvent debtor is prevented from disclaiming an EFC, but nonetheless ceases to perform its obligations under an EFC, the solvent counterparty cannot compel performance of the contract and is not entitled to any priority for damages. It can terminate the EFC, crystallize its losses, and claim as an unsecured creditor for its damages.
PARTIAL DISCLAIMER OF A CONTRACT
Yukon (Government of) v. Yukon Zinc, 2021 YKCA 2
Date of Decision: March 5, 2021
The appeal of the lower court decision was heard as part of an appeal of four decisions arising out of the receivership proceeding of Yukon Zinc.
Yukon Zinc, a mining corporation, was party to a master equipment lease that applied to approximately 570 items. The receiver of Yukon Zinc found that only 79 of these items were required for continuing the necessary care, maintenance and environmental remediation of the mine. Thus, the receiver sought to disclaim the portions of the master lease pertaining to the unnecessary items. The counterparty to the contract submitted that the receiver has a binary choice to either reject or maintain the contract as a whole, and that partial disclaimer is not permitted by law.
The lower court found that, while uncommon, the court has the authority to authorize the receiver to continue to use certain essential items to continue the care, maintenance and environmental remediation of the mine pursuant to the statutory discretion in subsection 243(1)(c) of the BIA and section 26 of the Yukon Judicature Act, while also permitting the disclaimer of the remainder of the master lease.
The counterparty to the master lease appealed the lower court decision and applied for an order that the disclaimer notice was a nullity, and that the receiver had affirmed the master lease and was required to pay the full lease payments to the counterparty from the date of the receiver’s appointment.
The YKCA emphasized that the lower court judge had not, in fact, authorized partial disclaimer of the master lease. Rather, the receiver was permitted to fully disclaim the master lease and authorized to continue using certain essential items, notwithstanding the disclaimer.
The YKCA disagreed with the lower court’s conclusion and found that laws of property do not permit one person to expropriate or appropriate for their own use the property of another person unless authorized to by statute. Section 243 of the BIA does not confer authority on courts to permit the receiver to make unilateral decisions on the use of property of third parties. Explicit language would be required in the BIA to confer such authority.
The YKCA declared that the purported appropriation by the receiver in the disclaimer notice of the right to use certain essential leased items was of no force or effect. The YKCA did not, however, order the receiver to pay the counterparty all amounts owing under the master lease since the date of the receiver’s appointment.
Status:
The counterparty sought leave to appeal the decision of the YKCA to the SCC to the extent that the YKCA did not order the receiver to pay all amounts owing since the date of its appointment. Leave to appeal was dismissed on November 4, 2021.
Takeaway:
The BIA does not confer authority on courts to override general property laws and to force one party to sell, lease or give use their property to another party. Disclaimer of contracts remains a binary choice to either disclaim or maintain a contract as a whole.
APPOINTMENT OF A RECEIVER PURSUANT TO SECTION 243 OF THE BIA AND INTERACTION WITH THE CIVIL CODE OF QUEBEC
Séquestre de Media5 Corporation, 2020 QCCA 943
The QCA affirmed that the remedy of a BIA receiver is available in respect of property located solely in Quebec. However, a secured creditor must satisfy the notice requirements under both the BIA and the Civil Code of Quebec before seeking such appointment. This leads to inconsistent notice requirements for application for the appointment of a BIA receiver between Quebec and the common law provinces.
Leave to appeal this decision to the SCC was dismissed on April 1, 2021, without reasons.
COURT CONFIRMS AUTONOMY OF LETTERS OF CREDIT, RULES LANDLORD MAY DRAW FOR FULL CLAIM AMOUNT
Re 7636156 Canada Inc, 2020 ONCA 681
The ONCA found that the obligations of an issuer to honour a draw on a letter of credit are independent, third party obligations, unaffected by disclaimer of a lease by a bankruptcy trustee. While the claim of a landlord in bankruptcy is limited, a landlord’s claim for damages for the unexpired term of its lease is not limited for the purposes of a letter of credit.
Leave to appeal this decision to the SCC was dismissed on April 22, 2021, without reasons.
REVERSE VESTING ORDERS
Arrangement relatif à Nemaska Lithium inc., 2020 QCCA 1488
Two shareholders, one of whom was also a creditor, objected to approval of an RVO on multiple grounds, including the court’s lack of authority to grant a vesting order for anything other than a sale or disposition of assets and the impossibility under the CCAA for debtor companies to emerge from CCAA outside of a plan of arrangement. The CCAA judge granted the RVO noting the purpose and efficiency of the RVO in maintaining going concern operations of debtor companies, remedial objectives of Canadian insolvency laws and the wide discretion of the CCAA supervising judge.
The QCA dismissed the application for leave to appeal the CCAA judge’s decision, noting that even if the RVO transaction was put to a vote of creditors as a plan of compromise or arrangement, the objecting creditors would not be able to determine the vote. The QCA also noted that an appeal would potentially hinder the progress of the CCAA.
Leave to appeal this decision to the SCC was dismissed on April 29, 2021, without reasons.
PRIORITY OF DIP CHARGES
Canada v. Canada North Group Inc., 2021 SCC 30
Date of Decision: July 28, 2021
The Alberta Court of Queen’s Bench considered whether a CCAA court can order that charges, such as charges for debtor-in-possession (DIP) financing or administration charges, rank ahead of the statutory deemed trust in favour of the Crown (in this case, the CRA) for unremitted source deductions. The Court found that it did have such authority. The ABCA upheld the lower court’s decision.
In a 5-4 decision, the majority of the SCC dismissed the CRA’s appeal and upheld the decision of the ABCA, concluding that a supervising CCAA Court has jurisdiction to grant priming charges and subordinate deemed trusts where doing so is necessary to fulfill the broad, remedial objectives of the CCAA.
The SCC identified certain circumstances and principles guiding a determination of whether it is necessary to subordinate a statutory deemed trust for unremitted source deductions:
-
Where the supervising judge believes that without a super-priority charge, a particular professional or lender would not act, it is generally necessary to subordinate the deemed trust.
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The prospect of a successful restructuring and whether the CCAA is likely to be used to sell the debtor’s assets should be considered.
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The relative amounts of the DIP financing and unremitted source deductions should be considered.
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Whether and for how long the Crown allowed source deductions to go unremitted without taking action should be considered.
Takeaway:
This decision provides comfort to lenders and other parties that rely on court-ordered priority charges that Courts have the jurisdiction to order that such charges rank in priority to deemed trusts in favour of the Crown for unremitted source deductions.
DISTRIBUTIONS TO CREDITORS OF PROCEEDS IMPRESSED WITH A DEEMED TRUST UNDER THE EXCISE TAX ACT (CANADA)
Canada v. Toronto-Dominion Bank, 2020 FCA 80
The Federal Court of Appeal found that, absent a bankruptcy, where a bank lends money to a debtor with an existing HST/GST liability and takes its security interest, in accordance with explicit language in the Excise Tax Act, the debtor’s property, to the extent of the tax debt, is already deemed beneficially owned by the Crown. Accordingly, secured creditors can be forced to disgorge an equivalent sum of money to the amount of the money received that was subject to a pre-existing HST/GST deemed trust, upon demand from the CRA. This obligation does not extend to unsecured creditors who receive payments from a debtor in the ordinary course who are not subject to the language of the statute.
Leave to appeal this decision to the SCC was dismissed on October 14, 2021.
For more information, please contact:
Pamela Huff 416-863-2958
Linc Rogers 416-863-4168
Caitlin McIntyre 416-863-4174
Cristina Cataldo 514-982-6312
or any other member of our Restructuring & Insolvency group.
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