Top Insolvency Cases and Highlights from 2017 – Part 1

Heather L. MeredithAdrienne Ho

2017 saw a number of interesting and important developments in Canadian insolvency and restructuring matters. Some of the highlights (which, in certain instances, will continue as issues in 2018 and beyond) are set forth below:

1) Trends: Fewer CCAA Filings and Retail Insolvencies in the News

According to the OSB, in the one year period ending September 30, 2017, only twenty-one Companies’ Creditors Arrangement Act (“CCAA”) proceedings were filed, compared to forty filings in the one year period ending September 30, 2016. Eleven of these proceedings were filed in Ontario, which is relatively consistent with the year prior. Alberta saw the biggest drop in CCAA filings, with only three filings in this period, compared to fourteen in the twelve months leading up to September 30, 2016. CCAA filings continue to be largely in the construction, retail trade, and real estate industries (3 filings each), with a significant decline in mining and oil and gas filings. Retail insolvencies dominated the news in 2017 with the Sears CCAA and liquidation voted the Canadian Press business news story of 2017 and the Toys R Us filing also making headlines, together with much speculation about the future of bricks and mortar retail stores.

2) Stelco Completes Successful Restructuring: Equitable Subordination Appeal Does Not Proceed to SCC

In March 2017, the Supreme Court of Canada (“SCC”) granted leave to appeal the Ontario Court of Appeal’s decision in Stelco that the doctrine of “equitable subordination” (a form of equitable relief to subordinate the claims of a creditor who has engaged in inequitable conduct) is not available in CCAA proceedings. The Court of Appeal ruled that there was no authority in the CCAA, either express or implied, to apply the doctrine of equitable subordination. The Court of Appeal also indicated that the broad jurisdiction under section 11 of the CCAA was not available to invoke the doctrine since the appellant did not identify how equitable subordination would further the remedial purpose of the CCAA. Finally, the Court noted that there was no provision in the CCAA similar to section 183 of the Bankruptcy and Insolvency Act (“BIA”) (investing the bankruptcy court with such jurisdiction at law and in equity as will enable it to exercise its bankruptcy jurisdiction), leaving the door open to different treatment in BIA and CCAA proceedings.

While insolvency professionals awaited Supreme Court guidance on the issue, in June 2017, Stelco successfully implemented a complex restructuring that compromised more than $2 billion in debt, restructured significant pension and benefit obligations, and implemented creative solutions that included monetizing land holdings, addressing environmental matters and implementing new collective agreements. As a result of the successful restructuring (which later saw Stelco completing a $200 million IPO in November 2017), the appellants withdrew the appeal, leaving the Ontario Court of Appeal’s decision in Stelco as the latest appellate court view on the issue of equitable subordination.

3) Monitor as Complainant in Oppression Actions

Two Ontario court decisions in 2017 considered whether a monitor could act as a complainant in an oppression action. The two courts reached opposite results on the facts of those cases.

In Ernst & Young Inc. v. Essar Global Fund Limited (“Essar”), the Ontario Court of Appeal upheld the decision authorizing the monitor to bring an oppression action. The Court observed that a monitor generally plays a neutral role though it frequently takes positions (indeed is required by statute to do so), typically in support of a restructuring purpose. The Court noted that it will be a rare occasion that a monitor will be authorized to be a complainant; however, the CCAA does not preclude the making of such an order, and in this case it was appropriate given that, among other things, the oppression action served to remove an insurmountable obstacle to the restructuring (since the transaction at issue gave one company the ability to veto a change of control of the debtor’s business) and the Monitor could efficiently advance an oppression claim on behalf of stakeholders who were not organized as a group but who were all affected by the alleged oppressive conduct.

In Urbancorp Cumberland 2 GP Inc., (Re), Myers J. declined to grant the Monitor’s motion for directions as to whether certain payments made to creditors were oppressive. He agreed that monitors may be empowered to bring legal proceedings in appropriate circumstances (though he noted the Monitor had not been empowered to do so in this case, and was critical of the attempt to structure the motion as one for directions and to rely on statements in a Monitor’s report that were not incorporated into an order). He reasoned that, while the court has broad discretion to empower the Monitor to take steps to facilitate the restructuring or to advance the goals of the CCAA, there was no evidence in this liquidating CCAA that the Monitor bringing proceedings in place of creditors could be said to facilitate the restructuring. He specifically noted that, unlike Essar where the claim addressed a roadblock to the restructuring affecting all parties, this claim simply pit current creditors against creditors paid out earlier and as such was really an inter-creditor proceeding. The Monitor was ordered to pay $40,000 in costs.

Both cases acknowledge that a monitor may be empowered to bring an oppression action in exceptional circumstances. In determining whether such circumstances exist, the test developed by the Court of Appeal in Essar (considering whether there is a prima facie case for oppression, whether the proposed action has a restructuring purpose/materially advances or removes an impediment to a restructuring and whether any other stakeholder is better placed to be a complainant) will likely guide courts in future cases.

4) Quebec Court Treats Pension Deemed Trusts the Same in Liquidating CCAAs as in BIA

In September 2017, the Quebec Superior Court in the Wabush Mines CCAA proceedings issued a detailed decision holding that the deemed trusts created under the federal Pension Benefits Standards Act and provincial pensions acts in Newfoundland and Labrador and Quebec do not apply in the context of a liquidating CCAA. The Court held that only employee contributions and normal cost payments are protected in a liquidating CCAA to the extent provided for by sections 6(6) and 36(7) of the CCAA, consistent with the priorities in a BIA distribution.

Building on comments from the SCC in Century Services Inc. v. Canada (Attorney General), the Court noted that the scheme of distribution under the BIA should apply in a liquidating CCAA unless there is a contradiction between the two. With respect to the deemed trusts at issue, the Court held that the provincial deemed trust created under Newfoundland and Labrador law was inoperable as a matter of federal paramountcy (the CCAA does not expressly invalidate deemed trusts in favour of parties other than the Crown; however, it would frustrate Parliament’s purpose by protecting amounts in addition to the specific protections in 6(6) and 36(7) of the CCAA) and the federal deemed trust was similarly ineffective since the CCAA, which protects only normal payments and employee contributions, was more specific and enacted after the federal pension act. Leave to appeal this decision to the Court of Appeal has been granted so this may not be the final word on pension deemed trusts in liquidating CCAAs.

5) Priority of Source Deduction Deemed Trust v. Court-Ordered Charges Still in Flux

In 2017, courts in Nova Scotia and Alberta issued seemingly inconsistent decisions as to whether a deemed trust for unremitted source deductions under the Income Tax Act (“ITA”) has priority over a DIP charge. As explained in our previous post, 1) in Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re), the Supreme Court of Nova Scotia held that the ITA deemed trust takes priority over all security interests, including a DIP charge in a BIA proposal (noting that while property may be sold by the debtor free from the trust, this does not mean that charges could supercede the trust); and, 2) in Canada North Group Inc. (Companies’ Creditors Arrangement Act) (“Canada North”), the Alberta Court of Queen’s Bench held that the DIP charge had priority over the ITA deemed trust in CCAA proceedings (noting that the deemed trust was unlike a proprietary interest, reviewing the importance of super-priority charges to restructurings, and concluding that the intent of Parliament was to grant priority to the relevant deemed trusts over all security interests other than the “super-priority” charges ordered by the CCAA court as necessary for the restructuring). Leave to appeal the decision in Canada North was granted late last year.

6) Strengthening GST/HST Deemed Trust as Against Secured Creditors

In July, 2017, the Federal Court of Appeal issued its decision in Canada v. Callidus Capital Corporation, which is widely seen as strengthening the deemed trust for GST/HST. As summarized here, the Court (with one dissent) held that, while the deemed trust is rendered ineffective with respect to property of the tax debtor at the time of bankruptcy, the CRA could still enforce the deemed trust for GST/HST as against a secured creditor who received proceeds from the sale of a debtor’s assets prior to bankruptcy. The decision has caused lenders to consider whether an early bankruptcy filing is preferable rather than forbearing and taking the risk that payments made to them will be clawed back by the CRA. Leave to appeal this decision to the SCC has been filed

We will provide a second set of highlights arising from 2017 matters next week.

Operator’s Liens and the PPSA Priority Regime

Pantelis Kyriakakis

Joint venture partners commonly enter into operating agreements which grant operators a security interest, referred to as an operator’s lien.  Operator’s liens are, for the most part, consensual and contractual security interests subject to the provisions of the Personal Property Security Act, RSA 2000, c P-7 (the “PPSA”) and the priority regime set out therein.

A recent example of the interplay between an operator’s lien and a prior registered general security interest is set out in Cansearch Resources Ltd. v Regent Resources Ltd., 2017 ABQB 535.  In Cansearch Resources the Alberta Court of Queen’s Bench considered the priority of a joint venture partner’s, Cansearch Resources Ltd.’s (“Cansearch”), unregistered operator’s lien vis-a-vie Alberta Treasury Branches’ prior registered General Security Agreement (the “GSA”), with respect to proceeds derived from the sale of Regent Resources Ltd.’s (“Regent”) 29.15% interest in the “Functional Units” in a jointly owned Joffre Gas Battery and Compression Facility (the “Joffre Facility”).  The operation of the Joffre Facility was governed by the Operating Agreement between Cansearch and Regent, which incorporated the 1999 Petroleum Joint Venture Association Operating Procedure.  The 1999 Petroleum Joint Venture Association Operating Procedure granted Cansearch an operator’s lien against Regent’s interests in the Joffre Facility as security for any unpaid expenses incurred by Cansearch in its capacity as operator and for the joint account.  In the end, the Court held that the prior registered General Security Agreement had priority over the unregistered operator’s lien.

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Proposed Amendments to Insolvency Legislation Granting Super-priority to Pension Plan Deficits and Employee Benefits

Adrienne Ho

This fall, the NDP and the Bloc Québécois (“Bloc”) have both introduced private member’s bills seeking to amend the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”). Both bills aim to provide greater protection to employees’ pension and group insurance plans and their severance and termination pay when their employer becomes subject to BIA or CCAA proceedings.

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Crown priority under section 222(3) of the Excise Tax Act

Walker W. MacLeodLan Nguyen

We have recently profiled conflicting cases (available here and here) dealing with a priority contest between super-priority charges granted pursuant to creditor protection legislation and deemed trusts arising under the Income Tax Act. This is not the only instance where creditors and tax authorities will clash over statutory trusts in the insolvency context.  In Canada v Callidus Capital Corporation, the Federal Court of Appeal interpreted section 222(3) of the Excise Tax Act, which creates a trust over GST collected but not remitted to the receiver general. The decision in Canada v Callidus is a win for the CRA as it provides the Crown with priority to sale proceeds paid by a tax debtor to a secured creditor notwithstanding the subsequent bankruptcy of the debtor.

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Alberta Court of Queen’s Bench Reiterates Court’s Discretion to Grant an Interim Financing Charge “Super-Priority” Status in the Face of a Deemed Trust Under the Income Tax Act

Walker W. MacLeodAudrey Bouffard-Nesbitt

This blog’s most recent post considered the Supreme Court of Nova Scotia’s June 2017 decision of Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re) (“Rosedale”) where the Court held that a deemed trust for unremitted withholdings under sections 227(4) and 227(4.1) of the Income Tax Act (Canada) (the “ITA”) had priority over a charge for interim financing granted by a court pursuant to section 50.6 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). In Rosedale, the interim financing lender relied on the 2007 Alberta Court of Queen’s Bench decision in Temple City Housing Inc. (Companies’ Creditors Arrangement Act) (“Temple”), asserting, among other things, that a deemed trust is in substance a security interest and can therefore be subordinated to an interim financing charge pursuant to section 50.6 of the BIA (the “BIA”). The Nova Scotia Supreme Court disagreed with the decision in Temple and held that the language creating the deemed trust in the ITA clearly provides that a deemed trust created thereunder takes priority over any other security.  As a result, and despite the terms of the DIP order issued in the case, the Canada Revenue Agency (“CRA”) had priority over the DIP lender.

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Deemed Trust for Unremitted Withholdings Trumps Interim Financing Charge in Recent Nova Scotia Supreme Court Decision

Audrey Bouffard-Nesbitt

In the recent decision of Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re) (“Rosedale”), the Supreme Court of Nova Scotia held that a deemed trust for unremitted withholdings under sections 227(4) and 227(4.1) of the Income Tax Act (Canada) had priority over a charge for interim financing granted by a court pursuant to section 50.6 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). The decision in Rosedale turns on an interpretation of First Vancouver Finance v Canada (National Revenue) (“First Vancouver”) and is in conflict with the Alberta Court of Queen’s Bench interpretation of First Vancouver in its 2007 decision Temple City Housing Inc. (Companies’ Creditors Arrangement Act) (“Temple”). In contrast to Temple, Rosedale concludes that First Vancouver is authority for the proposition that a deemed trust for unremitted withholdings takes priority over all security interests, including a security interest granted by a court in favour of an interim financing lender in restructuring proceedings.

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Alberta Court clarifies ranking of linear property tax claims

Walker W. MacLeodFiruz Rahimi

A recent unreported decision in the Alberta Court of Queen’s Bench has clarified the ranking of certain municipal tax claims against a bankrupt in Alberta.  In Bank of Nova Scotia et al v. Virginia Hills Oil Corp. et al, the Court accepted arguments by a court-appointed receiver and trustee in bankruptcy that unpaid pre-filing linear property taxes owed by a debtor company to a municipality are unsecured claims for the purposes of the Municipal Government Act.

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Key Employee Retention Plans in CCAA Proceedings

Walker W. MacLeod

Key Employee Retention Plans are a common feature in restructurings occurring under the Companies’ Creditors Arrangement Act.  The basis for a KERP is simple and easily explainable.   The value of almost any debtor company will be maximized through a sale or restructuring transaction that preserves it as a going-concern business and avoids a piecemeal and costly liquidation of assets at depressed prices.   Employees are critical to maintaining going-concern value but may be anxious about their future role in an insolvent entity or lack motivation to continue employment with a struggling debtor, particularly if the employees hold an equity position in the company that is likely to be wiped out on exit from the insolvency proceedings.  These concerns can be reasonably expected to cause employees to cease employment and result in a loss of value to the business.  A secured retention payment buttresses this by incentivizing employees, notwithstanding the inherent uncertainty in a CCAA filing, to continue employment and maintain the value of the enterprise for the ultimate benefit of creditors and other stakeholders.

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Rate Floors in Commercial Loan Agreements

Peter BirknessAndrew Foster

Over the past few years, rate floors have become standard in commercial loan agreements. Following the 2008 financial crisis, lending rates dropped significantly and a sustained period of low interest rates has followed. There have even been instances of interest rates for certain currencies becoming negative. To protect against negative interest rates, the lending market has adopted rate floors, particularly with respect to LIBOR rates. The purpose of rate floors is to give lenders a guaranteed return on their loans even in the event that rates become negative. In Canada, this development has resulted in floors on LIBOR and CDOR (Canadian Dollar Offered Rate) rates.

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Court of Appeal upholds Redwater decision

Sean CollinsWalker W. MacLeodPantelis Kyriakakis

In a majority two to one decision released on April 24, 2017, the Alberta Court of Appeal has upheld the lower court ruling in Re Redwater Energy Corporation.  The trial decision in Redwater, which settled a lengthy conflict between the Alberta Energy Regulator and insolvency professionals on the proper interpretation of section 14.06 of the Bankruptcy and Insolvency Act (Canada), was previously analyzed in detail here.  The majority judgment confirms the proposition that a receiver or trustee is entitled to disclaim or not take possession of a debtor’s interest in select AER licensed properties that have no value due to abandonment obligations and to vend the remaining licensed assets that have value.  By extension, the AER cannot refuse a license transfer solely because abandonment and reclamation obligations associated with the disclaimed properties will go unperformed.  The proceeds of sale must then be disbursed in accordance with the priority regime established in the BIA.  In more simple terms, the decision confirms that a court-officer appointed under federal legislation may pick and choose the realizable property in an estate in order to maximize the recovery available for creditors without undue interference from a provincial regulator.

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