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.
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.
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.
In a recent decision, the Federal Court of Appeal had occasion to consider a claim at the crossroads of bankruptcy and maritime law (ING Bank N.V. v. Canpotex Shipping Services Limited et al., 2017 FCA 47). Normally in Canada, bankruptcy cases are adjudicated in the superior courts of the respective provinces. This case was unusual because, although also a bankruptcy case, it fell under the Federal Court’s jurisdiction over admiralty matters.
The restructuring of Sanjel Corporation and its affiliates (previously discussed here) continues to provide interesting developments on the application and interpretation of the Companies’ Creditors Arrangement Act. In a recent decision in the case, the Court of Queen’s Bench of Alberta interpreted an initial order so as to limit the super-priority of a financial advisor’s court-ordered charge to the priority amount specified in the order. In doing so, the court rejected a unique argument made by the financial advisor that attempted to classify the amount claimed beyond the court-ordered charge as an obligation that had to be paid due to certain other provisions of the order. The advisor’s application for leave to appeal was subsequently dismissed in a decision that is available here.
On January 25, 2017, the British Columbia Supreme Court rendered its decision in Tudor Sales Ltd. (Re), 2017 BCSC 119. The case deals with an attempt to recharacterize a creditor’s claim in bankruptcy from debt to equity and the subordination of that claim under sections 137, 139 and 140.1 of, the Bankruptcy and Insolvency Act (Canada). Those sections provide that the claims of creditors who are not at arm’s length from the bankrupt, silent partners (i.e., lenders who receive an interest rate varying with profits or representing a share of profits) and “equity claims,” may be postponed until all other claims have been satisfied.
It is well-established that Canadian courts have jurisdiction to approve a plan of compromise or arrangement under the Companies’ Creditors Arrangement Act that includes releases in favour of third-parties. The leading decision on the issue remains Metcalfe & Mansfield Alternative Investments II Corp., which arose in response to the liquidity crisis that threatened the Canadian market in asset-backed commercial paper after the U.S. sub-prime mortgage collapse in 2007. The general rule, as established by the Ontario Court of Appeal, is that third-party releases must be reasonably connected to the restructuring in order for a plan that contains them to be sanctioned.
In a previous post we discussed how the Court of Queen’s Bench of Alberta recently authorized a sale transaction after being satisfied with the appropriateness of a sales process that was undertaken prior to the issuance of the receivership order. A pre-filing marketing and investment process may also be used to justify a sale transaction under section 36 of the Companies’ Creditors Arrangement Act. The most recent Alberta authority on this issue is Sanjel Corporation, where the Alberta Court of Queen’s Bench authorized a large and sophisticated oilfield services company to sell substantially all of its assets on the strength of a pre-filing sales process and over the strenuous objection of junior creditors. Sanjel signals a continued willingness by the courts to respect a robust pre-filing process and confirms that the CCAA may be used to liquidate or wind-down a business in appropriate circumstances.
In the recent unreported decision of Alberta Treasury Branches v. Northpine Energy Ltd., the Court of Queen’s Bench of Alberta authorized a disposition of a debtor’s assets by a receiver immediately upon appointment and without being forced to conduct a marketing process within the receivership proceedings. This decision is authority for the proposition that, where a pre-receivership sales process has been consistent with the principles set forth in Royal Bank of Canada v. Soundair Corp, a secured creditor may apply to authorize a receiver to enter into and close a sale transaction, distribute proceeds and be discharged on an initial appointment under section 244 of the Bankruptcy and Insolvency Act (Canada).
Section 11.4 of the CCAA requires that persons identified as critical suppliers to a debtor company continue to provide goods and services on terms and conditions with the existing supply relationship. The policy rationale underlying section 11.4 of the CCAA is simple: a business is dependent on the ongoing supply of important products and services, an interruption in such supply could adversely impact going concern operations, impair a restructuring and cause significant losses to creditors and other stakeholders. When the court makes such an order it is obligated to grant a charge in favour of the suppliers in an amount equal to the value of the goods or services supplied. The suppliers are prevented from insisting on immediate payment but obtain security for their post-filing extensions of credit to the debtor.
Prior to amendments to the CCAA in 2009, there was no express statutory authority within the CCAA to allow a court to direct a person, however critical to the operation of a business, to continue to supply goods and services to a debtor company. There was clear case authority that permitted a debtor company to make payment of pre-filing obligations when doing so would maximize the value of the business. The making of pre-filing payments often represents the simplest and most straightforward way of ensuring continued supply from vendors, who will understandably be more receptive to supplying after receipt of an anticipated payment as opposed to interpreting and complying with a court order. Although section 11.4 of the CCAA has been given a broad interpretation to compel continued supply, the case law subsequent to the passage of the 2009 amendments is also very clear that the court has retained the inherent jurisdiction to permit the payment of pre-filing obligations.