In a recent decision that is relevant to oil and gas receiverships, the Alberta Court of Queen’s Bench lifted a stay of proceedings against an insolvent operator to allow the non-operating party to enforce its right to take over operatorship pursuant to the CAPL 2007 Operating Procedure. The judgment is noteworthy as it represents the second time in the last eighteen months that the Court has lifted a stay of proceedings in an insolvency proceeding (the first being Bank of Montreal v Bumper Development Corporation Ltd) to permit the exercise of the contractual rights of a non-operator.
We previously published Part 1 of our survey of interesting and important developments in Canadian insolvency and restructuring matters in 2017. This post is the second and final part – with an additional seven highlights and cases. You can also find a printable version containing the complete “Top Insolvency Cases and Highlights from 2017” bulletin here.
1. CCAA Representation Orders can Benefit a Range of Stakeholders
In January 2017, the Quebec Court of Appeal considered the scope of representation orders in CCAA proceedings. The Court of Appeal in Groupe Hexagone heard an application for leave to appeal the order appointing representatives for a group of about 140 unpaid subcontractors. The fees of the representatives and their counsel were to be paid by the debtors and secured by a charge against the debtors’ assets. The petitioners did not dispute the application of the Canwest Publishing Inc. factors for granting a representation order but argued that this group of subcontractors did not meet the test since there was no evidence of vulnerability or limited resources, among other things.
The Court of Appeal dismissed the application for leave, observing that vulnerability could not be reduced to impecuniosity and that CCAA representation orders are not limited to “widows and orphans” but can in fact benefit stakeholders in a range of circumstances. The Court further held that it was not inappropriate to consider that subcontractors’ claims are vulnerable on the basis of the cost of individual participation, as opposed to the financial circumstances of each, and that vulnerability is only one of a series of factors to be weighed. This decision emphasizes that the appointment of a representative in a CCAA proceeding is a discretionary decision, which can be used to ensure effective participation of various stakeholders (beyond employees and retirees) where appropriate.
2. Redwater Appeal heard by the Supreme Court of Canada
In April 2017, the Alberta Court of Appeal upheld the lower court ruling in Redwater Energy Corporation (Re) (“Redwater” and summarized here). Later in the year, leave to appeal to the SCC was granted. The appeal was heard on February 15, 2018 and judgment was reserved. The Redwater decision is important for insolvency cases in the oil and gas industry in Alberta as it considered whether the bankruptcy trustee of an oil and gas company could disclaim the company’s interest in “orphan” wells while selling valuable wells to maximize recovery to creditors – a step opposed to by the provincial energy regulator. The Court of Appeal confirmed 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. This continues to be a very significant issue in insolvency cases in the oil patch and we await a final determination by the country’s highest court with interest.
3. Right to Set Off or Compensation Between Pre- and Post-Filing Claims
2017 also saw the Arrangement relatif à Métaux Kitco inc. (“Kitco”) decision from the Quebec Court of Appeal, which found that set off (or “compensation” in Quebec) was not allowed between post-filing claims and pre-filing debts in a CCAA proceeding. While it has been widely accepted that pre-filing claims cannot be set-off against post-filing claims in a bankruptcy, the Ontario Court had held in the 2003 Air Canada (Re) decision that there was no loss of mutuality and legal set-off could be asserted between pre- and post-filing debts in a CCAA proceeding (although the court did stay enforcement of such rights in that case). A similar result was reached in British Columbia in North American Tungsten Corporation Ltd. (Re) (where leave to appeal was denied) in 2015.
The Court in Kitco did not follow Air Canada. It referred to a 2003 Ontario Court of Appeal decision, Jones (Re), in the BIA proposal context as well to literature that was critical of the Air Canada decision for, among other things, creating an incentive for a creditor to procure goods or services from the debtor company post-filing and to withhold payment in order to recover pre-filing debt. Given the differing case law in Ontario and British Columbia, criticisms of the Air Canada case in the literature and moves to align bankruptcy and CCAA proceedings, where possible, it will be interesting to see how Kitco will be interpreted in future cases on this issue even outside of Quebec.
4. Repeal of Bulk Sales Act and Potential for Further Legislative Reform in Ontario
As discussed in our Canadian M&A Perspectives Blog, Ontario’s Bulk Sales Act, originally enacted to protect unpaid trade creditors from “bulk sales”, was repealed in March, 2017. The act became less relevant as other supplier rights developed, including PPSA security, oppression remedies and 30 day goods under the BIA. Repeal of the act was recommended by a business law advisory panel to support greater market certainty and confidence in market transactions. The panel also recommended the repeal of the Assignments and Preferences Act and the Fraudulent Conveyances Act in Ontario, to be replaced by the Uniform Law Conference of Canada’s Reviewable Transactions Act, for the same reasons and to support consistency with the BIA. It will be interesting to see whether those acts are also repealed although we do not expect that to occur this year.
5. High Test to Impose Constructive Trust for Debtor Misconduct in Bankruptcy
In May 2017, the Pemberton Music Festival was cancelled and the hosts made assignments in bankruptcy. The ticket seller then claimed that the ticket sale proceeds received by the debtors were subject to a constructive trust. The B.C. Court, however, found no basis to impose a constructive trust based on unjust enrichment or to remedy misconduct, highlighting that the test for imposing a constructive trust in a bankruptcy is high since it violates the basic policy of pari passu distribution of assets.
The Court noted the constructive trust to remedy misconduct is only available in bankruptcy proceedings in extraordinary cases where finding otherwise would result in a commercial immorality since it disrupts the usual scheme of distribution of the BIA. The applicants contended there was misconduct by the debtors in authorizing the sale of tickets when they must have known there was substantial uncertainty as to whether the festival would proceed. However, the Court held that the evidence fell short of establishing bad faith or other misconduct on the part of the debtors that would be sufficient to impost a constructive trust.
6. Importance of Vesting Orders for Providing Certainty in CCAA Transactions
2017 also saw another decision in the Wabush Mines proceedings emphasizing the importance of vesting orders to provide certainty in CCAA transactions. In 2016, the Quebec Superior Court had held that a vesting order could provide for the sale of certain properties owned by the debtor free and clear of any unpaid municipal taxes. Leave to appeal to this decision was denied in early 2017. At the end of 2017, the same court again commented on the scope of vesting orders.
The CCAA debtor, Wabush Mines, sold its assets to a buyer pursuant to a sale and vesting order. Prior to the sale, Wabush Mines had been required, pursuant to Quebec legislation, to put in place a pay equity program to determine whether a pay discrepancy existed between jobs traditionally held by men and those traditionally held by women and, if so, to correct it by salary adjustments retroactive to 2001. Wabush Mines did not finish the program prior to the CCAA filing (meaning the liability for salary adjustments was unclear). Following the sale, the Pay Equity Commission (“Commission”) sought to re-open the file as against the new owner of the assets. No proof of claim was filed by or in connection with the Commission in the Claims Process and the Commission had not contested the vesting order.
The CCAA court did not explicitly consider whether the claim for retroactive salary adjustments was a “claim” pursuant to the Claims Process Order, although the Monitor argued it was a “claim” and that no proof of claim was filed in respect of those claims prior to the claims bar date. Rather, the Court focused on the very broad language of the vesting order and commented that it is fundamental to the CCAA process that the purchaser be able to buy the debtor’s assets without fear of being sued for the debtor’s debts and that any uncertainty about this affects the purchase price to the detriment of all creditors (since it is difficult to pay the best price when also being forced to write a “blank cheque” for indeterminate debts of the debtor). The purpose of a vesting order is to eliminate this uncertainty. The Court held that the order vested the assets in the buyer free and clear of all obligations of the seller, including any salary adjustments for the period prior to the purchase. The Court did not comment on whether the buyer was a successor employer (a fact that would have to be determined by the relevant administrative tribunal) but held that the tribunal could determine if the buyer had any obligations with respect to the pay equity program other than obligations for pre-purchase salary adjustments.
7. Nortel Settlement and Distribution
Finally, in January 2017, Nortel’s restructuring plan for the Canadian debtors was sanctioned in both Canada and the United States and was implemented in May 2017, more than eight years after it had filed for CCAA protection. According to the Monitor:
- The Canadian estate received its allocation entitlement of approximately $4.156 billion, expense reimbursement of $35 million and the release of further sale proceeds of approximately $237 million, among other amounts;
- Distributions began in July 2017 and the initial distribution to unsecured creditors with claims in Canadian dollars was just over 45 cents on the dollar; and
- As of November 2017, the Canadian estate had distributed approximately $4 billion to over 15,100 unsecured creditors and approximately $63 million of priority payments, among other distributions.
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.
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.
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.
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.
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.
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.
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.
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.