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.