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.
The long-running conflict between insolvency professionals and the Alberta Energy Regulator (AER) that was clarified by the Court of Queen’s Bench of Alberta decision in Redwater Energy Corp. was previously analyzed in a blog post here. The decision in Redwater confirmed that a receiver is entitled to disclaim a debtor’s interest in a portion of the debtor’s AER licensed properties, including licensed properties and facilities that have negative value due to the fact of abandonment and reclamation obligations, and to thereafter vend the assets that the receiver remained in possession and control of. In a subsequent decision that is discussed here, a majority of the Court of Appeal upheld the lower court ruling in Redwater.
Subsequent to the decision in Redwater, the Court of Queen’s Bench of Alberta issued receivership orders in Northpoint Resources Ltd. and LGX Oil + Gas Inc. that altered paragraph 3(a) of the template receivership order on account of the Redwater decision. Paragraph 3(a) of the template receivership order provides that the receiver is authorized and empowered, but not obligated, to take possession and control of a debtor’s property. In both Northpoint and LGX the phrase “…and the Receiver shall be entitled to disclaim, abandon or renounce the Debtor’s interest in any of the Property” was added to paragraph 3(a). The submission of the AER that section 195 of the Bankruptcy and Insolvency Act (Canada) (BIA) stayed the operation of Redwater pending the resolution of the appeal was rejected in Northpoint because it constituted a separate and unrelated proceeding.
On Monday, June 20, 2016, the Alberta Energy Regulator (AER) issued Bulletin 2016-16 (Bulletin) detailing its interim regulatory response to the Alberta Court of Queen’s Bench decision in Re Redwater Energy Corporation (Redwater).
The Bulletin confirms that the AER and Orphan Well Association (OWA) have appealed Redwater, and announces three interim regulatory measures to be effective immediately. According to the AER, the following measures are temporary, pending the earlier of the Redwater litigation or the implementation of appropriate regulatory measures.
On May 6, 2016, the Supreme Court of Canada (“SCC”) released its much anticipated decision Krayzel Corp v Equitable Trust Co., appealed from the Alberta Court of Appeal. At issue, was whether incentives or discounts for prompt payment in a mortgage, which would be lost on default, offended s. 8 of the Interest Act.
This decision has important ramifications for lenders and provides needed guidance on how to structure mortgage interest provisions so that they do not run afoul of the Interest Act.
On May 18, 2016, the Court of Queen’s Bench of Alberta released its much anticipated decision in Re Redwater Energy Corporation, 2016 ABQB 278, which addressed the Oil and Gas Conservation Act (OGCA), the Pipeline Act and the Bankruptcy and Insolvency Act (BIA). The long running conflict involving the Alberta Energy Regulator (AER), receivers and trustees in bankruptcy, including the settlement agreement reached in National Bank of Canada v. Spyglass Resources Corp., was previously discussed here. The decision in Redwater, which has been upheld in an appeal decision discussed here, by the Court resolves the conflict by indicating that:
- a trustee is entitled to disclaim the debtor’s interest in a portion of the debtor’s AER licensed properties, including licensed properties and facilities that have negative value due to the fact of abandonment and reclamation obligations;
- a trustee is entitled to assume possession or control over a portion of a debtor’s AER licensed properties and facilities, including the fact that a trustee does not have to assume possession and control over AER licensed properties and facilities with the associated abandonment and reclamation obligations;
- a trustee is entitled, as a consequence of the foregoing, to sell a portion of a debtor’s AER licensed properties and facilities and the AER cannot refuse to transfer licenses to the purchaser in such circumstance only by virtue of the fact that the estate of the debtor will be left with AER licensed properties and facilities that will be disclaimed and not abandoned or reclaimed by the trustee; and
- abandonment orders issued by the AER are “claims” within the meaning of federal insolvency law and subject to compromise therein.
On April 20, 2016, the Canadian federal government introduced Bill C-15, which is legislation that provides for, among other things, a bank recapitalization or “bail-in” regime for domestic systemically important banks (“D-SIBs”).
The treatment of shareholder and other equity-related claims in the context of insolvency and reorganization proceedings in Canada was initially judge-determined and the case law generally accepted the premise that shareholders were not entitled to share in the assets of an insolvent corporation until after all the ordinary creditors have been paid in full. In 2009 further clarity was brought to the issue by introduction of the “equity claim” to the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”). An equity claim is defined to include (but is not limited to) claims for dividend payments, return of capital, retraction obligations, losses resulting from the ownership, purchase or sale of securities and claims for contribution and indemnity in respect of claims of this nature. Section 6(8) of the CCAA stipulates that a compromise or arrangement cannot be sanctioned unless all non-equity claims are to be paid in full before the payment of any equity claims. This codifies the common law rule that creditors’ claims rank ahead of shareholders’ claims and the expansive nature of the definition has been recognized in the leading appellate level authority on the issue.
The British Columbia Supreme Court decision in Re Bul River Mineral Corporation (“Bul River”) demonstrates that the “paid in full” requirement under section 6(8) of the CCAA can be subject to a flexible interpretation. In that decision, the Court sanctioned a plan of arrangement that involved the issuance of shares in a restructured company to creditors with both equity and non-equity claims; the creditors holding non-equity claims were deemed by the court to be paid in full even though these claims were not paid in cash. Continue Reading