Creativity in the Courts: Use of the CCAA to Address Asset-Backed Commercial Paper Crisis
The Ontario Court of Appeal has approved a creative use of the Companies’ Creditors Arrangement Act (CCAA) designed to unfreeze the $32-billion Canadian market for asset-backed commercial paper (ABCP).
As has been widely publicized, the Canadian ABCP market froze in August 2007 as a result of concerns in world credit markets arising from the US subprime mortgage crisis. After the market froze, a Pan-Canadian Investors Committee was formed to attempt to restructure it.
The Committee engaged in extensive negotiations over many months on behalf of the investors to obtain concessions and support of financial institutions for a restructuring plan. That support could only be secured in exchange for full releases from all investor claims for ABCP market participants, such as dealers who sold the ABCP to investors. However, unanimous agreement on such a restructuring, including the critical releases, by all holders of ABCP — who numbered in the thousands — was not feasible. As a result, in March 2008 the Committee instituted CCAA proceedings to provide a mechanism for the Committee to put a proposed restructuring to a vote of ABCP holders.
The CCAA requires approval of a restructuring both by affected creditors and by the supervising court. Creditors vote on a plan of arrangement. They must approve the plan by a majority in number representing two-thirds of the value of the affected debt. The court must then find the plan to be legal and must conclude that it is "fair and reasonable" to affected parties. If both creditors and the court approve, then all affected creditors are bound by the plan, even those who voted against it.
The plan of arrangement proposed by the Committee would exchange frozen ABCP for longer-term notes, and would also address a number of problems that had led to the market freezing. The releases required by participating financial institutions, although key to the deal, were a contentious element of the plan. Some note holders complained that participants in the ABCP market should not be released from claims against them arising from their role in creating ABCP and distributing it to investors.
The plan received overwhelming support from ABCP holders: approximately 96 per cent by number and by value voted in favour. However, court approval was opposed by a small group of ABCP holders. They argued that the CCAA does not authorize a CCAA plan to include releases of third parties who are not under CCAA protection. They also argued that the proposed release provision was not fair and reasonable.
Despite the objections, the Ontario Superior Court of Justice approved the plan on June 5, 2008. On August 18, 2008, the Ontario Court of Appeal affirmed the approval order in a unanimous decision authored by Justice Robert Blair, who has extensive experience in CCAA proceedings.
Justice Blair emphasized the flexible and remedial nature of the CCAA, and held that it should be interpreted with this nature in mind. He concluded that a CCAA plan may include third-party releases if the releases are reasonably connected to the proposed restructuring. In this case, he found this requirement had been met, because the parties who would be released by the plan were making significant contributions to the plan and were not willing to make those contributions unless provided with a release in return. Justice Blair also upheld the finding of the Superior Court that the release provisions of the plan are fair and reasonable in the context of this restructuring.
On September 19, 2008, the Supreme Court of Canada dismissed an application for leave to appeal.
McCarthy Tétrault Notes:
The ABCP case is an excellent example of creative use of the CCAA to address what would otherwise be an intractable problem. It is also an excellent example of the willingness of the courts to interpret the CCAA broadly and flexibly to facilitate restructurings and avoid value-destroying meltdowns.
McCarthy Tétrault LLP had several retainers in the ABCP matter (with the different lawyer teams screened from each other). In the appeal to the Ontario Court of Appeal which, is the subject of this article, a team of McCarthy Tétrault lawyers acted as litigation counsel for five Canadian banks who will provide the margin funding facility for the restructured notes.
Bankruptcy & Restructuring