Are Equity Claims Always Subordinated to Non-Equity Claims in CCAA Proceedings?
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.
The Stanfield Mining Group of Companies (collectively, “Stanfield”) carried on a mining business in British Columbia that encountered financial difficulties and entered into CCAA proceedings. After a three and a half year restructuring process, a plan of arrangement (the “Plan”) was eventually developed pursuant to which Purcell Basin Minerals Inc. (“Purcell”) was to acquire the sole equity interest in Stanfield. Ordinary creditors were to receive common shares of Purcell (“Purcell Shares”) in satisfaction of their claims.
At the time, Stanfield owed approximately $1.87 million to trade creditors (the “Trade Creditors”). The claims of the Trade Creditors were for services provided and were not equity claims. While the conversion of debt to equity is commonly used in CCAA restructurings, the unique feature of the Plan was that a second class of creditors comprised of persons holding preferred shares (the “Preferred Share Claimants”) were also entitled to exchange their shares for Purcell Shares. The claims of the Preferred Share Claimants were clearly equity claims within the meaning provided for in the CCAA. The Purcell Shares to be received by the Preferred Share Claimants would confer the same rights as the Purcell Shares to be received by the Trade Creditors; all Purcell Shares issued to creditors, whether they be Trade Creditors or Preferred Share Claimants were the same class of common shares. The Plan was overwhelmingly supported by the requisite majority of both Trade Creditors and Preferred Share Claimants. The unique issue that presented at the sanction application was whether the Trade Creditors were being paid in full in accordance with section 6(8) of the CCAA.
The Court’s Decision
The Court sanctioned the Plan despite its acknowledgment that the Plan would “seem to offend” the requirement that non-equity claims are paid before equity claims. It appears that three main factors persuaded the Court that Plan should be approved.
First, the valuation evidence indicated that the Purcell Shares to be issued to the Trade Creditors were worth at least as much as the debt owed to them. Second, the Trade Creditors that voted on the Plan had unanimously approved of it, knowing that there was significant uncertainty regarding any potential recovery. Third, it was clear that, if the assets and operations of the debtor companies were liquidated, the Trade Creditors would receive substantially less and likely none of the amounts owed to them.
Despite these compelling reasons to sanction the Plan, the clear effect of the Plan was to put the Trade Creditors in no better position than the Preferred Share Claimants. The terms of the Plan contemplated payment of equity claims without providing that all non-equity claims would be paid in full before the equity claims were to be paid, as required by section 6(8).
The Court was apparently cognizant of this problem but explained the result by noting that if the plans for the development of the Bull River mine do not succeed, none of the stakeholders will benefit, but if the plans do succeed, all will benefit. Presumably, then, the Court regarded the success or failure of the mine as an all-or-nothing proposition in which there was no realistic possibility that the Preferred Share Claimants would receive any payments on their Purcell Shares unless the development of the mine was successful enough that the Trade Creditors would be paid in full. On this interpretation, even if the Trade Creditors’ claims are not technically paid in full “before” any payment is made to the Preferred Share Claimants, the Trade Creditors will not suffer any prejudice resulting from such non-payment.
Bul River demonstrates that, even where there are insufficient funds available to immediately pay non-equity claims in full in cash as part of a CCAA arrangement, some of the existing shareholders’ equity may be preserved if the Court (and creditors) can be persuaded that the business carried on by the debtor company has enough value such that the issuance of an equity stake in that business can be construed as full payment of all non-equity claims. The business-driven interpretation of the statute, while creating what may be viewed as potential or technical non-compliance with section 6(8) of the CCAA, is consistent with the flexibility and judicial discretion that is a hallmark of CCAA and enhances the ability of the debtor to continue to carry on business and avoid the social and economic costs of liquidating its assets. That appears to be precisely what occurred in this case.
Bul River CCAA Plan of arrangement Sanction Hearing