Can a plan of arrangement authorize a monitor appointed to supervise insolvency proceedings to exercise rights on behalf of the debtor's creditors?
In the matter of Aquadis, the Quebec Court of Appeal recently rendered a decision on the power of a judge supervising restructuring proceedings under the Companies' Creditors Arrangement Act ("CCAA") to approve a plan of arrangement giving the monitor the power to exercise rights against third parties on behalf of the debtor's creditors. It appears to be, in the Court's own opinion, a unique case in Canadian jurisprudence.
In June 2015, Aquadis, an importer and distributor of bathroom products, commenced restructuring proceedings under the Bankruptcy and Insolvency Act, which were continued a few months later under the CCAA, and obtained a stay of the proceedings instituted against it because of its role in the supply chain of defective faucets. At the time, Aquadis was the subject of numerous actions by insurers who were seeking compensation for the damages incurred by their insureds as a result of the use of defective faucets.
In November 2016, the Superior Court of Quebec rendered an order authorizing the monitor appointed to oversee the restructuring of Aquadis, Raymond Chabot Inc. (the "Monitor"), to enter into transactions or, alternatively, to undertake on behalf of Aquadis' creditors, mainly insurers, legal proceedings against any person who resold or installed the defective faucets (the "November 2016 Order"). This Order was not subsequently challenged on appeal and no application for revocation of the judgment was presented.
In 2019, the Monitor filed a plan of arrangement providing, among other things, for the establishment of a fund pooling the amounts recovered through the proceedings it is initiating. The plan also provides that the Monitor may sue the retailers who sold the defective faucets on behalf of Aquadis' creditors. The creditors unanimously voted in favour of the proposed plan of arrangement and, two months later, the Superior Court approved it, despite the opposition of retailers.
Scope of the Monitor’s Powers
Some retailers appealed to the Court of Appeal, claiming that the trial judge erred in approving the plan of arrangement as presented inasmuch as it allowed the Monitor to exercise rights belonging to creditors. In support of their appeal, the retailers submitted several arguments, all of which were ultimately dismissed by the Court of Appeal.
Firstly, the retailers argued that the trial judge could not authorise the Monitor to exercise rights belonging to Aquadis' creditors in that it is not a power "in respect of the company" within the meaning of section 23 CCAA. Justice Schrager, writing for the Court, rejected this argument, stating that the proposed proceedings were in accordance with the spirit of the CCAA. More specifically, the Court noted that, although the CCAA lists certain duties and powers of the Monitor, section 23 provides that the Monitor must "do anything in respect of the company that the court directs the monitor to do." This provision is thus sufficient to give the court the necessary discretion to grant the Monitor such powers. This judicial discretion must, however, be exercised in furtherance of the CCAA’s purposes. In the present case, granting the Monitor the right to sue third parties on behalf of creditors serves a valid objective, namely, maximizing recovery for creditors.
The Court also noted that Aquadis' creditors voted unanimously in favour of the plan of arrangement as presented, which included the Monitor’s authority to sue on their behalf. In this sense, this power only gives effect to the creditors' desire to see the Monitor sue third parties in order to fund a litigation pool that will then be redistributed among them. Accordingly, the respect of the democratic decisions made by creditors constitutes another objective of the CCAA that is furthered by the approval of the plan of arrangement in the case at bar.
In the same vein, the Court observed that the mere fact that the judgment being appealed authorizes the Monitor to take action to enforce the rights of certain creditors is not conceptually foreign to insolvency law. Indeed, a bankruptcy trustee can exercise the rights of creditors against other creditors or third parties. This is notably the case with regard to remedies for preferences, which can be exercised by monitors since the 2007 amendments to the CCAA.
Secondly, the retailers alleged that the power granted to the Monitor is incompatible with its duty of neutrality. The Court rejected this argument, noting that this duty is far from being absolute and that it only requires the Monitor to remain objective and to make reasoned decisions aimed at furthering legitimate CCAA purposes. Moreover, the status of the retailers as stakeholders is not clear in the case at bar, insofar as they are not creditors who are parties to the restructuring proceedings, having decided not to file a proof of claim. Any resulting duty to them by the Monitor is thus dubious. Moreover, the fact that the Monitor and its counsel have entered into contingent fees arrangements does not suggest any lack of impartiality on its part either.
Diligence required to oppose the powers granted to the Monitor
Retailers also argued that they can oppose to the power granted to the Monitor by the plan of arrangement, even though they had not appealed the November 2016 Order granting the Monitor the same power. They argued that they were never notified of the latter, as they were not on the notification list. The Court rejected this claim, stating that this situation can only result from their failure to ask the Monitor’s counsel to be included on said list. Moreover, the Court concluded that the retailers had sufficient knowledge of the November 2016 Order before the filing of the plan of arrangement in 2019. Indeed, they received demand letters from the Monitor and also appeared before the Superior Court to contest the approval of previous transactions. In summary, their challenge of the Order is late, whether in light of the time limit for appeal under the CCAA or the possibility to apply for a variation of the order under the comeback clause in the Initial Order.
Finally, the Court concluded that the November 2016 Order would survive a judgment refusing the approval of the plan of arrangement. The Monitor would therefore still have the power to sue third parties on behalf of the creditors, notwithstanding the Court's conclusion on the plan.