Top Insolvency Cases and Highlights from 2017 – Part 2
We previously published Part 1 of our survey of interesting and important developments in Canadian insolvency and restructuring matters in 2017. This post is the second and final part – with an additional seven highlights and cases. You can also find a printable version containing the complete “Top Insolvency Cases and Highlights from 2017” bulletin here.
1. CCAA Representation Orders can Benefit a Range of Stakeholders
In January 2017, the Quebec Court of Appeal considered the scope of representation orders in CCAA proceedings. The Court of Appeal in Groupe Hexagone heard an application for leave to appeal the order appointing representatives for a group of about 140 unpaid subcontractors. The fees of the representatives and their counsel were to be paid by the debtors and secured by a charge against the debtors’ assets. The petitioners did not dispute the application of the Canwest Publishing Inc. factors for granting a representation order but argued that this group of subcontractors did not meet the test since there was no evidence of vulnerability or limited resources, among other things.
The Court of Appeal dismissed the application for leave, observing that vulnerability could not be reduced to impecuniosity and that CCAA representation orders are not limited to “widows and orphans” but can in fact benefit stakeholders in a range of circumstances. The Court further held that it was not inappropriate to consider that subcontractors’ claims are vulnerable on the basis of the cost of individual participation, as opposed to the financial circumstances of each, and that vulnerability is only one of a series of factors to be weighed. This decision emphasizes that the appointment of a representative in a CCAA proceeding is a discretionary decision, which can be used to ensure effective participation of various stakeholders (beyond employees and retirees) where appropriate.
2. Redwater Appeal heard by the Supreme Court of Canada
In April 2017, the Alberta Court of Appeal upheld the lower court ruling in Redwater Energy Corporation (Re) (“Redwater” and summarized here). Later in the year, leave to appeal to the SCC was granted. The appeal was heard on February 15, 2018 and judgment was reserved. The Redwater decision is important for insolvency cases in the oil and gas industry in Alberta as it considered whether the bankruptcy trustee of an oil and gas company could disclaim the company’s interest in “orphan” wells while selling valuable wells to maximize recovery to creditors – a step opposed to by the provincial energy regulator. The Court of Appeal confirmed that a court officer appointed under federal legislation may pick and choose the realizable property in an estate in order to maximize the recovery available for creditors without undue interference from a provincial regulator. This continues to be a very significant issue in insolvency cases in the oil patch and we await a final determination by the country’s highest court with interest.
3. Right to Set Off or Compensation Between Pre- and Post-Filing Claims
2017 also saw the Arrangement relatif à Métaux Kitco inc. (“Kitco”) decision from the Quebec Court of Appeal, which found that set off (or “compensation” in Quebec) was not allowed between post-filing claims and pre-filing debts in a CCAA proceeding. While it has been widely accepted that pre-filing claims cannot be set-off against post-filing claims in a bankruptcy, the Ontario Court had held in the 2003 Air Canada (Re) decision that there was no loss of mutuality and legal set-off could be asserted between pre- and post-filing debts in a CCAA proceeding (although the court did stay enforcement of such rights in that case). A similar result was reached in British Columbia in North American Tungsten Corporation Ltd. (Re) (where leave to appeal was denied) in 2015.
The Court in Kitco did not follow Air Canada. It referred to a 2003 Ontario Court of Appeal decision, Jones (Re), in the BIA proposal context as well to literature that was critical of the Air Canada decision for, among other things, creating an incentive for a creditor to procure goods or services from the debtor company post-filing and to withhold payment in order to recover pre-filing debt. Given the differing case law in Ontario and British Columbia, criticisms of the Air Canada case in the literature and moves to align bankruptcy and CCAA proceedings, where possible, it will be interesting to see how Kitco will be interpreted in future cases on this issue even outside of Quebec.
4. Repeal of Bulk Sales Act and Potential for Further Legislative Reform in Ontario
As discussed in our Canadian M&A Perspectives Blog, Ontario’s Bulk Sales Act, originally enacted to protect unpaid trade creditors from “bulk sales”, was repealed in March, 2017. The act became less relevant as other supplier rights developed, including PPSA security, oppression remedies and 30 day goods under the BIA. Repeal of the act was recommended by a business law advisory panel to support greater market certainty and confidence in market transactions. The panel also recommended the repeal of the Assignments and Preferences Act and the Fraudulent Conveyances Act in Ontario, to be replaced by the Uniform Law Conference of Canada’s Reviewable Transactions Act, for the same reasons and to support consistency with the BIA. It will be interesting to see whether those acts are also repealed although we do not expect that to occur this year.
5. High Test to Impose Constructive Trust for Debtor Misconduct in Bankruptcy
In May 2017, the Pemberton Music Festival was cancelled and the hosts made assignments in bankruptcy. The ticket seller then claimed that the ticket sale proceeds received by the debtors were subject to a constructive trust. The B.C. Court, however, found no basis to impose a constructive trust based on unjust enrichment or to remedy misconduct, highlighting that the test for imposing a constructive trust in a bankruptcy is high since it violates the basic policy of pari passu distribution of assets.
The Court noted the constructive trust to remedy misconduct is only available in bankruptcy proceedings in extraordinary cases where finding otherwise would result in a commercial immorality since it disrupts the usual scheme of distribution of the BIA. The applicants contended there was misconduct by the debtors in authorizing the sale of tickets when they must have known there was substantial uncertainty as to whether the festival would proceed. However, the Court held that the evidence fell short of establishing bad faith or other misconduct on the part of the debtors that would be sufficient to impost a constructive trust.
6. Importance of Vesting Orders for Providing Certainty in CCAA Transactions
2017 also saw another decision in the Wabush Mines proceedings emphasizing the importance of vesting orders to provide certainty in CCAA transactions. In 2016, the Quebec Superior Court had held that a vesting order could provide for the sale of certain properties owned by the debtor free and clear of any unpaid municipal taxes. Leave to appeal to this decision was denied in early 2017. At the end of 2017, the same court again commented on the scope of vesting orders.
The CCAA debtor, Wabush Mines, sold its assets to a buyer pursuant to a sale and vesting order. Prior to the sale, Wabush Mines had been required, pursuant to Quebec legislation, to put in place a pay equity program to determine whether a pay discrepancy existed between jobs traditionally held by men and those traditionally held by women and, if so, to correct it by salary adjustments retroactive to 2001. Wabush Mines did not finish the program prior to the CCAA filing (meaning the liability for salary adjustments was unclear). Following the sale, the Pay Equity Commission (“Commission”) sought to re-open the file as against the new owner of the assets. No proof of claim was filed by or in connection with the Commission in the Claims Process and the Commission had not contested the vesting order.
The CCAA court did not explicitly consider whether the claim for retroactive salary adjustments was a “claim” pursuant to the Claims Process Order, although the Monitor argued it was a “claim” and that no proof of claim was filed in respect of those claims prior to the claims bar date. Rather, the Court focused on the very broad language of the vesting order and commented that it is fundamental to the CCAA process that the purchaser be able to buy the debtor’s assets without fear of being sued for the debtor’s debts and that any uncertainty about this affects the purchase price to the detriment of all creditors (since it is difficult to pay the best price when also being forced to write a “blank cheque” for indeterminate debts of the debtor). The purpose of a vesting order is to eliminate this uncertainty. The Court held that the order vested the assets in the buyer free and clear of all obligations of the seller, including any salary adjustments for the period prior to the purchase. The Court did not comment on whether the buyer was a successor employer (a fact that would have to be determined by the relevant administrative tribunal) but held that the tribunal could determine if the buyer had any obligations with respect to the pay equity program other than obligations for pre-purchase salary adjustments.
7. Nortel Settlement and Distribution
Finally, in January 2017, Nortel’s restructuring plan for the Canadian debtors was sanctioned in both Canada and the United States and was implemented in May 2017, more than eight years after it had filed for CCAA protection. According to the Monitor:
- The Canadian estate received its allocation entitlement of approximately $4.156 billion, expense reimbursement of $35 million and the release of further sale proceeds of approximately $237 million, among other amounts;
- Distributions began in July 2017 and the initial distribution to unsecured creditors with claims in Canadian dollars was just over 45 cents on the dollar; and
- As of November 2017, the Canadian estate had distributed approximately $4 billion to over 15,100 unsecured creditors and approximately $63 million of priority payments, among other distributions.