Highlights of 2018 Canadian Restructuring Law
While 2018 saw a slight decrease in nationwide CCAA filings (with 19 total cases commenced, compared to 23 in 2017), there were a number of important decisions rendered throughout the country. The highlights are summarized below:
Supreme Court of Canada clarifies Crown priority for GST claims
In a decision discussed here, the Supreme Court of Canada ruled in Callidus that the Excise Tax Act deemed trust will not extend to pre-filing bankruptcy payments made by a borrower to a lender in circumstances where the borrower is subsequently rendered bankrupt. The judgment provides welcome certainty to lenders and avoids a policy that encourages early security enforcement against a distressed counterparty even if the desire is to work through credit issues by accepting voluntary pay downs. The decision does not touch on the operation of the ETA deemed trust in the circumstances where the tax debtor does not become bankrupt, and we anticipate further clarity on this issue through the appeal in Canada v. Toronto-Dominion Bank.
Ranking of BIA Part XI charges held to be discretionary
The priority debate between secured creditors and taxation authorities is not limited to claims arising under the ETA. Royal Bank of Canada v Reid-Built Homes Ltd., which was profiled here, considered the potential conflict between of section 243(6) of the Bankruptcy and Insolvency Act and provisions of the Municipal Government Act that create priming liens in favour of municipalities for property tax obligations. That section of the BIA provides that a court has authority to make an order respecting the payment of fees and disbursements of a court-appointed receiver “…including one that gives the receiver a charge, ranking ahead of any or all of the secured creditors.” The priority of the charges securing (i) the Receiver’s and its counsel’s fees and disbursements; and, (ii) the Receiver’s borrowings has been, for the most part, standardized under template orders and the super-priority of such charges by operation of federal legislation had never been seriously questioned. Reid-Built confirms the jurisdiction to both grant and limit such priority under the BIA in appropriate instances.
Forced contractual assignment provisions scrutinized
Each of section 11.3 of the CCAA and 84.1 of the BIA provides the court with the discretion to make an order assigning the rights and obligations of the debtor company to another person – usually a purchaser of assets from the debtor company. These provisions were added to the legislation as part of the 2009 amendments and are a strategic advantage to debtors and court-officers in that they can override contractual provisions that purport to prevent, limit or restrict contractual assignments to third-parties. In Dundee Oil and Gas Limited (Re), (which is analyzed here) Justice Dunphy provided some important guidance on information that should be provided to the court in support of a motion for an order assigning contracts. In particular, applicants should be prepared to provide detailed information about the financial and operational capacity of the proposed purchaser / assignee of the contracts to the court so as to satisfy the statutory requirement that the purchaser / assignee is “…able to perform the obligations.” The decision suggests that this requirement comes close to operating as a necessary precondition for the order to be granted in the circumstances where the application is contested.
Continuing debate on the nature of royalty interests in insolvency cases
Seventeen years have now passed since the Supreme Court of Canada held that that a gross overriding royalty was capable of constituting an interest in land. There continues to some debate (as discussed here) about the exact circumstances in which a royalty holder receives a specific interest in the property of the grantee. In Manitok Energy, the Alberta Court of Queen’s Bench held that a royalty agreement that entitled the holder to a specific volume of production created an interest in land. In Third-Eye Capital (discussed here), the Ontario Court of Appeal applied the Dynex Petroleum test to find, on the facts, that a particular agreement did give rise to an interest in land but invited further submissions from the parties on the issue of whether a court had jurisdiction to vest such interest in an insolvency proceeding. That specific issue does not appear to have been previously considered by a Canadian court and will have implications for resource companies, lenders and investors when the judgment is released.
Equity claim relief granted in CBCA restructuring proceedings
As previously explained here, each of the CCAA and the BIA provide specific requirements as to the treatment of “equity claims” in insolvency proceedings. In recent years a number of Canadian companies have completed balance sheet re-organizations under the provisions of the Canadian Business Corporations Act, which can be highly effective when the company has access to liquidity and there is consensus amongst key stakeholder groups on the material restructuring terms. In the Concordia International Corp. CBCA proceedings, the applying company was able to obtain relief pertaining to equity claims in its final order. The order, which both released and channeled equity claims to insurance proceeds, was similar to relief previously obtained in some CCAA sanction orders and illustrates the increasingly broad discretion that courts have under section 192 of the CBCA in respect of distressed or near-distressed entities.
restructuring Supreme Court of Canada GST Bankruptcy and Insolvency Act CCAA Bankruptcy and Insolvency CBCA