Court-appointed officers as advocates in Canadian insolvency proceedings
By Steven Weisz
Posted: 18th August 2017 09:18
The Ontario Superior Court of Justice in Canada (the “Court”) recently granted a novel application brought by a court-appointed Monitor in the insolvency proceedings of Essar Algoma Steel Inc.(“Essar Algoma”) for an equitable remedy under one of the corporate statues in Canada, commonly known as the oppression remedy. We believe that this decision marks the first time such a remedy was brought and granted in Canadian insolvency proceedings whether under the Companies’ Creditors Arrangement Act (the “CCAA”) by a court-appointed Monitor (an officer of the court) as was the case in Essar Algoma, or under the other primary Canadian restructuring statute for insolvent companies, the Bankruptcy and Insolvency Act. If the decision in Essar Algoma withstands appellate scrutiny it will be a marked de`parture from historical precedent and practice in Canada and its effect on future restructurings and re-financings will be of upmost interest to those involved with distressed companies in Canada.
The Oppression Remedy in Canada
The Canada Business Corporations Act (“CBCA”), provides that a complainant may apply to a court for an interim or final order it thinks fit, where the court is satisfied that in respect of a corporation any act or omission of the corporation effects a result, the business or affairs of the corporation have been carried on or conducted in a manner, or the powers of the board are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer. This provision allows a court broad discretion to rectify matters complained and expressly grants the court the authority to, among other things, restrain the conduct complained of, appoint a receiver, create or amend a unanimous shareholder agreement, liquidate or dissolve a corporation, or, vary or set aside a transaction or contract to which the corporation is a party and compensating the corporation or any party to the transaction or contract.
A “complainant”, the party who is authorised to bring the application, is defined in the CBCA as being a holder or owner of a security of the corporation, a director or officer, or any other person who, in the discretion of the court, is a proper person to make an application. Generally, cases have held that creditors and employees fall within that basket provision. The Essar Algoma case appears to be a novel precedent for finding that a court appointed CCAA Monitor is a “complainant”.
Any analysis of the oppression remedy should begin with a review and consideration of the test to be applied by a court in assessing whether an application under that provision has been properly made. The guiding test is set out in the leading and binding Supreme Court of Canada 2008 decision in Re BCE Inc.. The underlying principle of the oppression remedy is that stakeholders have certain reasonable expectations which are not necessarily enforceable by a contractual claim or a derivative action, but that would nonetheless be just and equitable for a court to enforce. In determining whether the stakeholders have “reasonable expectations”, a court must look to “the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.”
Once the claimant asserts a reasonable expectation, the test for oppression consists of two questions:
(i) Does the evidence support the reasonable expectation asserted by the claimant? and
(ii) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?
As the oppression remedy is equitable, each decision will be highly fact-specific. As the Supreme Court of Canada explained in Re BCE Inc., the remedy “gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair.”
Essar Algoma and the CBCA Plan of Arrangement
Essar Algoma is a steel manufacturer based in northern Canada, which has faced significant financial difficulties in recent years, stemming in large part from the downturn in steel prices. In 2014, Essar Algoma completed a reorganisation of its secured debt and bonds under the CBCA, which provides a court approved mechanism for solvent companies to restructure their debt obligations or shares.
Initially, Essar Algoma’s ultimate parent, Essar Global Limited (“Essar Global”) committed to make a large equity infusion of $250 to 300 million. However when that was not forthcoming, the CBCA reorganisation was amended to provide that funding of the arrangement would come from a transaction whereby Essar Algoma would sell its port facility assets to another indirect subsidiary of Essar Global, Port of Algoma Inc. (referred to as Portco) and lease the port lands to Portco for a 50 year term. US $150 million in financing was provided by third party lenders to Portco for the transaction. Portco paid Essar Algoma for the port assets and prepaid rent under the lease for the port lands. Portco and Essar Algoma entered into a number of agreements relating to the operation of the port, the provision of services to Essar Algoma to store and ship goods and for access to the port lands and the port assets. The payments by Essar Algoma to Portco were to be used to pay for shared services between Portco and Essar Algoma and to repay the financing obtained by Portco from the third party lenders.
The CBCA plan of arrangement was approved by the requisite creditors and the Court and was implemented. Nevertheless, in November 2015 Essar Algoma had a liquidity crisis, declared itself insolvent and applied for and was granted protection under the CCAA by the Court. Essar Algoma’s predecessor, Algoma Steel had restructured its business under the CCAA twice previously (early 1990s and early 2000s).
As part of the CCAA proceedings, a court approved sales and investment solicitation process was undertaken in respect of Essar Algoma’s assets and business. In the end, the only remaining bid in that process was a credit bid by certain lenders.
Standing of the Monitor
It is a well-settled principle in Canadian insolvency law that the Monitor, as an officer of the court, must be neutral and even-handed and not favour one stakeholder over another. The CCAA provides that a Monitor shall carry out its functions in relation to the debtor as the court may direct. On an application of certain lenders of Essar Algoma heard in September 2016, the Court authorised, empowered and directed the Monitor to bring an application under the CBCA in relation to the port transaction (and other transactions). However, the Court also expressly ordered that such a grant of power was without prejudice to any defences that could be raised in the claim, including whether the plaintiff Monitor, was a proper complainant under the CBCA and that the granting of the order directing the Monitor to do so did “not constitute a determination of any such issue”.
The Court applied the two-part analysis described above to its consideration of the Port Transaction and related matters: whether the evidence supported a reasonable expectation by the Monitor(as a representative for the stakeholders of Essar Algoma), and whether that expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest.
In considering the Monitor’s claim, the Court stated that stakeholders had a reasonable expectation that Essar Algoma would not “deal with a critical asset like the Port in such a way as to lose long-term control over such a strategic asset to a related party on terms that permitted the related party to veto and control [Essar Algoma’s] ability to do significant transactions or restructure and which gave unwarranted value to the third party.”
To determine whether the reasonable expectations had been violated, the Court focused mainly on the change-of-control provision related to the port transaction and the terms of the port transaction itself, including the 50-year lease term. The decision also contains a lengthy discussion regarding the independence of the board of directors of Essar Algoma and whether Essar Global unduly influenced the negotiations and approval of the terms of the 2014 CBCA plan of arrangement and the port transaction. The Court found that whereas the Essar Algoma board of directors were responsible for operational implementation of day to day matters, Essar Global influenced and was in effect, the directing mind in respect of the review and approval of the actions taken by Essar Algoma and its board relating to the port transaction The Court also noted that the port transaction only became necessary because the equity funding that had been committed to be provided by Essar Global was not forthcoming.
At the end of its analysis, the Court determined that the reasonable expectations of stakeholders of Essar Algoma had been violated by the unfairly prejudicial conduct of Essar Global and its affiliates and the lack of independence of the board of directors of Essar Algoma
An attack on the capacity of the Monitor to bring such a claim was made at the beginning of the trial and the court reserved its decision on that issue to after the end of the trial In its decision, the Court acknowledged the principle of neutrality and even-handedness of the Monitor as an officer of the court, but also held that exceptions to this principle can be made, and that a court has the discretion to allow a Monitor to take on a litigant role – a role which is by its nature not neutral. The Court also noted that since it had found that Essar Global acted in a manner that was unfairly prejudicial to stakeholders, it did not need to address the point of law that was raised as to whether the Monitor was a “complainant” as required under the CBCA and whether the claim was properly constituted and before the Court.
In its decision, the Court protected the bankruptcy remoteness of the port transaction and the reasonable expectations of the lenders to Portco such that the transaction and all underlying agreements and security will remain in place until the lenders are repaid in full In addition, the Court modified certain aspects of the port transaction to permit Essar Algoma to terminate certain agreements once the loan provided by the lenders has been paid in full., The Court also removed the right of Essar Global and its affiliates to consent to a change of control of Essar Algoma . The end result, if the decision stands, is to effectively take away the indirect equity rights of Essar Global in Portco.
Implications and Appeal
The decision is under appeal on the grounds that the trial judge erred in law, misapplied the law, and made palpable and overriding errors of fact with respect to his interpretation of the CCCA by identifying the Monitor as a proper complainant to bring the claim and in his finding that Essar Global acted in a way that was unfairly prejudicial to the reasonable expectation of stakeholders of Essar Algoma.
It is rare for court-appointed Monitors to be an adversarial litigant in insolvency proceedings in Canada and to the knowledge of the authors this is the first time a Monitor has been directed by the Court to bring a claim for oppression under the provisions of a Canadian corporate statute. If this decision is affirmed on appeal, it may open the door to increased adversarial litigation roles for court-appointed Monitors in Canada, will create uncertainty for market participants who are involved with distressed companies or companies that may become insolvent and it is an open question as to whether that is an appropriate or beneficial development to restructuring and insolvency law in Canada.
Steven has extensive experience in both the litigation and commercial aspects of significant and complex domestic and cross-border restructuring and insolvency matters, representing debtors, monitors, receivers, debtor-in-possession (DIP) lenders, secured creditors, pension administrators, suppliers, purchasers and other major stakeholders.
Recent engagements of significance on the public record include acting as counsel to:
- A service provider in the Companies' Creditors Arrangement Act (CCAA) proceedings of Data & Audio Visual Enterprises Holdings Inc, et al. (known as Mobilicity)
- The lenders' agent and DIP agent in the CCAA proceedings of Northstar Aerospace Inc. and its Canadian affiliates
- The monitor in the CCAA proceedings of Timminco Limited
- The monitor in the CCAA proceedings of Edgeworth Group
- The secured lender syndicate in the CCAA proceedings of Cinram International Income Fund
- An aircraft lessor and tour operator in the receivership of Skyservice Airlines Inc.
- The DIP lender in the CCAA proceedings of Canwest Global Communications Corp.
- The monitor in the CCAA proceedings of Bruce R. Smith Limited and John Henry Smith Limited
- The debtor in the CCAA proceedings of Arclin Canada Ltd.
- The pre-petition agents for the first lien lenders in the CCAA proceedings of Progressive Moulded Products