It’s time for the insolvency bar to get artsy, because the Ontario Court of Appeal’s decision on the restructuring plan for asset-backed commercial paper gives them room to be creative, say lawyers.
“Whatever can be done to try to rescue that situation, I think what they’re saying is the court should have as many tools in its box as creative counsel can put before them,” says Borden Ladner Gervais LLP lawyer Craig Hill, who practises in the area of commercial insolvency and restructuring.
The firm acted for monitor Ernst & Young in the case.
In Re: Metcalfe & Mansfield Alternative Investments II Corp. (www.ontariocourts.on.ca/decisions/2008/august/2008ONCA0587.htm), the appeal court recently backed the decision of Superior Court Justice Colin Campbell, who in June approved a restructuring plan for $32 billion of third-party, asset-backed commercial paper.
The plan includes an arrangement stopping investors from suing banks, brokerages, financial services companies, and bond-rating agencies for losses caused when the short-term investments caved in.
The main concern of appellants at the Court of Appeal, notes Hill, was whether the court had the jurisdiction to grant third-party releases. But a number of other “very complicated transactional parts of the arrangement” also were addressed, he adds.
Hill says third-party releases have received little attention from the judiciary previously, but the issue was fully argued in the case and wholly developed in Justice Robert Blair’s reasons in the appeal decision.
“Blair’s judgment is a clarification of, and even an extension of, the principles of interpretation of the CCAA [Companies’ Creditors Arrangement Act], that has been the subject matter of many applications in the past about what you can and can’t do,” says Hill.
“Because it’s such a brief statute that really doesn’t provide much in the way of guidelines for what goes into a plan of arrangement, effectively what Justice Blair has said now is it’s an open-ended and flexible statute, and that judges are going to take an active role in the application and interpretation of the legislation.”
“To some extent it’s been a little bit of a question mark as to whether or not third-party rights could substantially be affected in a CCAA plan,” says Jonathan Wigley, a bankruptcy and insolvency lawyer at Gardiner Roberts LLP. “What the two judgments now make clear, is that, yes, they can.”
Unlike the United States’ Bankruptcy Code, which has several hundred sections providing direction, the CCAA provides few guidelines or restrictions, notes Hill. Each judge hearing a CCAA application is going to have a range of options available to shape a restructuring, he says.
Hill suggests the decision could have added significance in the current economic climate. With various industries battling significant downturns and risk, companies running up against insolvency and forced to take a crack at restructuring will be looking closely at this case, he says.
“This decision certainly provides for more opportunities for those parties to have more options available in the path they may choose to carry out the restructuring,” says Hill.
“Now they’ve got a decision from the Court of Appeal that makes it clear that the judge has a great deal of flexibility in helping debtors chart that path.”
Hill adds that the judgment referenced the broad societal role of the CCAA.
“It is still considered to be a very negative thing for a company to shut down, all of the employees to be out of work, and all of the spin-off, negative affects of that,” he says.
While the investors committee that drafted the restructuring plan hopes to finish the process by Sept. 30, an application for leave to appeal at the Supreme Court of Canada could get in the way. Both sides, however, have asked the top court to expedite any hearings, as was the case on the BCE Inc. case earlier this year.
Wigley, however, says the appellants have a difficult task in shaping an argument to obtain leave.
“Very many of the retail customers of the ABCP product are effectively going to get something close to 100 per cent of their investment, and I think it’s going to be hard for the Supreme Court of Canada to ignore that fact,” he says.
Remarks by Campbell in his June decision suggest the deal is as good as it gets for such a widespread group as those affected by the ABCP collapse, which occurred in August 2007 in the midst of credit concerns.
“No plan of this size and complexity could be expected to satisfy all affected by it,” wrote Campbell. “The size of the majority who have approved it is testament to its overall fairness. No plan to address a crisis of this magnitude can work perfect equity among all stakeholders.
“The information available satisfies me that business judgment by a number of supporting parties has been applied to deal with a number of inequities. The plan cannot provide complete redress to all noteholders. The parties have addressed the concerns raised. In my view, the court can ask nothing more.”