The purpose of the Companies’ Creditors Arrangement Act is obvious from its title: “An act to facilitate compromises and arrangements between companies and their creditors.”
But what happens when a debtor has no plan to present to its lenders and is potentially buying time in order to sell the company?
Lawyers say so-called liquidating CCAA proceedings have been relatively common in Ontario, but ever since two contradictory rulings on the matter on opposite ends of the country last year, they’ve been watching out for how the courts here will respond.
“It’s become a current topic because there was a decision from the British Columbia Court of Appeal last summer that questioned whether it was an appropriate thing to do,” says Sue Grundy, a partner and chairwoman of the restructuring and insolvency group at Blake Cassels & Graydon LLP in Toronto.
In the B.C. ruling, housing and golf course developer The Cliffs Over Maple Bay Investments Ltd. applied for CCAA protection from creditor actions after it ran into trouble with plans for an irrigation system last year.
In response, its mortgage lenders appointed a receiver in a bid to enforce their agreements. But their efforts came to a halt when a lower court granted Cliffs Over Maple Bay its request for a stay of proceedings under the CCAA.
At issue in the case was whether the debtor had any intent to propose a restructuring plan on which creditors could vote. In its filing, Cliffs Over Maple Bay noted it hoped that by getting additional funding, fixing the irrigation problem, and finishing the golf course, it would be able to sell off its housing units and thereby meet its obligations.
Its lawyers also referred to previous court decisions approving of CCAA proceedings in cases where the plan was to sell assets or liquidate, but the B.C. appeal judges ruled such a move is contingent on the debtor intending to present its proposal to creditors for approval.
“I need not decide the point on this appeal but I query whether the court should grant a stay under the CCAA to permit a sale, winding up, or liquidation without requiring the matter to be voted upon by the creditors if the plan of arrangement intended to be made by the debtor company will simply propose that the net proceeds from the sale, winding up, or liquidation be distributed to its creditors,” Court of Appeal Justice David Tysoe wrote on behalf of a three-judge panel.
As a result, while noting Cliffs Over Maple Bay could yet alter its filing to propose a vote on its plans by its creditors, the court granted a request by one of its lenders to overturn the stay of proceedings.
It’s a ruling, then, that has raised the eyebrows of lawyers working in corporate restructuring and insolvency in Ontario, particularly since it has only been a few weeks since electronics retailer The Source By Circuit City emerged from what was essentially a liquidating CCAA proceeding through its sale to BCE Inc.
“The effect in Ontario is people will think about these things more than they have in the past few years,” says Grundy.
But both she and Rick Orzy, a partner and co-leader for the national bankruptcy and restructuring practice at Bennett Jones LLP, agree that while creditors have a legitimate concern that a CCAA proceeding will dilute their rights, getting a stay is appropriate in some cases even where the debtor ends up liquidating. The alternative of receivership, Orzy notes, “is more definitely the death of a company.”
Consequently, if a receiver takes over, customers might stop buying a company’s products out of fear they might not be able to return them. As well, selling off parts of a company through a restructuring process might garner a higher value than selling off assets under a receivership, he adds.
Grundy, too, says that with companies operating both in Canada and the United States, liquidating under CCAA protection can also be better for debtors and creditors since the court protection allows for a more co-ordinated sale process on either side of the border.
The other issue behind liquidating CCAA proceedings is simply the challenges in getting a receiver in the first place. That’s because with companies with legacy issues such as pensions or a collective agreement, receivers worry they might be liable as successor employers for any related costs should the business end up failing.
So, if the original owner continues operating it during the sale, “nobody new steps in the picture to take those liabilities on,” says Grundy.
The alternative is for the receiver to get creditors to grant them an indemnity from those liabilities, something the lenders themselves have good reason to be reluctant to do. As a result, the receiver might simply shut the business down to avoid those problems, a bad result for everyone, Grundy notes.
“Judges are very reluctant to force a business to close on a technicality,” she says, adding preserving jobs is an important goal of bankruptcy proceedings.
In the Newfoundland case, in fact, the court came to a different conclusion about a company’s restructuring plans than the B.C. judges. There, Humber Valley Resort Corp. was seeking a stay of proceedings after it ran into trouble at its golf course development.
In response, the judge ruled that although the company had yet to present a restructuring plan and had indicated it planned to sell off at least some of its assets, rejecting its request would open the door to creditors taking action and cause it to go under.
Justice Robert Hall further noted that the fact the company had yet to formulate a viable proposal didn’t preclude that it would do so soon.
Grundy and Orzy, then, aren’t particularly worried that the B.C. ruling will cause judges here to put an end to liquidating CCAA proceedings. “I don’t think it’s as much of a controversy as people say,” says Orzy, noting that while applicants for a stay of proceedings may find themselves denied, others will continue to get court approval.
The key, Grundy adds, is to examine conditions where a liquidating CCAA is appropriate. “I think people have had to look again at the basic reasons behind liquidating CCAAs.”