If you’re a corporate director or officer, you might find your company and/or yourself in need of relief from unmanageable debts. One way to seek relief is through the Companies’ Creditors Insolvency Act (CCAA). CCAA permits a corporation to propose a formal compromise to its creditors, including the compromise of certain claims against the company’s directors. CCAA also allows a corporation to apply to the court in the province with its head office, seeking protection from creditors to allow a compromise to be negotiated. The court has very broad powers to “make any order that it considers appropriate in the circumstances”; in May 2020 the Supreme Court of Canada has just reaffirmed the breadth of that discretion (9354-9186 Québec inc. v. Callidus Capital Corp).1How does the CCAA work?
CCAA applies to corporations carrying on business in Canada (except banks, railway or telegraph companies, insurance companies, and companies to which the federal Trust and Loan Act applies). However, the CCAA procedures can only be used by corporations with at least $5 million in debt. For companies that meet that threshold, CCAA provides an alternative to making a proposal under the Bankruptcy and Insolvency Act (BIA). A corporation may prefer CCAA proceedings to a proposal under BIA because the CCAA procedure is more flexible and carries less of a stigma.
In addition, to make a compromise under CCAA, the company must:
be bankrupt or insolvent;
have committed an act of bankruptcy within the meaning of the BIA or be deemed insolvent within the meaning of the Winding-up and Restructuring Act (WRA);
have made an authorized assignment or had a receiving order made against it under the BIA; or
be in the course of a winding up under the WRA because the company is insolvent.
If the creditors vote in favour of the compromise and the court approves it, the compromise binds the creditors. Effective November 1, 2019, CCAA requires that “[a]ny interested person in any proceedings under this Act shall act in good faith with respect to those proceedings,” and empowers the court to make any appropriate order if it finds an interested party has failed to act in good faith (the actions in this case predate the change).
What happened in this case?
Bluberi Group Inc., Bluberi Gaming Technologies Inc. and Bluberi USA, Inc. (later renamed 354-9186 Québec inc.) were technology companies specialized in the casino gaming business. By 2015, the companies were in financial trouble, and successfully sought an order beginning the CCAA process. The companies’ principal secured creditor was Callidus Capital Corporation, an “asset-based or distressed lender,” which was owed over $135 million, compared to $6 million in miscellaneous unsecured debts. The CCAA case included claims by the applicants (the “debtors”) that Callidus’ actions had contributed to their liquidity problems. Callidus later bought out most of the debtors’ assets, leaving $3 million in secured claims by Callidus, continuing claims by unsecured creditors, and the debtors’ surviving claims against Callidus (“in the range of $200 million”).
Callidus filed a plan of arrangement that would have distributed over $2 million to unsecured creditors, and dissolved the debtors’ claims against it. This received support by a majority of unsecured creditors but not the 2/3 necessary for approval; Callidus was ineligible to vote since it was a secured rather than an unsecured creditor. Subsequently, the debtors submitted a plan that included a continuing stay of the CCAA proceedings and acceptance of a litigation financing arrangement between the debtors and a third party to finance litigation against Callidus. Callidus submitted its own competing proposal, with comparable financial provisions and with the critical procedural change that Callidus sought to be allowed to vote as an unsecured creditor claiming that its “security” had decayed to worthlessness. Adding Callidus’ $3 million as unsecured debt would have provided the creditor votes necessary for approval.2
However, the judge overseeing the case applied his discretion and rejected Callidus’ proposal, which he viewed as motivated by an “improper purpose” (eliminating the debtors’ claims against it). Instead, the judge approved the debtors’ application for a stay with permission to pursue the litigation financing arrangement – he did not provide for a creditor vote by treating the application not as an arrangement with creditors but as a delay to allow the debtors to pursue an option (the litigation) that could greatly affect the assets available to unsecured and secured creditors.
Callidus appealed, and the Court of Appeals reversed on both points.3 The debtors appealed this reversal, and the Supreme Court of Canada has now restored the trial judge’s judgment. The Supreme Court summarized the facts of the case and the trial court’s decisions on the issues, but did not provide its independent judgment on the merits. Instead, the Supreme Court found that the trial judge was within his discretion and found “no basis upon which to interfere with the supervising judge’s exercise of his discretion” regarding these issues. Accordingly, the Supreme Court vacated the Court of Appeals decision and reinstated the trial court decision.
How should we think about this?
This decision reminds any party who may find himself, herself or itself on any side of a case under the CCAA. Since trial court judges can differ in their interpretations of laws and facts, and in particular in the views they develop of parties’ motivations and credibility, this decision injects additional uncertainty into cases involving CCAA.
About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
You may contact Mr. Elliott directly at: firstname.lastname@example.org