Bankruptcy and insolvency can trigger catastrophic consequences. Often, large claims of unsecured creditors are left unpaid (Para. 1 of Sun Indalex Finance v. United Steelworkers, 2013 SCC 6). The Companies’ Creditors Arrangement Act (“CCAA”) is one of the three principal insolvency statutes in Canada. The CCAA pursues an array of overarching remedial objectives. These legislative objectives include: “providing for timely, efficient and impartial resolution of a debtor’s insolvency; preserving and maximizing the value of a debtor’s assets; ensuring fair and equitable treatment of the claims against a debtor; protecting the public interest; and, in the context of a commercial insolvency, balancing the costs and benefits of restructuring or liquidating the company.” (Para. 40 of Callidus, 2020 SCC 10)
S. 11 of the CCAA serves as the source and anchor of the supervising judge’s jurisdiction and discretionary authority to balance of these legislative objectives before making any order and to conduct case-specific assessment that it considers appropriate in the circumstances. This discretionary power is broad, but never boundless. It must be exercised in furtherance of the remedial objectives mentioned above and with the three following baseline considerations in mind: appropriateness, good faith and due diligence (paras 50 to 51 of Callidus, 2020 SCC 10; para. 48 of Century Services Inc. v. Canada (Attorney General), 2010 SCC 60).
Thus, it is established that a high degree of deference is owed to discretionary decisions made by the supervising judges of the CCAA proceedings. The supervising judge is usually best-positioned to conduct the case-specific assessment as he/she has intimate knowledge of the reorganization process. As such, the appellate intervention will only be justified if the supervising judge erred in principle or exercised their discretion unreasonably (Paras 53 to 54 of Callidus, 2020 SCC 10).
Key Facts Related to the Appeal
Established in 1994, 9354-9186 Québec inc. (“Bluberi”) is a corporation which manufactured, distributed, installed, and serviced electronic casino gaming machines. It also provided management systems for gambling operations.
In 2012, Bluberi sought financing from the respondent, Callidus Capital Corp. (“Callidus”). Callidus extended a credit facility of approximately CAD$24 million to Bluberi. Callidus continued to extend credit to Bluberi in the next three years.
By 2015, Bluberi owed approximately CAD$86 million to Callidus.
On November 11, 2015, Bluberi initiated the CCAA proceedings. In its petition, Bluberi alleged that its liquidity issues were the result of Callidus taking de facto control of the corporation and dictating numerous purposefully detrimental business decisions. Bluberi alleged that by Callidus aimed to deplete Bluberi’s equity value, and further to own Bluberi and ultimately, to sell it.
On November 12, 2015, the supervising judge, Michaud J., issued an initial order under the CCAA. The Initial Order appointed Ernst & Young Inc. as monitor and granted certain relief to Bluberi.
On January 28, 2016, Bluberi proposed a sale solicitation process to sell its assets, which Michaud J. approved.
In early February 2017, this sale solicitation process made Bluberi enter into an asset purchase agreement with Callidus. Callidus thus obtained all of Bluberi’s assets in exchange for almost the entirety of its secured claim against Bluberi. But Callidus would still maintain an undischarged secured claim of CAD$3 million against Bluberi. The asset purchase agreement permits Bluberi to retain claims for damages against Callidus arising from its alleged involvement in Bluberi’s financial difficulties (“Retained Claims”). This Retained Claims should amount to over CAD$ 200 million in damages, which became the only and last asset of Bluberi.
On September 11, 2017, Bluberi filed an application seeking the approval of a $2 million interim financing credit facility to fund the litigation of the Retained Claims and other related relief. This application was set to be heard on September 9, 2017.
However, on September 8, 2017, one day before the above-mentioned scheduled hearing, without any notice, Callidus proposed a plan of arrangement (“First Plan”). The First Plan proposed that Callidus would fund a CAD$2.5 million distribution to Bluberi’s creditors in exchange for a release from the Retained Claims.
Michaud J. adjourned the hearing of both applications to October 5, 2017.
On October 5, 2017, the supervising judge ordered that the plan of arrangement could be put to a creditors’ vote.
On December 5, 2017, Callidus submitted its First Plan to a creditors’ vote. The plan failed to receive sufficient support because the creditors voting in favour only held 59.22% of the total value being voted, which did not meet the s. 6(1) threshold. Notably, SMT Hautes Technologies (“SMT”), which held 36.7% of Bluberi’s debt, voted against the plan. Note that prior to this meeting, Callidus filed a proof of claim as a secured creditor. Thus Callidus did not cast a vote.
On February 6, 2018, Bluberi filed an application seeking authorization of a proposed third party litigation funding agreement (“LFA”) with IMF Bentham Limited (“Bentham”, now known as Omni Bridgeway). Among other things, Bluberi’s application also sought the placement of a $20 million super-priority charge in favour of Bentham on Bluberi’s assets. The purpose of the LFA is to obtain funding for Bluberi to pursue the Retained Claims against Callidus (See Para. 60 of the Supervising judge’s order 2018 QCCS 1040 for details).
Callidus and certain unsecured creditors contested the LFA application on the ground that the LFA was a plan of arrangement and, as such, had to be submitted to a creditors’ vote.
On February 12, 2018, Callidus filed another plan of arrangement for creditors’ vote (“New Plan”). The New Plan was essentially identical to the First Plan. Further, Callidus filed an amended proof of claim, which purported to value the security attached to its $3 million claim at nil as Callidus claimed that Bluberi had no assets other than the Retained Claims. Accordingly, Callidus asserted that it was actually an unsecured creditor and sought the supervising judge’s permission to vote on the New Plan with the other unsecured creditors.
On March 16, 2018, the supervising judge, Michaud J. declined to submit the New Plan to a creditors’ vote because he considered that Callidus was acting with an “improper purpose” (para. 48 of the Supervising judge’s order 2018 QCCS 1040). Michaud J. approved the LFA and imposed the Litigation Financing Charge on Bluberi’s assets.
On February 4, 2019, the Quebec Court of Appeal allowed the appeal finding that “[t]he exercise of the judge’s discretion [was] not founded in law nor on a proper treatment of the facts so that irrespective of the standard of review applied, appellate intervention [was] justified” (para. 48 of the Quebec Court of Appeal decision 2019 QCCA 171)
On January 23, 2020, the Supreme Court of Canada rendered the judgement allowing the appeal from the Court of Appeal for Quebec and reinstating the supervising judge’s order.
On May 8, 2020, the Supreme Court of Canada provided the reasons for this judgement. The judgement stated that the appeal had two issues to be determined:
1) Did the supervising judge err in barring Callidus from voting on its New Plan on the basis that it was acting for an improper purpose?
2) Did the supervising judge err in approving the Litigation Funding Agreement as interim financing, pursuant to s. 11.2 of the CCAA?
Applicable Laws and Regulations (non-exhaustive list)
Section 3(1) CCAA stipulates that the access to the CCAA proceeding is restricted to debtor companies facing total claims in excess of CAD$5 million.
Section 6 (1) CCAA provides that, to be approved, a plan of arrangement must receive a “double majority” vote in each class of creditors ¾ that is, a majority in number of class members, which also represents two-thirds in value of the class members’ claims.
Section 11 CCAA is the anchor of the discretionary authority of the supervising judge. It stipulates that the supervising judge, on the application of any person interested in the matter, may, subject to the restrictions set out in the CCAA, make any order that it considers appropriate in the circumstances.
Section 11.2 (1) CCAA provides the court the authority to make an order on an interim financing application. While s. 11.2 does not define the notion “interim financing”, prof. Sarra described it as “refer[ring] to primarily to the working capital that the debtor corporation requires in order to keep operating during restructuring proceedings, as well as to the financing to pay the costs of the workout process” (See Rescue! The Companies’ Creditors Arragnement Act, at p. 197)
Section 11.2 (2) CCAA provides the court the authority to order and declare the priorities of the Administration Charge and Litigation Charge over the claim of any secured creditor of the company.
Section 11.2 (4) CCAA sets out a number of factors to be considered which guide the supervising judge to exercise its discretion in deciding whether to make an order to approve the interim financing.
Art. 22 (3) CCAA places voting restrictions on creditors who are “related to the [debtor] company”. This provision aims at reducing the ability of debtor companies to organize a restructuring plan that confers additional benefits to related parties (Office of the Superintendent of Bankruptcy Canada, Bill C-12: Clause by Clause Analysis, developed by Industry Canada, last updated March 24, 2015).
Section 18.6 (2) CCAA provides the court the authority to make any order that it considers appropriate if the court is satisfied that the interested person fails to act in good faith.
1) Did the supervising judge err in barring Callidus from voting on its New Plan on the basis that it was acting for an improper purpose?
No. The supervising judge has the discretion to bar a creditor from voting on a plan of arrangement where they determine that the creditor is acting for an improper purpose.
Section 11 and section 18.6 (2) CCAA give the supervising judge the jurisdiction to bar a creditor from voting on a plan of arrangement where the creditor is acting for an improper purpose (See also paras. 44 to 45 of Blackburn Developments Ltd. (Re), 2011 BCSC 1671).
In the instant case, among other self-contradictory measures of Callidus, its claims on the two plans of arrangement are worth to mention. The First Plan and the New Plan are virtually identical. The First Plan failed because SMT, an unsecured debtor, voted against the First Plan while Callidus did not vote on the First Plan. For the New Plan, Callidus applied to vote on it as an unsecured creditor. It is clear that if Callidus was allowed to vote on the New Plan, its vote would very likely result in the New Plan meeting the two thirds threshold for an approval under s. 6 (2) CCAA. As pointed out by the SMT, the main unsecured creditor, Callidus’ attempt to vote aims only at cancelling SMT’s vote which prevented Callidus’ Plan from being approved at the creditors’ meeting. Considering the other related circumstances, Michaud J. concluded that Callidus’s attempt to vote on the New Plan was an attempt to exert control over the vote for the sole purpose of obtaining releases from creditors, which is an “improper purpose”. He found that Callidus’ conduct was contrary to the “requirements of appropriateness, good faith and due diligence” As Callidus was not permitted to vote on the New Plan, Michaud J. concluded that the plan had no reasonable prospect of success. He therefore declined to submit it to a creditors’ vote(paras 38 to 59 of Supervising judge’s order 2018 QCCS 1040).
The Supreme Court specifically elaborated the requirement of due diligence. Para. 51 of Callidus, 2020 SCC 10 stated that the due diligence consideration “discourages parties from sitting on their rights and ensures that creditors do not strategically manoeuver or position themselves to gain an advantage”.
The Supreme Court confirmed that the supervising judge did not err in prohibiting Callidus from voting.
2) Did the supervising judge err in approving the Litigation Funding Agreement (LFA) as interim financing, pursuant to s. 11.2 of the CCAA?
No. The supervising judge can approve third party litigation funding as interim financing, pursuant to s. 11.2 of the CCAA.
First, the LFA, in the present case, was not a plan of arrangement. Thus, it does not require the approval of the creditors. A plan of arrangement requires at least some compromise of creditors’ rights (paras. 70 to 73 of the supervising judge’s order 2018 QCCS 1040; paras. 90 to 92 of Crystallex (Re), 2012 ONCA 404). The LFA aimed at extending financing to a debtor company to realize on the value of a litigation asset. The Litigation Financing Charge clause does not convert the LFA into a plan of arrangement by “subordinat[ing]” creditors’ rights (para. 90 of C.A. decision). Although this clause would have the effect of placing secured creditors like Callidus behind in priority to Bentham. This result is explicitly provided for in s. 11.2 (2) of the CCAA, which aims at incentivizing the funder to assist insolvent companies. This “subordination” does not convert statutorily authorized interim financing into a plan of arrangement. It does not compromise the terms of the creditors’ indebtedness or take away any of their legal rights. The present LFA contained no term that effectively convert it into a plan of arrangement (paras. 105 to 114 of Callidus, 2020 SCC 10).
Second, in the present case, the third party litigation funding from Bentham constitutes interim financing. It is acknowledged that this funding differs from the common forms of interim financing that are simply designed to help the debtor “keep the lights on”. However, in the instant case, Bluberi’s Retained Claims, especially the claim against Callidus, are the last and only assets that could be monetized for the benefit of creditors. Therefore, litigation funding furthers the purpose of interim financing: allowing Bluberi to file a lawsuit against Callidus for damages in the range of $200 million to realize on the value of its last assets.
Third, it is important to keep in mind that the common law doctrines of champerty and maintenance do not apply in Quebec, where litigation funding by a third party has been well accepted (paras. 42-49 of Marcotte c. Banque de Montréal, 2015 QCCS 1915 and Montgrain c. Banque Nationale du Canada, 2006 QCCA 557) The supervising judge canvassed the terms upon which Bentham and Bluberi’s lawyers would be paid in the event the litigation was successful, the risks they were taking by investing in the litigation, and the extent of Bentham’s control over the litigation proceedings (paras 79 to 81 of the supervising judge’s order 2018 QCCS 1040). The supervising judge also considered the factors set out in s. 11.2 (4) of the CCAA and the legislative objectives of the CCAA. The court found that the terms of the LFA (para. 78 of the supervising judge’s order 2018 QCCS 1040) met the criteria for approval of third party litigation funding set out in Bayens v. Kinross Gold Corporation, 2013 ONSC 4974 at para. 41:
a) The third party funding agreement must be necessary to provide to a plaintiff access to justice;
b) Plaintiff’s right to instruct and control the litigation should not be diminished by the third party funding agreement;
c) The third party funding agreement must not compromise or impair the lawyer and client relationship or the lawyer’s duties of loyalty and confidentiality;
d) The compensation of the third party funder must be fair and reasonable; and
e) The third party funder undertakes to keep confidential any confidential or privileged information.
The Supreme Court confirmed that the supervising judge did not err in approving the LFA as interim financing pursuant to s. 11.2 of the CCAA.
The Supreme Court of Canada (7:0) allowed the appeal and reinstated the supervising judge’s order. This decision tells us that (a) a high degree of deference is owed to discretionary decisions made by the judge supervising CCAA proceedings and thus, the appellate intervention will only be justified if the supervising judge erred in principle or exercised their discretion unreasonably; (b) while the creditor has the right to vote for the plan of arrangement, the creditor can be barred to vote if the court is satisfied that the creditor acts with improper purpose; (c) in certain circumstances, the litigation funding will be considered as a legitimate form of interim financing under section 11.2 of the CCAA.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention. ?)