Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Andrea Lockhart and Steven Golick . Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt, LLP , and Andrea Lockhart is an associate in the group.
Recently in Kitchener Frame Limited (Re ) , the Ontario Superior Court of Justice (Commercial List) (“Court”) upheld the use of broad releases in the context of proposal proceedings under the Bankruptcy and Insolvency Act (Canada) (the “BIA”).
The BIA contains provisions which allow an insolvent debtor to restructure by presenting a proposal to its creditors.  Conceptually it is similar to the Companies’ Creditors Arrangement Act (“CCAA”).  However, the BIA proposal provisions are more detailed in process and substance than the CCAA, and accordingly there is less flexibility for a debtor.  This explains why most large restructurings are done under the CCAA In Kitchener Frame Limited the debtors were inactive entities with no operating assets and no material liquid assets (other than the certain escrow funds).  However, they did have significant and mounting obligations including pension and other non-pension post-employment benefit (“OPEB”) obligations to former employees and surviving spouses of such former employees.
The proposal provided in part for the monetization and compromise of the OPEB claims of the OPEB creditors by way of a one-time, lump-sum payment to each OPEB creditor. The proposal also provided that secured and unsecured inter-company claims of affiliates in the amount approximately $120 million would not be pursued.
In this case, the proposal provided for a release (the “Release”) in favour of each of the debtors (collectively, the “Applicants”) as well as various third parties and their respective subsidiaries, directors, officers, members, partners, employees, auditors, legal counsel and agents and any person jointly or derivatively liable through any or all of the beneficiaries of the Release. The proposal was presented on a consolidated basis to the Applicants’ creditors and was accepted by over 99.9% in number and 99.8% in dollar value of voting affected creditors. Consequently, the Applicants brought a motion before the Court for an order sanctioning the consolidated proposal under the BIA and authorizing the Applicants and the Proposal Trustee to take all steps necessary to implement the consolidated proposal in accordance with its terms.
In considering the Release, the Court noted that nothing in the consolidated proposal released or discharged any released party from criminal or other wilful misconduct or any present or former director of the Applicants with respect to any director claims not subject to compromise under section 50(14) of the BIA. The Court also noted that no creditors or stakeholders objected to the scope of the Release, which was fully disclosed in negotiations with representative counsel to the creditors and referred to in materials sent by the Proposal Trustee to creditors prior to the creditors’ meeting.
Further, the Court adopted a flexible purposive interpretation to the BIA, starting from the proposition that there was no express prohibition in the BIA against including third party releases in a proposal. At most, the Court held there were certain limited constraints on the scope of the releases such as those set out in section 179 of the BIA as well as section 50(14) of the BIA prohibiting the scope of director releases as noted above. While noting that historically some case law had taken the position that section 62(3) of the BIA precluded the use of third party releases in a proposal, the Court held that if Parliament had intended that only a BIA debtor could be released, such section would have been simplified to provide for exactly such a result. Rather, the Court was of the view that any provision of the BIA purporting to limit the ability of a debtor to contract with its creditors must be clear and explicit.
In addition, the Court noted that the Court had approved the use of third party releases in appropriate circumstances under the CCAA where such third party releases met following criteria set out by the Ontario Court of Appeal in Metcalfe :

1. the parties to be released were necessary and essential to the restructuring of the debtor;
2. the claims to be released were rationally related to the purpose of the plan and necessary for it;
3. the plan could not succeed without the releases;
4. the parties who were to have the claims against them released were contributing in a tangible and realistic way to the plan; and
5. the plan would benefit the debtor companies but creditors generally.

In this case, the Court held that it would be a strange asymmetry between the CCAA and the BIA if the use of third party releases were permitted in one context and not the other. While the BIA was generally a more “rules based” regime, over the course of time the two statutory schemes had become more harmonized through the evolution of case law and statutory reform.  Guided by the principles espoused by the Supreme Court of Canada in Ted Leroy Trucking , the Court was of the view that the BIA and the CCAA should be harmoniously interpreted where possible to avoid forum shopping.  Accordingly, the Court approved the Release on the basis that it met all of the Metcalfe criteria, it had been negotiated and it had been fully and adequately disclosed to the Applicants’ creditors.
This case affirms and adopts the trend to harmonization between the CCAA and BIA and advances the law with respect to third party releases in the context of proposals under the BIA.  It provides guidance on the factors the court will take into account when considering whether to grant such releases.

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