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.
In Ontario, a debtor-in-possession (“DIP”) lender is usually granted a charge by the Ontario Superior Court of Justice (Commercial List) (the “Court”) over the assets of the debtor which is under the protection of the Companies’ Creditors Arrangement Act (the “CCAA”) to secure the repayment of the DIP loan.  The priority of the charge is set out in the order granting the charge.  Most such orders provide that prior to exercising its rights and remedies against the debtor after an event of default, the DIP lender must apply to the Court for relief from the Court ordered stay of proceedings.
 A recent endorsement of the Ontario Court issued on July 25, 2012 in the Allied Systems (Canada) Company CCAA proceedings departed from this general practise. In addition, this case provides another useful precedent for the approval of a cross-border guarantee in circumstances where a non-borrower Canadian guarantor is reliant on US borrower for ongoing financing and was, before the commencement of the proceedings, a guarantor of the US borrower.  Thirdly, the endorsement provides guidance on the Court’s view on protecting interim advances by a DIP lender where such advances are required by the debtor prior to the expiry of the appeal periods from the order.
Allied Systems Holdings, Inc. (“Allied Systems US”), together with Allied Systems (Canada) Company and Axis Canada Company (collectively, the “Canadian Companies”) and certain of their affiliates filed under Chapter 11 of the U.S. Bankruptcy Code (the “Chapter 11 Debtors” and the “Chapter 11 Proceedings”, respectively).  On June 12, 2012, the Court heard an application by Allied Systems US, in its capacity as foreign representative of the Chapter 11 Debtors, for relief under Part IV of the CCAA. Part IV of the CCAA is the equivalent of Chapter 15 of the US Bankruptcy Code.
The Chapter 11 Debtors sought orders (i) recognizing the Chapter 11 Proceedings as “foreign main proceedings” and providing certain relief ancillary thereto, (ii)  recognizing certain first day orders issued in the Chapter 11 Proceedings, and (iii) appointing of Duff & Phelps Canada Restructuring Inc. as the information officer in the CCAA proceedings (the “Information Officer”).  The first day orders included an interim financing order issued in the Chapter 11 Proceedings approving a DIP facility (the “Financing Order”) which was contingent upon, among other things, obtaining a secured guarantee from each of the Canadian Companies.
In granting the requested orders, the Court commented in particular on the appropriateness of the proposed DIP financing in light of the statutory factors set out in section 11.2 of the CCAA. The Court noted that the record reflected that the Chapter 11 Debtors did not have sufficient cash flow absent additional financing to continue their restructuring efforts, and that the Canadian Companies did not have the ability to operate without the support of the other Chapter 11 Debtors.  In addition, the Canadian Companies had previously provided secured guarantees under the Chapter 11 Debtors’ pre-petition first and second lien facilities and such first and second lien creditors did not object to the granting of a DIP charge.  Further, the proposed $20 million facility was subject to an interim cap of $10 million.  The US interim DIP loan lien, and the interim requested charge for the DIP loan did not purport to prime other pre-filing liens or charges.  Accordingly, the Court was satisfied that no creditor would be materially prejudiced by the approval of the interim DIP facility.
The Court also noted that the proposed form of supplemental recognition order included a non-typical provision permitting the DIP lender to exercise its rights and remedies under the Financing Order with respect to the Canadian property on five business days’ notice to the foreign representative, the Information Officer and the first and second lien lenders without further order or application to the Court. Given the immediate funding requirement, the Canadian Court was prepared to issue such order on the understanding that the Information Officer would promptly bring to the Court’s attention any proposed enforcement action.
This aspect of the order is quite unusual, and should not be considered as precedent for a new direction from the Court.  It should be assumed that this is very fact dependant, and will only be granted in usual circumstances.  In most cases, the Court will require that the DIP lender bring a motion to the Court in Canada prior to being entitled to proceed under the DIP charge granted by the Court..
In respect of the Court approving the Canadian companies’ guarantees of the US borrowings, this case illustrates the factual foundation that assists the Court in deciding whether to approve such guarantee.  While each situation is dependent on its facts, it is critical to put the factual framework in the record so that the court can determine whether to approve the company entering into the guarantee.
In addition, the Court noted in its endorsement that although this was an interim order, the debtor required funds immediately, and the DIP lender would be advancing the fund. In essence, the advances were to be made prior to the expiry of the appeal periods from the order.  The Court remarked that it expected that parties affected by the order would respect the priority accorded under the order to the DIP lender for advances made by the DIP lender up to the date on which the order may be varied or modified.  This is similar in concept to the protection afforded a DIP lender in the US for advances made on an interim DIP lending order.

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