This article has been contributed to the blog by Steven Golick and Sachin Kanabar.  Steven Golick is a partner in the Insolvency and Restructuring Group of Osler Hoskin & Harcourt LLP and Sachin Kanabar is an associate in the group.
In the recent decision of Re Kerr Interior Systems Ltd., the Court of Queen’s Bench of Alberta (the “Court”) contemplated whether it may authorize a debtor under the Companies’ Creditors Arrangement Act (“CCAA”) to call a creditors meeting to consider a substantive amendment to a plan of compromise or arrangement that had already been sanctioned by the Court.  The Court determined that it does have the discretion to order such a meeting.  However, it dismissed the debtor’s application in this case because the debtor did not meet the exceptionally high threshold for the Court to exercise such discretion.

The debtor company, Kerr Interior Systems Ltd. (“Kerr” or the “Company”), commenced proceedings under the CCAA and presented a plan of compromise or arrangement (the “Plan”) to its creditors.  The requisite majorities of creditors voted in favour of the Plan, which was subsequently sanctioned by the Court.  The Plan called for a global payment to Kerr’s creditors in four instalments.  The Company paid the first instalment but defaulted on the second instalment.  Kerr then sought informal creditor approval to alter the Plan but was unsuccessful.  As a result, it applied to the Court for permission to call another meeting of creditors to vote on an amended Plan.  The amended Plan contemplated that the creditors would accept a global payment of approximately 20% of the total amount that would have been paid under the Plan (the “Proposed Amendment”), which included the first instalment already paid.
The issues for the Court were whether it had the jurisdiction to direct a further meeting of creditors to consider the Proposed Amendment in such circumstances, and whether it should direct such a meeting in the present case.  The existence of this jurisdiction depended on the interpretation of certain provisions of the CCAA.
After a review of the legislative context and the relevant case law, the Court determined that it did have the jurisdiction to order a further meeting under the CCAA, pursuant to a provision that permits the Court to make any order that it considers appropriate in the circumstances.  The Court concluded that its supervisory function in the CCAA process only ends when the plan has been fully implemented or has failed.  As a result, the Court retains jurisdiction to address issues that arise after the plan is sanctioned and during its implementation, which include the ability to order a further creditors’ meeting after the plan has been voted on by creditors or sanctioned by the Court.
Ordering a further creditors’ meeting after Court sanction of the plan has the effect of introducing uncertainty into the CCAA process, which is contrary to the policy objectives underlying the CCAA.  As a result, the Court resolved that such discretion must only be exercised in exceptional circumstances.  Specifically, in circumstances that occur well beyond foreseeable risks, such as ordinary business risks.  Each case must be determined on its own facts and the Court should further consider the following, non-exhaustive list of factors in determining whether it is appropriate to exercise such discretion:

(a)                Is the plea for relief made in good faith?

(b)               Has it been made in a timely fashion?

(c)                Would granting the relief advance the policy objectives underlying the CCAA?

(d)               Would granting the relief enhance the public’s confidence in the CCAA process?

(e)                Would granting the relief otherwise serve the ends of justice?

(f)                 What is the level of creditor support?

Applying the above criteria to the facts of the case, the Court found that this was not an appropriate case in which to call a further creditors’ meeting.
Kerr’s basis for amending the Plan was that an unexpected downturn in the economy, difficulty collecting accounts receivable, the strain of servicing secured debt and the obligations of a related entity made it impossible for it to continue operations and fulfill its obligations under the Plan.  However, evidence adduced on cross-examination established that, since the formulation of the Plan, Kerr’s workforce had more than quadrupled in size, the Company chose to rely on the impact of the related entity’s debt in support of its application and Kerr had not shown that it had taken all reasonable steps to fulfill its obligations under the Plan.  These facts created doubt in the Court’s mind as to whether Kerr was acting in good faith.
The present case created a tension between two policy objectives underlying the CCAA:  facilitating a restructuring to permit the debtor to continue in business and avoid a liquidation versus the need for stability, certainty and fairness for all stakeholders involved in the proceeding.  There was no cogent evidence establishing that Kerr would not be able to operate if a further meeting to consider the Proposed Amendment was not ordered.  Also, the Proposed Amendment to the Plan was a radical change that was “more reasonably viewed as a completely new deal rather than an amendment”.  Further, the Company has the option to make another deal with its creditors in alternate insolvency proceedings or through filing another plan under the CCAA.  While this option would be expensive, the Court did not view at as being significantly more costly than complying with the conditions that would be imposed on calling the further meeting.  For these reasons, the Court determined that the policy objectives underlying the CCAA would not be advanced if the relief were granted.
The Court also concluded that public confidence in the CCAA process would not be enhanced by ordering a further meeting.  While the Court accepted that the Company suffered some negative effects from a downturn in the economy, this downturn and the other factors relied upon by Kerr were not truly exceptional or unforeseeable risks; they were ordinary business risks.  Since public confidence in the CCAA process is grounded in fairness and stability for the stakeholders involved, permitting Kerr a “second kick at the CCAA can” after defaulting on its obligations under the Plan in circumstances that are not truly exceptional would not enhance such public confidence.
Finally, while there was no evidence of the level of creditor support for the Proposed Amendment, the Company’s informal attempts at obtaining such support had presumably failed.  Considering all of the circumstances and factors together, the Court concluded that Kerr had not met the high threshold required for the Court to exercise its discretion to call a further meeting of creditors.
The decision rendered by the Court in this case establishes that a court may order a further creditors’ meeting, after a plan has been voted on by creditors and sanctioned by the court, to consider substantive amendments to the plan.  However, the discretion to order such a meeting may only be exercised in exceptional circumstances, particularly given the uncertainty that it potentially introduces into CCAA proceedings.

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