Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed by Sandra Abitan and Julien Morissette. Sandra Abitan is a Partner in the Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP, and Julien Morissette is an Associate in the Group.

Every time a company seeks protection pursuant to the Companies’ Creditors Arrangement Act (CCAA), in its initial order,  the court appoints a monitor as a neutral actor whose primary role is to supervise the debtor’s business and affairs. While the court-appointed monitor will typically  not  take possession of the assets nor manage the company, from time to time, courts have conferred a broad range of additional powers and duties upon monitors to facilitate restructurings and arrangements. In a judgment rendered in November 2012, a New Brunswick court bucked the trend and refused to expand the monitor’s powers despite an alleged lack of cooperation by company management.

The Landdrill group of companies (Landdrill), based in New Brunswick, offers industrial drilling services to mineral exploration companies around the world. It sought and obtained an initial order pursuant to the CCAA in August 2012. Ernst & Young Inc. was appointed monitor. No interim (debtor in possession) financing was obtained but the monitor was of the opinion that Landdrill had sufficient cash on hand to operate during an accelerated asset sale process, which was to be conducted primarily by the monitor pursuant to the initial order.

Two weeks prior to the date which had been targeted to seek court approval for the sale of assets, Norrep Credit Opportunities Fund LP (Norrep), one of Landdrill’s main secured creditors, seized the Court with a rare, but not unprecedented, request. Norrep alleged that upper management was uncooperative and obstructing the sale process. Specifically, it alleged that the chief executive officer (CEO) opposed the conclusion of a transaction with a proposed purchaser, cut off access to information on Landdrill’s activities in Mexico and withheld, for a time, payment of the fees of the monitor and its counsel (which are payable by the company). Norrep also expressed concern that Landdrill was “very quickly reaching the point where [it] will have run out of cash entirely”.

Accordingly, Norrep sought the following relief from the court:

• “enhance the powers of the Monitor to make and implement decisions related to the continued employment, dismissal, termination, lay-off and/or rationalization of personnel employed by [Landdrill] (including all executive and senior management personnel employed by [Landdrill]);”
• “authorize and direct the Monitor to have and exercise sole and exclusive authority (in the name of and on behalf of the Applicants, but in consultation with the Senior Lenders) to make and implement decisions related to rationalizing and reducing operating costs of [Landdrill], including (without limitation) decisions to wind up, discontinue, reduce, cease and downsize the business operations of [Landdrill] (in whole or in part);”

Landdrill opposed these requests. It is not clear what position the monitor took, if any. In his judgment, Chief Justice Smith framed the key question as being whether the Court had “authority to confer powers on the Monitor to remove [the CEO] from management and assume management of Landdrill”.

In its relatively short reasons, the Court first found, correctly, that there is no explicit authority in the CCAA allowing for the removal of management. The question then is whether the Court has the inherent jurisdiction to render such an order, notably by way of section 11 of the CCAA which, subject to certain restrictions, empowers the Court to “make any order that it considers appropriate in the circumstances”. The Court concluded that it had no authority to confer on the monitor the power to remove the CEO and that, accordingly, no examination of the CEO’s behaviour was required.

In reaching his decision, Chief Justice Smith  relied heavily on the Ontario Court of Appeal judgment in Re Stelco Inc. which states:

Court removal of directors is an exceptional remedy, and one that is rarely exercised in corporate law. This reluctance is rooted in the historical unwillingness of courts to interfere with the internal management of corporate affairs and in the court’s well-established deference to decisions made by directors and officers in the exercise of their business judgment when managing the business and affairs of the corporation. These factors also bolster the view that where the CCAA is silent on the issue, the court should not read into the s. 11 discretion an extraordinary power…

Chief Justice Smith also referred to another judgment stating that a monitor does not assume management, unlike a trustee in bankruptcy, liquidator or receiver.

This judgment is surprising in a few respects. First, the acts allegedly committed by the CEO ( if proven) were likely breaches of the initial order which could potentially lead to a finding of contempt of court. The Court did not even consider nor comment on the allegations.

Second and more importantly, the above-quoted passage of Stelco has largely been overridden by a subsequent amendment to the CCAA. Section 11.5 now provides that a court may remove a director who is “unreasonably impairing (…) the possibility of a viable compromise or arrangement (…) or is acting or is likely to act inappropriately as a director in the circumstances”. This provision does not mention officers or managers, but certainly suggests that Parliament wishes that courts take a more active role in this respect. In fact, even prior to this amendment, faced with the resignation of all directors of a debtor company, Québec courts had ordered that a monitor act in lieu thereof.

Third, in Re Royal Oak Mines Inc., which also predates the adoption of section 11.5 CCAA, an Ontario court appointed the monitor as interim receiver under the Bankruptcy and Insolvency Act for the specific purpose of displacing the board of directors and management, in which stakeholders had lost confidence.  It is possible that Norrep might have succeeded should it have chosen this approach but given the flexibility of the CCAA, it would be unfortunate to impose the additional time, effort and expense on all stakeholders of having the same actors playing the same role under different labels.

Fourth, it is common practice for monitors to be mandated by the court, with the consent of all relevant stakeholders, to lead a sales process for and on behalf of the debtors and later recommend an outcome. Norrep’s main concern here appeared to be the sales process and, even if the Court was unwilling to oust management, the Court could have taken other steps to advance and protect the integrity of  the process.

As of the date of this post, the judgment does not appear to have been appealed, nor has it been cited in any other reported decision. It remains to be seen whether it will be seen as a paradigm shift or, more likely, as an isolated decision.

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