NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Edward Sellers and Joshua Hurwitz. Edward Sellers is a partner in the Insolvency & Restructuring group and Joshua Hurwitz is an associate in the Insolvency & Restructuring group at Osler, Hoskin & Harcourt.
The Ontario Superior Court of Justice lifted a Companies’ Creditors Arrangement Act (the “CCAA”) stay and modified a Claims Procedure Order (“CPO”) to permit a class action proceeding which had not been filed by the CPO claims-bar date. Re Timminco Ltd. (2014), 2014 ONSC 3393, 2014 CarswellOnt 9328 (Ont. S.C.J.) (“Re Timminco”) highlights the discretionary nature of both stay and claims-bar orders under the CCAA and aligns this discretion with the purpose of the CCAA.
In May 2009, the representative plaintiff initiated a proposed class action naming Timminco Limited (“Timminco”) and certain directors and officers of Timminco (the “Directors”), among others, as defendants. The class action alleged that Timminco had made public misrepresentations regarding certain cost advantages in its manufacturing processes. The action sought access to insurance proceeds and potentially the assets of Directors.
In an initial order granted January 3, 2012, pursuant to the CCAA, Timminco obtained a stay of all proceedings – including the class action – as against itself and its Directors. On June 15, 2012, Timminco obtained a CPO which established a claims-bar date of July 23, 2012 for claims against the Directors. The representative plaintiff failed to oppose the CPO, seek leave to appeal the CPO, or file a proof of claim for the class action by the claims-bar date.
The Directors argued that the representative plaintiff’s failure to file a proof of claim by the claims-bar date barred the class action. They further argued that the CCAA stay should not be lifted to enable the class action to proceed.
By the time the case was heard by the Court, Timminco’s assets had been sold, distributions had been made to secured creditors, and no CCAA plan had been developed or was forthcoming.
Decision and Analysis
Morawetz J. held that the claims-bar date in the CPO should not bar the class action and that the CPO should be modified. He also held that the CCAA stay should be lifted.
Justice Morawetz’s analysis focused on the discretionary nature of claims-bar orders and stay orders under the CCAA. This discretion needed to be exercised in accordance with the purpose of such orders: assisting the debtor to restructure or realize on assets through the CCAA.
With respect to claims-bar orders, s. 12 of the CCAA states:
The court may fix deadlines for the purposes of voting and for the purposes of distributions under a compromise or arrangement.
The term “may” indicates the discretionary nature of claims-bar orders, which fall within the ambit of s. 12. Moreover, one of the purposes of claims-bar orders lies in determining the quantum of liabilities and this desire for certainty is magnified in importance when distributions need to be made or when a forthcoming CCAA plan will be presented to creditors. In this case, there had already been distributions to secured creditors and there was no CCAA plan pending. Justice Morawetz therefore reasoned that the claims-bar order should not be used to defeat the class action proceeding.
With respect to lifting stay orders, Morawetz J. reiterated that the lifting of a stay is discretionary. As discussed in Canwest Global Communications Corp., Re, 2011 ONSC 2215, 75 C.B.R. (5th) 156 (Ont. S.C.J. [Commercial List]), at para. 27, in exercising this discretion, the court should consider whether there are sound reasons for lifting the stay that are consistent with the objectives of the CCAA. This includes a consideration of (a) the balance of convenience; (b) the relative prejudice to the parties; and (c) where relevant, the merits of the proposed action. In this case, Morawetz J. opined that the prejudice experienced by the Directors – as a result of receiving notice after the claims-bar date – had to be balanced against the rights of the representative plaintiff to have the class action proceed to court. The prejudice experienced by the Directors could be remedied by a reasonable case timetable.
The decision of the Court in Re Timminco is unsettling: a class action plaintiff who participated in a CCAA case, but failed to oppose or appeal a claims-bar order and failed to file a proof of claim by the claims-bar date, succeeded in modifying a claims-bar order that was supposedly final and binding. Historically, where directors have remained in office while a corporate debtor is in the zone of insolvency, directors have sought indemnities and other protections to limit their exposure to liabilities while supporting a restructuring. These indemnities have served functionally to protect directors up until the claims-bar date. If a claims-bar date is as flexible ‑ or inapplicable in the absence of a CCAA plan ‑ as suggested by the Court, this will have an impact on director retention and conduct.
Re Timminco illustrates the discretionary nature of claims-bar and stay orders under the CCAA and how these orders are interpreted in a purposive manner. Of crucial importance in this case was the fact that Timminco’s assets had been sold and no CCAA plan was contemplated or forthcoming. Justice Morawetz emphasized this fact when he differentiated Re Timminco from previous case law discussing judicial discretion in assessing claims-bar orders where there had been a CCAA plan in place. So the prospect or existence – or lack thereof – of a CCAA plan will be an important consideration for a court in exercising its discretion to modify a claims-bar order.