This article has been contributed to the blog by Edward Sellers, Caitlin Fell and Marta Rochkin. Edward Sellers is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Caitlin Fell is an associate in the insolvency and restructuring group. Marta Rochkin is a student-at-law at Osler, Hoskin & Harcourt LLP.
The Manitoba Court of Queen’s Bench in Re Puratone Corporation, 2013 MBQB 171, lifted a stay of proceedings under the Companies’ Creditors Arrangement Act (CCAA) for a group of suppliers to bring an action against the debtor company and the director and officers of that company. The main claims asserted by the suppliers were that they had priority over the proceeds of the sale of the debtor’s assets through a constructive trust and for fraudulent misrepresentation by the directors and officers of the corporation for entering into sales with the suppliers on the brink of a CCAA filing.
The Puratone Group of companies sought and obtained protection under the CCAA in September 2012. A stay was granted in the initial order (the “Initial Order”) and was extended thereafter from time to time. A sale of Puratone’s assets was approved by the court in November 2012. The proceeds from the sale were to be split between three secured creditors, although there were significant shortfalls that would be sustained by each. The court required the monitor to retain $6.75 million for any issues that may arise from any disputes with the purchaser and potential legal action.
The CCAA Stay of Proceedings:
In the Initial Order, a stay of proceedings was granted for any existing and future action against both Puratone and its directors and officers. A stay under the CCAA can only be lifted with written consent of the debtor and the monitor or alternatively with leave of the court. While the CCAA does not provide any guidance for when to lift the stay, s. 11.02(3) does provide guidelines for when a court should make a stay order. This section states:

(3) The court shall not make the order unless

(a) the applicant satisfies the court that circumstances exist that make the order appropriate; and

(b) in the case of an order under subsection (2), the applicant also satisfies the court that the applicant has acted, and is acting, in good faith and with due diligence.

The Court also noted that there must be a “sound reason” to lift the stay. To determine whether there is “sound reason”, three considerations should be analyzed in light of the nature and timing of the CCAA process: balance of convenience; the relative prejudice to the parties; and the merits of the proposed action.
The Alleged Legal Claim:
A group of farming operators (“ITB claimants”) sought priority over the proceeds from the sale of Puratone’s assets for their unpaid supply of grain in the two weeks leading up to Puratone’s CCAA filing. The ITB claimants requested that the court lift the stay of proceedings so that the claimants could pursue their priority claims.
The ITB claimants argued that an order to lift the stay should be given as Puratone, as well as its secured creditors, directors and officers, must have known at the time that the grain was supplied that Puratone was going to apply for CCAA protection and proceed to liquidate its assets. The claimants supported this by pointing out that in only two months after CCAA protection was granted, the secured creditors and Puratone came to an agreement over the sale of assets that would result in a major shortfall for the secured creditors. Puratone must have already been preparing its CCAA application when it accepted the grain from the ITB claimants. The Court acknowledged that the secured creditors were prima facie entitled to the proceeds as they held valid and perfected security agreements and priority for the ITB claim would only be granted as an equitable remedy.
The Court’s Decision:
The Court held in favour of the ITB claimants in lifting the stay against both Puratone and its directors and officers. The Court also emphasized that it was unreasonable to expect the claimant to have all the evidence needed to prove their claim at the outset, as much of this evidence would only come out in the discovery stage of the proposed litigation. This included evidence relating to whether the secured creditors were not innocent third parties and as such the claimants should be awarded constructive trust in the proceeds. The Court noted that given the size of the indebtedness, and the timing of the transaction, it was reasonable to infer that the banks were aware of a possible CCAA application and that the banks understood that grains were supplied to Purtone in an effort to continue to operate its business. These inferences were sufficient for the Court to determine that there was sufficient merit to the proposed constructive trust claim.
On the balance of convenience, the Court favoured the ITB claimants as well and interpreted this consideration in view of whether any restructuring plan or sale would be at risk by lifting the stay. As almost all the assets were sold and there was a shortfall to secured creditors, any litigation would not substantially interfere with the CCAA proceeding.
In considering the relative prejudice towards the parties, the Court weighed the harm that may result to each party depending on the outcome of the motion. If the stay was kept in place and the ITB claimants were forced to wait until the end of the CCAA proceeding to commence their claim, there would be no money left. The prejudice suffered by the secured creditors if the order was granted would only be that the remaining distribution would not be paid out until the litigation had ended. The court was able to alleviate this concern by requiring the claimants to provide an undertaking to damages for any damages sustained by the secured creditors for a delay in distributing the funds.
Discussion & Implications:
The Court recognized the concern in circumstances where a company continues to take on trade credit on the verge of a CCAA filing, as the company must have contemplated that it would be unable to satisfy these obligations. However, the Court noted that this may be a unique situation as the CCAA proceedings were essentially a liquidation proceeding, with no real prospect of a restructuring..
This decision and a decision by the Court on the merits of the claim for constructive trust and fraudulent misrepresentation may have significant implications for debtors as well as directors and officers. when companies continue to obtain credit and operate in the normal course of business as they prepare for CCAA protection.

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