Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Caitlin Fell and Edward Sellers . Edward Sellers is a partner and Caitlin Fell is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP.
In January 2013, the Ontario Superior Court of Justice in Dondeb Inc., Re, 2012 ONSC 6087, dismissed a debtor’s application for an initial order under the Companies’ Creditors Arrangement Act (“CCAA”) and instead granted a receivership order. The application for an initial order was dismissed on the basis that the Court was not satisfied that a successful plan could be developed that would receive creditor approval.
In late 2012, a group of companies owned and controlled by or through a holding company, Dondeb, Inc. (“Dondeb”), sought an Initial Order under the CCAA. The application for an initial order was sought in order to enable an orderly liquidation of the assets and property of the various companies comprising of Dondeb. The applicants argued that the flexible mechanism of the CCAA was appropriate in this circumstance as there were common expenses and common security across some of the companies and that any order in liquidation would prevent the incurrence of added cost should individual properties and companies be placed in liquidation.
In analyzing the purpose and nature of the CCAA, the Court accepted the general proposition of law advanced on behalf of the applicants that the court has wide discretion “on any terms it may impose” to make an initial order and that the breadth and flexibility of the CCAA permit both the preservation and restructuring of the business as a going concern or also a sales process or orderly liquidation to achieve maximum value and achieve the highest price for the benefit of all stakeholders.
The Court also accepted the general proposition that given the flexibility inherent in the CCAA process and the discretion available, that an initial order may be made in a situation of “enterprise” insolvency where as a result of a liquidity crisis not all of the individual entities comprising the “enterprise” may be themselves insolvent but a number are and the purpose of the restructuring plan is to restore financial health or maximize benefit to all stakeholders by permitting further financing. Such a process can include liquidation.
The application however was opposed by numerous secured creditors, representing over 75% in value, who had mortgages or other security on the property that was beneficially owned by one or more of the companies in the Dondeb “Group”.
After considering various arguments, the Court determined that a successful plan would not likely be developed that would receive approval by the creditors in any meaningful fashion. The Court noted that to a large extent, the principal of the applicants was the author of his own misfortune not just for the liquidity crisis in the first place but also for a failure to engage with creditors as a whole at an early date. The Court determined that the receivership order would achieve an orderly liquidation of most of the properties and protect the revenue from the operating properties with the hope of potential of some recovery of the debtor’s equity. The Court also considered decisions where it was determined that CCAA relief should not be granted, including in the case of Octagon Properties Group Ltd. Re, 2009 CarswellAlta 1325 (Alta. Q.B.). In Octagon Properties Group Ltd., the Court stated the following:

This is not a case where it is appropriate to grant relief under the CCAA. First, I accept the position of the majority of first mortgagees who say that it is highly unlikely that any compromise or arrangement proposed by Octagon would be acceptable to them. That position makes sense given the fact that if they are permitted to proceed with foreclosure procedures and taking into account the current estimates of value, for most mortgagees on most of their properties they will emerge reasonably unscathed. There is no incentive for them to agree to a compromise. On the other hand if I granted CCAA relief, it would be these same mortgagees who would be paying the cost to permit Octagon to buy some time. Second, there is no other reason for CCAA relief such as the existence of a large number of employees or significant unsecured debt in relation to the secured debt. I balance those reasons against the fact that even if the first mortgagees commence or continue in their foreclosure proceedings that process is also supervised by the court and to the extent that Octagon has reasonable arguments to obtain relief under the foreclosure process, it will likely obtain that relief.

In general, the Court noted that the use of the CCAA for the purpose of liquidation must be used with caution when liquidation is the end goal, particularly when there are alternatives such as an overall less costly receivership that could accomplish the same overall goal.

The views and opinions expressed herein are exclusively the personal views of the guest contributors only, unless otherwise attributed. Information and opinions expressed herein do not necessarily represent the views of Weil, its attorneys, or its clients. Please see the complete Disclaimer for additional terms and conditions of use of this blog.