DIP Financing Rules Crystallized: Interim DIP Financing Arrangements Approved by the Ontario Court of Appeal


This article has been contributed to the blog by Steven Golick, Mary Paterson and Lindsay Offner. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt, LLP, and Lindsay Offner is an associate in the group.  Mary Paterson is an associate in the litigation department of Osler, Hoskin & Harcourt, LLP.

In Re Crystallex, the Ontario Court of Appeal (“Court of Appeal”) unanimously upheld three orders of the Ontario Superior Court of Justice (“OSCJ”) that (1) authorized bridge financing, (2) authorized interim financing pursuant to section 11.2 of the Companies’ Creditors Arrangement Act (“CCAA”) and (3) authorized a management incentive program (“MIP”).

Crystallex had a contract to develop a gold deposit in Venezuela which was rescinded by the Venezuelan government through no fault of Crystallex.  Crystallex had a $3.4 billion arbitration claim against the Venezuelan government. As a result of the recession of the contract, Crystallex was unable to pay $100 million to its noteholders, which was due Dec 31, 2011, and accordingly a CCAA filing was commenced.   The arbitration claim was the only asset of Crystallex.

The Initial Order granting CCAA protection also permitted Crystallex to pursue all avenues of interim financing, which included conducting an auction to raise financing in order to pursue the arbitration claim. The OSCJ also approved a $3.125 million bridge loan from Tenor Special Situations Fund 1, L.P (“Tenor”).

The auction resulted in Crystallex choosing a $36 million DIP financing bid by Tenor and rejecting the bid from its Noteholders.  The Tenor DIP financing contained some unusual provisions, including additional compensation of 35% of the net proceeds of any arbitration award or settlement, and certain governance rights. The OSCJ approved the Tenor interim financing and the Noteholders, which were all of the creditors of Crystallex, appealed the decision.

The noteholders appealed on various grounds, including that the DIP financing would continue after Crystallex emerged from CCAA protection, that they had offered to match the Tenor DIP financing terms, that the OSCJ had erred in deferring the business judgement of the directors in approving the bridge loan and the DIP loan, and that the Tenor DIP loan was effectively an arrangement in the guise of a financing.

Although the noteholders had appealed the grant of the bridge loan, this was not strongly pursued.  The bridge loan had already been disbursed, spent and repaid, and accordingly the Court of Appeal held that the appeal with respect thereto was moot.

The Court of Appeal rejected the appeal with respect to the Tenor DIP loan and the MIP.

The Court of Appeal noted that the CCAA gives courts broad discretionary powers. Although this discretion must further the underlying spirit and remedial purpose of the Act, the discretion is broad enough to permit a supervising judge to make any order appropriate to the circumstances. This discretion supported the OSCJ’s authorization of the interim DIP financing auction process.

Further, the Court of Appeal noted that section 11.2 of the CCAA contemplates the grant of a charge the primary purpose of which is to secure financing required by the debtor during the expected duration of its CCAA proceedings. The Court went on to say, however, that a further purpose of interim financing granted under section 11.2 is to enhance the prospects of a plan of compromise or arrangement that will lead to a continuation of the company in a restructured form or plan approval. Although section 11.2(4)(a) requires the court to consider the period for which CCAA protection will be in place, it does not require that such protection actually be in place. Thus, in this case, section 11.2 permitted interim financing that extended beyond the period of CCAA protection.

The Court of Appeal noted that the OSCJ had held that the competing DIP financing bid by the noteholders was not on the same terms of the Tenor DIP financing, upheld this, and rejected the submissions of the noteholders on this point.

The Court of Appeal held that the recommendation of the debtor’s directors with respect to interim financing under section 11.2 of the CCAA is not a determinative factor and in some cases may not be a factor at all in whether or not to make an order under section 11.2, although it would be unusual if the board did not recommend the financing for which the debtor was seeking approval. Instead, the judge must make an independent determination of whether an order under section 11.2 is appropriate.

However, the Court of Appeal decided that the recommendation of the debtor’s independent directors about a MIP is entitled to some weight, especially when those directors received expert advice, as they did in this case, because the CCAA does not list the specific factors the court must consider and the directors likely had the best sense of which employees were essential to the restructuring efforts.

The decision of the Court of Appeal in Re Crystallex highlights the flexibility that section 11.2 of the CCAA gives to a supervising judge to grant interim DIP financing to a company that has been granted protection under the CCAA.

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