Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Caitlin Fell and Dave Rosenblat. Caitlin Fell is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Dave Rosenblat is a student at law at Osler, Hoskin & Harcourt LLP.
On January 31, 2013, the Ontario Superior Court of Justice (Commercial List) in Farley Window Ltd. (Re), 2012 ONSC 756 granted debtor protection under the Companies’ Creditors Arrangement Act (the “CCAA”) despite opposition from that debtor’s only significant secured creditor. The decision in Farley follows shortly after the decision in Dondeb Inc., Re, 2012 ONSC 6087 where the debtor’s application for CCAA protection in that case was dismissed and a receivership order was granted.
Farley Windoor Ltd. and Farley Windows, U.S.A., Inc. (collectively, “Farley” or the “Applicants”) sought an initial order under the CCAA. However, Farley’s only significant secured creditor (the “Secured Creditor”) opposed the application and sought instead the appointment of a receiver and manager of all the property and assets of Farley. Prior to the granting of the initial order, Farley had outstanding liabilities of approximately $16.1 million and had been facing numerous operational challenges. Worth noting is that Farley had approximately 400 employees and was the second largest employer in the Town of Alexandria at the time of the hearing.
Following an unsuccessful attempt to obtain additional capital or refinancing, Farley resolved to commence CCAA proceedings to restructure its business through the sale of one of its product lines and consolidation of its operations. Farley provided the court with a proposed sales and investment solicitation process (“SISP”) and submitted that the SISP would most likely result in a refinancing by a “bridge lender” that would replace the Secured Creditor facilities then in place. Farley submitted that the SISP was necessary to conduct the proposed restructuring under the protection of the CCAA in view of its financial position.
In granting Farley’s requested relief and denying the appointment of a receiver, the Court noted that the Monitor had advised that the requested relief was in the best interests of the Applicants and stakeholders, that the Applicants were acting in good faith and with due diligence, and that there was a real possibility of a refinancing or sale. The Court emphasized that it would not be appropriate to appoint receivers when there was a reasonable prospect of obtaining refinancing on a restructured basis.
Further, in allowing CCAA protection, the Court held that the Secured Creditor failed to demonstrate that the proposed restructuring would not succeed or that its secured position would be eroded to the point that some of its secured claim would become unsecured.  The Secured Creditor’s loss of confidence in Farley was not a sufficient reason for barring CCAA protection as, in this circumstance, the loss of confidence of the Secured Creditor did not amount to a situation where all principal creditors had lost confidence in the debtor. In this case other, more exposed, creditors and stakeholders of Farley including employees as well as the Town of Alexandria supported the proposed order. In this respect, the Court provided that it must not prefer the interests of a secured creditor over the interests of other stakeholders without compelling evidence that the security would be eroded to the point of losing its benefit.
The decision in Farley follows shortly after the decision in Dondeb Inc., Re, 2012 ONSC 6087. As mentioned in this blog, in Dondeb, a debtor’s application for CCAA protection was dismissed and a receivership order was granted. In Dondeb, the CCAA was denied on the basis that the Court was not satisfied that a successful plan could be developed and receive approval from the creditors. This is in contrast to Farley where an initial order was granted in spite of the objection of the only significant secured creditor. Farley and Dondeb can be distinguished primarily on the basis of the existence and role of other significant stakeholders and creditors including employees.  Both Dondeb and Farley shed light on the factors that may impact the granting of an initial order in the face of secured creditor objections.

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.