Restructuring

This article has been contributed to the blog by Dave Rosenblat. Dave Rosenblat is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP.

The British Columbia Superior Court (the “Court”) was faced with competing applications regarding a small liquefaction facility (the “Project”) in Douglas Channel LNG Assets Partnership v. DCEP Gas Management Ltd., 2013 BCSC 2358 (“Douglas”). Douglas involved several parties that had invested considerable resources into the development of the Project. The Project faced financial difficulty and various other troubles, leading to certain of these parties seeking the appointment of a receiver. In response, other involved parties sought protection under the Companies’ Creditors Arrangement Act (the “CCAA”). The Court granted a stay under the CCAA given that there was a reasonable possibility of a restructuring.

Background

Certain entities controlled by a Mr. Tatham, HN DC LNG Limited Partnership and Golar LNG Ltd. (“Golar” and collectively the “Project Participants”) had invested considerable resources into the development of the Project. Financing had been obtained by various Tatham entities, Douglas Channel LNG Asset Partnership, Douglas Channel Gas Services Ltd. and LNG Capital Financing Ltd. through the issuance of promissory notes. The noteholders are Golar, ENN Group Co. Ltd. (“ENN”) and AGH Consolidated Ltd.

The Project was facing financial difficulties. Additionally, parties to the Project were either unable or unwilling to meet various obligations under an Investment Framework Agreement which governed the relationship between the Project Participants. Further, certain Tatham entities were facing financial difficulties and the Tathams’ relationship with other parties involved in the Project had soured. Two of the secured creditors, Golar and ENN, demanded payment of amounts due under the promissory note. After not being paid, Golar and ENN sought the appointment of a receiver. In response, the debtor entities sought CCAA protection.

Certain non-Project Participants, which the Court described as stakeholders, made appearances in the proceeding. One of these stakeholders was Exmar NV (“Exmar”), a leader in the development and operation of liquid natural gas facilities which supported the application for CCAA protection. Exmar sought a short window of time for the purpose of making a proposal to resolve the dispute between the parties to the Project (that is to say, to bring in money). The Court noted that Exmar had brought in an expression of interest from a potential purchaser of liquid natural gas from the Project.

Parties favouring a receivership submitted that there was no real business with respect to the Project and that it was devolving. Further, these parties cited a broken relationship between the Project Participants and general dysfunction which had arisen with respect to the Project. Those Project Participants seeking the appointment of a receiver argued that it was appropriate given that any proposal under the CCAA was “doomed to fail”.

Certain Project Participants and Exmar argued that the CCAA regime was appropriate for the Project. These parties submitted that the structure of the Project was complicated and that there were contractual issues which would need to be litigated that could not be dealt with in a receivership. Additionally, the parties favouring CCAA protection submitted that the key Project assets were not in peril.

Analysis

The Court held that immediate peril to the key Project assets had not been established. Certain contracts with Pacific Northern Gas Ltd. (“PNG”) were identified as being at risk; however, PNG was prepared to agree to a short stay before taking any action regarding such contracts.

Though the Court accepted that there was no real operating business at the time, it noted that the Project was a development business which had been operating and into which significant efforts had been invested. Additionally, the Court noted that there was clear interest for the Project to continue under some structural arrangement. Therefore, the Court was of the view that the opportunity to form a plan was warranted and that there was a reasonable possibility for a restructuring. For that reason, a one-month stay of proceedings was provided under the CCAA.

Implications

Douglas illustrates that the prospect of a restructuring may lead courts to grant CCAA protection rather than appoint a receiver when there are competing applications for each respective remedy. Courts may find that there is a reasonable possibility for a restructuring when an external party indicates that it is willing to assist in, and contribute to, such an effort. A lack of operations will not necessarily be a barrier to obtaining a stay under the CCAA. Rather, development businesses may receive the benefit of a stay in certain circumstances. However, such a remedy may not be available when key assets are at risk.

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