Can a proposal be approved if the company failed to disclose a creditor’s claim and give notice of the NOI to the creditor?
Conforti operated hair salons in malls and commercial office spaces. It became insolvent due to reduced business caused by the pandemic and imposed restrictions. Moroccanoil was a manufacturer of luxury haircare and body care products. In April 2015, it commenced proceedings against Conforti’s predecessor in New Jersey, USA, alleging that Conforti breached a settlement agreement with Moroccanoil. It claimed it was owed over $2.8 million.
Conforti filed a notice of intention to make a proposal on September 28, 2020. Notice was given to known creditors as declared by the company, which at the time excluded Moroccanoil. Moroccanoil was not included in Conforti’s statement of affairs, either at the time that the notice of intention was filed on September 28 or when the holding proposal was filed on March 12, 2021. Moroccanoil learned of Conforti’s Bankruptcy and Insolvency Act proceedings on June 7, 2021 through its American lawyers in the New Jersey proceeding, and began receiving notice of the BIA proceedings from June 2021 onwards.
Conforti’s trustee brought this motion to approve Conforti’s proposal to creditors. On a motion for court approval of a proposal, the court must consider the interests of the debtor (in restructuring debt and staying in business), the creditors (in resolving claims in a reasonable fashion), and the public (in maintaining the integrity of the bankruptcy process and the need to preserve commercial morality). The court must also consider the interests of all stakeholders, and weigh the effects of the approval of the proposal against those of a bankruptcy. The burden of proving that the proposal should be approved by the court lies with the debtor making the proposal, although the court hears the proposal trustee’s report. Courts have accorded significant deference to the majority vote of creditors at a meeting of creditors and courts have also accorded deference to the recommendation of the proposal trustee.
Moroccanoil was the only voting creditor that voted against the proposal, and opposed the trustee’s motion to approve same. It relied on s. 50.4(1) of the BIA, which provides that, on the commencement of an NOI, a debtor has a duty to file an initial creditor list which includes the names of creditors with claims of $250 or more. Morrocanoil argued that Conforti knowingly failed to disclose the Morrocanoil claim on the initial creditor list, while Conforti argued that such failure was merely an administrative irregularity and did not amount to a failure by Conforti to perform the duties imposed on it under the BIA.
The Court disagreed that Conforti’s failures should be dismissed as administrative irregularities. It found that Conforti had knowledge of Moroccanoil’s claim and its predecessor’s debt to Moroccanoil, and failed to disclose them on the initial creditor list. In failing to make these required disclosures, Conforti failed to perform its duty under the BIA.
Nevertheless, the Court did not regard Conforti’s failures to be conduct that rises to such a level that the public’s perception of the bankruptcy process would be undermined if the proposal was approved. It exercised its discretion to approve the proposal notwithstanding that it provided security for payment of less than 50 cents on the dollar on all unsecured claims provable against Conforti’s estate. The Trustee was of the view that the proposal provided for a greater recovery than bankruptcy, estimating that the return to creditors in a bankruptcy would be approximately 13%, versus approximately 20% under the proposal.
Moreover, the proposal was supported by all unsecured creditors except for Moroccanoil. The support of the creditors was a significant factor that supported the granting the motion. Accordingly, the Court granted the trustee’s motion and approved the proposal.
Judge: Justice Cavanagh
Counsel: Brendan Bissel of Goldman Sloan Nash & Haber and Joël Turgeon of Reconstruct for Crowe Soberman as proposal trustee; Clifton Prophet of Gowling WLG for Moroccanoil; Bobby Sachdeva and Erin Craddock of Miller Thomson for the company; Carmine Scalzi of Scalzi Professional Corporation for Antonio Conforti; Michael Noel of Torys for Cadillac Fairview; Michael Citak of Gardiner Roberts for Oxford Properties; Jessica Wuthmann of Camelino Galessiere for five landlords
By Matilda Lici