Can creditors receive post-filing interest on their claims in CCAA proceedings?
The Debtor was a mortgage investment company that no longer carried on active business. It previously loaned money it obtained from investors who subscribed for its preferred shares to various business enterprises. The preferred shareholders were equity claimants and ranked lower in priority to the Debtor’s creditors. They would not be paid until the creditors’ claims were paid. The Monitor advised that the creditors would not approve a plan of arrangement unless it was amended to provide for post-filing interest to be paid to all creditors. Without this provision, the Debtor would be placed into bankruptcy.
The Debtor and the Monitor brought an application seeking directions on whether the plan of arrangement should be amended to include a provision that the creditors shall be paid post-filing interest at the 5% interest rate provided for in the Bankruptcy and Insolvency Act. The normal rule (called the “interest stops rule”) in insolvency proceedings is that creditors are not entitled to be paid interest that accrues after filing. The question was whether the rule should also presumptively apply in the CCAA context.
There is no specific provision in the CCAA dealing with post-filing interest. However, the Supreme Court of Canada has described the BIA and the CCAA as part of a harmonized integrated insolvency regime where the fair treatment of creditors and the orderly administration of an insolvent debtor’s estate apply with equal force. If the interest stops rule is not presumptive in the CCAA context, creditors entitled to post-filing interest may be less motivated to compromise than those creditors without it and the CCAA’s remedial objectives could be frustrated.
However, there may be exceptional circumstances—as in this case—where the interest stops rule is unfair and plans of arrangement may allow for payment of post-filing interest. If the creditors approved the plan of arrangement, the Monitor would recover sufficient funds to pay creditors in full and to make a distribution to preferred shareholders (albeit less than the value of their claims). Any additional and subsequent recoveries would be to the benefit of the preferred shareholders.
If the plan of arrangement failed, the Debtor would be bankrupt. In the event of bankruptcy, the creditors would still be paid their proven claims, but the costs of the proceeding would be higher and any distribution to creditors and preferred shareholders would be delayed. In accordance with the BIA, post-filing interest at 5% would continue to accrue on the creditors’ proven claims until they were paid, but this would have the effect of eroding the surplus available for distribution to the preferred shareholders.
Accordingly, the Court held that the plan should be amended in the form recommended by the Monitor to allow for post-filing interest of 5%, and presented to the creditors for their vote.
Counsel: Jeremy West of Watson Goepel for the Petitioner; John Whyte of Lakes, Whyte LLP for the Preferred Shareholders; Peter Reardon of Nathanson, Schachter & Thompson LLP for the creditors, James Hancock and 1083163 Alberta Ltd.; Douglas Hyndman of Kornfeld LLP for the Monitor.
Judge: Walker J.