What is the proper method of valuing the assets subject to a security interest in an insolvency?
Aldo Group filed for CCAA protection in May 2020, obtained overwhelming creditor approval of its plan of arrangement (the “Plan”) in April 2022, and received sanction of the Plan in May 2022 from Pinsonnault J.S.C. of the Superior Court of Quebec. The Plan provided that the issue of the valuation of Aldo Group-creditor Investissement Québec (“IQ”)’s secured claim (the “Secured Claim”) would be deferred to (a) provide the parties time to negotiate or (b), failing an agreement, have the valuation determined by the Court. It was essential to address this Secured Claim because the discharge of the underlying IQ security was a condition to securing the exit financing necessary to the Plan’s implementation.
No agreement between the parties could be reached respecting the Secured Claim’s value, and Justice Pinsonnault was thus seized with the task of determining the same. Pursuant to the Plan, secured claims were, in the event of failure to resolve any issue, to be appraised based on the value of the assets charged by a given secured creditor’s security. The parties agreed that the appropriate valuation date was May 7, 2020, the date of the initial order (the “Valuation Date”). Aldo Group took the position that the software and hardware assets charged by IQ’s security (the “IQ Assets”) should be assessed based on their liquidation value because Aldo Group was insolvent at the Valuation Date, while IQ submitted that these should be valuated based on their going-concern value because Aldo Group was still operating on the Valuation Date and intended to continue to do so.
Aldo Group argued that, as a threshold matter, IQ had failed to properly identify the charged assets and that the value of the IQ Assets was therefore nil. In the alternative, Aldo Group submitted expert evidence by KPMG valuating the IQ Assets’ liquidation value at between $140,000 and $6.5 million (with a midpoint of $ 3.3M). IQ’s experts valued the IQ Assets on a going-concern basis at a net book value of $86 million.
The Court decided in favour of Aldo Group. Justice Pinsonnault held that the IQ Assets were properly identified but should be valuated on a liquidation basis at $3.3 million. The Court found that, at the Valuation Date, Aldo Group was clearly insolvent, was about to run out of the liquidity needed to operate, and that their short- and medium-term survival was dependent on obtaining interim financing. Therefore, the IQ Assets had, at that time, only nominal value and were to be assessed on a liquidation basis. The Court also noted, with respect to Aldo Group’s intent to continue operating, that a recent study on CCAA-proceeding outcomes shows that most restructurings under this statute do not result in a plan of arrangement being approved. Seeking CCAA protection therefore does not necessarily suggest that a given debtor is or will be operating as a going concern.
In making the finding as to valuation, the Court also cited with approval certain submissions in the Monitor and KPMG reports to the effect that, even if IQ were to enforce its full security, the yield would be minimal due to several difficulties in this respect. Enforcing IQ’s security as valued on a going-concern basis would mean the inability for Aldo Group to implement the Plan and therefore the potential liquidation of the company, with the result being that the IQ Assets would ultimately be appraised in a liquidation context anyway. Constraints on the transfer of software licenses and the uniqueness of certain programming, which limited the market for the IQ Assets, were also potential issues. In addition, all other creditors had accepted a compromise of their claims, and the plan of arrangement received near-unanimous consent.
IQ sought leave to appeal from the first-instance decision at the Quebec Court of Appeal. IQ argued inter alia that the motion judge erred in (a) using the liquidation value, as opposed to the going-concern value, of the IQ Assets in determining the valuation of the Secured Claim essentially because Aldo Group intended to continue to operate and (b) that Aldo’s capacity to pay the debt should not have been used as a criteria for its assessment.
In denying the application, Marie-Josée Hogue, J.C.A. reiterated that it must be shown that the appeal raises a question of general importance for the insolvency-law practice, that the question is important to the file, that the appeal has arguable merit, and that the appeal will not unduly hinder the CCAA proceedings. The Court noted that the decision below was a highly factual and particular one that established no new legal principles and did not err as to the applicable law. The decision did not stand for the principle that liquidation value is the only valuation method possible for assets in a CCAA proceeding. The decision was thus not of importance for the practice at large.
Furthermore, the chances of success on appeal were low given that the issues raised on appeal were those of fact and no errors were identified in this respect. An appeal also risked endangering the implementation of Aldo Group’s Plan. Therefore, while the matter was of perhaps importance to IQ, the test for granting leave was not made out and leave was denied accordingly.
Judges: Michel A. Pinsonnault, J.S.C. of the Superior Court of Quebec and Marie-Josée Hogue, J.C.A. of the Quebec Court of Appeal
Counsel: Denis Ferland, Gabriel Lavery Lepage and Benjamin Jarvis of Davies Ward Phillips & Vineberg for the Aldo Group; Jocelyn Perreault of McCarthy Tétrault for EY as Monitor; Marc-André Morin, Nicola Mancini and Éliane Dupéré-Tremblay of Fasken Martineau DuMoulin for IQ; Danny Duy Vu of Stikeman Elliott for National Bank; Marc Duchesne and Mathieu Lévesque of Borden Ladner Gervais for BMO and others; Noah Zucker and Julie Lacourcière of Norton Rose Fulbright Canada for CIBC; and Kim Sheppard for the Department of Justice
By Matilda Lici