Can a transaction fee have priority over other post-filing liabilities without a court-ordered charge?
The petitioners (together, “Ascent”) are currently in the midst of creditor protection proceedings under the Companies’ Creditors Arrangement Act (the “CCAA“). As of the fall 2018, Ascent was in the business of cultivating, producing, processing and distributing cannabis and cannabis by-products in British Columbia and in the United States. Ascent’s business was severely compromised by the suspension of its Canadian cannabis licenses.
In November 2018, Ascent engaged Clarus to assist with a review of its strategic alternatives pursuant to terms set out in an Engagement Letter. Clarus advised that the best course of action was to pursue a sale of Ascent’s Canadian assets as soon as possible to another producer who held the applicable licenses.
Ascent instructed Clarus to pursue a formal sale and investment solicitation process of the Canadian assets (the “SISP”). From December 2018 into February 2019, Ascent dealt with many interested parties, at all times assisted in that respect by Clarus. Later in the process, Ascent determined that it was in its best interests to continue its restructuring efforts in a CCAA proceeding and, within that proceeding, secure outside financing so as to extend the SISP for a short period of time.
By the deadline under the SISP, Ascent had received multiple bids for its Canadian assets, including a bid by Gulf Bridge. Ascent accepted Gulf Bridge’s bid and entered into an asset purchase agreement (“APA”) with BZAM Management Inc. (“BZAM”), Gulf Bridge’s affiliate. The transaction closed on April 5, 2019, resulting in Ascent holding net proceeds of just over $29 million.
The Engagement Letter provides for the payment of a “Transaction Fee” upon the closing of a “Transaction”. It was clear that the completion of the BZAM APA came within the definition of a “Transaction” under the Engagement Letter. Clarus sought an order directing Ascent to pay it $949,200, being the transaction fee payable as a result of the completion of the BZAM APA.
- That it is a “post-filing” claim payable now in priority to the claims of the pre-filing creditors, as will be determined under the Claims Process;
- In the alternative, that it is a Pre-Filing Claim that should nevertheless be paid in priority to other pre-filing claims.
Pursuant to s. 11 of the CCAA, this Court has the general authority to make any order that it considers “appropriate” in the circumstances. The Court held that there were unique circumstances in this case to support that a payment to Clarus at this time, and in priority to pre-filing claims, was appropriate.
The SISP was an extensive and challenging process. Clarus’ employees were extensively involved in that process and provided real and substantial value to Ascent in formulating, conducting and assessing the SISP process. Clarus conducted the SISP in a professional manner from early December 2018 until the CCAA filing on March 1, 2019.
At the time of the CCAA filing, all parties fairly believed that there would be more than enough proceeds to pay not only all of Ascent’s post-filing claims, but also all their pre-filing claims. Based on the flawed presumption that there were more than sufficient proceeds for all creditors arising from the BZAM sale, Clarus continued to provide substantial services to Ascent (and thereby other stakeholders) in these CCAA proceedings.
All secured creditors had been paid in full or otherwise addressed. Payment of the fee under the Engagement Letter would have little or no impact on the pre-filing unsecured creditors. Stakeholders are to be treated as fairly and equitably as the circumstances allow. It would be unfair to deny Clarus its fee which has benefited all stakeholders significantly.
The Court granted an order directing immediate payment by Ascent to Clarus in respect of the amounted invoiced as payable under the Engagement Letter.
Counsel: Jason Dutrizac of DS Lawyers Canada for the Petitioners, Lance Williams of Cassels Brock & Blackwell LLP for Ernst & Young Inc., the Monitor, Ashley Taylor and Jonathan Buysen of Stikeman Elliott LLP for Clarus Securities Inc., Scott Turner and Balpreet Singh Khatra of Burns Fitzpatrick LLP for Blair Jordan and Karin Lelani, and Kimberly Robertson of Lawson Lundell for Green Sage, LLC and OpenFource, Inc. dba Trek Global.