Can leasing companies be exempted from the allocation of professional fees in a restructuring?
Atlantica Diversified Transportation Systems Inc. (“Atlantica”) was a large trucking company operating in Halifax, Nova Scotia. It leased 82 trucks and trailers from Canadian Western Bank/Canadian Western Bank Leasing Inc. (“CW”). By August 2017, Atlantica was not paying its lease payments to CW. On August 24, 2017, CW sent a demand letter for the full balance owing under the contract, being $628,836.97.
On November 24, 2017, Atlantica applied for protection under the Companies’ Creditors Arrangement Act (“CCAA”). An initial order was granted on December 7, 2017, which stayed any proceedings or enforcement processes commenced against Atlantica. By February 2018, the CCAA restructuring was abandoned and the stay of proceedings was lifted. One of the outstanding issues concerned the allocation of the maximum allowable $75,000 available for the Administrative Charge (the professional fees and disbursements of Atlantica’s legal counsel and financial advisors) among the secured creditors.
BDO Canada Ltd. (the “Monitor”) recommended that the Administrative Charge be allocated between the secured creditors on the basis of debt payable to them as a percentage of the total debt payable to the secured creditors. BDO calculated CW’s portion to be 73% of the fees ($7,357,700 of the total secured debt of $10,037,632.80).
CW did not agree with the allocation. It argued that its financial arrangement with Atlantica reflected a “true lease”, rather than a “security interest” or “financing lease”. (Click HERE for a quick reminder of what a “true lease” is). As such, CW argued that it was not a secured creditor and ought to be either entirely exempted from the allocation process, or, alternatively, responsible for only a modest allocation, based on the remaining non-lease obligations owed to it by Atlantica. Approximately 91% of the money owed to it by Atlantica arose from “true leases”, and only the remaining 9% arose from non-lease obligations.
Based on the evidence put before it, the Court agreed that the trucks and trailers leased by Atlantica from CW represented “true” leases. In the circumstances of a “true lease”, lessors are generally exempted from the allocation of administrative expenses.
Nevertheless, the Monitor argued that true lessors can be allocated some of the relevant costs of the Administrative Charge, provided that it is just and equitable in all the circumstances. It suggested that CW benefited from the CCAA process because the Monitor was statutorily obliged to keep CW informed and serve as a central point of contact, which lowered CW’s monitoring costs. The Monitor also emphasized that the benefit of the CCAAprocess must be considered from the perspective of the collective good of the creditors, not the benefit derived by any single creditor.
CW disagreed with the claim that it benefited from the CCAA process, arguing that certain actions, including the return of 24 of its vehicles, were not necessarily attributable to the Monitor’s actions. Moreover, it alleged that it suffered prejudice as a result of the process, because it could not seize the vehicles itself during the process, despite not receiving the lease payments it was entitled to.
Ultimately, what is just and equitable is largely determined by the facts of each case. The general principles applicable to such allocations were set out in HSBC Bank of Canada v Maple Leaf Loading Ltd. The overall result of an allocation must be one that is fair and equitable, and does not readjust the priorities between creditors, nor ignore the benefit or detriment to any creditor.
Having found that CW was a true lessor in relation to $6,4480,416.64, the Court held that CW derived, at best, a very modest actual direct or indirect benefit from the CCAA proceeding. It recognized that any quantification of such potential benefit was particularly difficult.
Nevertheless, the remaining $595,401.97 of non-lease obligations owed by Atlantica to CW provided a basis for the court to conclude that it was just and equitable to allocate some percentage of the Administrative Charge to CW, in acknowledgement of the Monitor’s efforts to recover some of CW’s owed income from the truck and trailer leases. In the Court’s view, a just and equitable allocation for CW was 20% of the Administration charge—that is, $15,000.
Counsel: D. Bruce Clarke and Leon Tovey of Burchells LLP for the Applicant, Gavin MacDonald of Cox & Palmer for Canadian Western Bank, Adam Crane and Heather Wyse of Patterson Law for BDO Canada Ltd., Matthew Moir of Weldon McInnis for Trailer Wizards Ltd. and Gregory MacIntosh for the Federal Dept. of Justice
Full case: http://canlii.ca/t/hqwtq