Can a DIP financing order be varied years after court approval?
The Ad Hoc Committee of Shareholders (the “Committee”) of Crystallex International Corporation (“Crystallex”) sought leave to appeal the order of the motion judge dated May 22, 2018, which was made in the context of proceedings relating to Crystallex under the Companies’ Creditors Arrangement Act (“CCAA“). The Committee represented the interests of over 200 shareholders who, together, hold approximately 30% of Crystallex’s common shares. It sought to vary Debtor in Possession (“DIP”) financing orders that had received court approval four to five years ago.
When Crystallex sought CCAA protection in December 2011, its assets consisted of an arbitral claim for US$3.8 billion against the Bolivarian Republic of Venezuela for breach of an exclusive mining contract. Pursuant to an initial credit agreement, the DIP Lender proposed to provide US$36 million to Crystallex to fund its claim against Venezuela in exchange for a 35% interest in Crystallex’s potential recovery in that proceeding. A second agreement provided for the discretionary compensation of Crystallex management, who would receive a percentage of the recovery proceeds if the arbitration was successful. The court granted orders approving both agreements on April 16, 2012. The court later granted further orders amending the initial credit agreement to increase Crystallex’s indebtedness (the “DIP Financing Amendments”).
In 2016, Crystallex obtained an arbitral award of approximately US$1.4 billion against Venezuela, and Crystallex and Venezuela subsequently entered into a settlement agreement. The Committee alleged that the DIP Financing Amendments severely diluted their interest in the arbitral award by assigning all but a small percentage of the proceeds to the DIP Lender, thus prejudicing the interests of Crystallex’s shareholders. In its May 2018 motion, the Committee sought to vary the amending orders but did not impugn the initial orders, arguing that the amending orders were granted without prior notice to the shareholders.
The motion judge dismissed the Committee’s motion to lift the stay of proceedings to permit the shareholders to commence the proposed action against Crystallex. He concluded that there was no basis in law to vary the impugned amending orders, noting that the limited grounds for varying a final, issued and entered order are to correct slips or errors in expression. He found that the Committee sought to overturn key provisions of the order, the fairness and reasonableness of which had been established before the DIP Lender and Crystallex relied and acted upon them. The motion judge rejected the Committee’s argument that the shareholders had insufficient or no notion of the motions to approve the amendments, finding that they had been aware of the CCAA proceedings since early 2012. Finally, he held that the complaining shareholders had had ample opportunity to challenge or oppose the terms of the orders but had failed to act with reasonable diligence within the applicable limitation period.
In order to obtain leave to appeal from the decision of a judge supervising a CCAA proceeding, the moving party must demonstrate that the proposed appeal: (i) is prima facie meritorious and not frivolous; (ii) is of significance to the practice; (iii) is of significance to the proceeding; and (iv) will not unduly hinder the progress of the action.
The Court of Appeal held that the motion judge—appropriately relying on the record before him—fairly concluded that there was no slip or error in expression in the orders, nor had the shareholders alleged any fraud or newly discovered facts. As such, there was no basis to vary the orders based on the court’s inherent jurisdiction or r. 59.06(2) of the Rules of Civil Procedure. The Court also found that notice was effected in accordance with the initial order and with s. 23 of the CCAA. The Monitor published notices of the CCAA proceedings and created a website on which it posted its reports, court orders and motion materials. It issued a press release that identified the website’s address. All of the motion materials disclosed the amounts of the proposed amendments.
None of the shareholders represented by the Committee took steps to be placed on the service list. They failed to attend the hearings when the impugned amending orders were granted. According to their own evidence, the shareholders knew of the CCAA proceedings since early 2012. In essence, this was a case of too little, too late. Potentially interested stakeholders cannot sit idle and await the outcome of realization proceedings. They must act to protect their interests or else suffer the consequences of their omission. The Committee did not demonstrate that the motion judge exercised his discretion unreasonably or made any error in principle in dismissing the Committee’s motion.
Moreover, the Court held that the issue regarding variation of these CCAA orders was not of public importance as the law on varying orders is neither new nor contentious. It conceded that the appeal may be of significance to the action, but maintained that, on its own, this factor was insufficient to warrant granting leave to appeal. The Court dismissed the Committee’s motion for leave to appeal.
Counsel: Clifton Prophet and Nicholas Kluge of Gowling WLG for the Moving Party, the Ad Hoc Committee of Shareholders of Crystallex International Corporation, Timothy Pinos, Ryan Jacobs and Shayne Kukolowicz of Cassels Brock for the Respondent, the DIP Lender, Jay Swartz, James Doris and Robin Schwill of Davies Ward Phillips & Vineberg for the Respondent, Crystallex International Corporation and Aubrey Kauffman of Fasken for the Respondents, Robert Fung and Marc Oppenheimer