Can a creditor cross-examine a debtor before a meeting to vote on a proposal?
Eureka 93 and the related corporations were intended to be a vertically integrated hemp and cannabis enterprise. The corporate network created for that purpose collapsed into insolvency. The debtors’ property was subject to a first mortgage, a second mortgage and DIP financing.
The original appraisal of the land value was done in 2018. In June 2020, the debtors obtained an updated appraisal, which valued the land as having lost 1/3 of its value. Based on the new valuation of the land, the debtor proposed to value the security represented by the second mortgage at $0. This would make the noteholders the largest unsecured creditor. As such the noteholders would effectively control the proposal. If the noteholders voted against the proposal, there would be a bankruptcy.
The noteholders were unhappy about the stark binary choice to either vote for the proposal or to trigger a bankruptcy. The wanted to obtain more information and sought an order that the debtors be cross-examined in advance of the meeting of creditors. They hoped to discover other assets which could be applied against their debt or at least get a better understanding of whether they could put any faith in the proposal as it was structured. The meeting of creditors to vote on the proposal is now scheduled for July 28, 2020.
Section 163(2) of the Bankruptcy and Insolvency Act (the “BIA“) requires the requesting party to show “sufficient cause” and is for the purpose of investigating the administration of the estate of the insolvent party. The section does not authorize a “fishing expedition” by a creditor for its own benefit or to pursue a private remedy. The order must be for the general benefit of the creditors.
The BIA is designed to provide for the orderly disposition of the affairs of individuals and entities that are insolvent including the possibility of avoiding bankruptcy through a proposal. As such, the BIA provides a mechanism to freeze events by means of a stay and it then provides a series of rights, decision points and powers of investigation.
Here, the noteholders sought the order in advance of voting on a proposal essentially so that they could make a more informed choice. The scheme of s. 163 is generally to give the Trustee the power to investigate the affairs of a bankrupt and normally to authorize a creditor to conduct such investigations where the Trustee is unable or unwilling to take those steps. Section 52 of the BIA permits creditors to vote to adjourn the meeting for further investigation or for examination under oath. So the noteholders had three alternatives at least. They could vote for the proposal. They could vote against the proposal and trigger a bankruptcy. Finally, they could vote to adjourn the meeting for the purpose of examinations under oath.
The request for cross examinations in advance of the meeting of creditors was premature. Without having the report of the trustee and attending the meeting where the creditors may pose questions, it is difficult to meet the test in s. 163 (2). The proposal trustee had not expressed any concern about lack of cooperation or lack of access to information. Moreover, although the other creditors were on notice of this motion and took no position on it, and despite the fact that the noteholders would control the meeting, it was in the interests of all creditors to be able to attend the meeting, receive and review the proposal and to cast their votes—including a vote on whether to request further investigation.
The Court dismissed the noteholders’ motion without prejudice to any requests for information that may lawfully be demanded other than pursuant to s. 163 (2) of the BIA.
Counsel: Patrick Shea of Gowling WLG for the debtors, Elliot Birnboim and Michael Crampton of Chitiz Pathak LLP for Dominion Capital LLC (noteholders), Andrew Lenz of Perley-Robertson, Hill & McDougall LLP for PR, creditor, Eric Golden of Blaney McMurtry LLP for the Proposal Trustee and Shawn Bustin for Family Lending Inc./AgriRoots
Judge: Mr. Justice Calum MacLeod