What factors will a court consider on competing applications to terminate or extend the period to make a proposal?
A recent Alberta decision considers the factors a court will consider on competing applications brought by the debtor to extend the period to make a proposal and a secured creditor to terminate the period to make a proposal.
Flasha Holdings and Paul Flasha Contracting Ltd. (collectively, “Flasha”), and their proposal trustee, Faber Inc., applied to extend the date for them to make a proposal. Arundel Capital Corporation (“Arundel”), a secured creditor of Flasha, applied to terminate the period for Flasha to make a proposal.
Arundel submitted that Flasha was unlikely to make a proposal that would include paying its secured creditors and the Canada Revenue Agency in full, and that Arundel would not accept any proposal that did not including paying Arundel its $1.2 million claim in full. Arundel conceded that it would vote in favour of a proposal that saw it paid in full.
Flasha argued that it was able to make a proposal that would include paying Arundel in full, it was acting in good faith, and no creditor would be materially prejudiced by an extension. It contemplated receiving financing from Travelers in the amount of $1,575,000, which would be sufficient to pay out Arundel, the CRA and the other secured creditors.
Ultimately, the Court was satisfied that Flasha would likely be able to make a viable proposal that included paying out Arundel in full. The expected proposal in this case would not involve Arundel assuming any risk. To the contrary, it would have the certainty of immediate full payment. Moreover, Flasha and the proposal trustee had described the intended proposal, which was supported by a copy of Travelers’ term sheet, and they had explained that the CRA review, which was pending, was required to finalize a proposal. This was far more substantial than the bald assertion of a future proposal.
The Court concluded that Arundel failed to show that Flasha was unlikely to be able to make a viable proposal that would be accepted by its creditors. Rather, Flasha had demonstrated that it would likely be able to make a viable proposal if the Court granted the extension sought.
The Court was also not satisfied that an extension would prejudice Arundel. Arundel put forward no evidence of the rate of depreciation of the equipment which secured its leases beyond claiming that the equipment had deteriorated, was likely damaged and its value was being eroded. The proposal trustee submitted that the equipment was appraised and valued at $3,065,600 fair market value, $2,566,900 orderly liquidation value and $2,201,700 forced liquidation value. The Court concluded that the forced liquidation value of the equipment was at least $2,000,000 and any depreciation in subsequent months would not reduce its value below $1,500,000. Consequently, Arundel would not suffer prejudice due to depreciation as a result of the extension sought by Flasha.
Finally, the Court considered the length of the extension. Arundel submitted that the extension should be limited to 15 days and granted on certain conditions. However, in light of the fact that CRA was not able to predict when its review process would be complete, the Court found that the appropriate extension was 45 days. The Court granted Flasha’s application to extend the time for making a proposal and dismissed Arundel’s application.
Judge: Honourable Mr. Justice G.S. Dunlop
Counsel: Jamie Flanagan of McLennan Ross LLP for Arundel; Bradley Smith of Verhaeghe Law Office for Flasha; Bryan P. Maruyama of Parlee McLaws LLP for Faber Inc. as proposal trustee; George F. Body of the Department of Justice Canada for Canada Revenue Agency