Can a CCAA interim financing order be set aside?
The Respondents were six corporations, all of which are owned and controlled by one individual. The Appellants were the secured creditors of one or more of the Respondents. The Respondents’ assets consisted of a trailer park and an incomplete water treatment facility located on lands owned by the Respondents. The trailer park is the Respondents’ only functioning business, and has two employees.
As of November 2017, the Respondents owed the Appellants approximately $10,725,000. Following the commencement of foreclosure proceedings, the Respondents applied for an initial order, a sale approval and vesting order and access to interim financing pursuant to the Companies’ Creditors Arrangement Act (“CCAA”). The court granted an order authorizing, inter alia, interim financing of $1.25 million to enable the Respondents to complete the water treatment facility. The Appellants appealed and leave was granted on the issue of whether it was appropriate to grant the initial order for CCAA protection and to grant up to $1.25 million interim financing.
The Appellants challenged the appropriateness of CCAA proceedings, questioning whether the water treatment facility was capable of completion and, if so, whether it could produce viable capital. They also opposed the interim financing, arguing that the Chambers judge failed to consider the relevant factors pursuant to s. 11.2(4) of the CCAA. They claimed that granting interim financing to complete the water treatment facility would only result in the Respondents incurring further debt, which would inevitably fall on the creditors’ shoulders when the Respondents were forced to liquidate.
Pursuant to s. 11.2(1) of the CCAA, a debtor corporation may apply to the court at any stage of the proceedings for interim financing. Interim financing is a benefit to all stakeholders “as it allows the debtor to protect going-concern value while it attempts to devise a plan of compromise or arrangement acceptable to creditors”. It is generally granted to ensure the debtor corporation can continue its essential operations, such as “keeping the lights on” and paying employees, while it undergoes the CCAA proceedings.
Before an order allowing interim financing to be obtained can be granted, the court must consider, among other things, the factors enumerated in s. 11.2(4):
- the period during which the company is expected to be subject to proceedings under this Act;
- how the company’s business and financial affairs are to be managed during the proceedings;
- whether the company’s management has the confidence of its major creditors;
- whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company;
- the nature and value of the company’s property; and
- whether any creditor would be materially prejudiced as a result of the security or charge.
Decisions made pursuant to the CCAA are highly discretionary and attract deference from appellate courts. The mix of business and legal decisions made in real time make it difficult to say, after the fact and with any degree of precision, that one particular decision would have been better than another. Still, CCAA decisions are not immune from appellate intervention, and an appellate court can review a lower court’s decision to determine if the judge erred in principle, disregarded a material fact, or failed to act judicially.
The Chambers judge was satisfied that the completion of the water treatment utility would add to the overall net worth of the applicants, and the monitor would ensure that the $800,000 of the $1.25 million designated for this purpose was appropriately used. According to the Court of Appeal, although the Chambers judge concluded the completion of the water treatment facility would “add to the overall net worth” of the Respondents, he failed to consider whether this added net worth would enhance the prospect of a viable compromise pursuant to s. 11.2(4)(d). He also failed to consider the length of time the parties would be subject to CCAA proceedings pursuant to s. 11.2(4)(a).
There was no evidence of urgent circumstances dictating a need to permit the Respondents to obtain interim financing with a priority charge at this stage of the proceedings. The Respondents’ only active business received a monthly income that was sufficient to “keep the lights on” and pay the only two employees. Interim financing was not needed to maintain the Respondents’ essential operations. In fact, there was evidence that granting interim financing to complete the water treatment plan would deter the parties from reaching a viable compromise.
The creditors strongly opposed the funds being sought to facilitate the construction of a project they viewed as an inevitable failure. This fact further detracted from the appropriateness of granting the interim financing, with a priority charge, at the preliminary stage of the proceedings.
The Court concluded that the Chambers judge had erred in granting the interim financing and the appeal related to that issue was allowed. The appeal relating to the appropriateness of the initial order was dismissed.
Counsel: Diana Lee, Q.C. and Alexander Shalashniy of Kanuka Thuringer LLP for Industrial Properties Regina Ltd., Rick Van Beselaere, Q.C. of Miller Thomson LLP for 101297277 Saskatchewan Ltd., Ryan Pederson of Leland Kimpinski LLP for Affinity Credit Union and Jeffery Lee, Q.C. and Paul Olfert of MLT Aikins for the Respondents
Full case: http://canlii.ca/t/hs7tj