Will the Court approve the sale of an insolvent business to a related party without a sales process?
The Debtor entered into an Asset and Share Purchase Agreement with the Purchaser and sought approval and a vesting order in respect of that transaction, pursuant to s. 65.13 of the Bankruptcy and Insolvency Act (the “BIA“). The Proposal Trustee supported the application and recommended the transaction. The Debtor’s two secured creditors approved of the transaction.
The Debtor is an engineering services firm operating in Alberta and surrounding provinces in the energy sector. It has been experiencing declining revenues and operations given the downturn in the Canadian energy sector. The Debtor was projected to have negative cash flow this fiscal year without this transaction.
The Purchaser is a newly created subsidiary of a company related to the Debtor. Section 65.13 of the BIA precludes a person who is the subject of an NOI from selling or disposing of assets outside the ordinary course of business, without authorization of the Court. Section 65.13(4) sets out a non-exclusive list of factors that the Court must consider. Section 65.13(5) applies where a proposed sale or disposition is to a person who is related to the insolvent person, as is the case here.
- good faith efforts were made to sell or otherwise dispose of the assets to persons who are not related to the insolvent person; and
- the consideration to be received is superior to the consideration that would be received under any other offer made in accordance with the process leading to the proposed sale or disposition.
The Debtor argued that its Board considered a sale process and determined that it was not feasible. The Debtor’s circumstances, combined with a highly mobile clientele and workforce—both of whom could simply go elsewhere in the face of a sales process—meant that the Board did not consider a third-party sale process to be realistic. The Debtor also lacked the liquidity to fund a sale process, and would lose an estimated $600,000 during the process. The Board considered that the sale process itself would erode the value that was left in the Debtor, and there would be nothing left to sell at the end.
The Court approved the transaction and granted the relief sought by the Debtor. It based its decision on a few factors.
Second, the number and value of non-served unsecured claims was relatively small, so the unserved unsecured creditors were not prejudiced by the transaction. There was no scenario where the unsecured creditors would be paid, unless their debt was assumed by a purchaser.
Third, while the process leading up to the transaction was not as robust as is often expected, this was reasonable in the circumstances. The Board’s reasoning as to why a sales process was not feasible in this case made sense, given the financial circumstances of the company, the lack of liquidity to fund the sale process, the portable nature of the employees and clients, and the circumstances in which a process would have to take place, including the very depressed price of oil.
Finally, the Purchaser was paying consideration at the highest end of the possible range of value that could be recovered for either the company as a going concern, or on a liquidation basis. The purchase price was significantly more than would be achieved in a liquidation. The Court was satisfied that the consideration was reasonable and fair. Moreover, the transaction was going to proceed quickly, so as to avoid further erosion of value.
Counsel: Randal Van de Mosselaer and Kelsey Armstrong of Osler, Hoskin & Harcourt LLP for OEL Projects Ltd., Jeffrey Oliver of Cassels for the Trustee, J.H. Wilson for Three Former Employees and Roger Jaipargas of Borden Ladner Gervais LLP for CIBC.
Judge: Honourable Justice April Grosse