Court refuses to call creditors' meeting

Delta 9 Cannabis Inc (Re), 2024 ABKB 657 
What is the test for a CCAA meeting order?

Summary: In this case, the Court considered a request to call a creditors’ meeting under the CCAA. The senior secured creditor, who was purportedly unaffected under the proposed plan, objected to the calling of the meeting on the basis that the plan purported to bind and affect the creditor’s rights without giving it a right to vote, in violation of section 6 of the CCAA. The creditor also complained that the plan contemplated a payment to equity holders in violation of section 6(8) of the CCAA. The Court agreed and took the rare step of refusing to grant the meeting order without prejudice to reapply, stating that these issues should be resolved before the Plan is proposed to creditors to save a potentially wasteful process.

On July 15, 2024, the Court granted an initial order under the Companies’ Creditors Arrangement Act with respect to the “Delta 9 Group”. Following a comeback application, the Court granted an Amended and Restated Initial Order approving, among other things, the Delta 9 Group borrowing from Fika Herbal Goods (“Fika”) subject to an approved an interim financing term sheet.

On October 22, 2024, Fika filed this application seeking a creditors’ meeting order that, among other things, authorized the Delta 9 Group to call, hold and conduct a virtual meeting (the “Creditor Meeting”) of the “Affected Creditors Class” to consider and vote on a resolution to approve a plan of compromise and arrangement (the “Plan”). The application was opposed by the senior secured creditor, SNDL Inc. (“SNDL”). SNDL argued that the Plan was not capable of sanction and should not be put to a creditor vote. Fika argued that SNDL’s concerns should be dealt with at the Plan sanction hearing.

Fika relied on sections 4 and 5 of the CCAA as providing the authority for ordering a creditor meeting for the purpose of a creditor vote. These sections are permissive, not mandatory. As such, they engage the Court’s discretion as to whether to order the meeting. The Court also has broad discretion under section 11 of the CCAA where there is no CCAA provision conferring more specific jurisdiction. Oversight of the plan negotiation, voting and approval process falls squarely within the Court’s purview.

The Court’s discretion must be exercised in furtherance of the CCAA’s remedial purpose. The test as to whether a creditor meeting should be ordered is whether it is in the best interests of the debtor and its stakeholders to do so, which has been described as a low standard. In the majority of CCAA proceedings, an order directing a creditor meeting is an uncontroversial procedural step in the CCAA process and is not usually the time to argue whether the proposed plan is fair and reasonable. When the order is objected-to, it is incumbent on the Court to carefully examine the material filed and the issues or concerns raised. As part of that, the Court may consider the equities as they relate to the debtor company and its secured creditor. When issues raised are significant, they may warrant determination prior to ordering a creditor meeting.

Courts have confirmed that it may be appropriate to refuse to grant a request to direct a creditor meeting where:

1. the plan is not in the best interests of the debtor and its stakeholders (including its creditors);

2. there is no reasonable chance the debtor will be able to continue in business;

3. the plan “lacks economic reality”;

4. there is no hope the plan would be approved by creditors;

5. the plan would not be approved by the Court; and

6. the plan is inconsistent with court orders or the CCAA process did not unfold in a “fair and transparent manner”.

SNDL raised several issues with the Plan, including that (1) it purported to bind and affect SNDL’s rights without giving SNDL a right to vote, in violation of section 6 of the CCAA; (2) it involved a payment to equity holders in violation of section 6(8) of the CCAA; and (3) it allowed holders of equity claims to vote, in violation of section 22.1 and 6(1) of the CCAA. The Court noted that SNDL had no right to vote on the Plan because it was expressly excluded from being an Affected Creditor. The issue was whether the Plan affected SNDL’s rights such that it must be given a right to vote, failing which the Plan was doomed to fail for non-compliance with section 6(1) of the CCAA.

Fika argued that SNDL was unaffected, based on its interpretation of the Plan. SNDL argued that the Plan materially affected it by amending the repayment terms or timing of the SNDL senior debt, its payor, and the collateral subject to SNDL’s security through the sale of one of the CCAA petitioners. The Court found that if SNDL’s claim that the Delta 9 Group’s indebtedness under the SNDL senior debt was validly accelerated prior to the Initial Order, then the Plan would affect and purport to bind SNDL and its claim without giving it a voting right. The Plan, in its current form, could not withstand the scrutiny of the test to sanction a plan, namely (i) strict compliance with all statutory requirements; (ii) all materials filed and procedures carried out authorized by the CCAA; and (iii) a fair and reasonable plan. This was a factor against ordering the proposed Creditor Meeting.

Secondly, the record reflected an unexplained ex gratia or extra-contractual transfer of something of value to shareholders, when creditors were not likely being fully paid as part of the Plan. This raised a concern that the Plan was structured to avoid the policy behind section 6(8) of the CCAA or the well-established principle of equitable subordination, which is used to “keep shareholders away from the table while the claims of other creditors are being sorted out”.

The Court also took notice of the fact that the Monitor supported the Court ordering the proposed Creditor Meeting and was of the opinion that the Plan constituted a good result for Affected Creditors. The chief restructuring officer of the Delta 9 Group also believed that the Plan preserved the value of the Plan entities and was in the best interests of the Delta 9 Group’s stakeholders because it would enable substantially greater recoveries for creditors than bankruptcy or liquidation. No Affected Creditors objected to the Creditor Meeting. The largest unsecured creditor supported the application and voiced its concerns for the interests of Delta 9 Group employees.

In the unique circumstances of this case, the Court was not satisfied that it was appropriate to exercise its discretion to order a Creditor Meeting as proposed. The resolution of the dispute about whether SNDL’s secured debt validly accelerated may have a significant effect on SNDL’s interests and the viability of the Plan in these proceedings. Consequently, it was appropriate for that issue to be resolved before the Plan is proposed to creditors to save a potentially wasteful process.

The Court dismissed Fika’s application, without prejudice to its right to re-apply.

Judge: Honourable Justice M.A. Marion

Counsel: Sean Collins and Ashley Bowron, McCarthy Tetrault LLP for SNDL Inc.

Ryan Zahara and Chris Nyberg, MLT Aikins LLP for Delta 9 Cannabis Inc., Delta 9 Logistics Inc., Delta 9 Bio-Tech Inc., Delta 9 Lifestyle Cannabis Clinic Inc. and Delta 9 Cannabis Store Inc.

James Reid, Matthew Cressati and Larry Ellis, Miller Thomson LLP for 2759054 Ontario Inc. operating as Fika Herbal Goods

David LeGeyt and Ryan Algar, Burnet, Duckworth & Palmer LLP for the Monitor, Alvarez & Marsal Canada Inc.

Howard A. Gorman, K.C., Norton Rose Fulbright Canada LLP for the directors of Delta 9

Daniel Segal and David Smith, Department of Justice Canada for Canada Revenue Agency

Adam Pollock, Duboff Edwards Schachter Law Corporation for 7217804 Manitoba Ltd.