Court rejects stay extension following failed CCAA conversion application

Atlantic Sea Cucumber Limited (re), 2023 NSSC 238
What is the test for extending an NOI stay following a failed CCAA conversion application?

Overview: In this case, the Court rejected a stay extension motion following a failed CCAA conversion application by the company. The Court found that, throughout the proceedings, there had been distinct flavours of attempts to “strong arm” the Court into granting relief by compressing timelines and saying disaster would result if the relief was not granted. No evidence was presented to the court as to the alleged destruction of value in a bankruptcy, and the Court refused to grant the stay.

On July 17, 2023, Atlantic Sea Cucumber Limited (“Atlantic”) sought, on an emergency basis, an extension of time to file a proposal pursuant to s. 50.4(9) of the Bankruptcy and Insolvency Act, following an unsuccessful application to convert the matter to a proceeding under the Companies’ Creditors Arrangement Act. The Trustee supported Atlantic’s application, but Atlantic’s creditor Weihai Tawei Haiyang Aquatic Food Co. Ltd. (“WTH”) did not.

Atlantic had previously filed a first application to extend time pursuant to s. 50.4(9) of the BIA on May 26, 2023, which application was granted. At the time, WTH did not object to the abridgement but did object to the extension (or in the alternative sought a shorter extension). Despite that, the Court granted the extension for the full 45 days, given that a 30-day period proposed by WTH as an alternative to a refusal would coincide with the Canada Day weekend. The Court granted the first extension on the basis that the parties would subsequently provide fulsome evidence of substantive progress, should a further extension be sought.

On July 6, 2023—two days before the BIA stay was set to expire—Atlantic sought to convert to CCAA proceedings. No prior application was made to extend the BIA stay. Atlantic’s application to convert was dismissed with reasons to follow.

In respect of the second application to extend, WTH asserted that the BIA stay expired on Saturday, July 15. It argued that the federal Interpretation Act, not the Civil Procedure Rules, applied and that Saturdays “counted” for such purposes. As such, the application for extension of time that was filed and heard on Monday, July 17^th was out of time. Notwithstanding that opposition, the Court was presented with the Trustee’s second report, which was principally, if not exclusively, for the CCAA proceedings. The Trustee had completed an inventory and the report contained a cash flow projection (including $325,000 in professional fees over four months on $800,000 in sales), and the Trustee had obtained an opinion on the “validity and enforceability” of security granted by the company to a non-arm’s length entity.

Against that backdrop, the Court considered the three-part test in s. 50.4(9) BIA, which may be summarized as present and continuing good faith and diligence, the “likelihood” of an ultimate viable proposal, and lack of material prejudice to any creditor. The Court further considered whether, should the test be met, granting an extension would be a proper exercise of its resultant discretion.

First, WTH conceded, and the Court agreed, that an extension would not materially prejudice it under 50.4(9)(c). Second, as to “proposal viability”, the test for the likelihood of a viable proposal is an objective one. The proposal need not be a certainty and “likely” means “such as might well happen.” While the Court had considerable doubts in the context of a second extension of “viability,” particularly given WTH’s express loss of confidence in Atlantic and its ability to drive a proposal, given the objectivity of the test and on a bare balance of probabilities, the Court concluded that the “viability” test was met.

Third, in respect of the due diligence and good faith tests, the Court rejected the notion that the 59.4(9)(a) inquiry is little more than a recitation by the Trustee that good faith and due diligence are at hand. It is a determination to be made by the Court, not by the Trustee. The “good faith and due diligence” requirement relates to the development of a viable proposal, not to other insolvency options. Although there were notable developments between May 31 and July 6, they were primarily, if not exclusively, geared towards converting the insolvency to CCAA proceedings. Accordingly, on balance, the Court was not convinced that what had been done was adequate to satisfy the Court to a civil standard of due diligence.

Moreover, at all stages of this and the CCAA proceeding, there were distinct flavours of attempts to “strong arm” the Court by compressing timelines where the upshot was “you have to sign this or disaster will result.” The initial stay extension was filed on May 26, 2023 and was heard on the very last possible day. The CCAA application was heard on the last juridical day before that extension expired. The CCAA materials made the point that if the initial CCAA order were not granted, a disastrous bankruptcy would follow; when that was rejected, Atlantic returned to Court making the same argument, and sought to do so ex parte. The Court was not presented with any reason for this, and held that it was not consistent with good faith and fair dealing.

Finally, the Court considered whether it should exercise its discretion to grant the stay. Section 50.4(9) is permissive, not mandatory. The case law recognizes that a 50.4(9) extension is a discretionary order, if the conditions for its exercise have been met. Here, the company came before the court on an “emergency” basis three times already, in effect seeking forgiveness not permission. While both the CCAA and BIA 50.4(9) arguments focused on an alleged destruction of value, no evidence of that was presented to the Court. As such, the Court noted that a change of drivers may be what is needed to move the sale process forward, given the other disputes in the file.

The application was denied with costs to be fixed by the appellate court reviewing the decision.

Judge: Raffi A. Balmanoukian, Registrar in Bankruptcy

Counsel: Darren O’Keefe of O’Keefe & Sullivan and Caitlin Fell of Reconstruct for Atlantic; Joshua Santimaw of Boyne Clarke for the Trustee MSI Spergel Inc. and Gavin MacDonald and Meaghan Kells of Cox & Palmer for WTH

Note: This decision, as well as the decision of Justice Rosinski dismissing the CCAA application, are under appeal.