Creditors urged to exercise "increased vigilance" with RVOs

Groupe Financier Chok Inc. v. 9497706 Canada Inc. et al., 2023 QCCS 4482
Can a creditor prosecute claims affected by an RVO after it's been granted?

Overview: In this case, the Court rejected an application by a party seeking to register an immovable hypothec against property that was sold pursuant to an RVO in CCAA proceedings. The Court found that the doctrine of res judicata applied, and emphasized that requests for RVOs should prompt creditors to exercise increased vigilance and diligence to ensure that their claims are not transferred against their will to a new company destined for bankruptcy.

The Plaintiff, Groupe Financier Chok inc. ("Chok"), sought an order compelling the registration of an immovable hypothec in the amount of $5 million against certain Property, together with an order that the Defendant, 9497706 Canada Inc., pay it $3,336,711.90 (the "Chok Application"). The Chok Application was based on an undertaking allegedly given by the Defendant, a nominee corporation for the Property, in its capacity as guarantor of obligations of an affiliate of Groupe Sélection Inc. (“Groupe Sélection”). On November 13, 2019, Chok had granted a $5 million loan to a subsidiary of Groupe Sélection. Two days later, on November 15, 2019, the Defendant had allegedly granted an undertaking to Chok to register, at the latter's request, an immovable hypothec in the amount of $5 million against the Property in the event the debtor defaulted on its obligations under the Chok loan (the “Undertaking”).

The Defendant argued that it was not bound by the Undertaking and requested that the Chok Application be dismissed on the grounds that the Undertaking was not enforceable against the Defendant as a result of orders issued in the Groupe Sélection CCAA Proceedings. Specifically, the Defendant argued that the Property was acquired pursuant and subject to the provisions of an Approval and Reverse Vesting Order (“RVO”) issued in the Groupe Sélection CCAA Proceedings. Under the RVO, Revera Inc. ("Revera") acquired all rights, title and interest of certain Groupe Sélection entities in various assets held by the Groupe Sélection free and clear of all Excluded Liabilities and Excluded Contracts, including those liabilities or contracts in connection with Groupe Sélection-related parties. Consequently, and since the transaction contemplated and authorized by the RVO was completed, Chok had no right to compel the Defendant to register a $5 million immovable hypothec against the Property, nor to claim from it the sum of more than $3.3 million. 

The Defendant asserted, inter alia, the provisions of article 168 of the Code of Civil Procedure ("CCP") dealing with the doctrine of res judicata (article 168(1) CCP) and that the Chok Application was inadmissible as unfounded at law even if the facts alleged were true (article 168, paragraph 2 CCP).

Numerous relevant orders had indeed been issued in the Groupe Sélection CCAA Proceedings since November 2022. The Court held that Chok was or should have been aware of these various orders since at least the beginning of January 2023, when it was added to the Service List for the proceedings. On April 7, 2023, following a contested hearing, the Court granted the CCAA Monitor’s application for the approval of a Stalking Horse Purchase and Sale Agreement and Stalking Horse Bidding Procedures (the “Stalking Horse Order”). The application, which was served on the Service List, dealt with the possible sale to Revera of the interests of Groupe Sélection affiliates in connection with the Property in a context where, in the absence of another buyer, the Monitor would eventually request an RVO in a transaction with Revera.

Although it received notice of the Monitor’s application, Chok did not intervene or contest the order sought, notwithstanding that the order contained provisions that were likely to affect its rights against the Defendant. Chok likewise did not intervene or challenge the Monitor’s subsequent application for the RVO in favour of Revera. In each case, the Monitor’s motion materials contained indicators sufficient to arouse Chok's attention as to the possible impact on the Undertaking.

Indeed, the Monitor’s RVO application contemplated that certain debts would be excluded from the proposed transaction with Revera and would be transferred instead to a new entity, NewCo, which would go bankrupt shortly thereafter. These excluded debts and liabilities included the Undertaking. Paragraph 35(c) of the RVO specifically contemplated that upon the completion of the transaction with Revera, all obligations, agreements and undertakings not explicitly assumed by Revera would constitute Excluded Liabilities to be transferred to NewCo. The Court concluded that the RVO had the effect of transferring the Undertaking to NewCo, such that the Defendant was thereby definitively released from all obligations arising from or related to the Undertaking. Accordingly, following the conclusion of the transaction with Revera, as authorized by the RVO, Chok no longer had any right of action against the Defendant in respect of the Undertaking. 

The Court held that the fact that Chok did not come forward or object in the CCAA proceedings leading to the RVO did not allow it to escape the application of the doctrine of res judicata. Both Chok and the Defendant were parties to the Chok Application as well as parties to the Groupe Sélection CCAA Proceedings when each of the Stalking Horse Order and the RVO were issued. Although duly notified, Chok failed to intervene and oppose the Monitor’s applications that led to the Stalking Horse Order and the RVO to enforce its rights with respect to the claims in the Chok Application and the Undertaking. Now, through its application in a new forum, Chok sought to mount a collateral attack on the RVO, which was a final judgment. The integrity of the Groupe Sélection CCAA Proceedings and the orders granted therein took precedence and militated in favour of rejecting the relief sought by Chok.

The Court concluded that, in CCAA proceedings, requests for approval and reverse vesting orders should prompt creditors to exercise increased vigilance and diligence to ensure that their claims are not transferred against their will to a new company destined for bankruptcy, to the full exoneration of the original insolvent debtor. It is up to the affected creditor to diligently assert their rights.

Judge: Michel A. Pinsonnault, J.C.S.

Counsel: Denis Ferland, Benjamin Jarvis and Louis Martin O’Neill of Davies Ward Phillips & Vineberg for 9497706 Canada inc.

Tomy Markakis of De Louya Markakis for Groupe Financier Chok inc.