Edward Collins Contracting Limited (Re), 2022 NLSC 149

November 02, 2022

What factors will a court consider in competing applications for a CCAA initial order or a receivership order?

On July 8, 2022, the Royal Bank of Canada applied to appoint Ernst and Young Inc. as a court-appointed receiver over all or substantially all of the assets of the subject Companies. The Companies, which operated as a general contractor specializing in roadworks, opposed the application. On July 18, 2022, the Companies sought an initial order under section 11.02(1)(a) of the CCAA or, in the alternative, that the receivership application be dismissed. On July 20, 2022, the Court granted a consent order, restraining any person having a contractual arrangement or a statutory mandate for the supply of goods or services from discontinuing, altering or terminating the supply of such goods or services until September 16, 2022 (the “Consent Stay Period”). The was not a stay under the CCAA or the BIA.

The CCAA applies to a debtor company if it is insolvent or has committed an act of bankruptcy and owe more than $5 million. The Companies owed RBC in excess of $5 million and CRA about $4.9 million. Accordingly, the Court was satisfied that the Companies were insolvent and qualified as debtor companies under the CCAA.

In order to satisfy the Court that an Initial Order was appropriate, the Companies were required to put forth “a germ of a plan” that suggested “a reasonable possibility of restructuring”. However, they did not need to present a fully developed plan at the initial hearing, nor were they required to have the support of all of their creditors.

The Companies’ financial crisis was triggered by an improvident capital purchase, an unfavourable construction contract, and the general collapse of the Companies’ revenue and resulting operating losses. Consequently, the Companies were not able to pay the deemed trust debt to CRA to fund these losses. This, together with the collapse in the Companies’ retained earnings and profits and the increase in CRA’s deemed trust debt, caused RBC to take action to protect its security from further erosion.

The Court then turned to whether the Companies put forth “a germ of a plan” that suggested “a reasonable possibility of restructuring”, and found that they had. The plan was based on two pillars. The first pillar was the prospect of a refinancing of the Companies’ debt obligations. The second pillar was the positive cash flow from existing contracts. The CCAA required the Companies to provide weekly projected cash flow statements, making disclosure of all material facts known to them. The Court found that these cash flow statements were adequate to support an Initial Order. In the absence of other evidence, the disclosure was realistic and there was no evidence that the Companies had not disclosed all material facts known to them.

The Court acknowledged that the Companies’ plan depended on a daunting number of contingencies. However, it noted that any insolvent debtor who seeks protection under the CCAA likely has a similar list. The Companies sought an Initial Order, which would expire in 10 days. The Companies had provided more than a “germ of a plan”. They presented a plan that, if successful, could present a reasonable possibility of restructuring. Therefore, the Companies had established that circumstances existed which would allow the Court to grant the Initial Order.

Finally, the Court considered whether the Companies’ conduct during the Consent Stay Period was reason to refuse the Initial Order. RBC argued that the Companies’ conduct was relevant for three reasons:

  1. The Companies’ late filings showed that they did not act with due diligence;

  2. The Companies’ inaction to address their financial problems showed that they did not act with due diligence; and

  3. The Companies should meet a more onerous standard of whether they have “a germ of a plan” because they had the advantage of the Consent Stay Period.

The Court found that the Companies had acted with due diligence to the extent they needed to in their application for the Initial Order. The Court acknowledged that applicants often operate under severe financial pressure when they apply for an Initial Order. They have limited time to prepare their application and information is, by necessity, usually preliminary. As CCAA applications are usually urgent, the court may receive information shortly before the hearing. The timelines are necessarily compressed. While there was no doubt that the Companies filed information at the last minute, by their nature, CCAA proceedings are conducted in “the hothouse of real-time litigation”. Late filings in these circumstances, although not condoned, are sometimes inevitable.

Further, the CCAA focuses on the go-forward restructuring of the company, not on the past. Had the Companies taken a series of different actions, they may have avoided their financial difficulty. Perhaps they might have restructured earlier. However, such speculation about the actions that led up to the Companies’ financial difficulties were irrelevant. The Court refused to consider the Companies’ failure to take action to restructure before they came to the Court seeking the Initial Order, holding that if it were to do so, this would have the effect of denying creditor protection to debtors who are the authors of their own misfortune. The CCAA, at least for the Initial Order, offers a no-fault remedy, provided that the applicants act in good faith and act with due diligence in the CCAA application. Accordingly, the Court granted the Initial Order, and stayed RBC’s receivership application.

Judge: Justice Alexander MacDonald

Counsel: Darren O’Keefe of O’Keefe & Company for the Companies; Neil Jacobs, K.C. and Joseph Thorne of Stewart McKelvey for RBC; Maeve Baird for the Minister of National Revenue; David Hearn for the Government of Newfoundland and Labrador; Andrew Punzo and Mark Borgo of BLG for Western Surety; Tim Hill, K.C. and Joshua Santimaw of BoyneClarke for Daimler Truck Financial Services Canada Corporation; and Andrew Fitzgerald, K.C. of Learmonth, Boulos & Fitzgerald for S.R. Stack & Company Ltd.

By Matilda Lici