Right to sue DIP lender for breach of intercreditor agreement extinguished by initial order?

Re Dynamic Technologies Group Inc., 2023 ABKB 172
Should an initial order under the CCAA which grants a DIP charge also extinguish the right of another secured creditor to sue the DIP lender for breach of an intercreditor agreement?

Dynamic Group consisted of 5 related companies that were jointly involved in providing supply and support of rides and attractions to theme parks located in various countries. Due to the pandemic and unanticipated rising costs, Dynamic Group encountered debt repayment and cashflow problems and, on March 9, 2023, obtained an Initial Order under the CCAA.

The main secured creditor, Promising Expert Limited (“PEL”), was owed $16 million USD plus interest. A secondary secured creditor, Export Development Bank (“EDC”), was owed over $2 million USD and interest. Both PEL and EDC advanced their respective loans to a particular Dynamic Group entity, Dynamic Technologies Group Inc (“DTG”), pursuant to an intercreditor agreement. The intercreditor agreement provided that the EDC loan was subordinate to PEL’s security interest to the extent of $14 million USD in respect of common collateral, however, EDC had priority over PEL in respect of its priority collateral, which consisted of a specific large receivable. Notably, all of the other entities comprising Dynamic Group were also signatories to the intercreditor agreement.

Dynamic Group sought interim financing, and PEL was the only lender prepared to step forward with an interim financing term sheet. The Initial Order approved super-prioritized interim financing by PEL to Dynamic Group to the extent of $250,000. That approval was subject to EDC’s right to argue that if any further super-prioritized interim financing beyond the initial $250,000 was approved, the advance of that additional interim financing should be “without prejudice” to any claim EDC might have against PEL for breach of the intercreditor agreement.

Dynamic Group subsequently sought certain amendments to the Initial Order in the Amended and Restated Initial Order, including a super-prioritized interim financing increase to $2.6 million. EDC claimed priority over PEL in respect of the priority collateral (i.e. the receivable). However, any priority enjoyed by EDC was overridden by the court-imposed super-priority related to the interim financing. Consequently, EDC argued that the Court could not or should not extinguish contractual rights between two creditors. In other words, the CCAA governs the relationship between the debtor and its creditors, not between creditors inter se.

The Court granted the ARIO as requested by Dynamic Group without the reservation of rights sought by EDC. The Court noted that sections 11.2(1) & (2) of the CCAA specifically provide that the Court may override the interests of any secured creditor in approving interim financing. PEL was the only lender in the marketplace prepared to step forward. Without its doing so, the restructuring plan would have been dead in its tracks from the start. If a different lender had decided to step in, EDC would have no argument. In losing its action against PEL, EDC was in no different a position than any secured creditor of Dynamic Group whose security is diminished or whose rights are “confiscated” because of the court-ordered super-priority in favour of the interim lender. In this case, the interim lender just happened to be PEL.

If PEL bore the risk of having to pay damages to EDC because it accepted court-ordered super-priority for its extension of interim financing, the super-priority would be illusory. Without immunity, PEL could be called upon to disgorge to EDC an amount equivalent to EDC’s loss from the exercise of the court-ordered super-priority. Allowing EDC to preserve its potential right of action would thereby defeat the purpose of conferring the super-priority, and would expose PEL to a risk that another interim lender would not have. PEL (and similarly situated secured creditors in other CCAA proceedings) would be disincentivized from acting as interim lender.

The changing of the priority scheme via court order is integral to the viability of the interim financing. Unless granted, PEL would have no reason to offer the interim financing, no reorganization would take place and Dynamic Group would have no alternative but to go bankrupt or go into liquidation. Thus, for public policy reasons—namely, avoidance of the economic and social cost of large business failure—the interim lender under CCAA restructuring proceedings is afforded special treatment. That special treatment consists of the super-priority or priming charge as well as, in this case, insulation from third party contractual liability.

The Court dismissed EDC’s request, and extinguished its putative cause of action as part and parcel of giving full effect to the super-priority accorded to PEL as interim lender.

 

Judge: Justice Douglas Mah

Counsel: Ryan Zahara of MLT Aikins for Dynamic Group; John Regush of Dentons for Promising Expert Limited; David LeGeyt and Ryan Algar of Burnet, Duckworth & Palmer for the Monitor FTI Consulting; Aaron Stephenson of Norton Rose Fulbright for Export Development Canada; Jessica Markic for Export Development Canada; Sam Gabor of Gowling WLG for CIBC