Saving Cannabis Inventory From Going Up in Smoke

Authors: William E. J. Skelly, Chris Nyberg, Jess R. Reid, MLT Aikins LLP

A recent decision established that Canada Revenue Agency (“CRA”) should not withhold the renewal of an excise licence issued under the Excise Act, 2001 (“Excise Act”) where an excise licence is necessary for the debtor to deal with their assets within an insolvency proceeding.

On July 10, 2023, the British Columbia Supreme Court (the “Court”) provided its oral reasons in Tantalus Labs Ltd. (Re), 2023 BCSC 1450, a decision which involved a dispute between Tantalus Labs Ltd. (“Tantalus”), a B.C. based cannabis company that filed a Notice of Intention to Make a Proposal (the “NOI” and the “NOI Proceedings”) pursuant to s. 50.4 of the Bankruptcy and Insolvency Act (the “BIA”) and CRA, over its declaration that Tantalus was ineligible for renewal of its cannabis excise license (the “Excise Licence”) under the Excise Act, which was essential to allow Tantalus to sell its cannabis inventory in the NOI Proceedings for the benefit of its stakeholders.

Background

Tantalus operated a federally licensed cannabis production and distribution facility in B.C. In Canada, cannabis producers and distributors require both a cannabis licence issued under the Cannabis Act, and an excise licence issued under the Excise Act, in order to produce, distribute and sell cannabis products.

Tantalus had significant excise tax arrears owing to CRA. The company had entered into a payment plan agreement with CRA, finalized on June 12, 2023, which detailed Tantalus’ monthly payment schedule for the excise tax arrears and the criteria that needed to be met in order for the company to continue to be eligible to renew its Excise Licence (“Renewal Criteria”). The first payment under the payment plan was due on June 30, 2023.

On June 12, 2023, Tantalus’ secured lender issued a demand for payment and a Notice of Intention to Enforce Security against Tantalus’ assets as a result of previous defaults. Tantalus subsequently engaged Ernst & Young Inc. (the “Proposal Trustee”) to file the NOI on June 28, 2023 which resulted in the automatic stay of proceedings coming into force.

On June 29, 2023, CRA contacted Tantalus to inform the company that it was no longer eligible for renewal of the Excise Licence, despite Tantalus not having breached the payment plan or any of the Renewal Criteria. CRA also stated that it would be attending the Tantalus facilities immediately after the Excise Licence expired on July 10, 2023 to destroy all of Tantalus’ cannabis inventory and cannabis stamps, notwithstanding the stay of proceedings.

CRA took the position that, as a result of Tantalus filing the NOI, it indicated that the company did not have “sufficient financial resources to conduct [its] business in a responsible manner,” one of the specified Renewal Criteria. This was contrary to the evidence from the Proposal Trustee demonstrating that Tantalus would have adequate financial resources to complete its NOI Proceedings.

Court Proceedings

On July 10, 2023, the day the Excise Licence expired, Tantalus brought an application seeking the following relief:

• declaring CRA in breach of the stay of proceedings under s. 69.6(4) of the BIA;

• declaring CRA be estopped from destroying the cannabis stamps and inventory until July 28, 2023;

• declaring the Excise Licence be extended until July 28, 2023; and

• granting Tantalus the ability to sell its inventory out of the ordinary course of business in the absence of the Excise License but subject to the approval of the Proposal Trustee.

CRA challenged the Court’s jurisdiction to grant the relief sought by Tantalus and the parties agreed that a hearing on the merits as to the Court’s jurisdiction could be heard on July 27, 2023. Notwithstanding that CRA challenged the Court’s jurisdiction to grant the relief originally sought by Tantalus, the Court chose to exercise its discretion under s. 183(1)(c) of the BIA and granted an order (the “Status Quo Order”) providing Tantalus the following interim relief:

• the Excise Licence was maintained and renewed until July 27, 2023 as it was validly issued to Tantalus at the filing of the NOI;

• CRA was estopped from taking any actions against Tantalus until July 27, 2023; and

• Tantalus would be permitted to continue selling the cannabis inventory in the ordinary course under the Excise Licence under the supervision of the Proposal Trustee.

The Court, relying on Arrangement relatif à Rising Phoenix International Inc., 2022 QCCS 1670, found the following factors relevant in exercising its discretion to grant the Status Quo Order to Tantalus:

• This was an exceptional case due to CRA’s inexplicable actions and intention to destroy Tantalus’ inventory in an insolvency proceeding, particularly considering CRA was a substantial unsecured creditor of Tantalus;

• There was considerable urgency in granting relief to Tantalus as the Excise Licence would expire by end of day and there was significant risk to the interests of Tantalus’ other stakeholders;

• The hearing with respect to the Court’s jurisdiction as to the original relief sought was scheduled for July 27, 2023, allowing only for a short extension of the Excise Licence where Tantalus would have the supervision of the Proposal Trustee for ordinary-course sales and the Court for out-of-the-ordinary course sales of cannabis inventory;

• The Proposal Trustee’s opinion that Tantalus’ cash flow projections indicated that it could conduct operations for the duration of the NOI Proceedings in a responsible manner, which was one of the key Renewal Criteria for the Excise Licence;

• Tantalus would be able to pay any excise taxes arising as a result of any sales of cannabis inventory during the NOI Proceedings;

• Allowing sales of the cannabis inventory until July 27, 2023 would preserve some value in Tantalus’ cannabis inventory for the benefit of all stakeholders and could result in payment being made to Tantalus’ unsecured creditors, including CRA;

• CRA would not be prejudiced by the interim relief granted.

While the facts in this case were unique, this decision provides useful guidance regarding when a court may choose to exercise its discretionary powers under s. 183(1)(c) of the BIA where a government regulatory body seeks to exercise statutory powers in a manner that could contravene the stay of proceedings under the BIA and prejudice the value of the debtor estate. It may also lend support to the position that, in future liquidations of cannabis inventory by insolvent producers, where CRA seeks to either cancel or not renew their excise licences as a result of historical payment defaults, the most practical result is to liquidate the cannabis inventory to maximize value to the estate.

Vancouver lawyers, William E. J. Skelly and Jess R. Reid, were pleased to act as counsel to Tantalus Labs Ltd. in this case. The MLT Aikins LLP insolvency and restructuring group comprises of 24 lawyers practicing in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy.

If you require help navigating bankruptcy proceedings, please contact a member of the MLT Aikins insolvency and restructuring team.