SCC Ruling Affirms Authority to Approve Litigation Funding Agreement as Interim Financing

Sylvain Rigaud, Arad Mojtahedi and Saam Pousht-Mashhad of Norton Rose Fulbright

In a ruling from the bench, with reasons to follow, the Supreme Court of Canada unanimously allowed on January 23, 2020, the appeal from the Quebec Court of Appeal’s decision in 9354-9186 Québec Inc. v. Callidus Capital Corporation, confirming the authority of a supervising court acting pursuant to the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (“CCAA”) to approve litigation funding agreements outside of a formal plan of arrangement and granted a super-priority charge against the proceeds of a claim. The Court restored the decision of CCAA judge Jean-François Michaud, who approved a litigation funding agreement between the debtors and a litigation financier, enabling it to pursue a claim against one of its creditor.

Background

The appellants 9354-9186 Québec Inc. et al. (Bluberi) specialized in electronic gaming machines. In 2012, Bluberi signed a loan agreement with the respondent Callidus Capital Corporation (Callidus) that lent approximately $86 million through credit facilities between 2012 and 2015. According to Bluberi, Callidus was largely responsible for its ensuing financial difficulties.

In 2015, Bluberi filed a petition for the issuance of an initial order under the CCAA, which was granted by the Superior Court. Later, Bluberi was authorized to sell all its assets to Callidus, which was settled through a reduction of Callidus’ debt. The purchase extinguished all but $3 million of Callidus’ secured claim against Bluberi. Bluberi also retained its right to pursue its claim against Callidus.

In 2017, Bluberi sought to obtain the necessary orders to finance their litigation against Callidus. Callidus responded by filing a motion to hold a creditors’ meeting to propose a plan of arrangement. Callidus’ plan, which provided for a distribution of approximately $2.6 million to the creditors in exchange of a full release in its favour, was submitted to a vote but the 66 2/3% threshold of section 6 CCAA was not met.

Thereafter, Bluberi sought the authorization for a litigation funding agreement with the appellants Bentham IMF. Callidus responded by filing a motion to convene again a creditors’ meeting to hold a vote on its new plan of arrangement. This time, Callidus announced its intention to value its $3 million security at nil to exercise its right to vote as an unsecured creditor.

Issues before the Court

It unclear whether the Court will address all the issues germane to Callidus’ right to vote, including classification of creditors, scope of “related parties” under sections 4(2) and 4(3)(c) of the Bankruptcy and Insolvency Act (BIA) and the use of the “improper purpose” doctrine. Each issue may have far-reaching impact:

• Absence of Commonality of Interest: Callidus sought to (1) value its security at nil, (2) vote in the same class as other unsecured creditors, (3) forego its dividend under the proposed plan, and, in exchange, receive a release from Bluberi’s claim. It is apparent that Callidus wanted a release at lowest cost, while the unsecured creditors’ wanted to maximize their payout. The Supreme Court was asked to determine whether Callidus shared a sufficient commonality of interest with the other unsecured creditors to be permitted to vote in the same class.

• Related Party: A creditor is related to the debtor under section 22(3) CCAA if they are “related persons” under section 4 BIA. A creditor “related” to the debtor is prohibited from voting on a plan. Callidus had a pledge on all of Bluberi’s shares, which raised the question whether Callidus was “related” to Bluberi, therefore barring Callidus’ right to vote on its proposed plan.

• Proper Application of Doctrine of Improper Use: Justice Michaud used his discretion to remove Callidus’ right to vote on its own plan because Callidus’ behaviour was contrary to the “requirements of appropriateness, good faith, and due diligence [that] are baseline considerations that a court should always bear in mind when exercising CCAA authority.” At issue was whether the residual discretion afforded to CCAA courts in finding “improper purpose” was properly used.

Finally, the critical issue as to whether a supervising CCAA judge had, as a matter of law, the authority to approve litigation funding agreements under the authority of section 11.2 CCAA (interim financing) will certainly be confirmed by the Supreme Court.

Takeaway

While we await the reasons from the Supreme Court of Canada, one immediate takeaway is that CCAA courts have the authority to approve a litigation funding agreement outside of a formal plan of arrangement. This decision is important as it cements the use of litigation funding in the insolvency context and confirms that the CCAA judge has the discretion to determine whether a litigation funding agreement should be put to a creditors’ vote. It is also the first time Canada’s highest court has considered litigation funding in any context.

Sylvain Rigaud, Arad Mojtahedi and Saam Pousht-Mashhad jointly represented the ICC and CAIRP before the SCC.