Secured creditor appeals stalking horse sale

Overview: In this case, the Court considered an application by a secured creditor to appeal the sale of the company’s assets to another secured creditor who also provided a DIP loan in the CCAA proceedings. The applicant secured creditor argued that the Court erred in finding that section 36(6) of the CCAA did not apply to the credit deal in this case, and that the Court did not have the jurisdiction under section 36(6) of the CCAA to vest a debtor’s assets to only one of its creditors and not the other. The Court rejected the application for leave to appeal, finding that deference should be granted to the chambers judge’s decision and that the proposed grounds of appeal showed little or no merit. The Court also concluded that the proposed appeal should be rejected as it could reopen the AVO and thwart the principles and objectives of the CCAA.

Canadian Overseas Petroleum Limited (“COPL”) is a publicly traded oil and gas exploration, development and production company with headquarters in Calgary, Alberta. COPL was in financial difficulties and, as of February 2024, “days away from being fully depleted of any and all cash reserves”.

COPL had two senior creditors—a group of companies collectively referred to as Summit and BP Energy Company (“BP”). Summit and BP were secured and ranked equivalently on a first priority, pari passu basis. Summit had a secured loan facility in the amount of $45 million and BP had hedge obligations or terminated swap agreements which resulted in obligations due and owing in the amount of $11.8 million.

On March 8, 2024, COPL obtained an initial protection order under the Companies’ Creditors Arrangement Act. In February 2024, prior to the CCAA proceedings, COPL’s representatives met with representatives from BP and Summit to request interim financing. Notwithstanding that it was warned that the seniority of BP’s debt would likely be impaired if it did not participate in the proposed interim financing, BP declined to participate. Summit was the only party that agreed to advance interim financing to COPL. As part of the initial protection order, Summit provided interim financing in the amount of $1.5 million.

On March 19, 2024, the CCAA process was extended, the interim financing was increased to $11 million and the proposed sale and investment solicitation process (“SISP”) was approved. Part of the SISP included a stalking horse purchase agreement entered into by Summit and certain vendors of COPL. The stalking horse agreement allowed Summit to acquire COPL’s assets for a base consideration of $55 million, comprised by the $11 million interim financing and the assumption, by Summit, of its own portion of the pari passu secured indebtedness of approximately $45 million. BP’s hedge obligations in the amount of $11.8 million were not being assumed. BP was given notice of that application and the proposed terms of the stalking horse agreement, and did not oppose it.

On April 24, 2024, the Court granted an approval and vesting order (“AVO”) to confirm the stalking horse agreement. At this hearing, BP opposed the AVO. BP argued that section 36(6) of the CCAA does not allow for a vesting of assets to only one of the creditors and not the other. The Court noted that Summit was assuming liability as opposed to receiving “a cheque” for its secured claims and that it was a “going concern transaction that will ultimately see Summit paid perhaps, depending on the success or failure of the corporation”. In its reasons, the Court referred to section 36(6) and indicated that because there was no money in, section 36(6) did not apply and even if section 36(6) could apply to a credit deal, it did not apply in the circumstances of this case.

BP sought leave to appeal under section 13 of the CCAA on the grounds that the Court erred, inter alia, in finding that section 36(6) of the CCAA did not apply to the circumstances of this case.

The test for leave to appeal under section 13 of the CCAA involves a four-part test:

1. Is the appeal prima facie meritorious and not frivolous?

2. Is the point on appeal of significance to the action?

3. Is the point raised of significance to the practice?

4. Will the appeal unduly hinder the progress of the action?

Deference is granted to a chambers judge's decision regarding determinations under the CCAA. An applicant must point to an error of law or palpable and overriding error in fact or exercise of discretion.

BP argued the sales process was distinct from the transaction. It submitted that the stalking horse agreement as proposed in the SISP was non-binding and it was not until the AVO application that the terms were final. The respondents argued that BP’s complaints regarding the transaction were just a collateral complaint about the sales process. BP could not complain about that process, because it was aware that its security could be affected as early as February 20, 2024 when it was asked to consider participating in interim financing to COPL. BP had two months from the time it knew its security was at risk until the hearing at the end of April 2024 to raise objections.

If leave to appeal were granted, the delay would mean the end of the CCAA proceedings and COPL would be in bankruptcy. The expectation from the sale in bankruptcy of non-going concern assets was likely to result in insufficient proceeds to cover the interim financing debt and nothing to pay the prefiling obligations owed to Summit and BP. Additionally, delay also affects the Chapter 15 Bankruptcy Code proceedings in the US.

With respect to whether the proposed grounds of appeal were prima facie meritorious, the Court held that the proposed grounds of appeal showed no or little merit. Appellate courts are to exercise the power to grant leave “sparingly”. The fact that an appeal is only with leave indicates that Parliament intended that most decisions made by the CCAA judge “should be interfered with only in clear cases”. In the absence of raising grounds of appeal of sufficient merit, the proposed appeal would not be of significance to the practice. Nor would the proposed appeal be of significance to the action itself in terms of the restructuring of COPL except that it could reopen the AVO and thwart the principles and objectives of the CCAA. Reopening a final order and an appeal itself would cause delay which would result in undue delay to the progress of the action.

Accordingly, the Court was satisfied that leave should not be granted and dismissed the application.

Judge: The Honourable Justice William T. de Wit

Counsel: Marc Wasserman, David Rosenblat, Shawn Irving and Viktor Nikolov of Osler for COPL; Jeffrey Oliver for KSV as monitor; Ryan Zahara and Jordan Eeles of MLT Aikins for Summit; and Derek Pontin of Dentons for BP