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Poseidon Plan of Arrangement Resolves Director and Auditor Liability Claims

By Ken Lenz, Kevin Zych and Isabel Langlois of Bennett Jones 

The Alberta Court of Queen’s Bench recently sanctioned the Companies’ Creditors Arrangement Act (“CCAA”) plan of compromise and arrangement (the “Plan”) of Poseidon Concepts Corp. and certain of its affiliates (together, “Poseidon”). The Plan is an example of using CCAA proceedings to settle complex litigation, in this case several securities class actions that were brought against Poseidon, its directors and officers, its auditors and underwriters, and other related entities. A unique aspect of the Plan, demonstrating the flexibility of the CCAA provisions, is that recovery was provided to Poseidon’s secured creditors in part through director and officer (“D&O”) insurance proceeds.

Background

Poseidon was a public company based in Calgary, Alberta, that carried on business as a supplier of storage tanks for fracking fluid to oil and gas companies in Canada and the United States. At its peak, Poseidon’s shares traded for $16.89 on the Toronto Stock Exchange, and its market capitalization exceeded $1 billion. In February 2013, Poseidon disclosed that it had incorrectly stated up to $100 million in accounts receivable recorded in the first nine months of 2012. Following this disclosure, various Canadian securities regulators issued cease trade orders and the value of Poseidon’s shares quickly became worthless.

Poseidon’s shareholders commenced class actions (the “Class Actions”) in Alberta, Ontario, Québec and New York against Poseidon, its directors and officers, and against entities that were involved with Poseidon’s financial reporting, including Poseidon’s auditors, nine financial institutions that underwrote a public offering of Poseidon’s shares in January 2012, and an entity related to Poseidon.

Prior to filing, Poseidon had secured debt owing a lending syndicate in excess of $80 million.

Poseidon CCAA Proceeding

On April 9, 2013, Poseidon obtained protection from its creditors pursuant to an initial order granted by the Alberta Court of Queen’s Bench under the CCAA. PricewaterhouseCoopers Inc. was appointed as Monitor (the “Monitor”).

In the course of the CCAA proceeding, the Monitor sold Poseidon’s assets, but the proceeds collected from the sale were insufficient to repay Poseidon’s syndicate of lenders in full. The only additional funds potentially available for distribution were the proceeds from Poseidon’s D&O liability insurance.

The Monitor, whose powers were enhanced by Court order, commenced an action on behalf of Poseidon against the directors and officers, the auditors, and the related entity (the “Monitor Action”) for negligence and oppression. The Monitor Action was unique because, unlike many D&O insurance policies, Poseidon’s did not forbid recovery by one co-insured (Poseidon) against other co-insured (the directors and officers). Therefore, the Monitor, on behalf of Poseidon, was able to bring a claim against its own directors and officers for which the insurance coverage was triggered.

Plan of Arrangement

The Plan, which includes contributions from all defendants in the above litigation, resolves all claims, including the Class Actions, the Monitor Action, and other related claims, such as cross-claims, third-party claims, and claims for indemnity. The Plan provides for an initial distribution of more than $18 million to Poseidon’s syndicate of lenders and more than $34 million to Poseidon’s shareholders, who were the plaintiffs in the Class Actions. The D&O insurers contributed policy limits, less costs incurred.

The Plan was voted on and approved by the members of the lending syndicate, and was then sanctioned and approved by the Court on May 4, 2018 (the “Sanction Order”). Recognition of the Sanction Order has been granted in all other jurisdictions.

Takeaways

The flexibility afforded by the CCAA allowed the parties to settle complex litigation by way of a Plan, which included the following features:

  • the members of the Class Actions were allowed to participate in the settlement despite the fact that formal class action certifications had not been obtained;
  • broad releases of all parties were granted as part of the Plan and settlement;
  • the Plan only effected a compromise of the claims of Poseidon’s secured creditors (the lending syndicate), leaving a relatively small number of unsecured creditors unaffected which expedited the settlement considerably; and
  • Poseidon, through the Monitor Action, was able to access a portion of the D&O insurance proceeds for the benefit of the estate and, ultimately, Poseidon’s lending syndicate.

The Poseidon CCAA proceeding is another example of effecting a resolution of complex litigation involving multiple parties and jurisdictions through a CCAA plan. Other recent examples include the Sino-Forest CCAA proceeding in Ontario and the Lac-Mégantic CCAA proceeding in Québec.

Bennett Jones LLP acted as counsel for the Monitor in the Poseidon CCAA proceeding.