Quest University Canada (Re), 2020 BCSC 318

How will the court decide between two competing DIP financing proposals?

In the early 2000s, Quest was formed as a private, not-for-profit, post-secondary institution, pursuant to the Sea to Sky University Act. Quest sought creditor protection under the Companies’ Creditors Arrangement Act on January 16, 2020. The relief granted in the Initial Order was limited to matters that were reasonably necessary until the comeback hearing in 10 days’ time after all stakeholders had received notice of the proceedings.

At a comeback hearing, Quest sought approval of interim financing from RCM Capital Management Ltd. (“RCM”) for its continued operations during this proceeding. One of the secured lenders, VF, opposed the proposed interim financing and brought a cross-application to approve interim financing that it has secured with Burley Capital Inc. (“Burley”).

Quest and VF agreed that Quest required interim financing in order to complete its restructuring efforts within this proceeding. The crux of the matter, however, was who should be the person to provide that financing, RCM (per Quest) or Burley (per VF).

Quest submitted that it is appropriate to approve the RCM financing and grant a charge in favour of RCM, pursuant to s. 11.2 of the CCAA. This provision grants the Court jurisdiction to approve an interim financing charge over Quest’s assets in an amount considered appropriate having regard to its cash-flow statement. Factors to be considered in granting such an order include, but are not limited to:

the period during which the debtor is expected to be subject to CCAA proceedings;
how the debtor’s business and financial affairs are to be managed during the proceedings;
whether the debtor’s management has the confidence of its major creditors;
whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the debtor;
the nature and value of the debtor’s property;
whether any creditor would be materially prejudiced as a result of the charge; and
the monitor’s report, if any.

The above factors were also engaged in respect of VF’s interim financing application.

The competing proposals by Quest and VF were similar in most respects, but also differ in very material ways. One important difference was that the Burley commitment letter contained a condition precedent—as part of the Burley financing proposal, VF sought an order removing four governors from Quest’s Board. In addition, VF sought an order appointing four governors to Quest’s Board. The result of granting this relief would be to appoint VF’s nominees to act as the majority of Quest’s governors.

VF did not provide any detailed reason why it has chosen to specifically remove certain governors as part of its proposal. The evidence supported that all of these individuals were reputable and competent people and independent of Quest.

The evidence also contradicted VF’s allegation that the Board had failed to take any steps to address the ongoing financial concerns that have persisted since Quest’s inception. The Board had pursued a variety of avenues to address the financial situation, including negotiations with potential academic partners, significant discussions with its lenders, pursuing fundraising avenues, hiring various advisors, developing a proposal process with respect to the development lands and, attempting to bolster enrollment.

Removing and replacing directors of a corporation, even a debtor corporation, subject to the CCAA, is an extreme form of judicial intervention in the business and affairs of the corporation. In a CCAA restructuring, the Monitor performs a supervisory function that provides a form of protection to the corporation’s stakeholders. In determining whether to exercise its discretion in s. 11.5(1), a court would ordinarily take into consideration the presence or absence of any recommendation from the Monitor.

The Court held that VF had not met its burden in establishing, on a balance of probabilities, that Quest’s Board is unreasonably impairing the possibility of achieving a successful restructuring in this proceeding. The fact that the governors had not yet been successful did not mean that they were incompetent; nor did it translate into a finding that they were now unreasonably impairing the restructuring efforts.

This was not a situation where Quest’s Board will be taking steps on its own in this restructuring without significant input and oversight. The Initial Order granted imposes restrictions on the decisions to be made by Quest in the future. In addition, the Monitor was specifically tasked to monitor the restructuring efforts and assist and advise Quest in those efforts.

Moreover, RCM’s loan would enhance the prospects of a successful restructuring. RCM is an independent lender whose interests are plain and understandable—they want to advance a loan at a price and recover those amounts in due course. The same could not be said for Burley’s proposal. There were substantial concerns regarding inherent conflicts that were apparent from a closer review of Burley and its proposal. The Monitor did not support the Burley proposal, echoing the same concerns about independence.

Burley’s corporate status, at this time, is not in good standing. The Monitor had not yet had time to assess Burley’s capability to fund the required financing amount and no evidence had been presented by VF/Burley to support that conclusion. The Monitor recommended that the Court approve the RCM financing as representing the best option in terms of pursuing a successful restructuring.

Given the above, the Court approved the RCM financing proposal, on the terms sought.

Counsel: John Sandrelli and Valerie Cross of Dentons for the Petitioners, Vicki Tickle of McMillan for the Monitor PricewaterhouseCoopers Inc., Katie Mak of Clark Wilson LLP for Capilano University, Kibben Jackson of Fasken for SESA-BC Holding Ltd. and RCM Capital Management Ltd., Walker MacLeod of McCarthy Tétrault for Vanchorverve Foundation, Shawn Poisson of Koffman Kalef LLP for Bank of Montreal, Brittney Dumanowski of Owen Bird for the Toronto Dominion Bank, L.V. Mauro for Her Majesty The Queen In Right of Province of British Columbia

Fullcase: http://canlii.ca/t/j5rm0