When can a proposal be deemed refused before a vote?
Schendel is a major construction conglomerate in Alberta. In the fall of 2018, work on one of its major projects was halted by Alberta, causing Schendel to default on amounts owing to Alberta Treasury Branches (“ATB”). On March 22, 2019, Schendel filed a notice of intention to file a proposal, triggering a stay of enforcement action by ATB and other creditors.
On July 10, 2019, Schendel filed a proposal to ATB and its other creditors. The proposal treated ATB’s claim of approximately $22 million in two segments. ATB’s secured claim was the sole occupant of the Secured Class, while the unsecured portion of the claim joined the other unsecured creditors in steerage. By virtue of the solo nature of its secured claim, ATB had a veto over the proposal.
The creditors’ meeting to vote on the proposal was scheduled for July 31, 2019. On July 12, 2019, ATB applied for orders deeming refused the proposal, lifting the proposal stay of proceedings, and appointing a receiver and manager. ATB argued that since it intended to vote “no” at the meeting—based on having lost confidence in Schendel’s management, among other factors—the failure of the proposal on July 31, 2019 was a foregone conclusion. Schendel opposed the application, citing the possibility of an amended proposal between July 16 and 31, and based on what it perceived as the commercial unreasonableness of and inequitable and improper conduct by ATB.
- the debtor has not acted, or is not acting, in good faith and with due diligence;
- the proposal will not likely be accepted by the creditors; or
- the creditors as a whole would be materially prejudiced if the application under this subsection was rejected.
If s. 50(12) is satisfied, Schendel would be deemed bankrupt and ATB, as a secured creditor, would be free to enforce its security. The Court concluded that the proposal was almost guaranteed not to be accepted. ATB was the only creditor in the “Affected Secured Creditors” class, and the proposal required a “yes” vote by ATB for the proposal to succeed. ATB intended to vote “no”, and presented evidence that its position would not change at the July 31st meeting. It maintained that it would fare better under a bankruptcy.
While Schendel’s evidence included details of a potential deal with a third party, which it described as “possibly” leading to a sweetened amended proposal, the evidence did not disclose the timing of the deal, its potential terms, the likelihood of consummation, or by how much the proposal’s terms might be enhanced as a result. Regardless, the focus of the analysis remains on the proposal as filed. The possibility of a different, and better, proposal is not a factor. By laying down a proposal, proponents take the risk that a creditor will say “this is not good enough” and move for termination under s. 50(12) of the BIA.
- it does not support the proposal; and
- it sees no prospect of an acceptable amended proposal.
The Court held that ATB was acting in good faith and in a commercially reasonable manner. It was entitled to intensify its scrutiny of Schendel’s loans and overall business conditions, to demand payment when it did, and to notify Schendel of its intention to enforce the security per the BIA-prescribed notice period. ATB had no duty to forbear from enforcing its rights. There was no evidence that ATB was attempting to pursue an improper purpose (e.g. attempting to drive a competitor out of business or escaping from a royalty regime). Rather, ATB was pursuing its interests and asserting its rights within the bounds of, and for purposes squaring with, the Canadian insolvency system (i.e. recovering its loans). It was entitled to oppose the proposal and, on the basis of that opposition, seek a “deemed refused” ruling.
The Court found that the proposal should be deemed refused.
Counsel: Pantelis Kyriakakis and Walker MacLeod of McCarthy Tetrault LLP for the Applicant ATB, Jim Schmidt and Katherine Fisher of Bennett Jones LLP for the Debtor Companies and Dana Nowak of MLT Aikins LLP for the Proposal Trustee