Schendel Management Ltd, 2019 ABQB 545

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.

Pursuant to s. 50(12) of the Bankruptcy and Insolvency Act (the “BIA“), a proposal should be deemed refused if:
  • 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.

Where a creditor seeks to have the proposal deemed refused, it is effectively saying that:
  • it does not support the proposal; and
  • it sees no prospect of an acceptable amended proposal.
Section 50(12) allows a veto creditor in such circumstances to fast-forward to the inevitable result—the proposal’s termination. Even if the creditor perceives a likelihood or real possibility of worthwhile amendments to the proposal, it is entitled to balance the potential upside of waiting against the costs associated with waiting.
 
If Parliament had intended an “unabridgeable” period between the proposal filing and the vote meeting (whether to ensure “full consideration” by the creditors, an opportunity for the debtor to propose amendments, or otherwise), it would not have included the “deemed refused” element in s. 50(4). In actuality, where the writing is on the wall (with a veto-position creditor steadfastly opposed), courts have granted applications for orders deeming refused such proposals.
 
The Court then considered Schendel’s claim that ATB had not acted in good faith or in a commercially reasonable manner in respect of its efforts to enforce its security. Academic commentary on the subject of creditors acting in good faith in insolvency proceedings has not suggested good-faith testing of creditors voting on proposals or arrangements i.e. outside of the “improper purpose” (i.e. abuse of system) contexts. Some have posited that imposing an explicit “vote in good faith” duty on creditors may “ultimately have a paralyzing effect on negotiations, add greater litigation costs, impair efficiency, and alter the carefully calibrated balance between the rights of creditors and their insolvent debtors.”
 

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.

CounselPantelis 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

 
 
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