Toys “R” Us (Canada) Ltd., 2018 ONSC 2744

Can a debtor exit CCAA proceedings without a restructuring?

In 2017, the US retailer Toys “R” Us (the “Parent Co.”) and its Canadian subsidiary, Toys “R” Us (Canada) Ltd. (“T Inc.”) commenced Chapter 11 proceedings in the US Bankruptcy Court. At that time, T Inc. was cash flow positive and balance sheet solvent. Commencing the proceedings violated the terms of T Inc.’s asset-based lending facilities and created a liquidity crisis that rendered it technically insolvent so as to entitle it to protection under the Companies’ Creditors Arrangement Act (“CCAA“).

The Parent Co. did not fare well over the holiday retail season, so the Chapter 11 proceedings turned toward liquidation. The Parent Co.’s shares in T Inc. were part of the assets that were offered for sale in the US liquidation proceedings. Following a stalking horse bidding procedure, the sole bidder and the Parent Co. entered into a share purchase agreement. T Inc. was not a selling party under the agreement, but it agreed to cooperate with the buyer and the seller to transition its business from the Parent Co.’s platform to the buyer’s.

The share purchase agreement required court approval of the proposed transaction by both US and Canadian courts. The US Bankruptcy Court granted its approval to the transaction. T Inc. applied for court approval of its acceptance of the obligation to facilitate the Parent Co.’s share sale.
 
At issue was whether T Inc. could exit the CCAA proceedings without undergoing a restructuring. T Inc.’s solvent business would be purchased from its insolvent owner, but the business would otherwise remain intact, and the sale did not compromise any creditor’s claim under the CCAA.

The Court referenced Century Services Inc. v Canada (Attorney General), wherein the Supreme Court of Canada identified three broad ways in which a debtor can emerge from CCAA proceedings:
  1. If the proceedings fail, the debtor will be liquidated in bankruptcy or otherwise;
  2. If the proceedings succeed, the debtor will be restructured and emerge with a business that is more or less intact; or
  3. Solvency is restored and the CCAA process terminates without reorganization being needed—as was the case here.

The Court commented that the fact that the buyer did not seek to downsize T Inc.’s business as a condition of the sale transaction reflected the strength of T Inc.’s business. It held that T Inc.’s proposed obligation to facilitate the Parent Co.’s share sale was in its best interest, reasonable and fully consistent with the purposes of the CCAA.

The Court also considered another provision in the share purchase agreement, which held that at closing, T Inc. would release claims it may have against the Parent Co. This provision could pose a concern for creditors if there were to be a quick insolvency of T Inc. If T Inc. were flipped back into insolvency proceedings before existing creditors were paid, the release of claims against the Parent Co. could significantly prejudice the creditors by diminishing the pool of assets available to fund recoveries.

 The Monitor had already run a claims process in the CCAA proceeding, so the creditors’ claims were all known, even if not all finalized. To protect these creditors, the parties to the share purchase transaction agreed to hold up payment of the sale proceeds, up to a maximum of $60.5 million, pending early payment of the creditors. Pursuant to this equity reserve process, creditors would have no claim against the reserved funds unless or until T Inc. failed to pay a claim that it had agreed or been ordered to pay after closing of the share sale. The Court praised the process as an “elegant structure”, which would ensure that equity was not paid before creditors.

 
The Court concluded that the approvals sought in respect of the terms of the share purchase agreement were reasonable and congruent with the goals of the CCAA.

Counsel: Brian EmpeyChris Armstrong, and Bradley Wiffen of Goodmans LLP for the applicant, Jane Dietrich of Cassels Brock & Blackwell LLP for Grant Thornton Limited, the Monitor, Tony DiMarinis of Torys LLP for FairFax Financial Holdings Ltd., Linc Rogers of Blake, Cassels & Graydon LLP for JPMorgan Chase Bank, NA, DIP Agent, Linda Galessiere of McLean & Kerr LLP for various landlords including: Ivanhoe, Morguard, Cushman, and SmartREIT, Adam Slavens of Torys LLP for LEGO, Danish Afroz of Bennett Jones LLP for the Unsecured Creditors Committee of Toys “R” Us Inc. and other debtors in chapter 11 proceedings before the United States Bankruptcy Court for the Eastern District of Virginia and Andrea Lockhart of Osler, Hoskin & Harcourt LLP for the ad hoc committee of B-4 Lenders