Five-judge panel considers the objectives of the Companies’ Creditors Arrangement Act

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Author: Lee J. Marriner

Appeals at the British Columbia Court of Appeal are typically heard by three judges. When the Court may have to reconsider and potentially overrule a binding prior decision, however, appeals are heard by a five-justice division. 

A five-justice division heard an appeal in a Companies’ Creditors Arrangement Act, 1985, c C-36 proceeding in Port Capital Development (EV) Inc. v. 1296371 B.C. Ltd., 2021 BCCA 382, (“Port Capital“) in order to consider whether to overrule Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp., 2008 BCCA 327 (“Maple Bay“).

Seeking Companies’ Creditors Arrangement Act (CCAA) protection mid-construction

In short, Port Capital involved developers of a high-rise in Vancouver that sought CCAA protection mid-construction. The petitioners were developers that had two secured creditors with mortgages registered on title, various lien holders, and unsecured creditors. The CCAA initial order provided that the Monitor was to carry out a dual track process to either sell the property or find an equity investment in the project as a going concern, potentially through a restructuring, reorganization, or refinancing of the petitioners. 

The Port Capital three liquidation offers

In the application appealed from, the chambers judge considered three “liquidation offers” to purchase the assets of the petitioners, and one “refinancing transaction.” The best of the three liquidation offers would have paid interim financing and administration charges in full and paid some of the amount owed to the first mortgagee, but with no money remaining for the second mortgagee or other creditors. The refinancing transaction involved borrowing funds to pay the interim financing and administration charges, and the first mortgage on the property. The refinancing transaction would permit the petitioners to seek further construction financing to complete the project, and would mean the second mortgagee would continue to have a prospect of repayment and certain pre-sale purchasers would continue to have the opportunity to purchase units, which they would have lost if the liquidation offer was approved. 

The Port Capital initial decision

The chambers judge refused to grant a continued stay of proceedings and approve the refinancing transaction, however, on the basis that there was not even “the kernel of a plan” in the evidence to show an intention to put forward a plan of arrangement or compromise on which creditors could vote. Instead, the chambers judge approved the best liquidation offer, despite the fact this offer would result in a partial recovery to only one of the petitioners’ pre-CCAA creditors. 

The Port Capital appeal and review of CCAA objectives

On appeal, the Court noted that the Monitor had concluded the refinancing transaction would have a materially better outcome, and admitted new evidence that showed this outcome had improved as a result of developments since the initial chambers hearing. 

The Court then reviewed the objectives of the CCAA and traced developments under the Act, such as the appointment of monitors, interim financing orders with super-priority, and liquidating CCAAs. These developments show that the stated objective of the CCAA of “facilitating compromises and arrangements of Canadian companies with their creditors” has been substantially overtaken. For this reason, the focus of the Court in Maple Bay on this objective of the CCAA “may now be outdated.” 

Why CCAA objectives are now “more fundamental and broader”

The Court held that the chambers judge made an error in principle in giving primary importance to the absence of a planned compromise in the refinancing transaction, given the evolution of the CCAA and the complex and innovative solutions that CCAA proceedings can now involve. The Court held that the objectives of the CCAA are now “more fundamental and broader” than the presentation of a formal plan of arrangement. The Court noted, however, that the issue of whether a compromise is sought can still be relevant when courts consider whether an order is appropriate under section 11 of the CCAA, as debtor companies should not resort to the CCAA simply to buy time without having some proposal in hand, or the kernel of one, that is likely to further the purposes of the CCAAOn the basis of this and other errors, the Court set aside the chambers judge’s approval of the liquidation offer and instead approved the refinancing transaction. 

Port Capital impact on Maple Bay

While the Court in Port Capital did not expressly overrule Maple Bay and distinguished its facts, the Court’s consideration of Maple Bay in light of developments under the CCAA confirms that the absence of an intention to propose a plan of compromise or arrangement in a CCAA proceeding will not determine whether orders under section 11 are appropriate in the proceeding. 

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