Callidus Capital Corp: Policing CCAA Proceedings
May 11, 2020
By Gavin Giles, Partner at McInnes Cooper,
Romain Viel, Lawyer at McInnes Cooper,
Andrew Kinley, Lawyer at McInnes Cooper
The Supreme Court of Canada recently released a much-awaited decision regarding the Companies’ Creditors Arrangement Act (the “CCAA”). The CCAA is an insolvency statute that permits the reorganization of insolvent companies facing claims above $5 million.
In 9354-9186 Québec inc. v. Callidus Capital Corp., the Court confirmed a judge could stop a creditor from voting on a plan of arrangement under the CCAA where a creditor votes for an improper purpose. The Court also accepted that a judge could approve interim financing from a third party to fund litigation during CCAA proceedings.
9354-9186 Québec inc. (“Bluberi”) obtained a loan from Callidus, which was secured by a pledge of Bluberi’s assets. If Bluberi defaulted, Callidus could take its assets to satisfy the loan.
Bluberi lost a significant amount of money and, as a result, it applied for CCAA protection. In Bluberi’s CCAA application, it alleged that Callidus caused its insolvency by dictating detrimental business decisions. Bluberi successfully obtained CCAA protection.
Bluberi realized it needed to sell its assets to pay off its creditors and, therefore, entered an agreement with Callidus that provided Bluberi’s assets to Callidus in exchange for extinguishing its secured claim against Bluberi. Bluberi also kept its right to sue Callidus for Bluberi’s insolvency problems (the “Retained Claims”). The judge approved this agreement and Callidus acquired Bluberi’s business. Bluberi’s sole remaining asset was the Retained Claims, still pledged to Callidus as security for the $3 million that Blueberi continued to owe to Callidus.
Callidus proposed a plan of arrangement (“Callidus Plan 1”) and applied to the court for an order convening a creditors’ meeting to vote on that plan. Under Callidus Plan 1, some creditors of Bluberi would get everything owed to them and others would only get partial amounts. The catch was that Bluberi had to give up its rights regarding the Retained Claims. Bluberi’s unsecured creditors voted and rejected Callidus Plan 1. Callidus could have voted on Callidus Plan 1, but it chose not to vote.
Bluberi filed a proposed third party litigation funding agreement (“LFA”) with the court for approval as interim financing. Under the LFA, a third party lender would provide Bluberi with a loan to fund the Retained Claims litigation in exchange for part of the litigation proceeds. Callidus objected on the basis that the LFA was a plan of arrangement and that the creditors were required to vote on it. Additionally, Callidus put forward a new plan of arrangement (“Callidus Plan 2”), which was essentially the same as Callidus Plan 1. Callidus asked the judge if it could vote on Callidus Plan 2, as if it could vote, it would pass.
The judge said Callidus could not vote because it was acting with an “improper purpose” with Callidus Plan 2. With Callidus Plan 2, Callidus was trying to override the result of the vote on Callidus Plan 1. Further, Bluberi could go forward with the LFA because the agreement was fair and not a plan of arrangement. The Quebec Court of Appeal disagreed and sided with Callidus on both issues. Bluberi applied to the Supreme Court of Canada, which unanimously allowed the appeal and restored the initial judge’s order.
Evolution of CCAA Proceedings
CCAA proceedings traditionally had been to facilitate the restructuring and survival of a corporate debtor so that it could continue its business while satisfying debts. Where such a restructuring is not possible, the alternative option is liquidation through either receivership or under the Bankruptcy and Insolvency Act (“BIA”). The Court commented that CCAA proceedings had evolved to include some form of liquidation under the CCAA. This type of CCAA liquidation may take many forms and include the sale of the corporate debtor, the sale of the corporate debtor’s assets and the downsizing of business operations.
Voting for an Improper Purpose
Subject to certain exclusions, in CCAA proceedings, a creditor with a provable claim can generally vote on a plan of arrangement that affects its rights. However, a judge can also prevent a creditor from voting on a plan of arrangement where the vote is for an improper purpose. In considering a creditor vote, a judge needs to balance the remedial objectives of the CCAA, which include keeping corporate debtors operational and maximizing the amounts the creditors can thus recover, while also being guided by the baseline considerations of appropriateness, good faith and due diligence. If a creditor is exercising its voting rights in a manner that frustrates those objectives, it is acting for an improper purpose and the judge may prevent the creditor from voting.
The judge properly prevented Callidus from voting on Callidus Plan 2 because it was acting for an improper purpose. Callidus Plan 1 had failed to receive approval from other creditors. Callidus Plan 2, which was nearly identical to Callidus Plan 1, was not warranted as none of Bluberi’s financial or business affairs had changed significantly. Callidus was trying to acquire control of the vote and avoid input from other creditors, which was in contravention of objectives of the CCAA, including creditor democracy (all creditors should have a fair say regarding plans of arrangement).
Interim Financing to Fund Litigation
The Court described interim financing as a flexible tool that may take on a range of forms, including third party litigation funding in appropriate circumstances. Although litigation funding differs from more common interim financing that is to help the debtor “keep the lights on”, litigation funding can become interim financing where a single litigation asset may be monetized for the benefit of creditors. This practice allows the debtor to realize the value of its assets for the benefit of creditors. Further, LFAs are generally not plans of arrangement, unless they incorporate a plan of arrangement for the benefit of litigation proceeds among creditors.
The judge correctly approved the LFA as interim financing. The LFA was to help Bluberi realize on the value of the Retained Claims – its last asset. Further, the LFA was not a plan of arrangement because it did not propose any plan or compromise of the creditors’ rights.
The decision highlights the following important takeaways for banks, trustees and other financial institutions that are involved in CCAA proceedings:
- liquidation is going to become more common in CCAA proceedings;
- parties in CCAA proceedings should be careful when proposing plans of arrangement – the timing must be right, the plan must support CCAA objectives and parties should be wary of duplicative or multiple plans; and
- litigation funding will likely become more usual in CCAA proceedings, especially where a corporate debtor has a significant litigation asset.
The decision also provides helpful insight into CCAA proceedings that are likely to become more prevalent because of the economic fallout that will likely occur because of the novel coronavirus pandemic.
Please contact your McInnes Cooper lawyer or any member of our Bankruptcy and Insolvency Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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