Law Times

Page 10 March 23, 2015 • Law Times www.lawtimesnews.com FOCUS Judge reiterates standards for CCAA ex parte applications BY MICHAEL McKIERNAN For Law Times ompanies' Creditors Arrangement Act ap- plicants got a reminder of the high standards they must meet in seeking pro- tection on an ex parte basis when a Superior Court judge took the extraordinary step of voiding his own initial order at a later hearing. After a brief hearing on Sept. 19, Ontario Superior Court Jus- tice Michael Penny granted an initial order under the act to CanaSea PetroGas Group Hold- ings Ltd., a Toronto-based hold- ing company involved in oil and gas exploration, and four of its subsidiaries, including the Sin- gapore-based CanaSea Oil and Gas Group Pte. Ltd. Less than a month later, after hearing from two of the subsid- iary's creditors, the judge had changed his mind entirely, con- cluding he wouldn't have issued the initial order had he been aware of the facts that emerged at the second hearing. "I am not satis- fied that the applicants filled their high obligations of candor and disclosure on an ex parte appli- cation. For this reason, my ini- tial order is terminated. I declare my order of September 19, 2014 void ab initio," wrote Penny in his Oct. 16 judgment. Shawn Irving, a litigation part- ner at Osler Hoskin & Harcourt LLP, acted for Equity Ventures International Holdings Ltd., one of two creditors that brought the motion to vary Penny's initial or- der. Irving says he was surprised but very pleased by the breadth of Penny's reversal. The decision clears the path for his client to pur- sue windup proceedings against the subsidiary in Singapore. "It's not uncommon for a judge to amend or vary an initial order, and in fact that happens quite often. But to have the whole thing declared void ab initio is very unusual and unprecedented in recent memory," says Irving. "The application judge was plainly troubled by what he re- garded as a misleading picture that was painted at the ex parte hearing. This is a helpful reminder of the applicant's obligation to make full and fair disclosure of all material facts when acting ex parte." Irving says the particular facts of the case and the early stage of the proceedings combined to leave Penny with the realistic op- tion of simply undoing his initial order. No debtor-in-possession funds had yet been advanced in the case. "It might have been dif- ferent if DIP funds had been ad- vanced because declaring the ini- tial order void in that case might have prejudiced some third par- ties. In this case, no innocent third parties had taken any action rely- ing on the initial order," he says. In his original Sept. 19 deci- sion, Penny concluded on the strength of a factum and affi- davit from CanaSea's founder, Zhenyu Fang, that the finances of the holding company and its subsidiaries were "inextricably intertwined" and that each had li- abilities exceeding $5 million. Equity Ventures and Blue Energy Holdings Ltd., which between them are owed $13 million by the Singapore-based subsidiary, then moved to vary the initial order and have the company removed from the proceedings. They claimed the Ontario Superior Court lacked jurisdiction over the Singapore- based subsidiary. The creditors' loan documents also prescribed Singapore as the venue for any dispute with the company. Following Fang's cross-exami- nation by lawyers for the creditors, Penny concluded that financial statements filed in support of the initial CCAA application were, "on closer inspection, not finan- cial statements at all" and that there was no evidence of debt ob- ligations between the Singapore- based subsidiary and any of the other CanaSea subsidiaries to support the companies' claims of inextricably linked finances. The cross-examination also re- vealed that while the group of Ca- naSea companies employed Ernst & Young Singapore as financial advisers, the application for the initial order didn't include the un- audited financial statements pre- pared by the accountants. Penny said in his Oct. 16 deci- sion that the new evidence "sim- ply does not support" the con- clusions he reached in granting the initial order. Instead, he con- cluded that the only subsidiaries to meet the CCAA's $5-million li- ability threshold were Singapore companies with "very little con- nection to Canada." Although the holding company also met the threshold and was a Canadian company, it "essentially carries on no business," wrote Penny. "Had the evidence reviewed in this endorsement been brought to my attention earlier, my discretion would not have been exercised in favour of issuing the initial order." The CanaSea companies sought leave to appeal Penny's sec- ond decision, claiming the court denied them procedural fairness. They argued the reason for the ter- mination of the initial order was their failure to make full and frank disclosure on the ex parte applica- tion, a concern they claimed they could have successfully answered had they known it was an issue. However, Ontario Court of Appeal Justice Robert Sharpe denied them leave to appeal. He disagreed with their charac- terization of the judgment and concluded Penny's decision was entitled to deference. "It was for the CCAA judge to assess the evidence as to the na- ture of the debts from which the moving parties seek relief, the na- ture of the financial relationship between the various components of the CanaSea Group and the degree of connection between the alleged insolvency and Can- ada. There was ample evidence in the record to support the find- ings he made and I am far from persuaded that he made any er- ror in principle or that he misap- prehended the evidence," wrote Sharpe in his Nov. 20 decision. Although they got the result they wanted from Sharpe in the end, the creditors had objected to him hearing the motion for leave to appeal as a single judge in an oral hearing since the usual prac- tice in CCAA matters is for a panel to hear motions in writing. In a bulletin published by their law firm, Blake Cassels & Graydon LLP, Pamela Huff and Matthew Kanter, who acted for Blue Energy, said all CCAA play- ers should take note: "The Court of Appeal has clearly stated that the appellant/moving party has the procedural option of bring- ing the motion for leave to appeal a CCAA decision orally in front of a single judge of the Court of Appeal or in writing to a panel of three judges. An appellant will have to analyze the best strategy for obtaining leave." LT The wait is almost over. Soon we'll be adding our personal injury offering to Practical Law Canada. Practical, up-to-date content designed for the personal injury and insurance defence lawyers. Watch for it. Learn more at www.carswell.com/practicallawcanada IT'S PRACTICALLY HERE COMING SOON – PRACTICAL LAW CANADA PERSONAL INJURY C

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