Law Times

PAGE 10 FOCUS march 22, 2010 • Law Times CanWest a test case for court application of new bankruptcy rule into force in September requir- ing court approval for any dis- position of assets by a CCAA- protected company where the transaction was "outside of the ordinary course of business." Th e Industry Canada brief- ing book on the provision, s. 36, cites its purpose as intend- ing "to provide the debtor com- pany with greater fl exibility in dealing with its property while limiting the possibility of abuse" by phoenix corporations. Such abuses arise in the con- text of owners who engage in serial bankruptcies. Th ese indi- viduals incorporate businesses and then cause them to become bankrupt. Th e same person pur- chases the assets at a discount and starts a new business using CCAA amendment changes game for dispositions A BY JULIUS MELNITZER For Law Times new provision in the Companies' Creditors Arrangement Act came them. As a result, the owner continues with what amounts to the original business while leaving creditors unpaid. Th e diffi culty is that s. 36 is cast in very broad terms capable of capturing dispositions that are insignifi cant in relation to the as- sets of the entire enterprise. "Th e provision is unfortu- nate in its scope, so the judg- ments interpreting it tend to be very practical," says Mario Forte of Ogilvy Renault LLP. "Basically, judges have been working around it rather than putting people through the sausage maker of court approv- al with respect to every disposi- tion in a restructuring." But when a disposition is to an entity related to the debtor, judges have more reason to be circumspect, even more so when the transaction is a large one. Th at's the situation Ontario Superior Court Justice Sarah Pepall faced in the CanWest various CanWest assets, only some of which were under bankruptcy protection. Th e idea was to restructure the enterprise by transferring the assets of Th e National Post to a new entity. CMI, supported by the mon- Edward Sellers was disappoint- ed Justice Sarah Pepall didn't definitively exclude 'desir- able, good-faith steps taken in effecting a reorganization.' restructuring. In November, CMI Entities, a group of com- panies that were under CCAA protection, asked Pepall to ap- prove a transition and reorga- nization agreement among the itor, described the transactions involved as "inter-entity ar- rangements" and asked Pepall to declare that the agreement repre- sented an internal corporate re- organization that wasn't subject to s. 36. Such a reorganization, it argued, was within the ordi- nary course of business of the insolvent enterprise and there- fore didn't engage the provision. But, Pepall noted, not every in- ternal corporate reorganization escaped the purview of s. 36. "Indeed, a phoenix corpora- tion to one may be an internal corporate reorganization to an- other," she wrote. In this case, however, the businesses of the Post and the parent of the new subsidiary were "highly integrated and in- terdependent." Th e current ar- rangement refl ected an anom- aly that hindered the success of the enterprise and that the agreement aimed to remedy. "Th e transition and reor- ganization agreement is an internal reorganization trans- action that is designed to re- align shared services and assets within the CanWest corporate family so as to rationalize the business structure and to better refl ect the appropriate business model," Pepall noted. It would therefore be "com- mercially unreasonable" to re- quire the parties to engage in the sale approval process con- templated by s. 36, including putting the Post up for grabs by third parties, before permitting a realignment. "In these circumstances, I am prepared to accept that s. 36 is inapplicable," Pepall concluded. But Pepall went on to say Bankruptcy in Canada Fourth Edition The most authoritative statement of the law since 1922 Substantially revised and rewritten by two leading practitioners, this fourth edition is of benefit to civil and common law practitioners. It offers a concise, comprehensive description of bankruptcy in general, and the distinctive features of the Canadian system in particular. Not just the law, but also the basis of the law: • Coverage of national and international dimensions of bankruptcy law • Reference to the jurisprudence of other countries as it relates to Canada • An authoritative explanation of history, constitutional law, comparative law, statutory construction and interpretation • Precise directions regarding practice and procedure Handy features include: • Appendices including the and • Tables of Cases • Table of Legislation • Extensive index For a clear and comprehensive understanding of bankruptcy, turn to this classic resource. ORDER your copy today Hardbound • 912 pp. • 2009 • $225 P/C 0181010000 • ISBN 978-0-88804-491-4 that even where the provision didn't apply, court approval was still necessary when the disposi- tion was to a related person and there existed an apprehension that it wasn't in the ordinary course of business. But even if the court decided the transac- tion was so, it could still con- sider the criteria in s. 36 in as- sessing whether it was fair. In the CanWest case, the agreement was the product of extensive negotiations and consultation, and the major creditors all supported it. At the same time, it preserved val- ue for stakeholders and main- tained employment. "I am satisfi ed that the pro- posed transaction does facili- tate the restructuring and is fair and that the transition and re- organization agreement should be approved," Pepall ruled. But Edward Sellers of Osler Hoskin & Harcourt LLP, who is part of the team of lawyers representing CMI, is disap- pointed with the ruling. "We hoped that the court might be prepared to read down the scope of s. 36 to defi nitively exclude desirable, good-faith steps taken in eff ecting a reor- ganization," he tells Law Times. "But the court wasn't prepared to do that, and the ruling leaves us with certain challenges be- cause it's not infrequently that a company in CCAA protection has to move things around to get the deal done." LT CLARIFICATON For a 30-day, no-risk evaluation call: 1.800.565.6967 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. Honsberger_Bankruptcy in Canada (LT 1-2x4).indd 1 www.lawtimesnews.com LT0322 3/16/10 3:57:48 PM A March 1 article, "Bring- ing dependent contractors out of the shadows," incor- rectly identifi ed the lawyer who represented Elizabeth McKee in McKee v. Reid's Heritage Homes Ltd. as Ross Wells. In fact, Kirk Stevens of Lerners LLP was counsel for McKee, while Wells represented Reid's Heritage Homes. John D. H onsberger, Q.C. and Vern W. DaRe Bankruptcy and Insolvency General Rules of Debts Regulations Bankruptcy and Insolvency Act, Orderly Payment

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