Law Times

Law Times • march 23, 2009 NEW An online resource tool 1.800.263.3269 Bestcase earlug.indd 1 3/26/08 11:52:01 AM Focus On facilitate compromises and arrangements between companies and their creditors." But what happens when a debtor has no Two contradictory rulings fuel debate T CORPORATE RESTRUCTURING & INSOLVENCY Liquidating CCAA proceedings common in Ontario BY GLENN KAUTH Law Times he purpose of the Companies' Creditors Arrangement Act is obvious from its title: "An act to plan to present to its lenders and is potential- ly buying time in order to sell the company? Lawyers say so-called liquidating CCAA proceedings have been relatively common in Ontario, but ever since two contradictory rulings on the matter on op- posite ends of the country last year, they've been watching out for how the courts here will respond. "It's become a current topic because there was a decision from the Brit- ish Columbia Court of Appeal last sum- mer that questioned whether it was an ap- propriate thing to do," says Sue Grundy, a partner and chairwoman of the restructur- ing and insolvency group at Blake Cassels & Graydon LLP in Toronto. In the B.C. ruling, housing and golf course developer Th e Cliff s Over Maple Bay Investments Ltd. applied for CCAA protection from creditor actions after it ran into trouble with plans for an ir- rigation system last year. In response, its mortgage lenders appointed a receiver in a bid to enforce their agreements. But their eff orts came to a halt when a lower court granted Cliff s Over Maple Bay its request for a stay of proceedings under the CCAA. At issue in the case was whether the debtor had any intent to propose a re- structuring plan on which creditors could vote. In its fi ling, Cliff s Over Maple Bay noted it hoped that by getting additional funding, fi xing the irrigation problem, and fi nishing the golf course, it would be able to sell off its housing units and thereby meet its obligations. Its lawyers also referred to previous court decisions approving of CCAA proceedings in cases where the plan was to sell assets or liq- uidate, but the B.C. appeal judges ruled such a move is contingent on the debtor intending to present its proposal to credi- tors for approval. "I need not decide the point on this ap- peal but I query whether the court should grant a stay under the CCAA to permit a sale, winding up, or liquidation without requiring the matter to be voted upon by the creditors if the plan of arrangement in- tended to be made by the debtor company will simply propose that the net proceeds from the sale, winding up, or liquidation be distributed to its creditors," Court of Appeal Justice David Tysoe wrote on be- half of a three-judge panel. As a result, while noting Cliff s Over for any related costs should the business end up failing. So, if the original owner continues operating it during the sale, "nobody new steps in the picture to take those liabilities on," says Grundy. Th e alternative is for the receiver to get Maple Bay could yet alter its fi ling to pro- pose a vote on its plans by its creditors, the court granted a request by one of its lenders to overturn the stay of proceed- ings. It's a ruling, then, that has raised the eyebrows of lawyers working in corporate restructuring and insolvency in Ontario, particularly since it has only been a few weeks since electronics retailer Th e Source By Circuit City emerged from what was essentially a liquidating CCAA proceed- ing through its sale to BCE Inc. "Th e eff ect in Ontario is people will think about these things more than they have in the past few years," says Grundy. But both she and Rick Orzy, a partner and co-leader for the national bankruptcy and restructuring practice at Bennett Jones LLP, agree that while creditors have a le- gitimate concern that a CCAA proceed- ing will dilute their rights, getting a stay is appropriate in some cases even where the debtor ends up liquidating. Th e alternative of receivership, Orzy notes, "is more defi - nitely the death of a company." Consequently, if a receiver takes over, customers might stop buying a company's products out of fear they might not be 'The effect in Ontario is people will think about these things more than they have in the past few years,' says Sue Grundy. able to return them. As well, selling off parts of a company through a restructur- ing process might garner a higher value than selling off assets under a receiver- ship, he adds. Grundy, too, says that with companies operating both in Canada and the United States, liquidating under CCAA protec- tion can also be better for debtors and creditors since the court protection allows for a more co-ordinated sale process on either side of the border. Th e CCAA proceedings is simply the chal- lenges in getting a receiver in the fi rst place. Th at's because with companies with legacy issues such as pensions or a collective agreement, receivers worry they might be liable as successor employers other issue behind liquidating PAGE 9 creditors to grant them an indemnity from those liabilities, something the lenders themselves have good reason to be reluc- tant to do. As a result, the receiver might simply shut the business down to avoid those problems, a bad result for everyone, Grundy notes. "Judges are very reluctant to force a business to close on a technical- ity," she says, adding preserving jobs is an important goal of bankruptcy proceedings. In the Newfoundland case, in fact, the court came to a diff erent conclusion about a company's than the B.C. judges. Th ere, Humber Valley Resort Corp. was seeking a stay of proceedings after it ran into trouble at its golf course development. In response, the judge ruled that although the company had yet to present a restructuring plan and had indicated it planned to sell off at least some of its assets, rejecting its re- quest would open the door to creditors taking action and cause it to go under. Justice Robert Hall further noted that the fact the company had yet to formulate a viable proposal didn't preclude that it would do so soon. Grundy and Orzy, then, aren't par- ticularly worried that the B.C. ruling will cause judges here to put an end to liqui- dating CCAA proceedings. "I don't think it's as much of a controversy as people say," says Orzy, noting that while appli- cants for a stay of proceedings may fi nd themselves denied, others will continue to get court approval. Th e key, Grundy adds, is to examine conditions where a liquidating CCAA is appropriate. "I think people have had to look again at the basic reasons behind liquidating CCAAs." restructuring plans LT Looking for an easier way to attract attention? it's easy. www.lawtimesnews.com SAILING - 4.6 x 5X.indd 1 3/18/09 10:22:16 AM

• Cover
• Competition Act
• Dead Time
• Focus On Corporate Restructuring & Insolvency