NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Andrea Lockhart, an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP
A recent decision of the British Columbia Supreme Court in Re Bul River Mineral Corp. highlights the discretionary nature of claims-bar orders under the Companies’ Creditors Arrangement Act (the “CCAA”). We have previously commented on this topic in our article discussing Re Timminco, where the Ontario Court permitted a lifting of the stay of proceedings to permit the pursuit of a class-action proceeding that had not been filed by the claims bar date. In this case, among other things, the Court reviewed a preferred shareholder claim that had been deemed to be accepted as a debt claim in accordance with a “negative option” claims procedure. Notwithstanding the claims resolution mechanics set out in the claims procedure order and the debtors’ acceptance of the claim in accordance with such order, the Court exercised its discretionary authority to review the claim in light of the objectives of the CCAA and recharacterized the claim as an equity claim.
Prior to entering into CCAA protection on May 26, 2011, the Stanfield Mining Group (the “Group”) had been involved in the development of a mining property in British Columbia. At the time of the CCAA filing, the Group’s petition referenced debt obligations of $904,000 to trade suppliers and two unsecured judgments totalling $386,135. The petition materials also indicated amounts owing for “redeemable shares” in the amount of approximately $138,000,000, which represented the redeemable non-voting preferred shares that the Group had issued to various investors. In August 2011, the Group obtained Court approval for a broad claims process (the “Claims Procedure”) that included, among other claims, equity obligations arising from the ownership of shares. The Claims Procedure contemplated a “negative option” claims process whereby a known creditor’s claim would be deemed to be accepted at the amount set out in the Group’s creditor list unless the known creditor submitted an objection notice by the claims bar date. In this case, the creditor list actually included not only trade claims but also shareholder claims.
At the time the Group conducted the Claims Procedure, they had not taken any steps towards developing a restructuring plan or secured a plan sponsor. Nearly three years after the Claims Procedure had been approved by the Court and substantially completed, the Group entered into a letter agreement with a plan sponsor outlining a restructuring plan that contemplated that shares of a newly incorporated entity would be distributed to the plan sponsor, other related parties, the Group’s non-voting shareholders and trade creditors. As the Group’s largest liability arose from the preferred shares, the characterization of the shareholder claims as debt or equity would have a profound impact on the manner in which the restructuring proceedings would proceed in light of the restrictive treatment of equity claims under the CCAA.
One of the claims in issue related to a preferred shareholder that had obtained a default judgment prior to the CCAA proceedings in connection with the Group’s failure to comply with its share redemption obligations. In accordance with the Claims Procedure, the shareholder submitted an objection notice to the Group by the claims bar date pursuant to which it asserted, among other things, that it had a trade claim for the default judgment amount. The Group was deemed to have accepted such objection notice as it failed to deliver a notice of disallowance to the shareholder by the requisite deadline.
In considering whether the Court had the jurisdiction to review the preferred shareholder’s claim, the Court noted that it was important to keep in mind the broad remedial objectives of the CCAA to facilitate a restructuring as opposed to a liquidation. The Court further noted that it had the power to achieve such objectives through its flexible discretionary authority under section 11 of the CCAA, pursuant to which the Court could make any order that it considered appropriate in the circumstances. With respect to CCAA claims procedures, specifically, the Court noted that their purpose was to achieve certainty within restructuring proceedings for both debtors and creditors. Claims procedures were aimed at determining the universe of known claims and potential distributions to creditors with a view to enabling creditors to make an informed choice as to the restructuring or liquidation alternatives presented to them.
At the time the Claims Procedure was conducted, the Group did not know whether there would be a restructuring plan to present to their creditors, as it was not determined whether a viable mine even existed. Accordingly, the Group did not conduct a substantive review of the claims received and there was no independent review of claims by the Court-appointed Monitor or any other third party claims officer. Rather, the only factor of review was whether the debt related to a trade debt or an equity interest. Further, it appeared that the individuals reviewing the claims did not appreciate the different treatment of debt versus equity claims under the CCAA and the potential consequences of their inaction with respect to claims under the “negative option” structure of the Claims Procedure. In retrospect, the Court held that the Claims Procedure lacked certain procedural safeguards and failed to achieve the objectives of fairness, reasonability and transparency with respect to the determination of claims. Therefore, the Court concluded that it was not precluded from considering the issues on their merits so as to achieve the fundamental objective under the CCAA of facilitating a restructuring based on valid claims.
With respect to the particular claim in issue, the Court noted that historically equity holders had been subordinated in restructuring proceedings as they were understood to be higher risk participants, which historical treatment was now codified in the CCAA. Further, in light of the policy objectives to treat similarly situated claims in a similar fashion, the issuance of a pre-filing default judgment should not accord one preferred shareholder preferential treatment over the Group’s other preferred shareholders. Accordingly, the Court held that the preferred shareholder’s claim should be recharacterized as an equity claim and that the default judgment did not elevate such equity claim to a debt claim.
This case highlights how the Court may exercise its broad discretionary authority at any point in a CCAA proceeding to facilitate a restructuring bearing in mind the remedial objectives of the CCAA. However, such discretionary authority is not without limits. The Court will bear in mind the requirements of appropriateness, good faith and due diligence when exercising such authority. In this case, the Court noted that was no real prejudice to stakeholders as no restructuring plan had been presented to creditors and no vote had been conducted. Further, the Court noted that restructuring plan sponsored by the plan sponsor (who objected to the characterization of the preferred shareholder claim as a debt claim) was the Group’s only option to avoid a liquidation.