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, and Mary Angela Rowe, an Articling Student-at-Law at the firm
In Re CanaSea Petrogas Group Holdings Ltd., 2014 ONSC 6116, the Ontario Court of Justice (Commercial List) (the “Ontario Court”) made a rare decision to terminate the Companies’ Creditors Arrangement Act (“CCAA”) restructuring proceedings of an international corporate group by declaring the initial order granting CCAA protection to such parties (“Initial Order”) void ab initio. A single judge of the Ontario Court of Appeal subsequently refused the applicants’ motion for leave to appeal and confirmed the importance of deference to a CCAA judge with respect to the appeal of a discretionary order. The Ontario Court of Appeal also raised questions about the ability of a corporate group to claim CCAA protection for a foreign subsidiary where the indebtedness owing by such subsidiary was primarily owed to foreign investors pursuant to debt instruments governed by foreign law. The decisions of the Ontario Court and the Ontario Court of Appeal also serve as a reminder to the restructuring bar of the importance of making full and fair disclosure on an ex parte application for CCAA protection.
In this case, CanaSea Petrogas Holdings Limited (“CPGH”) and its subsidiaries applied to the Ontario Court on an ex parte basis and received an Initial Order granting them protection under the CCAA, including a stay of proceedings. CPGH was a Canadian holding company that held 100% of the shares of two Singapore investment vehicles (CanaSea International Pte. Ltd. (“CIPL”) and CanaSea Oil and Gas Group Pte. Ltd. (“COGG”)). COGG held 100% of the shares of CanaSea PetroGas Investment Inc. (“CPII”), Canadian holding company that itself held 100% of the shares of CanaSea Oil and Gas Ltd., a Saskatchewan corporation that was the sole operating entity of the corporate group (“COGL”, and together with CPGH, CIPL, COGG and CPII, the “CanaSea Group”). Following notice of the issuance of the Initial Order, two foreign creditors holding convertible notes issued by COGG (the “Convertible Noteholders”) brought a motion before the Ontario Court to remove COGG from the CCAA proceedings on the basis that, among other things, the Ontario Court lacked the statutory jurisdiction to issue the Initial Order in respect of COGG. The Convertible Noteholders, who held approximately 90% of COGG’s indebtedness and 49% of the aggregate indebteness of the CanaSea Group, wanted to pursue their rights and remedies under the convertible notes and related documentation in Singapore in accordance with the terms of such documentation.
The motion raised various issues, including the adequacy of the CanaSea Group’s financial disclosure. The Ontario Court noted that the CanaSea Group, both in its application materials and in oral submissions before the Court, had advised the Court that each of the applicants had liabilities in excess of $5 million and was insolvent, each applicant was unable to meet its obligations as they became due, and each applicant’s finances were inextricably intertwined through intercompany debt obligations. The Ontario Court also noted that the CanaSea Group’s evidence and submissions at the ex parte hearing were to the effect that, although COGG was the borrower under the convertible notes, as a result of intercompany obligations both CPII and COGL were somehow “on the hook” for the loans and that such submission effectively brought the applicants other than COGG within the insolvency and indebtedness thresholds required by the CCAA. However, as a result of the evidence obtained through cross-examination and produced as a result of the Convertible Noteholder’s motion, the Ontario Court held that its previous conclusions were in fact wrong and that the evidentiary record only supported a finding that the top Canadian holding company (CPGH) and its two Singapore subsidiaries (CIPL and COGG) were insolvent and had liabilities in excess of $5 million. Further, the applicants had not complied with their statutory obligation under section 10(2)(c) of the CCAA to disclose all financial statements prepared during the year before the application. The Court was highly critical of the CanaSea Group for failing to fill their “high obligations of candor and disclosure on an ex parte application”. Accordingly, the Court noted that it would not have issued the Initial Order had it been aware of all the relevant facts and therefore terminated the Initial Order and declared it to be void ab initio.
On appeal, a single judge of the Ontario Court of Appeal noted that the CCAA judge had set aside his own order on the basis that there was no evidence of COGL’s solvency, independent of COGG, and that the Singapore entities (CIPL and COGG), the real debtors in the proceeding, had very little connection to Canada. Such decision was entitled to deference, as it was for the CCAA judge to assess the evidence as to the nature of the debts from which the applicants sought relief, the nature of the financial relationship between the various members of the corporate group, and the degree of connection between the alleged insolvency and Canada. Further, while the Singapore financing vehicles (who held the vast majority of the CanaSea Group’s third-party indebtedness) were under the umbrella of a Canadian holding company, there was no authority to support the CanaSea Group’s contention that there was a common law doctrine of “common enterprise insolvency” that would somehow permit such entities to claim the benefit of the CCAA in relation to debts they incurred in Singapore that were subject to Singapore law.
As this case highlights, CCAA courts are called upon to make decisions quickly in reliance upon the information provided by the parties. Fairness dictates that on an ex parte application, where creditors and other interested parties do not have the ability to make submissions to the Court, the applicant has a duty to provide full and fair disclosure of all material facts to the Court. Further, the Court of Appeal’s decision casts doubt on the ability of a solvent company to receive full CCAA protection (as opposed to simply a stay of proceedings) solely on the basis that certain affiliated CCAA applicants are insolvent.
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