NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick and Andrea Lockhart. Steven Golick is a partner in the insolvency and restructuring group of Osler Hoskin & Harcourt LLP, and Andrea Lockhart is an associate in the group.
In September 2009, Canadian Parliament proclaimed into force a number of significant amendments to Canada’s two main restructuring statutes – the Companies’ Creditors Arrangement Act (“CCAA”) and the Bankruptcy and Insolvency Act (the “BIA”). Prior to these amendments being enacted, it was relatively common to sell assets out of the ordinary course in proceedings under the CCAA and to a lesser extent, when a company was under the protection of the proposal provisions of the BIA. Pursuant to such amendments, each of the CCAA (s. 36) and the BIA (s. 65.13) now expressly permit a debtor to seek court approval of non-ordinary course asset sales.
Such sales are similar to “363 sales” under the U.S. Bankruptcy Code, wherein a debtor may sell its assets free and clear of existing liens and encumbrances.
Under the 2009 amendments, in deciding whether to approve a sale, the Canadian court must consider a number of statutory factors including: (a) whether the sales process was reasonable; (b) whether the Monitor or Proposal Trustee supports the proposed sale; (c) the extent to which creditors were consulted; (d) the effects of the proposed sale on creditors and other interested parties; and (e) whether the consideration to be received for the assets is fair and reasonable.
Debtors have successfully used the sale provisions of the CCAA in a number of cases including in Canwest Global Communications Corp., Brainhunter Inc., and White Birch Paper Holding Co. Notably, the Ontario Superior Court of Justice in Brainhunter Inc. held that the CCAA expressly permitted the sale of substantially all of the debtor’s assets in the absence of a plan of compromise or arrangement.
There appears to have been no reported cases on the interpretation of the sale provisions under the BIA where there is no viable proposal. In the recent case of Komtech Inc., the Court for the first time similarly approved a sale of substantially all of a debtor’s assets in the absence of a viable proposal under the BIA.
Komtech Inc. (“Komtech”), an Ontario manufacturer of plastic injection products, filed a notice of intention to make a proposal (“NOI”) under the BIA on March 2, 2011. A. Farber & Partners Inc. was appointed as Proposal Trustee. As a result of the NOI, Komtech received the protection of an automatic 30-day stay of proceedings in order to develop a proposal to present to its creditors. The stay period was subsequently extended for 45 days to May 16, 2011.
During the first stay extension, Komtech brought a motion for the approval of a bidding process for the auction of its assets and a stalking horse asset purchase agreement that provided for the sale of substantially all of Komtech’s assets to a third-party purchaser. The Court was satisfied that the asset purchase agreement with the stalking horse bidder satisfied the requirements of section 65.13 of the BIA, noting that the proposed sale price for the assets was materially in excess of liquidation value and that Komtech made reasonable efforts to search for alternative financing, equity partnership or a purchaser or the business. The Court also noted that the asset purchase agreement contemplated the ongoing employment of substantially all of Komtech’s employees, and that suppliers and the greater community would benefit from the continued operation of Komtech’s business.
The last issue before the Court was whether the Court was permitted to approve the sale when the debtor was unable to present a proposal to its creditors. It was clear that there would be no value to the unsecured creditors, since the amount of the secured debt far exceeded the potential value of the assets.
Ultimately, the Court approved the sales process. It also approved the stalking horse asset purchase agreement on a preliminary basis. The Court noted that while creditors would not have an opportunity to vote on the sale under a proposal, the Proposal Trustee had undertaken to provide all secured creditors and a representative group of Komtech’s largest unsecured creditors with notice of the vesting order motion at which time they would have an opportunity to voice their concerns.
The remaining issue that the Court had to determine was whether a sale could be approved in light of the fact that there was no possibility of a viable proposal being presented to creditors, since there would be not be sufficient realizations to pay out the secured creditors. The Court held that section 65.13 of the BIA was not expressly limited to cases where the debtor was capable of presenting a viable proposal as the foregoing was not an expressly enumerated factor for court consideration.
The Court considered the CCAA asset sale provisions which were enacted at the same time and are substantially similar to the BIA provisions. The Court reviewed and applied by analogy the decision in the Brainhunter case, which had permitted a sale under the CCAA even in the absence of a presentation and vote upon a plan of arrangement. Finally, the Court held that the object of the BIA and CCAA amendments was to encourage restructuring over liquidation and that, in this case, the sale of Komtech as a going concern was in the best interests of Komtech’s secured and unsecured creditors given previous unsuccessful attempts to sell the business and the estimated realizable value of the company’s assets.
It is now clear that for restructuring cases filed in Ontario under the CCAA or the BIA, provided that the statutory tests are met, in the right circumstances the Courts can allow sales of all of the assets of a business even where the debtor cannot present a viable plan or proposal to its creditors.