To Restructure or Liquidate? – That is the Question: Dueling CCAA and Receivership Applications

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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.

The Companies’ Creditors Arrangement Act (the “CCAA”) can be a powerful tool for a debtor to obtain a breathing space in an attempt to restructure.  When good faith efforts are made towards a plan of arrangement, secured creditors can be and usually are stayed from pursuing remedies.  However, there are limits.  A recent decision of the Ontario Court illustrates circumstances where a debtor’s attempt to use the CCAA as a shield against a receivership application exceeded those limits.

In the judgment of the Honourable Justice Mesbur of the Ontario Superior Court of Justice (Commercial List) dated January 5, 2012 in Callidus Capital Corp. v. Carcap. Inc., 2012 ONSC 163, the Court was faced with competing CCAA and receivership applications.

The debtors were in the business of sub-prime car lease financing and sub-prime equity car loans. The debtors held deposit accounts with the Toronto Dominion Bank (“TD”) without any overdraft or credit facilities.

In July and August, 2011 TD noticed that there was a high rate of unusual activity in the debtors’ accounts.  More than $60 million in cheques passed through the accounts, with more than $18 million in one day in August.  Annual revenues of the business was about $24 million. TD froze the accounts which were in overdraft position of approximately $7 million, contrary to their banking arrangements with TD.

Pursuant to an Accommodation Agreement, TD provided the debtors with a secured loan of $5 million to cover the overdraft and some working capital. The debtors failed to repay the loan when due on August 29, 2011.

On September 1, 2011, the debtors entered into a $15 million secured demand loan facility with Callidus Capital Corp. (“Callidus”). In connection therewith, the debtors established disbursement accounts for the loan proceeds and the requisite blocked accounts with TD. The debtors did not disclose to Callidus the existence of the TD overdraft, the Accommodation Agreement or the repayment default.

Subsequent to the first Callidus advance, the TD Accommodation Agreement was amended to reduce the secured loan amount to $2 million and to extend the maturity date to September 12, 2011. When the loan was not repaid, TD entered into an agreement with the debtors on September 16, 2011 to terminate the Accommodation Agreement and extend the financing to September 30, 2011, subject to certain paydowns. TD also required the debtors to transfer the blocked accounts and the disbursement accounts within 90 days.

Callidus did not learn of the debtors’ secured loan arrangements with TD bank until three weeks after the date of its first advance. At such time, Callidus learned that TD was permitted to offset overdrafts in one account against deposits in another, including the disbursement accounts into which Callidus had deposited its advances.

Callidus also learned that certain cheques written under the initial Callidus advance that were to be used to pay certain persons in accordance with the Callidus loan agreement had been returned NSF due to the debtors’ overdraft position with TD. A further field audit revealed that the debtors had breached certain other terms of the loan agreement by diverting funds from certain accounts to cover overdraft positions and by depositing certain accounts receivable into the disbursement accounts instead of the blocked accounts.

As a result of the foregoing, Callidus demanded payment in full of all amounts owing under its facility and served notice under section 244 of the Bankruptcy and Insolvency Act of its intention to enforce security. Subsequently, Callidus and the debtors entered into a forbearance agreement pursuant to which Callidus agreed to forbear from exercising its rights on a day-to-day basis subject to certain conditions, including finding alternate financing to pay out Callidus by April 30, 2012 and submitting a complete restructuring plan to Callidus by November 30, 2011 to be completed by December 31, 2011.  The debtors failed to meet such milestones and Callidus brought a motion to appoint a receiver.  The debtors responded by bringing a cross-motion for CCAA protection, intimating to the Court that if they obtained the benefit of a 13 week stay of proceedings they would be able to restructure.

In considering whether to appoint a receiver, the Court noted that it must consider all the circumstances of the case, including (a) the effect on the parties of appointing the receiver, including potential costs and likelihood of maximizing return on and preserving the property, (b) the parties’ conduct, and (c) the nature of the property and rights and interests of all parties in relation thereto. The Court noted that receivers are considered an “extraordinary remedy,” however an applicant need not show irreparable harm if a receiver is appointed.

In this case, the Court noted that the CCAA should not be used as a last ditch effort to stave off the inevitable and that the petition for CCAA relief seemed more like a defensive tactic than a bona fide attempt to restructure. Accordingly, the Court granted the receivership application and denied CCAA protection, after taking into consideration the following factors:

  • Callidus had a right to appoint a receiver under the terms of its security;
  • The debtors were in default under the forbearance agreement;
  • Both secured lenders had lost all faith in the debtors’ management;
  • The debtors’ past conduct, including the activities in their bank accounts suggested that the companies were out of financial control, operating outside of the normal course of business;
  • The debtors had no alternative sources of financing and could not continue to operate as a going concern.  They had been given every opportunity to cure their defaults and had failed to do so;
  • The debtors failed to come up with a rudimentary plan, or even a “germ of a plan”;
  • The lenders’ security was declining in value and their rights were being eroded; and
  • Neither lender, who represented a considerable part of the debtors’ creditors, would support a plan of arrangement.

This case illustrates the point that in certain circumstances, debtors will not be given the opportunity to restructure, but rather the courts will appoint a receiver to liquidate the assets of the debtor.  Each case depends on its facts.  This is especially the case where there is no hope of a plan being put to the creditors, evidence of prior questionable acts, an inability to describe even a germ of a plan, no financing and no hope of financing, deteriorating assets, and complete loss of faith in management.  In these circumstances the court will balance the interests of the stakeholders and may lean to appointing a receiver, rather than allowing the debtor an opportunity to delay and further deteriorate the collateral, under the guise of an attempt to restructure within the framework of the CCAA.

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