Restructuring and InsolvencyRestructuring and Insolvency Group e-COMMUNIQUÉ - June 2011Published: 06/09/2011 By Larry Ellis, Bruce Leonard, Alex Tarantino, David Ward In This Issue
Court of Appeal Defines Directors’ Authority in a ReceivershipBy David Ward Are the directors of a corporation which has been placed into receivership entitled to retain counsel on behalf of the corporation without prior approval of the Receiver or the court? According to a recent decision of the Ontario Court of Appeal, the answer is “Yes”. In The City of Peterborough v. Kawartha Native Housing Society Inc., Ontario’s highest court noted that boards of directors of companies placed in receivership retain residual powers. Powers which the Receiver-Manager is not authorized to exercise by the relevant court order, or terms of private appointment, remain vested in the directors. Barring a resignation, directors remain in office and can exercise functions. Further, whatever their residual authority may be, the board of directors continue to have an obligation to act in the best interest of the corporation. If, in their opinion, the appointment of a receiver is not in the best interest of the corporation, or if they believe that the steps being taken by the Receiver on behalf of the corporation are not in the corporation’s best interest, then they are entitled to retain counsel to bring the matter to the attention of the court. It will be for the court to decide if the board has acted responsibly and reasonably in doing so. That said, the right to retain counsel by the board of a corporation in receivership is not unfettered. The court ruled that if, for example, a lawyer is retained for a purpose that has the effect of interfering with the receiver’s legitimate duties as an officer of the court, or the Receiver’s duties as the manager of the ongoing operation of the corporate enterprise, then the retainer is not appropriate. The Court of Appeal decision emphasized that “there are no blank cheques”. The court will decide whether a board of directors is to be reimbursed for the legal expenses in taking a particular course of action. In exercising its discretion to make a cost award in favour of a board of a corporation in receivership, the court will consider whether the board was acting in the interest of the corporation and whether the position advanced by the board was properly advanced by the board rather than by the Receiver. In Kawartha Native Housing, the Court of Appeal concluded that it was clear that the positions advanced by counsel for the board were properly advanced by the board rather than by the Receiver. Counsel were taking positions adverse to the Receiver and were entitled to retain and properly pay legal counsel for services rendered out of the assets of the corporation. For a copy of the decision in The Corporation of the City of Peterborough v. Kawartha Native Housing Society Incorporated, et al please contact dward@casselsbrock.com. Ontario Court of Appeal Gives Super-Priority to Pension Plan Wind-Up DeficiencyBy Larry Ellis The Ontario Court of Appeal dramatically affected commercial lending practice in Ontario in its decision in Re Indalex Limited. Under the decision, the Court held that pension fund deficiencies are ranked as super-priority obligations, and come ahead of secured creditors and the DIP lenders. As a result, in dealing with both pre-filing credit facilities and DIP financing, lenders will need to carefully navigate through the troubled waters created by Indalex. Secured lenders that provide credit facilities to companies with defined benefit plans are at risk of having their security subordinated to claims of pension beneficiaries, whether or not their debtor seeks insolvency protection. In addition, those companies that wear the dual hat of plan administrator are at risk of being attacked for breach of fiduciary duties to the pension plan. Indalex Limited (“Indalex”) was a Canadian company with separate pension plans for its executives and salaried employees. Indalex filed for Companies’ Creditors Arrangement Act (“CCAA”) protection on April 3, 2009 and obtained Court approval to post-filing financing (“DIP Financing”) during the CCAA proceeding. Upon approving the DIP Financing, the Court granted a charge to the DIP Financing lender (“DIP Lender”) against all of the assets of Indalex, which was to rank ahead of Indalex’s other creditors.1 In July 2009 Indalex closed a court-approved sale of its assets and sought approval to distribute the purchase proceeds to the DIP Lender. Both sets of former employees objected to the proposed distribution on the basis that the shortfalls in the pensions were subject to a deemed trust that ranked ahead of the DIP Lender’s claim. In overturning the Superior Court’s decision, the Court of Appeal ordered that the sale proceeds be paid to the pension plans in priority to the DIP Lender’s claim. The salaried employees’ pension plan (“Salaried Plan”) was in the process of being wound up when the CCAA proceeding was initiated. Indalex was the plan administrator of the Salaried Plan. As at the date of the CCAA filing the Salaried Plan had a funding deficiency of $1,795,600 (“Salaried Deficiency”). Section 75 of the Pension Benefits Act (“PBA”) requires an employer, where a pension plan is being wound up, to pay into the plan all payments that are due immediately or that have accrued and have not been paid. Section 57(4) of the PBA establishes a deemed trust for, among other things, amounts accrued to the date of the wind up but not yet due under the plan or regulations. The Court of Appeal concluded that the entire Salary Deficiency had accrued at the date of wind up and as such was subject to the deemed trust granted under Section 57(4) of the PBA. The executive employee pension plan (“Executive Plan”, together with “Salaried Plan”, the “Plans”) was still operative at the time the CCAA was initiated. Indalex was also the plan administrator of the Executive Plan. At the time of the CCAA filing the estimated wind-up deficiency was $3,200,000 (“Executive Deficiency”). The PBA deemed trust provisions apply to deficiencies in plans that are being wound up. As a result, the Court of Appeal was not able to conclude that the PBA deemed trust provision applied to the Executive Deficiency. However, the Court did conclude that Indalex, as plan administrator, owed fiduciary duties to the Plans. The Court held that as Plan Administrator Indalex did not protect the best interests of the Plan’s beneficiaries and, accordingly, was in breach of its fiduciary obligations as administrator. The Court held that this breach of fiduciary duty gave rise to a constructive trust on the basis that the breach enabled Indalex to obtain property that should have been held in trust for the pension beneficiaries. The Court consequently imposed a constructive trust over Indalex’s property for the amount of the pension deficiencies. As a result of the application of a constructive trust, the Court ordered that the Plans be paid the full amount of their respective deficiencies, ahead of the DIP Lender. For a copy of the decision in Re Indalex Limited please contact lellis@casselsbrock.com. The CCAA Scene: Recent and Notable - June 2011Adananc On February 28, 2011, Adanac Molybdenum Corporation announced that it successfully implemented its plan of compromise and arrangement and emerged from CCAA protection. It was announced that, on implementation, Adanac’s outstanding common shares were consolidated on a 150 to 1 basis with 24,698,888 post-consolidation common shares issued to creditors. Adanac owns the Ruby Creek Project, located in northwest British Columbia. Ambrilia Biopharma On April 8, 2011, Ambrilia Biopharma Inc. announced that it would seek the permission of the Québec Superior Court to terminate its CCAA protection after which Ambrilia would file for bankruptcy under the BIA. Ambrilia has been under CCAA protection since July 31, 2009. Based in Montreal, Québec, Ambrilia focused on the development of treatments for viral diseases and cancer. Angiotech On April 4, 2011, Angiotech Pharmaceuticals, Inc. announced that the affected creditors of Angiotech and certain of its subsidiaries have unanimously approved the Second Amended and Restated Plan of Compromise or Arrangement regarding such subsidiaries under the CCAA. The plan was approved by the Supreme Court of British Columbia on April 6, 2011. On May 12, 2011, Angiotech announced that the Second Amended and Restated Plan of Compromise or Arrangement was successfully implemented – US$250,000,000 7.75% senior subordinated notes due 2014 were cancelled in exchange for the issuance of new common shares of Angiotech to the holders of such notes. Angiotech develops and markets treatment solutions for diseases or complications associated with medical device implants, surgical interventions and acute injury. Davie Yards On May 19, 2011, Davie Yards Inc. announced that it obtained an order from the Québec Superior Court extending its CCAA stay to July 7, 2011. It was also announced that Davie was continuing its discussions with Fincantieri – Cantieri Navali Italiani and DRS Technologies Canada regarding the proposed acquisition of the Davie shipyard by an entity that would be majority owned by Fincantieri. Davie builds offshore service vessels and rigs and owns and operates the Davie Yard in Québec. Fortress Energy On May 30, 2011, Fortress Energy Inc. announced that it obtained an order from the Court of Queen’s Bench of Alberta extending its CCAA protection to June 30, 2011. Groupe Dumoulin On February 25, 2011, Groupe Dumoulin Électronique Inc. announced that it successfully obtained protection under the CCAA in Québec and will close 6 of its 21 corporate stores, thereby exiting the US market. Groupe Dumoulin is based in Québec, Canada and sells consumer electronics. Nortel On May 2, 2011, Nortel Networks Corporation announced that certain of its subsidiaries obtained orders from the U.S. Bankruptcy Court for the District of Delaware and the Ontario Superior Court of Justice approving the stalking horse asset sale agreement with Ranger Inc. (a wholly owned subsidiary of Google Inc.) for the sale of all of Nortel’s remaining patents and patent applications for a cash purchase price of US$900,000,000. The bidding process is scheduled to end on June 13, 2011 with an auction currently scheduled for June 20, 2011. On May 12, 2011, Nortel announced that Guangdong Nortel Telecommunication Equipment, a Chinese joint venture between Nortel Networks Limited, Nortel China Limited and certain third parties, completed the sale of substantially all of its assets to Ericsson Mobile Data Applications Technology Research and Development Guangzhou Company Limited and Ericsson (Guangdong Shunde) Communications Company Limited for approximately US$50 million in cash. Priszm Income Fund On March 31, 2011, Priszm Income Fund announced that it successfully filed under the CCAA in Ontario. The order was obtained in connection with Priszm’s previously announced potential sale of restaurants in Ontario and British Columbia to Soul Restaurants Canada Inc. and its potential sale of all other locations outside of Ontario and British Columbia. It was further announced that Priszm’s existing secured lenders agreed to provide additional financing of up to US$3,000,000. On April 29, 2011, Priszm announced that it obtained an order extending the stay period to June 30, 2011. On May 30, 2011, Priszm announced that it obtained an order from the Ontario Superior Court of Justice approving the sale of restaurants in Ontario and British Columbia to Soul Restaurants for an aggregate purchase price of $42.8 million. On June 1, 2011, Priszm announced that the sale closed. It also announced that, regarding its remaining restaurants, offers were received on May 25, 2011 and Priszm was in the process of reviewing the offers. Priszm holds an interest in Priszm Limited Partnership which owns and operates restaurants across Canada. Professional Notes - June 2011Bruce Leonard participated on behalf of Canada in a major invitational International Insolvency Colloquium held recently in Paris. The Colloquium focused on the contrasts between North American restructuring and reorganizational practice and comparable practices in France, Germany and the UK. The highlight of the Colloquium was an address by the French Minister of Justice which took place in the refined and elegant premises of Supreme Court of France. Bruce Leonard ws privileged to co-moderate the 51st Annual Financial Lawyers Conference held recently in Dana Point, California. The Financial Lawyers Conference is a premier organization of senior bankruptcy and commercial attorneys in the southern California area. This year's Conference focused on Commercial Aspects of International Bankruptcy Issues and Bruce co-moderated the program with Hon. Bruce A. Markell of the United States Bankruptcy Court for the District of Nevada. On May 17, 2011, John Birch and Deborah Grieve spoke on the topic of "Ethical Issues When Insolvency Arises" at The Law Society of Upper Canada Business Law Summit, held in Toronto. This new business law summit was created to assist in dealing with the different types of business transactions that are bound to arise in this era of economic highs and lows. On May 19, 2011, Deborah Grieve spoke on the topic of "Insurance - Are You Covered?" at the CAIRP May 2011 Insolvency and Restructuring Forum held in Toronto. The forum focused on the key issues affecting mid-market commercial and personal insolvency practitioners today. David Ward's article Canada Expands Judicial Assistance to the U.S. - Non Monetary Judgment Recognized and Enforced for First TIme was published in the May 2011 edition of the publication The Bankruptcy Strategist. |