Case Trends

We've seen an uptick in corporate insolvency filings and creditor-driven CCAAs (Companies' Creditors Arrangement Act), followed by a corresponding increase in interesting developments in insolvency law. There has been an overall trend towards prioritizing environmental obligations. Reverse Vesting Orders continue to be sought, with Canadian courts cautioning that they remain extraordinary relief. In 2023, the BC and Ontario courts each rejected such applications, although later approved slightly modified versions in each case. In the fall, the Quebec Court of Appeal issued its ruling in the Chronometriq matter, recognizing a court's power to grant interim financing charges priority over CRA's deemed trust claim in proposal proceedings under the Bankruptcy and Insolvency Act. A summary of these cases, as well as other interesting insolvency cases identified by Fasken's National Insolvency & Restructuring Group is below.

Legislative Update

In 2023, Parliament provided enhanced protection for pensions in insolvency proceedings by enacting The Pension Protection Act (the "Act"). Among other things, The Pension Protection Act provides that all unfunded pension liabilities must be paid before all other creditors in insolvency proceedings. While the objectives of the Act are to protect vulnerable pensioners, this poses a risk to secured lenders and their anticipated response is expected to precipitate the end of defined benefit pension plans in Canada. The Act has a four-year transitional provision, coming into force in April 2027. Click here to read Fasken's full summary of this legislation.

In BC, the Money Judgment Enforcement Act received Royal Assent and will come into force by regulation in 2025. The Act will establish a "money judgment registry" that is similar to, and will operate in parallel with, the BC personal property registry. Click here for Fasken's summary of this legislation.

On the Horizon

We await decisions from the Supreme Court of Canada on several appeals heard in December 2023: the application of the corporate attribution doctrine in insolvency proceedings (John Aquino, et al. v Ernst & Young Inc.)and whether securities commission penalties relating to fraud or obtaining money under false pretenses survives bankruptcy (Poonian v British Columbia (Securities Commission)). We also await the outcome of Provincial appellate decisions, including Alberta regarding priorities between environmental obligations and secured creditors (Qualex) and British Columbia regarding use of reverse vesting orders to avoid property transfer tax (Peakhill). Additionally, we will be watching the legislative developments regarding Bill C-280 and the proposed deemed trust to be given to unpaid suppliers of perishable fruits and vegetables.

Canadian Insolvency Cases for 2023

Case Key Takeaways

Re EncoreFX Inc., 2023 BCSC 39.

 A debtor's bankruptcy assignment was annulled following the successful implementation of its CCAA proposal. While there appears to be a functional gap in the BIA (Bankruptcy and Insolvency Act) in that it does not address what happens to a bankruptcy after the successful implementation of a proposal under the CCAA, the Court still found that the annulment was permissible under s. 181(1) of the BIA on the basis that the bankruptcy order "ought not to have been made" in the first place.
Re PaySlate Inc., 2023 BCSC 608. The Court rejected an application for a reverse vesting order. Although the proposed transaction was the only offer received in a robust Court-approved sale process, the Court found there was insufficient evidence regarding the value of tax attributes included in the proposed transaction and there was insufficient notice given to contract counterparties given the treatment of their agreements under the transaction. The Court subsequently approved a modified version of the RVO (Reverse Vesting Orders).
Peakhill Capital Inc. v Southview Gardens Limited Partnership, 2023 BCSC 1476. The Court approved an RVO in a receivership for a real estate sale, structured as a share transaction to avoid property transfer taxes. It is the first reported decision in Canada (following a contested hearing) that has approved an RVO solely for the purpose of achieving a tax benefit. This decision is under appeal.
Cordy Environmental Inc. v Obsidian Energy Ltd., 2023 BCSC 1198. The Court found that a service company that performed remediation work on a pipeline spill could potentially rely on the statutory indemnification provisions under BC's Environmental Management Act, to recover unpaid amounts from a prior owner of the pipeline, with whom the service company had no contractual relationship and despite the insolvency of the party the service company ultimately contracted with.
Re Tantalus Labs Ltd.,2023 BCSC 1291. Approved the sale of cannabis assets following a very abbreviated sales process (less than 30 days from commencement to closing of the transaction, including Court approval of same). The sale was approved the day before the debtor's excise tax license was set to expire in the face of CRA's refusal to renew that license and indications it would enter the debtor's premises upon the licenses' expiration and destroy the cannabis inventory.
NYDIG ABL LLC v IE CA 3 Holdings Ltd., 2023 BCSC 1383. In a cryptocurrency matter, the Court determined that an equipment lender's security did not extend to digital currency "mined" utilizing the financed equipment and transferred to a related party through a Hashpower Agreement. However, the Court declared the transfers void as against the lender as a fraudulent conveyance. This declaration was made primarily on the basis that the effect of the Hashpower Agreement was to transfer the debtor's valuable cryptocurrency to a related party without paying fair value, while saddling the debtor with the costs of mining those digital assets, including the equipment financing.
Qualex-Landmark Towers Inc. v 12-1- Capital Corp., 2023 ABKB 109. Greatly extended the protective umbrella for costs associated with environmental reclamation obligations based on the Redwater decision. The Court granted a pre-judgment attachment order for the estimated costs of a private environmental claim and gave that order priority over prior-registered mortgagees outside of formal insolvency proceedings. This decision is presently subject to an appeal.
Re Mantle Materials Group, Ltd., 2023 ABKB 488. Following the Redwater decision and the case law applying it, the Court granted environmental obligations priority over a first ranking purchase money security interest in relation to equipment used for the debtor's gravel operations. The proposal proceedings were being pursued largely to perform remediation work arising from environmental protection orders.
Mantle Materials Group, Ltd. v Travelers Capital Corp., 2023 ABCA 302. The Court denied the first ranking creditor's application for leave to appeal, stating that the Applicant lacked an arguable case, and an appeal would harm the debtor's efforts to meet their environmental obligations. The Court reaffirmed the notion from Redwater that abandonment and reclamation obligations are binding on the bankrupt estate and not tied to a specific type of asset of the debtor.
Re Goldenkey Oil Inc., 2023 ABKB 263. The Court refused an application by an insolvent company in proposal proceedings to transfer litigation into a litigation trust to be funded by a litigation financing arrangement. The Court held that there was insufficient evidence demonstrating that the proposed plan for a litigation trust would maximize the recovery for the company's creditors and stakeholders. The company needed to, at minimum, adduce evidence as to why the company was unable to pursue the litigation on its own, what other litigation-funding options it explored, whether contingency-fee pursuit of the litigation was an option, and whether it explored ways for the company, its creditors, or stakeholders to have a say in overseeing the litigation or in approving or commenting on any proposed settlement.
Re Dynamic Technologies Group Inc. (Companies' Creditors Arrangement Act), 2023 ABKB 172. A debtor entered creditor protection under CCAA and received interim financing that was provided by a creditor subject to an inter-creditor agreement. The interim financing was secured by a court-ordered charge in priority to all secured creditors. The other creditor to the inter-creditor agreement sought to preserve its right to bring an action against the interim financier for breach of contract on the basis that the interim financing charge violated the terms of the inter-creditor agreement. The Court dismissed the application, holding that the Court's discretion under CCAA s. 11.2(2) to grant an interim financing charge in priority to other claims prevails over the rights provided in the inter-creditor agreement.
Re Golfside Ventures Ltd., 2023 ABKB 86. The Court, relying on inherent jurisdiction, granted a charge to secure payment of the trustee's fees and expenses in priority to the claim of secured creditors. The trustee had accepted its appointment on the understanding that there would be sufficient equity in the estate to recover its fees and expenses pursuant to BIA s. 136(1). After the trustee's appointment, a creditor registered a lien against the debtor's property in an amount that exceeded the value of the estate. Therefore, the secured creditor stood to be paid in priority to the trustee's fees and to exhaust the value of the estate. The Court held that the BIA does not expressly address circumstances where a secured claim becomes discoverable after a trustee's appointment, and a balance of the competing interests weighed in favour of granting a priority charge in favour of the trustee for payment of its fees and expenses.
Eye Hill (Rural Municipality) v. Saskatchewan (Minister of Energy), 2023 SKKB 52; 2023 SKCA 120. The Court found that a CCAA Initial Order did not create a trust in favour of municipalities respecting payment of municipal property taxes, the applicable provincial legislation only created a lien over the charged property, not the proceeds of sale, and even if the municipality had a lien, the Crown's claim for unpaid environmental obligations took priority pursuant to Redwater. In the result, the Energy Regulator had priority to the sale proceeds over the municipalities' claims for unpaid property taxes. The Saskatchewan Court of Appeal dismissed the municipalities' appeal of this decision.
White Oak Commercial Finance, LLC v Nygård Holdings (USA) Limited et al, 2023 MBCA 73. The Court upheld the decision of the lower court to substantively consolidate a number of related corporations which had filed NOI proposals under the BIA and were subsequently placed in a court-appointed receivership. The Court found that sufficient "elements of consolidation" were present to justify a finding of substantive consolidation, that the benefits of consolidation outweighed any prejudice to particular creditors, and that consolidation was fair and reasonable in the circumstances. This case addressed a novel issue in Canadian law as the appellants argued that one of the entities was solvent and that a solvent entity could not properly be the subject of a consolidation order. The Court held that the entity was insolvent as they filed an NOI proposal and had been the subject of a receivership order. In the alternative, the Court went on to say that if it was wrong in finding that the entity was insolvent, a solvent entity can still be the subject of an order for substantive consolidation.
In the Matter of CannaPiece Group Inc., 2023 ONSC 841. The Court refused to grant a reverse vesting order largely on the basis that the order sought would transfer a secured creditor's security interest to "residualco," with no reasonable prospect of recoveries for that creditor. The Court found that the equities did not favour the vesting out of this security interest, especially given the fact that the debt would have been assumed under the stalking horse bid, which was outbid by another secured creditor. A modified version of the RVO transaction was approved by the Court eight days later, which included the assumption of this debt.
Instant Brands Acquisition Holdings Inc. et al., 2023 ONSC 4252. Notwithstanding the prohibition on DIP roll-ups contained in section 11.2(1) of the CCAA, the Court approved a roll-up DIP granted by the United States Bankruptcy Court. It was approved on the basis of comity and in the context of foreign recognition proceedings pursuant to Part IV of the CCAA.
In the Matter of a Plan of Compromise or Arrangement of JTI-Macdonald, Imperial Tobacco and Rothmans, 2023 ONSC 2347. The Court declined to grant leave to the Heart & Stroke Foundation of Canada to bring a motion for a further representative counsel order on behalf of "future harm claimants". Notwithstanding the fact that the HSF was found to be acting in good faith, leave was denied on the basis that: i) it did not proceed with due diligence in bringing its application, with the mediation having been ongoing for four years, ii) there has been no change in circumstances necessitating representative counsel for these claimants, as they are included in the definition of claimants with "Tobacco-Related Wrongs", already represented by representative counsel, or their interests are otherwise adequately represented in the mediation; and iii) the introduction of further representative counsel at this late stage of the mediation would almost certainly prejudice the progress of the CCAA proceedings.
Bank of Montreal v Iskenderov, 2023 ONCA 528. A husband transferred a matrimonial home to his wife pursuant to a separation agreement and the bank sought to set aside the transfer after the husband defaulted on a loan that was fraudulently obtained. The husband and wife moved for summary judgment arguing that the bank's claim was statute-barred under the Limitations Act. The Court overturned both the lower court's decision and their own previous decision in Anisman v Drabinsky to find that the basic limitation period of two years applies, and not the ten year period under the Real Property Limitations Act, to actions by creditors seeking a declaration that a fraudulent conveyance of real property is void.
Re YG Limited Partnership and YSL Residences Inc., 2023 ONCA 505. The limited partners of a bankrupt limited partnership were denied standing to participate in a creditor's appeal of the disallowance of its claim by the Trustee. The limited partners lacked the direct economic interest required to potentially support standing, as this was an interest vested in the general partner. Further, the BIA provides that the only parties with standing on an appeal from the disallowance of a claim by a trustee is the trustee, creditor claimant and the debtor.
Ontario Securities Commission v. Camerlengo Holdings Inc., 2023 ONCA 93. An arguable expansion of a "fraudulent conveyance" pursuant to the Fraudulent Conveyances Act. The Court found that a subsequent creditor – that is a claimant who was not a creditor at the time the transfer was made – can attack a transfer if the transfer was made with the intention to defraud creditors generally, whether present or future. The Court further stated that "an intent to defraud creditors generally can be made manifest by taking steps to judgment proof oneself in anticipation of starting a new business venture."
Validus Power Corp. et al. and Macquarie Equipment Finance Limited, 2023 ONSC 6367. The Court approved the Receiver's/Monitor's application to approve a stalking horse sales process over the objections of the debtor company. In approving the stalking horse sales process, the Court held that there is one overarching test to be applied on such a motion which is: "taking into account the support for and opposition to the terms of the proposed SISP and stalking horse agreement, while recognizing whether and how those parties supporting or opposing it are economically affected by the outcome, will the proposed process (including its stalking horse bid component and all other material terms), if approved and approved at this time, likely result in the best recovery on the assets being sold pursuant to a fair and transparent process?" In doing so, the Court clarified that there are no divergent lines of authority in approving stalking horse sales processes, and the authorities are entirely consistent with this one overarching question.
Re Xebec Adsorption Inc., 2023 QCCS 2417. The Court approved the Monitor's application to approve a Proposed Allocation Methodology. The Proposed Allocation Methodology allocated the costs and expenses of the CCAA proceedings in circumstances where there were "multiple petitioners whose operations [gave] rise to a dizzying number of intercompany transfers and transactions, two secured creditors with security interests on different assets and multiple geographical situses." The Court found that the Proposed Allocation Methodology's transparency advanced the policy and remedial objectives of the CCAA.
In the matter of Groupe Sélection Inc. et al., 2022 QCCS 4281, 2023 QCCS 923, 2023 QCCS 1107, 2023 QCCS 1611 Following a four-day hearing on competing applications, the Court granted a banking syndicate's CCAA application and dismissed the debtor's application. The restructuring remained highly litigious even after the issuance of the Initial Order. The SISP was contested by the debtor and several partners. The partners objected to the stay of rights of first refusal ("ROFR") and rights of first offers ("ROFO") for the duration of the SISP. The Court ultimately approved it, concluding that the stay was necessary to ensure a competitive sales process, and found that those partners' rights were adequately protected by a mandatory auction mechanism included in the SISP. Approval of a stalking horse SISP was also contested by the Debtor, who took the position that a formal winding-up of the limited partnerships included in the stalking horse SISP would better preserve the value for creditors. The Court rejected this position in a unique judgment on a contested stalking horse application. Lastly, hypothecary creditors contested the Monitor's decision to stop paying the interest owed to hypothecary creditors at the outset of the restructuring. The Court dismissed this motion in one of the first judgments endorsing a decision to stop interest payments to secured creditors in a restructuring process.
Syndic de Chronométriq Inc., 2023 QCCA 1295. The Court held that the Superior Court of Quebec, pursuant to the BIA, possessed the authority to order super-priority charges that ranked ahead of a deemed trust in favour of the Crown created by s. 227(4.1) of the Income Tax Act and the equivalent provisions contained in Quebec law. The charges in question were an interim financing charge, an administration charge, and directors' and officers' charges ordered by the lower court on a motion by the Respondent-Debtors to authorize interim financing in conjunction with their NOI proposal. This approach under the BIA is consistent with the powers previously granted to lower courts under the CCAA in similar circumstances by the Supreme Court of Canada in Canada North.
Re Atlantic Sea Cucumber Limited, 2023 NSSC 238. Following a failed CCAA conversion application by the debtor company, the Court rejected the Company's stay extension request in its NOI proposal proceedings. The Court found that, throughout the proceedings, there had been distinct flavours of attempts to "strong arm" the Court into granting relief by compressing timelines and saying disaster would result if the relief was not granted. No evidence was presented to the court as to the alleged destruction of value in a bankruptcy, and the Court refused to grant the stay extension. The decision is under appeal.
Re Roman Catholic Episcopal Corporation of St. John's, 2023 NLSC 5. CCAA proceedings commenced to resolve numerous outstanding claims against the Church, estimated to be more than $50,000,000 and 100 claimants. Both the claimants and the Church proposed to resolve claims through a summary claims process but disagreed as to the appropriate procedure. A claims process was approved; however, the claimant's proposed procedure based on a tiers and averages system to determine the quantum of damages was rejected by the Court as being arbitrary, ad hoc, and procedurally unjust as it could result in both under and over compensation. The Court also found that it had the potential to fetter not only the Claims Officer's discretion in reviewing and adjudicating claims, but it could also fetter the Court's own discretion if it is later called upon to review a disputed Claim. While the CCAA provides for a summary process in proving claims, having a pre-determined damage award was taking that summary process too far.

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