A must-read decision for insolvency professionals puts important restrictions on use of the CBCA for debt restructurings
by Kevin Zych and Preet Bell
June 4, 2015
In a recent unreported decision denying approval of a plan of arrangement under the Canada Business Corporations Act (CBCA) proposed by Connacher Oil and Gas Limited, Justice C.M. Jones of the Alberta Court of Queen's Bench considered the solvency test that corporations must meet in order to obtain a final order approving a plan of arrangement under the CBCA.
Under the CBCA, one of the express statutory requirements to obtain a plan of arrangement is that the applicant must not be insolvent. In previous cases, where a company has been in financial difficulty, this requirement has sometimes been satisfied where there are multiple applicants, at least one of which is not insolvent at the time of the initial application.
Connacher was attempting to do the same in its case by having a newly-incorporated (and solvent) corporation be an applicant alongside Connacher. However, the novel issue in this case (which had not been considered in any other reported case) was whether the solvency requirement also required the Court to be satisfied – at the time that the final order approving the arrangement was sought – that the emerging entity from the plan of arrangement would be “not insolvent”.
In this case, due to an acceleration of debt by Connacher's First Lien lenders based on an event of default, even if the plan of arrangement was implemented, it was possible that the restructured Connacher would still be insolvent as it admitted that it could not pay the full amount of the First Lien debt. The threshold issue stated by Justice Jones was: “does the Court have the jurisdiction to issue a final order under the CBCA where the entity emerging from the Arrangement will or might be insolvent?”
Due to a request by Connacher to have the Court issue an order waiving the event of default relied upon by the First Lien lenders for acceleration of their debt, a related but distinct issue the Court considered was whether it was appropriate for the Court to exercise the broad power given to it under the CBCA arrangement provisions to waive an alleged event of default; in effect, waiving the potential problem of insolvency.
In a key decision for CBCA arrangement proceedings and creditors, Justice Jones clarified the CBCA plan of arrangement provisions as solvency legislation and provided caution to companies attempting to circumvent the use of insolvency legislation and/or circumvent financial problems by asking for a release or waiver, through legislative provisions that are not intended to deal with such situations.
Justice Jones concluded that:
- In order to make a final order under the CBCA plan of arrangement provisions, the court must be satisfied that the entity emerging from the proceeding will not be insolvent; and
- It is not appropriate for the court to exercise its discretion to essentially “deem away” events of default which underlie the determination of whether the entity emerging from the proceeding will not be insolvent.