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COMPANIES’ CREDITORS ARRANGEMENT ACT (CCAA) MATTERS - Compromises and arrangements - Proposals

Friday, May 08, 2020 @ 2:42 PM  

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Appeal by Bluberi Gaming Technologies Inc. and its affiliated entities (collectively “Bluberi”) from a judgment of the Quebec Court of Appeal finding that Callidus Capital Corp. (“Callidus”) did not have an improper purpose and should be permitted to vote on its own plan of arrangement submitted to creditors of Bluberi, and finding that a third-party litigation funding agreement proposed by Bluberi was a plan of arrangement that had to be submitted to a creditor’s vote. In 2012, Callidus had extended a credit facility of approximately $24 million to Bluberi. Over the next three years, Bluberi lost significant amounts of money, and Callidus continued to extend credit. By 2015, Bluberi owed approximately $86 million to Callidus. In November 2015, Bluberi obtained an initial order under the Companies Creditors’ Arrangements Act (CCAA). In its petition for the order, Bluberi alleged that its liquidity issues were the result of Callidus taking de facto control of the corporation and dictating a number of purposefully detrimental business decisions, in order to deplete the corporation’s equity value with a view to owning Bluberi and, ultimately, selling it. A solicitation process for the sale of Bluberi’s assets led to Bluberi entering into an asset purchase agreement with Callidus. Callidus acquired all of Bluberi’s assets in exchange for extinguishing almost the entirety of its secured claim against Bluberi, but retained an undischarged secured claim of $3 million against Bluberi. The agreement also permitted Bluberi to retain claims for damages against Callidus arising from its alleged involvement in Bluberi’s financial difficulties (“Retained Claims”), which Bluberi asserted could amount to over $200 million in damages. The Retained Claims were Bluberi’s sole remaining asset, and thus the sole security for Callidus’s $3 million claim. Bluberi filed an application seeking approval of a third-party litigation funding agreement (LFA) with a publicly traded, third-party litigation funder, Bentham IMF Capital Limited (“Bentham”), to fund its pursuit of the Retained Claims. Callidus and certain unsecured creditors argued that the LFA was a plan of arrangement and, as such, had to be submitted to a creditors’ vote. Callidus also filed an application to submit a plan of arrangement to a creditors’ vote. Under the proposed plan, Callidus would fund a distribution to Bluberi’s creditors in exchange for a release from the Retained Claims. The supervising judge granted Bluberi’s application, authorizing Bluberi to enter into a litigation funding agreement with Bentham, but dismissed Callidus’s application and declined to submit the proposed plan of arrangement to a creditors’ vote. The supervising judge determined Callidus should not be permitted to vote on its own plan of arrangement because it was acting with an “improper purpose”, and therefore the plan had no reasonable prospect of success. The Court of Appeal reversed both decisions, holding that the supervising judge erred in finding that Callidus had an improper purpose, and had “misconstrued in law the notion of interim financing and misapplied that notion to the factual circumstances of the case”.

HELD: Appeal allowed. Supervising judges in CCAA proceedings were given broad discretion to make a variety of orders that respond to the circumstances of each case and “meet contemporary business and social needs”. The judge had to keep in mind three baseline considerations, which the applicant bore the burden of demonstrating: (1) that the order sought was appropriate in the circumstances, and (2) that the applicant was acting in good faith and (3) with due diligence. A creditor generally could vote on a plan of arrangement or compromise affecting its rights, subject to any specific provisions of the CCAA or a proper exercise of discretion by the supervising judge. There were no specific provisions in the CCAA to govern when a creditor who was otherwise eligible to vote on a plan could nonetheless be barred from voting. Section 11 provided supervising judges with the discretion to bar a creditor from voting where the creditor was acting for an improper purpose. When he made this decision, the supervising judge had presided over Bluberi’s CCAA proceedings for over two years, received 15 reports from the Monitor, and issued approximately 25 orders. He was intimately familiar with Bluberi’s CCAA proceedings. He was aware that, at a prior vote on an earlier version of Callidus’ proposed plan of arrangement (the “First Plan”), Callidus had chosen not to value any of its claim as unsecured and had declined to vote at all — despite the Monitor explicitly inviting it do so. The supervising judge was also aware that Callidus’s First Plan had failed to receive the other creditors’ approval. Between the failure of the First Plan and the proposal of the new plan — which was identical to the First Plan, save for a modest increase of $250,000 — none of the factual circumstances relating to Bluberi’s financial or business affairs had materially changed. However, Callidus sought to value the entirety of its security at nil and, on that basis, sought leave to vote on the New Plan as an unsecured creditor. The inescapable inference was that Callidus was attempting to strategically value its security to acquire control over the outcome of the vote and thereby circumvent the creditor democracy the CCAA protected. The supervising judge made no error in exercising his discretion to prevent Callidus from doing so. There was also no basis to interfere with the supervising judge’s exercise of his discretion to approve the LFA as interim financing. The breadth of a supervising judge’s discretion to approve interim financing was apparent from the wording of s. 11.2(1) of the CCAA. That section did not mandate any standard form or terms, but simply provided that the financing had to be in an amount that was “appropriate” and “required by the company”. The supervising judge was focused on the fairness at stake to all parties, the specific objectives of the CCAA, and the particular circumstances of this case. LFAs could constitute interim financing, and the Court of Appeal was incorrect to hold that approving the LFA as interim financing “transcended the nature of such financing”. The LFA was not a plan of arrangement because it did not propose any compromise of the creditors’ rights. The decision of the supervising judge was restored.

9354-9186 Québec inc. v. Callidus Capital Corp., [2020] S.C.J. No. 100, Supreme Court of Canada, R. Wagner C.J. and R.S. Abella, M.J. Moldaver, A. Karakatsanis, S. Côté, M. Rowe and N. Kasirer JJ., May 8, 2020. Digest No. TLD-May42020011-SCC