In a recent decision 9354-9186 Québec inc. v. Callidius Capital Corp, 2020 SCC 10 , the Supreme Court of Canada affirmed that:
- under Canada’s Companies’ Creditors Arrangement Act (“CCAA“), supervising judges have broad powers and discretion to enforce the requirement that parties act in good faith;
- a CCAA judge has the discretion to bar a creditor from voting on a plan of arrangement where they determine that the creditor is acting for an improper purpose; and
- litigation funding is an acceptable form in interim financing in insolvency proceedings.
Bluberi Gaming Technologies Inc. (“Bluberi“) manufactured electronic casino gaming machines. In 2012, Bluberi sought and received financing in the amount of $24-million from Callidus Capital Corporation (“Callidus“). Bluberi lost significant amounts of money over the following three years, and Callidus continued to extend credit. By 2015, Bluberi owed Callidus approximately $86 million. Bluberi claimed that Callidus, as a secured creditor, took de facto control of the business to deplete its value, with the eventual goal of purchasing Bluberi.
In 2015, Bluberi obtained CCAA protection and determined, along with the court-appointed Monitor, that an asset sale was necessary. The supervising judge approved a sale in early 2016, over Callidus’s objection. Bluberi and Callidus then entered into an asset purchase agreement. Callidus obtained all of Bluberi’s assets in exchange for extinguishing almost all of its secured claims against Bluberi. The agreement also allowed Bluberi to retain its claim for damages against Callidus for alleged involvement in causing the debtor’s financial difficulties.
In 2017, Bluberi filed a motion seeking approval of an interim financing credit facility to fund litigation against Callidus. However, the day before the motion hearing, Callidus proposed the first of two plans of arrangement. Bluberi’s creditors were divided into two classes: unsecured creditors in one class, and Callidus as the sole secured creditor in the other. The first proposal failed to secure the required double majority within the unsecured creditors class (i.e. a majority of unsecured creditors holding two-thirds of the value of the class members’ claims).
In 2018, Bluberi filed an application to authorize a third party litigation funding agreement to pursue its claims against Callidus. A few days later, Callidus proposed its second plan of arrangement. This second proposed arrangement was nearly identical to the first. However, before voting on the plan of arrangement, Callidus filed an amended proof of claim valuing its secured claims against Bluberi at nil.
The supervising judge heard Bluberi and Callidus’s claims together. He approved Bluberi’s third party litigation agreement as interim financing pursuant to s. 11.2 of the CCAA. However, he refused to allow Callidus to vote with unsecured creditors because it was acting with an “improper purpose”. The Quebec Court of Appeal reversed the supervising judge’s decision.
The Supreme Court of Canada considered two issues:
- Did the supervising judge err in barring Callidus from voting on its second proposed plan of arrangement?
- Did the supervising judge err in approving the litigation funding agreement as interim financing?
With respect to both questions, the Court recalled the purposes of the CCAA, the role of a supervising judge, and the deference owed to the decisions of supervising judges by appellate courts. The CCAA is remedial legislation that balances several policy objectives including the prevention of social and economic loss resulting from the liquidation of insolvent companies, but also the maximization of creditor recovery. The supervising judge, who oversees CCAA proceedings from beginning to end, plays a key role in achieving those policy objectives. Appellate courts must pay deference to the decisions of supervising judges, who have detailed knowledge of the entire evolution of a CCAA file.
Creditor was Rightly Barred from Voting
With respect to the first issue, the Court agreed with the supervising judge that Callidus should not be permitted to vote with the unsecured creditors class. The Court reaffirmed that s. 11 of the CCAA granted supervising judges broad discretion to “make any order that it considers appropriate in the circumstances”. However, certain “baseline considerations” must be met: the applicant must demonstrate that the order sought is appropriate in the circumstances, and that the applicant has been acting in good faith and with due diligence. (Notably, the requirement of good faith conduct was recently codified as s. 18.6 of the CCAA.)
Under the CCAA, there is no bar to creditors voting in their own interest. However, the Court held that in this case the “inescapable inference” was that Callidus had attempted to strategically “circumvent the creditor democracy the CCAA protects.” The Court concluded that the supervising judge rightfully barred Callidus from voting for the second proposal as an unsecured creditor because it was acting for an improper purpose. The Court found that an improper purpose was any purpose collateral to the purpose of insolvency legislation which in this case was Callidus’ attempt to manipulate the creditors’ vote to ensure that its second plan would succeed where its first plan had failed.
Litigation Funding may be approved as Interim Financing
With respect to the second issue, the Court reaffirmed that the supervising judge appropriately considered that the litigation funding agreement was fair and reasonable. In particular, he considered terms upon which lawyers would be paid, the risks and investments of the funder, and the extent of the funder’s control of the litigation. The Court reaffirmed the supervising judge’s findings that the agreement was appropriate.
However, the respondent Callidus also argued that the third party litigation financing agreement was in reality a plan of arrangement which must be put to a creditors’ vote. The Court disagreed. Without fully defining a “plan of arrangement”, the Court held that there must be some compromise of creditors’ rights for a proposal to amount an “arrangement” requiring creditor approval. The proposed litigation funding agreement did not impact creditors’ rights and could therefore be court-approved as interim financing pursuant to s. 11.2 of the CCAA.
The Court illustrated the difference between a plan of arrangement and interim financing by likening the litigation claims to a “pot of gold”. The litigation funding agreement, like debtor-in-possession financing, would enable Bluberi to secure a pot of gold for creditors. It did not dictate how that pot of gold would be divided amongst them. However, this distinction does not prevent judges from ordering a super-priority litigation charge for the funder, which is permitted by statute. The Court held that such a charge is an acceptable trade-off to ensure the funder’s participation in the process. To find otherwise would denude judges of the statute-given power to order the super-priority.
- CCAA judges enjoy broad discretionary powers, including the manner in which parties are held to the standard of good faith.
- Canadian Courts have the discretion to bar a creditor from voting where the creditor is acting for an improper purpose.
- Litigation funding agreements are accepted in CCAA proceedings and do not, in themselves, require creditor approval.
With thanks to Jan Nato for his assistance in writing this article.