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Insolvency - CCAA - Creditors. Québec inc. v. Callidus Capital Corp.
In Québec inc. v. Callidus Capital Corp. (SCC, 2020) the Supreme Court of Canada reviewed the role of creditors under the Companies' Creditor Arrangement Act:[56] A creditor can generally vote on a plan of arrangement or compromise that affects its rights, subject to any specific provisions of the CCAA that may restrict its voting rights (e.g., s. 22(3)), or a proper exercise of discretion by the supervising judge to constrain or bar the creditor’s right to vote. We conclude that one such constraint arises from s. 11 of the CCAA, which provides supervising judges with the discretion to bar a creditor from voting where the creditor is acting for an improper purpose. Supervising judges are best-placed to determine whether this discretion should be exercised in a particular case. In our view, the supervising judge here made no error in exercising his discretion to bar Callidus from voting on the New Plan.
(1) Parameters of Creditors’ Right to Vote on Plans of Arrangement
[57] Creditor approval of any plan of arrangement or compromise is a key feature of the CCAA, as is the supervising judge’s oversight of that process. Where a plan is proposed, an application may be made to the supervising judge to order a creditors’ meeting to vote on the proposed plan (CCAA, ss. 4 and 5). The supervising judge has the discretion to determine whether to order the meeting. For the purposes of voting at a creditors’ meeting, the debtor company may divide the creditors into classes, subject to court approval (CCAA, s. 22(1)). Creditors may be included in the same class if “their interests or rights are sufficiently similar to give them a commonality of interest” (CCAA, s. 22(2); see also L. W. Houlden, G. B. Morawetz and J. P. Sarra, Bankruptcy and Insolvency Law of Canada (4th ed. (loose-leaf)), vol. 4, at N§149). If the requisite “double majority” in each class of creditors — again, a majority in number of class members, which also represents two-thirds in value of the class members’ claims — vote in favour of the plan, the supervising judge may sanction the plan (Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 296 D.L.R. (4th) 135, at para. 34; see CCAA, s. 6). The supervising judge will conduct what is commonly referred to as a “fairness hearing” to determine, among other things, whether the plan is fair and reasonable (Wood, at pp. 490-92; see also Sarra, Rescue! The Companies’ Creditors Arrangement Act, at p. 529; Houlden, Morawetz and Sarra at N§45). Once sanctioned by the supervising judge, the plan is binding on each class of creditors that participated in the vote (CCAA, s. 6(1)).
[58] Creditors with a provable claim against the debtor whose interests are affected by a proposed plan are usually entitled to vote on plans of arrangement (Wood, at p. 470). Indeed, there is no express provision in the CCAA barring such a creditor from voting on a plan of arrangement, including a plan it sponsors.
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[61] While the appellants are correct that s. 22(3) was enacted to harmonize the treatment of related parties in the CCAA and BIA, its history demonstrates that it is not a general conflict of interest provision. Prior to the amendments incorporating s. 22(3) into the CCAA, the CCAA clearly allowed creditors to put forward a plan of arrangement (see Houlden, Morawetz and Sarra, at N§33, Red Cross; Re 1078385 Ontario Inc. (2004), 2004 CanLII 55041 (ON CA), 206 O.A.C. 17). In contrast, under the BIA, only debtors could make proposals. Parliament is presumed to have been aware of this obvious difference between the two statutes (see ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board), 2006 SCC 4, [2006] 1 S.C.R. 140, at para. 59; see also Third Eye, at para. 57). Despite this difference, Parliament imported, with necessary modification, the wording of the BIA related creditor provision into the CCAA. Going beyond this language entails accepting that Parliament failed to choose the right words to give effect to its intention, which we do not.
[62] Indeed, Parliament did not mindlessly reproduce s. 54(3) of the BIA in s. 22(3) of the CCAA. Rather, it made two modifications to the language of s. 54(3) to bring it into conformity with the language of the CCAA. First, it changed “proposal” (a defined term in the BIA) to “compromise or arrangement” (a term used throughout the CCAA). Second, it changed “debtor” to “company”, recognizing that companies are the only kind of debtor that exists in the CCAA context.
[63] Our view is further supported by Industry Canada’s explanation of the rationale for s. 22(3) as being to “reduce the ability of debtor companies to organize a restructuring plan that confers additional benefits to related parties” (Office of the Superintendent of Bankruptcy Canada, Bill C-12: Clause by Clause Analysis, developed by Industry Canada, last updated March 24, 2015 (online), cl. 71, s. 22 (emphasis added); see also Standing Senate Committee on Banking, Trade and Commerce, at p. 151).
[64] Finally, we note that the CCAA contains other mechanisms that attenuate the concern that a creditor with conflicting legal interests with respect to a plan it proposes may distort the creditors’ vote. Although we reject the appellants’ interpretation of s. 22(3), that section still bars creditors who are related to the debtor company from voting in favour of any plan. Additionally, creditors who do not share a sufficient commonality of interest may be forced to vote in separate classes (s. 22(1) and (2)), and, as we will explain, a supervising judge may bar a creditor from voting where the creditor is acting for an improper purpose.
(2) Discretion to Bar a Creditor From Voting in Furtherance of an Improper Purpose
[65] There is no dispute that the CCAA is silent on when a creditor who is otherwise entitled to vote on a plan can be barred from voting. However, CCAA supervising judges are often called upon “to sanction measures for which there is no explicit authority in the CCAA” (Century Services, at para. 61; see also para. 62). In Century Services, this Court endorsed a “hierarchical” approach to determining whether jurisdiction exists to sanction a proposed measure: “courts [must] rely first on an interpretation of the provisions of the CCAA text before turning to inherent or equitable jurisdiction to anchor measures taken in a CCAA proceeding” (para. 65). In most circumstances, a purposive and liberal interpretation of the provisions of the CCAA will be sufficient “to ground measures necessary to achieve its objectives” (para. 65).
[66] Applying this approach, we conclude that jurisdiction exists under s. 11 of the CCAA to bar a creditor from voting on a plan of arrangement or compromise where the creditor is acting for an improper purpose.
[67] Courts have long recognized that s. 11 of the CCAA signals legislative endorsement of the “broad reading of CCAA authority developed by the jurisprudence” (Century Services, at para. 68). Section 11 states:General power of court
11 Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances. On the plain wording of the provision, the jurisdiction granted by s. 11 is constrained only by restrictions set out in the CCAA itself, and the requirement that the order made be “appropriate in the circumstances”.
[68] Where a party seeks an order relating to a matter that falls within the supervising judge’s purview, and for which there is no CCAA provision conferring more specific jurisdiction, s. 11 necessarily is the provision of first resort in anchoring jurisdiction. As Blair J.A. put it in Stelco, s. 11 “for the most part supplants the need to resort to inherent jurisdiction” in the CCAA context (para. 36).
[69] Oversight of the plan negotiation, voting, and approval process falls squarely within the supervising judge’s purview. As indicated, there are no specific provisions in the CCAA which govern when a creditor who is otherwise eligible to vote on a plan may nonetheless be barred from voting. Nor is there any provision in the CCAA which suggests that a creditor has an absolute right to vote on a plan that cannot be displaced by a proper exercise of judicial discretion. However, given that the CCAA regime contemplates creditor participation in decision-making as an integral facet of the workout regime, creditors should only be barred from voting where the circumstances demand such an outcome. In other words, it is necessarily a discretionary, circumstance-specific inquiry.
[70] Thus, it is apparent that s. 11 serves as the source of the supervising judge’s jurisdiction to issue a discretionary order barring a creditor from voting on a plan of arrangement. The exercise of this discretion must further the remedial objectives of the CCAA and be guided by the baseline considerations of appropriateness, good faith, and due diligence. This means that, where a creditor is seeking to exercise its voting rights in a manner that frustrates, undermines, or runs counter to those objectives — that is, acting for an “improper purpose” — the supervising judge has the discretion to bar that creditor from voting.
[71] The discretion to bar a creditor from voting in furtherance of an improper purpose under the CCAA parallels the similar discretion that exists under the BIA, which was recognized in Laserworks Computer Services Inc. (Bankruptcy), Re, 1998 CanLII 2550 (NS CA), 1998 NSCA 42, 165 N.S.R. (2d) 296. In Laserworks, the Nova Scotia Court of Appeal concluded that the discretion to bar a creditor from voting in this way stemmed from the court’s power, inherent in the scheme of the BIA, to supervise “[e]ach step in the bankruptcy process” (at para. 41), as reflected in ss. 43(7), 108(3), and 187(9) of the Act. The court explained that s. 187(9) specifically grants the power to remedy a “substantial injustice”, which arises “when the BIA is used for an improper purpose” (para. 54). The court held that “[a]n improper purpose is any purpose collateral to the purpose for which the bankruptcy and insolvency legislation was enacted by Parliament” (para. 54).
[72] While not determinative, the existence of this discretion under the BIA lends support to the existence of similar discretion under the CCAA for two reasons.
[73] First, this conclusion would be consistent with this Court’s recognition that the CCAA “offers a more flexible mechanism with greater judicial discretion” than the BIA (Century Services, at para. 14 (emphasis added)).
[74] Second, this Court has recognized the benefits of harmonizing the two statutes to the extent possible. For example, in Indalex, the Court observed that “in order to avoid a race to liquidation under the BIA, courts will favour an interpretation of the CCAA that affords creditors analogous entitlements” to those received under the BIA (para. 51; see also Century Services, at para. 24; Nortel Networks Corp., Re, 2015 ONCA 681, 391 D.L.R. (4th) 283, at paras. 34-46). Thus, where the statutes are capable of bearing a harmonious interpretation, that interpretation ought to be preferred “to avoid the ills that can arise from [insolvency] ‘statute-shopping’” (Kitchener Frame Ltd., 2012 ONSC 234, 86 C.B.R. (5th) 274, at para. 78; see also para. 73). In our view, the articulation of “improper purpose” set out in Laserworks — that is, any purpose collateral to the purpose of insolvency legislation — is entirely harmonious with the nature and scope of judicial discretion afforded by the CCAA. Indeed, as we have explained, this discretion is to be exercised in accordance with the CCAA’s objectives as an insolvency statute.
[75] We also observe that the recognition of this discretion under the CCAA advances the basic fairness that “permeates Canadian insolvency law and practice” (Sarra, “The Oscillating Pendulum: Canada’s Sesquicentennial and Finding the Equilibrium for Insolvency Law”, at p. 27; see also Century Services, at paras. 70 and 77). As Professor Sarra observes, fairness demands that supervising judges be in a position to recognize and meaningfully address circumstances in which parties are working against the goals of the statute:The Canadian insolvency regime is based on the assumption that creditors and the debtor share a common goal of maximizing recoveries. The substantive aspect of fairness in the insolvency regime is based on the assumption that all involved parties face real economic risks. Unfairness resides where only some face these risks, while others actually benefit from the situation . . . . If the CCAA is to be interpreted in a purposive way, the courts must be able to recognize when people have conflicting interests and are working actively against the goals of the statute.
(“The Oscillating Pendulum: Canada’s Sesquicentennial and Finding the Equilibrium for Insolvency Law”, at p. 30 (emphasis added)) In this vein, the supervising judge’s oversight of the CCAA voting regime must not only ensure strict compliance with the Act, but should further its goals as well. We are of the view that the policy objectives of the CCAA necessitate the recognition of the discretion to bar a creditor from voting where the creditor is acting for an improper purpose.
[76] Whether this discretion ought to be exercised in a particular case is a circumstance-specific inquiry that must balance the various objectives of the CCAA. As this case demonstrates, the supervising judge is best-positioned to undertake this inquiry.
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