The CCAA and Real Estate Development Companies
The CCAA1 is the most flexible Canadian statute under which a corporation can restructure its business. When compared against the BIA,2 the CCAA looks like a blank canvass and lends itself well to invention and mutual compromise. The overarching goal of the CCAA is for the debtor corporation to formulate a plan of compromise or arrangement that is approved by the corporation's creditors or to effect a going concern sale, both of which are intended to provide greater value to the creditors than if the debtor corporation were liquidated under the BIA.
However, proceedings under the CCAA are expensive and typically involve priority charges over the property of the debtor corporation for professionals, directors and officers of the debtor corporation, and interim financing, which can have the effect of eroding creditors' realization.
Despite the flexibility of the CCAA, certain types of businesses may be less suitable for its application. Three recent decisions of the Ontario Superior Court of Justice (Commercial List), Dondeb,3 Edgeworth4 and Hush Homes,5 involved real estate development companies seeking protection under the CCAA. These cases all shared similar facts: the debtor corporations were in the business of real estate development and investment and had several single-purpose subsidiary corporations, each of which owned a discrete piece of real estate. Each piece of real estate was encumbered by at least one mortgage and many were cross-collateralized. Mortgages accounted for the vast majority of the first-ranking secured indebtedness. The debtor corporations sought protection under the CCAA and certain of their respective lenders opposed the applications on the basis that it would be more advantageous and cost efficient for them to proceed with an orderly sales process under their respective mortgage security.
Dondeb
In Dondeb, the debtor corporations sought relief under the CCAA to enable a liquidation of their assets and property. DIP financing and a charge to secure it, as well an administrative charge to secure the fees and expenses of the professionals involved in the CCAA administration, were all sought. The application was opposed by various secured lenders who collectively held approximately 75% of the value of the secured indebtedness. The basis for the opposition was that: (i) the properties would be more appropriately sold under the mortgage security; (ii) the DIP financing and administration charges unnecessarily burdened the equity of the properties; (iii) the lenders had lost all faith in management and its ability to generate revenue from the real estate; and (iv) no plan would be realistically accepted by the lenders because there was no underlying business to restructure that would yield greater value for them than through enforcement of their own respective mortgage security.
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* Ian Aversa is a partner in the Financial Services Group and Jeremy Nemers is an associate in the Financial Services Group. The authors would like to thank Daniel Everall, a student-at-law at Aird & Berlis LLP, for his assistance in preparing this paper.
Footnotes
1 Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 [CCAA].
2 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [BIA].
3 Re Dondeb Inc., 2012 ONSC 6087 [Dondeb].
4 Romspen Investment Corp. v. Edgeworth Properties, et. al., 10 November 2011, CV-11-9452-00CL, Receivership Order of the Honourable Justice Campbell (Ont. S.C.J. [Comm. List.]) and Re Edgeworth Properties Inc., et. al., 10 November 2011, CV-11-9409-00CL, CCAA Order of the Honourable Justice Campbell (Ont. S.C.J. [Comm. List.]) [Edgeworth].
5 Re Hush Homes Inc., 2015 ONSC 370 [Hush Homes].
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