In the recent decision in the CCAA Proceedings of Timminco Ltd. et al. 1, the Ontario Court of Appeal has affirmed the CCAA Court's jurisdiction to grant super-priority status to DIP financing charges (including over provincial deemed trusts) and, effectively, confirmed that a supervising CCAA Court has a broad discretion to do so.
In November 2010, the decision of the Ontario Court of Appeal in Indalex Ltd, Re2caused a commotion among Canada's insolvency, pension and lending professionals. In that case, the lower court had granted a super-priority charge (a "DIP Charge") in favour of the lender who was funding the restructuring of Indalex Ltd. under the CCAA3. However, on appeal, the Court of Appeal held that the DIP Charge did not have priority over certain provincial statutory deemed trust claims with respect to the debtors' pension plans. The Court of Appeal did add, however, that a CCAA court could grant a DIP Charge with super-priority status over provincial deemed trusts (among other interests), provided that the judge specifically invoked the doctrine of paramountcy – i.e., where the federal law operated to render the provincial law inapplicable. Some insolvency professionals suggested that the decision undermined the jurisdiction of the CCAA court and would make it difficult, if not impossible, to secure DIP financing in future restructurings. Pension administrators and unions, of course, hailed the decision as just. What followed were months of academic debate and an appeal to Supreme Court of Canada in June 2012, which decision is pending.
While the insolvency community was obsessed with Indalex, the issue of DIP priority arose again in the context of the CCAA proceedings of Timminco Limited and Becancour Silicon Inc. In February 2012, on a motion for the approval of a DIP financing agreement, on notice to the interested parties, the debtors requested that the CCAA court grant a super-priority DIP Charge. The Communications, Energy and Paperworkers' Union of Canada and the United Steelworker's Union (together, the "Unions") opposed the order as their members were also members of debtors' underfunded pension plans. Justice Morawetz of Toronto's Commercial List court granted the relief4and, in doing so, expressly considered the question of paramountcy. Justice Morawetz found that that was "no real alternative" to granting a super-priority DIP Charge based on the following findings of fact, among others:
(a) without DIP financing, the debtors would be forced to cease operating;
(b) a bankruptcy would not be in the interest of anyone, including the pension plan members;
(c) the DIP lender would not agree to provide financing without a super-priority charge; and
(d) alternative DIP proposals were for insufficient amounts or included unfavourable terms.
Justice Morawetz also noted that it was unrealistic to expect any DIP lender to advance funds without receiving a super-priority charge securing the same. Based on the above, Justice Morawetz held that in the absence of an order granting of the DIP Charge, the objectives of the CCAA would be frustrated and that in such circumstances, the doctrine of paramountcy is properly invoked to order a super-priority DIP Charge, ranking ahead of all interests including the provincial deemed trusts with respect to the debtors' pension plans. The Unions sought leave to appeal.
On the leave application, the Court of Appeal held that the Unions failed to meet the test for leave under the CCAA. The Court affirmed its decision in Indalex that a CCAA court may invoke the doctrine of paramountcy to override provisions of provincial statutes where the application of the provincial legislation would "frustrate the company's ability to restructure and avoid bankruptcy." The Court further noted that the findings of fact of the CCAA judge (enumerated above), including that there was no real alternative to approving the DIP Facility and DIP super-priority charge, were "unassailable" and properly supported invoking the doctrine of paramountcy.
The extraordinary thing about the Timminco decisions – both by Justice Morawetz and the Court of Appeal – is just how ordinary they are. The findings of fact made by Justice Morawetz are almost always present in the context of DIP financing arrangements. For example, no reasoned lender would lend without a super-priority charge and, typically, without the DIP funds, the debtor will be forced to cease operations. In short, it is difficult to imagine a restructuring in which a CCAA court could fail to find that "absent a court order granting the super-priority the objectives of the CCAA would be frustrated". The decision of the Court of Appeal has confirmed that such a finding of fact is sufficient to support the use of the doctrine of paramountcy. In short, the decisions provide a roadmap for a CCAA court to grant a super-priority DIP Charge.
Accordingly, while the insolvency, pension and lending community has debated the effects of the Indalex decision, the recent decision of the Court of Appeal in Timminco has effectively re-entrenched the ability of a CCAA Court to grant super-priority DIP Charges. Provided the interested parties are served (as required by the CCAA) and the applicant can tender evidence that the DIP financing and super-priority DIP Charge are required, it seems clear that the CCAA Court has a broad discretion to invoke the doctrine of paramountcy to order such a charge. In view of this decision, and its general application to the practicalities of DIP financing, what the Supreme Court ultimately decides in Indalex, though interesting from an academic standpoint, may have limited practical effect.
Footnotes
1 Timminco Limited and Becancour Silicon Inc., Re, (20 July 2012), Ontario M41062 & M41085 (Ont. C.A.).
2 (2011), [2011] 75 C.B.R. (5th) 19 (Ont. C.A.).
3 Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36.
4 Timminco Ltd., Re, (2012) 86 C.B.R. (5th) 171 (Ont. S.C.J. [Commercial List]).
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