The British Columbia Supreme Court recently reviewed the considerations to be applied on an application by a secured creditor to lift a stay of proceedings granted in an initial order under the Companies' Creditors Arrangement Act (the "CCAA"). In Re Azure Dynamics Corp.,1 Madam Justice Fitzpatrick confirmed that the classic "doomed to fail" argument will not be persuasive where the applicant creditor is not prejudiced, and where the objectives of the CCAA are best served, by allowing the stay of proceedings to continue.
Azure Dynamics Corporation and its subsidiaries (the "Companies") are a global enterprise in the business of manufacturing and developing automotive technologies for electric and hybrid vehicles. The Companies have established business relationships with commercial vehicle manufacturers and users, including Ford Motor Company, Canada Post, Purolator and Fedex. Earlier this year, the Companies, in need of ongoing financing to fund operations, became insolvent when efforts to close an equity financing fell through as a result of a regulatory issue.
On March 26, 2012, the Companies applied for and obtained relief under the CCAA. The Initial Order provided for a stay of proceedings (the "Stay") until April 25, 2012. On April 13, 2012, faced with insufficient cash flow to continue with their restructuring efforts, the Companies brought an application for approval of debtor in possession, or DIP, financing for four million dollars. At the same time, one of the Companies' secured creditors, Johnson Control Inc. ("JCI"), brought an application to lift the stay of proceedings so that they could move to realize on their purchase-money security interest on certain battery systems provided to the Companies.
Application to lift the stay of proceedings
The CCAA contains no specific guidance with respect to the circumstances in which a Court can or should make an order to lift a stay of proceedings. The Court was referred to the decision in Re Canwest Global Communications Corp.2 in which the Ontario Superior Court of Justice held that a court should have regard to the objectives of the CCAA, the balance of convenience, the relative prejudice to the parties, and the actions of the debtor company. The Ontario Superior Court of Justice outlined various situations where a court will lift a stay order, as follows:
- When the plan is likely to fail.
- The applicant shows hardship (the hardship must be caused by the stay itself and be independent of any pre-existing condition of the applicant creditor).
- The applicant shows necessity for payment (when the creditor's financial problems are created by the order or where the failure to pay the creditor would cause it to close and thus jeopardize the debtor company's existence).
- The applicant would be significantly prejudiced by refusal to lift the stay and there would be no resulting prejudice to the debtor company or the positions of creditors.
- It is necessary to permit the applicant to take steps to protect a right which could be lost by the passing of time.
- After the lapse of a significant time period, the insolvent company is no closer to a proposal than at the commencement of the stay period.
- There is a real risk that a creditor's loan will become unsecured during the stay period.
- It is necessary to allow the applicant to perfect a right that existed prior to the commencement of the stay period.
- It is in the interests of justice to do so.
JCI submitted that situations 1, 4, 6, and 9 were applicable. It argued that any plan that might be proposed was likely to fail because JCI held an unsecured position, which it would use to block approval of any plan which did not provide it with full repayment. It was also argued that the Company was required – but had failed – to give the court and the creditors some sense of what would be proposed by way of a plan and to show that there would be some utility in continuing further with the proceedings. JCI also argued that it would experience significant prejudice if the stay was not lifted. The alleged prejudice was the continued consumption of JCI's products and the ongoing professional costs secured by the prior ranking Administration Charge and liabilities secured by the Director's Charge (the proposed DIP lender had agreed to take a subordinate position to JCI and the other secured creditors).
The Court dismissed the application to lift the stay of proceedings and granted the Companies' application for DIP financing. With respect to JCI's submission that any plan was doomed to fail, the Court dismissed this argument citing Asset Engineering LP v Forest & Marine Financial Limited Partnership,3 in which the BC Court of Appeal held that a creditor cannot forestall an application under the CCAA on the basis that it would refuse to vote in favour of any plan. Madam Justice Fitzpatrick emphasized that the Court must consider the interests of the numerous other stakeholders, not just those of the creditor and debtor. In this case, those stakeholders included numerous employees, unsecured creditors, trade creditors, landlords, and the general community that the Companies were a part of. It also included stakeholders, like Ford, who had important contractual relationships with the Companies.
With respect to the argument that there was no prospect of a viable plan, the Court held that there was substantial evidence of a kernel of a plan. The Companies had made significant efforts to obtain financing, which the Monitor had commented favourably on. The Companies had also commenced multiple discussions with parties potentially interested in refinancing or recapitalizing the Companies. These discussions showed the Court that there was value in the Companies that might be explored through a sales or refinancing process. The Court also noted that since the proceedings were only commenced three weeks prior to the subject application, it could not be said that there had been any failure on the part of the Companies to show progress in their restructuring efforts. Overall, the Court held that there was a kernel of a plan and that the Companies should be given a reasonable chance to explore the formulation of it.
Finally, with respect to JCI's submission that it would be prejudiced by the continuation of the stay, the court held that JCI did not stand in any special or unique position. Any prejudice to JCI had to be balanced against a reasonable prospect that there would be a successful restructuring, which would ultimately benefit all parties. The Court noted that the Companies would suffer great prejudice if the stay was lifted as repossession of JCI's collateral could significantly affect the Companies' restructuring efforts.
The decision confirms that it will be difficult for a secured party that wishes to enforce security over specific assets to obtain relief from a CCAA stay of proceedings where the effect of doing so would be to prevent the debtor from continuing to carry on business. The difficulty is likely to be particularly pronounced early in a CCAA case when the restructuring is still evolving. In such situations, there may be a heavy practical onus for the party seeking to lift the stay to justify the dramatic step of bringing the debtor's efforts to reorganize to an end. The approach taken by the Court is consistent with one of the key goals of the CCAA, being to permit operating businesses to survive to avoid the negative social consequences and other costs of a shut down liquidation.
1 2012 BCSC 781.
22009, 61 CBR (5th) 200.
3 2009 BCCA 319.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2012 McMillan LLP