Canada: Receivership Or CCAA? Having Already Given Significant Time, A Creditor Is Not Forced To Wait Longer To Enforce

Last Updated: August 23 2017
Article by David Gerecke

Affinity Credit Union 2013 v. Vortex Drilling Ltd. 2017 SKQB 228

In late July 2017, Mr. Justice Scherman was faced, for the second time in less than two years, with competing applications for CCAA and receivership orders. For the second time, he rejected the application under the CCAA and ultimately a receiver was appointed (in both cases, an interim receiver was appointed to preserve the status quo). On the first occasion, which involved Phenomenome Discoveries Inc. and Phenomenome Laboratories Inc., the decision was unreported notwithstanding that Justice Scherman appears to have given reasons. This time we have a full reported set of reasons.

Background Facts

Vortex Drilling Ltd. ("Vortex") was in the business of drilling oil wells. It was hit hard by the drop of the price of oil. In 2013, Affinity Credit Union 2013 ("Affinity") advanced Vortex nearly $15 million to refinance two drilling rigs and purchase a third rig. While the loan facilities were repayable on demand, prior to demand there was a schedule of combined monthly interest and principal payments. The credit agreement also provided that any material change in risk or adverse change in the financial condition of Vortex would constitute a default.

After oil prices collapsed, Vortex could not make its scheduled monthly payments to Affinity. Affinity agreed on several occasions to allow Vortex to defer principal payments, so that through 2016 it paid only interest in most months. Vortex then failed to make negotiated balloon principal payments and in January 2017 failed to resume regular monthly principal and interest payments as Vortex had undertaken to do.

Affinity demanded payment in May 2017, allowing Vortex 30 days to pay in full. In June 2017, Affinity applied to appoint a receiver. Vortex sought an adjournment (a second adjournment) to allow it to apply for CCAA relief. The Court granted that adjournment but appointed an interim receiver pending the hearing of the competing motions.

There was no question in the Court's mind that Vortex was insolvent.

Vortex's Argument for CCAA Relief:

  • Putting it into receivership could only result in liquidation and loss of employment for many individuals, and other economic impacts.
  • Affinity had ample security to cover its debt.
  • The oil industry was improving and it expected a substantial improvement in its cash flow.
  • It was pursuing promising refinancing opportunities.

Affinity's Position:

  • It had the contractual right to appoint a receiver given Vortex's state of insolvency.
  • It had already provided Vortex with substantial accommodations and deferrals (some $4.5 million in payments deferred over 2 ½ years), and Vortex had failed to honour its contractual commitments in return.
  • Vortex's business was no longer viable. It could not cover its operating costs, let alone its make required payments on its capital loans.
  • Vortex had had many months to refinance but had failed to do so.
  • Allowing Vortex to continue to operate when it could not cover its costs would mean the value of the rigs would depreciate and Affinity's security position would be eroded.

The Court's Findings

Justice Scherman rejected the CCAA application and ordered the appointment of a receiver. One factor that clearly influenced him was that Vortex relied primarily on affidavit evidence from a Tina Twietmeyer, who described herself as Administrative Director of Vortex without describing her job function or how she obtained the knowledge she claimed to have. She had never been a corporate director of Vortex.

It was evident to the Court that much of Tina Twietmeyer's evidence was based on information and belief, with no basis for that information and belief being established. That in itself would be contrary to the Rules of Court but Justice Scherman determined that an application for an initial order and stay under the CCAA is not an interlocutory application. While further applications would be expected, His Lordship held that such an application is more in the nature of one for a final order, such that affidavit evidence based on information and belief would not be admissible.

In any event, Justice Scherman concluded that he could not place significant weight on Tina Twietmeyer's evidence because he had no ability to assess its reliability. He raised numerous specific concerns:

  • Tina Twietmeyer's affidavits included opinions that Vortex was experiencing significant growth. The whole of the evidence simply did not support that.
  • She provided evidence on the economic climate in the western Canadian oil industry, which Justice Scherman characterized as at best a hope and ultimately inadmissible speculation.
  • She referred to an appraisal on the value of the rig assets, without filing it, claiming confidentiality. Affinity thus had no ability to test that opinion evidence. Affinity's evidence also raised significant doubt about those values, particularly given that the rigs were significantly underutilized.
  • While there were multiple affidavits from Tina Twietmeyer, the President and General Manger of Vortex filed none.

Vortex's conduct also concerned Justice Scherman deeply. During the period that Affinity's receivership application was adjourned, and the parties were negotiating a potential forbearance agreement, Vortex represented to another credit union (which happened to be part of Affinity's syndicate) that it had no accounts payable. It wrote cheques purporting to pay various payables but then did not deliver them to the payees, to create an "accounting fiction" that allowed Vortex to access some $121,000 in operating credit under its margin requirements with the second credit union. This came to light only because of investigations by the interim receiver. Justice Scherman viewed it as a breach of Vortex's covenants to provide honest and accurate financial information to Affinity, and a failure to act in good faith.

Justice Scherman expressed many additional concerns but one factor seems to have been particularly important to him:

[38] ... Affinity has provided significant relief from the contractual terms over a two year period. In a practical sense, Affinity has already effectively provided Vortex with much of the remedial opportunity contemplated by the CCAA. Vortex has had the benefit of two years of debt repayment accommodations and forbearance and the opportunity to seek alternate financing.

Thus, at least on this one occasion, voluntary forbearance by a lender to provide extended relief to the borrower, was taken into account by the Court, and Justice Scherman rejected the CCAA application and ordered the appointment of a receiver.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
David Gerecke
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.