Co-author: Stephen Brown-Okruhlik, student at law
In a recent decision, the Court of Queen's Bench of Manitoba considered when a stay of proceedings under the Companies' Creditors Arrangement Act ("CCAA") should be lifted to allow parties to bring claims against an insolvent company outside of the CCAA proceeding.1 The case provides new guidance to litigants as to when it is appropriate to lift the stay. It also serves as a reminder that special considerations may apply to companies doing business while insolvent and when restructuring proceedings are contemplated.
Puratone ran a commercial hog production business. It sought protection under the CCAA and the initial order included standard stay provisions, including a stay of existing proceedings as well as further actions against the company without leave of the court. Also, actions against directors and officers for existing claims could not be commenced or continued until a compromise or arrangement was sanctioned by the court or rejected by the creditors.
This was a liquidating CCAA. Through a court-approved sales process substantially all of Puratone's assets were sold to Maple Leaf Foods Inc. A group of farming operators opposed the distribution of the sale proceeds. The operators had supplied grain to Puratone within two weeks of the CCAA filing.
The operators alleged that Puratone and its directors and officers must have been planning its CCAA filing well in advance of ordering the grain and therefore had no intention of paying for it. Among other things, the operators sought damages for negligent misrepresentation against the company, a declaration of an implied or constructive trust, and a declaration that directors and officers acted fraudulently.
Justice Dewar lifted the stay of proceedings to allow the operators to pursue their claim against the company as well as the directors and officers. Central to his decision was the need to balance stakeholder interests in a CCAA proceeding.
He observed that the CCAA does not lay out a test for lifting a stay of proceedings. However, relying on the decision of the Saskatchewan Court of Appeal in ICR Commercial Real Estate (Regina) Ltd. v Bricore Land Group Ltd.,2 Justice Dewar noted that there must be "sound reasons," consistent with the scheme of the CCAA, to relieve against the stay, and that "sound reasons" were measured by a consideration of three factors. Those factors were: the balance of convenience; the relative prejudice of the parties; and the merits of the proposed action.
Justice Dewar provided some additional guidance on the application of the test. In his view, these three factors should be viewed together in the context of the nature and timing of the CCAA process. Early in the CCAA process, lifting a stay may jeopardize a company's ability to restructure. Courts will therefore be reluctant to lift a stay of proceedings in the early stages. However, courts will be more receptive to lifting a stay late in a CCAA proceeding that involves only the sale of assets, after any restructuring has been accomplished or abandoned.
In this case, Puratone's restructuring had "from the outset all of the earmarks of a liquidation proceeding".3 The operators' argument raised "the issue of whether a company with exposed secured creditors should be incurring credit at a time when it is preparing to make a CCAA application".4
Justice Dewar reasoned that there was no restructuring plan that was put at risk by lifting the stay of proceedings and therefore the operators should have the chance sooner rather than later to pursue their claim. He offset any chance of prejudice to the secured creditors by requiring that the operators file an undertaking whereby they would be liable for any damages arising from delay in the payment of holdback monies to the secured creditors.
With respect to the directors and officers, Justice Dewar found that a reasonable inference could be drawn that at least some of the directors and officers would have known that the proceeding was being prepared within the two week period before the CCAA application. He lifted the stay of proceedings against the directors and officers to allow the operators to bring their claim.
Liquidating CCAAs May Be More Likely to Have to Address Claims Outside the CCAA Process
It remains to be seen if the operators will succeed against the company or management. In any case, the decision in Re Puratone does provide that CCAA stays will more likely be lifted in the context of a liquidating CCAA than in a traditional restructuring where courts will be more reluctant to have the debtor's attention diverted from the restructuring process.
The case is also to be noted by those advising directors and
officers conducting business while a restructuring under the CCAA
is contemplated. Directors and officers cannot necessarily rely on
a stay of proceedings to insulate them from liability, especially
in circumstances where a liquidating CCAA, rather than a
traditional restructuring of the business, will be the result of
the insolvency proceedings.
1 Re Puratone et al, 2013 MBQB 171.
2 ICR Commercial Real Estate (Regina) Ltd. v Bricore Land Group Ltd., 2007 SKCA 72.
3 Re Puratone et al, 2013 MBQB 171 at para. 20.
4 Re Puratone et al, 2013 MBQB 171 at para. 22.
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.
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