In early 2015, 9171665 Canada Ltd. and Connacher Oil and Gas Ltd. (together Connacher) applied to the Alberta Court of Queen's Bench (Court) for a final order pursuant to section 192 of the Canada Business Corporations Act (CBCA) for the approval of a plan of arrangement to restructure Connacher (Arrangement). On April 2, 2015, Justice C.M. Jones rejected Connacher's restructuring proposal for the reasons set out below.
Under the Arrangement, Connacher sought to convert approximately C$1-billion of second secured lien notes (Second Lien Notes) to equity and to issue C$35-million of new second lien convertible notes. The Arrangement was approved by at least two-thirds of the votes cast at the shareholders' and noteholders' meetings (the required amount of support as established by precedent). Connacher did not invite the first secured lien noteholders (First Lien Noteholders) to vote on the Arrangement as they did not consider the First Lien Noteholders' interests to be affected. The proposal was opposed by Credit Suisse, the agent for the First Lien Noteholders.
Prior to this hearing, on February 2, 2015, in anticipation of the restructuring of the Second Lien Notes, Connacher did not pay the interest due on the Second Lien Notes. As a result, the First Lien Noteholders sued Connacher in the state of New York (the governing jurisdiction of the first lien note agreement) on the basis that this failure to pay interest was a default under the first lien note agreement. Connacher contested that it was in default on the basis that the failure to pay interest was part of a Second Lien Note restructuring, an action permitted under the first lien note agreement. The New York courts had not yet ruled on the action at the time these proceedings were taking place in the Court. A finding of default under the first lien note agreement would result in an acceleration of the First Lien Notes (such that the entire outstanding principal sum would immediately become due and payable).
In its application for the Arrangement, Connacher sought to have the alleged default waived or cured by the Court so that the Arrangement could proceed. Credit Suisse asserted that any Arrangement rescinding the alleged default by Connacher would compromise the rights of the First Lien Noteholders. Credit Suisse also argued that the Court could not approve an arrangement under section 192 of the CBCA where it could not be demonstrated that the restructured entity would emerge solvent. A determination of whether or not there was a default under the first lien note agreement and the potential acceleration would heavily influence whether Connacher could emerge solvent from the Arrangement.
Ultimately, Justice Jones did not approve the Arrangement. He was not satisfied that Connacher would emerge from the Arrangement solvent or that the Arrangement was fair and reasonable under the circumstances.
Justice Jones held that non-insolvency post-emergence is a requirement for the exercise of judicial authority under section 192 of the CBCA. He stated that "non-insolvency of the emergent entity ... is an essential requirement for the exercise of [the court's] power to approve [a] Plan of Arrangement."
Justice Jones also said that a stay or no-default order that may be issued to maintain the status quo should not be easily extended to claims that have already been advanced on the basis of an alleged existing default.
Pending the resolution of the New York action, Justice Jones was unable to conclude whether Connacher would emerge from the Arrangement solvent unless he exercised his jurisdiction to retroactively eliminate the basis for the New York action altogether. Justice Jones declined to take such steps.
In his analysis, Justice Jones quoted the following excerpt from an article written by William Kaplan, titled "Stay of Proceedings Under the Canada Business Corporations Act - a Question of Balance," Annual Review of Insolvency Law, Carswell (2011):
... the CBCA arrangement provisions were not designed to deal with the full range of issues affecting multiple parties that many insolvencies can present. It is a focused remedy and requires focus for its proper use. Where an applicant requires broader third party orders restraining otherwise lawful conduct, especially on a permanent basis, one must question whether the proceeding is more properly administered under true insolvency process as opposed to the CBCA. The broader the third party impact requested, the more searching the analysis of whether the CBCA truly should be applied.
Relying on this excerpt, Justice Jones stated that he was "hesitant to use ... section 192 of the CBCA ... to potentially affect the resolution of the rights of parties to significant contracts affecting an applicant, which are the subject of a present action in another jurisdiction which Connacher appears to have attorned to." Justice Jones held that the Arrangement was unfair and unreasonable because it purported to extinguish a right that may have accrued to the First Lien Noteholders without the chance for them to even vote on the Arrangement.
Justice Jones also considered the policy implications of interfering with Credit Suisse's default claim. He questioned the impact of such interference on the attitude of lenders, in particular foreign lenders, such that agreements "with Canadian borrowers negotiated in good faith and at some considerable expense, containing provisions designed specifically to address possible responses to adverse economic circumstances, can be nullified, or at least compromised by a CBCA Court convened to respond to those very adverse economic circumstances...."
Additionally, in support of his finding that the Arrangement was unreasonable, Justice Jones was unable to find a valid business purpose underlying the Arrangement. He was not satisfied on the evidence before him that Connacher — as restructured — would remain a going concern absent an increase in oil prices and an improvement in the exchange rate between Canadian and U.S. currencies.
Overall, this decision may provide insight as to the courts' application of section 192 of the CBCA. First, it proposes that section 192 should only be used to affect a plan of arrangement where a court is satisfied that the emerging entity will be solvent. Second, it suggests that a plan of arrangement that significantly impacts the rights and claims of third parties may be better dealt with under the insolvency statutes rather than the CBCA.
After this decision, Connacher and the First Lien Noteholders reached a settlement. As part of this settlement, the First Lien Noteholders withdrew their action against Connacher in New York and entered into a waiver and settlement agreement. The Arrangement was also amended to reflect the terms of the settlement. The amended Arrangement was approved by the Court on April 23, 2015 and Connacher announced on May 11, 2015 that it had closed. The Court's approval raises the question of how it was able to overcome its prior assertion that the recapitalization of Connacher is unlikely to have a valid business purpose and is thus unreasonable.
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