On May 8, 2020, the Supreme Court of Canada (the "SCC") released its reasons for the ruling rendered on January 23, 2020, which allowed the appeal by 9354-9186 Québec Inc. and 9354-9178 Québec Inc. (collectively, "Bluberi")1. The SCC's ruling set aside the Québec Court of Appeal's (the "Court of Appeal") ruling, thereby restoring the first instance judgment of the Superior Court of Québec ("Superior Court"). In so doing, the SCC provided critical guidance regarding the high level of deference owed to the supervising judge in proceedings under the Companies' Creditors Arrangement Act2, as well as the approval of litigation financing agreements as interim financing3.
Bluberi manufactured, distributed, installed and serviced electronic casino gaming machines, and provided management services related thereto. In November 2015, Bluberi sought and obtained an initial order pursuant to the CCAA. At that point, Callidus Capital Corporation ("Callidus") was Bluberi's secured creditor, having extended financing to Bluberi prior to the CCAA filing.
Following a sale of its assets, Bluberi's only remaining asset was a claim against Callidus valued by Bluberi at approximately $200,000,000 (the "Retained Claim"). According to Bluberi, Callidus's actions as lender had caused Bluberi's liquidity issues, thereby forcing Bluberi into insolvency.
In February 2018, in order to pursue the Retained Claim, Bluberi petitioned the Court to approve a litigation funding agreement (the "LFA") with a third-party litigation financier (the "Financier"), which would be secured by a first-ranking charge on the Retained Claim in favour of the Financier.
Callidus opposed the LFA, arguing that it was not interim financing but rather akin to a plan of arrangement and therefore required creditor approval. Moreover, Callidus submitted its own plan of arrangement to Bluberi's creditors, offering a cash dividend in exchange for a release from the Retained Claim. Callidus valued its own security (initially valued at $3,000,000) at zero, such that it would vote on its own plan as an unsecured creditor. In so doing, Callidus would have secured the statutory votes required for creditor approval of its plan. It is worth noting that Callidus had previously submitted a plan of arrangement to Bluberi's creditors, where it had retained the initial value of its security, such that it did not have an unsecured claim and did not vote on its plan.
In the first instance, the supervising Superior Court judge held as follows4:
- Callidus could not vote on its own plan of arrangement submitted to Bluberi's creditors as it was acting for an improper purpose; and
- The LFA was valid interim financing pursuant to s. 11.2 CCAA, such that a creditor vote was not required for its approval.
The Court of Appeal reversed the first instance judgment5, essentially holding that as a creditor, Callidus had an unfettered discretion to vote in its own self-interest, and that the LFA was not interim financing since its purpose was not to allow Bluberi to continue its operations and restructuring efforts.
The SCC Decision
In an increasingly rare unanimous ruling, the SCC overturned the CA's ruling, thereby restoring the first instance judgment. Specifically, the SCC held that the SC did not err when it held that (1) Callidus could not vote on its own plan of arrangement as an unsecured creditor on the basis that it was acting for an improper purpose, and (2) the LFA could be approved by the Court as interim financing pursuant to s. 11.2 CCAA.
Discretion of the Supervising Judge and Improper Purpose
Given that the CCAA does not provide for any explicit powers for a Court to bar a creditor from voting on a plan of arrangement, the Court may rely on its inherent jurisdiction pursuant to s. 11 CCAA in order to exercise such a power. Moreover, great discretion must be afforded to the supervising judge who exercises this inherent jurisdiction, as this judge has intimate knowledge of and familiarity with the facts and circumstances surrounding the CCAA proceeding in question.
Following a historical review of the relevant case law and doctrine, the SCC provides insightful guidance on the exercise of a supervising judge's inherent jurisdiction. According to the SCC, although a supervising judge has extensive and broad powers under this inherent jurisdiction, such powers must be exercised so as to further the key remedial objectives of the CCAA, including but not limited to:
- providing for timely, efficient and impartial resolution of a debtor's insolvency;
- preserving and maximizing the value of a debtor's assets;
- ensuring fair and equitable treatment of the claims against a debtor;
- protecting the public interest; and
- balancing the costs and benefits of restructuring or liquidating the company6.
Additionally, the Court must be satisfied that (1) the order sought is appropriate in the circumstances, (2) the applicant has been acting in good faith and (3) the applicant has been acting with due diligence7.
In its analysis, the SCC held that the Superior Court did not err in its discretionary decision to bar Callidus from voting on its own plan of arrangement. Although the CCAA does not preclude creditors from voting on a plan that they have submitted, a Court may bar such a creditor from voting if the creditor is acting in an improper purpose. Indeed, the Court noted that there were no significant changes in Bluberi's financial situation between the filing of each of Callidus' plans of arrangement. As such, the Superior Court did not err in finding that Callidus acted in an improper purpose when it valued its security at nil to secure creditor approval of its plan. To that effect, the Court held as follows:
 In our view, the supervising judge's decision to bar Callidus from voting on the New Plan discloses no error justifying appellate intervention. As we have explained, discretionary decisions like this one must be approached from the appropriate posture of deference. It bears mentioning that, when he made this decision, the supervising judge was intimately familiar with Bluberi's CCAA proceedings. He had presided over them for over 2 years, received 15 reports from the Monitor, and issued approximately 25 orders.
 The supervising judge considered the whole of the circumstances and concluded that Callidus's vote would serve an improper purpose (paras. 45 and 48). We agree with his determination. He was aware that, prior to the vote on the First Plan, Callidus had chosen not to value any of its claim as unsecured and later declined to vote at all — despite the Monitor explicitly inviting it do so. The supervising judge was also aware that Callidus's First Plan had failed to receive the other creditors' approval at the creditors' meeting of December 15, 2017, and that Callidus had chosen not to take the opportunity to amend or increase the value of its plan at that time, which it was entitled to do (see CCAA, ss. 6 and 7; Monitor, I.F., at para. 17). Between the failure of the First Plan and the proposal of the New Plan — which was identical to the First Plan, save for a modest increase of $250,000 — none of the factual circumstances relating to Bluberi's financial or business affairs had materially changed. However, Callidus sought to value the entirety of its security at nil and, on that basis, sought leave to vote on the New Plan as an unsecured creditor. If Callidus were permitted to vote in this way, the New Plan would certainly have met the s. 6(1) threshold for approval. In these circumstances, the inescapable inference was that Callidus was attempting to strategically value its security to acquire control over the outcome of the vote and thereby circumvent the creditor democracy the CCAA protects. Put simply, Callidus was seeking to take a "second kick at the can" and manipulate the vote on the New Plan. The supervising judge made no error in exercising his discretion to prevent Callidus from doing so.
The LFA as Interim Financing
The SCC also agreed with the Superior Court to the effect that the LFA was not a plan of arrangement, but rather akin to interim financing, such that it may be approved by the Court pursuant to s. 11.2 CCAA. Indeed, the SCC held that although the CCAA does not define "plan of arrangement", it is understood from the jurisprudence that a plan of arrangement requires, at minimum, some compromise of creditors' rights8. In such a context, the LFA of this particular matter could not be considered to a be a plan of arrangement, as it merely provided for financing by the Financier of the litigation of the Retained Claim, in exchange for a portion of the proceeds of any judgment or settlement of same, and a first-ranking charge in favour of the Financier on the Retained Claim. It is worth noting that the LFA did not contemplate how the proceeds of the litigation would be distributed amongst Bluberi's creditors. As such, according to the SCC, the LFA could not be interpreted as a plan of arrangement:
 We agree with the supervising judge that the LFA is not a plan of arrangement because it does not propose any compromise of the creditors' rights. To borrow from the Court of Appeal in Crystallex, Bluberi's litigation claim is akin to a "pot of gold" (para. 4). Plans of arrangement determine how to distribute that pot. They do not generally determine what a debtor company should do to fill it. The fact that the creditors may walk away with more or less money at the end of the day does not change the nature or existence of their rights to access the pot once it is filled, nor can it be said to "compromise" those rights. When the "pot of gold" is secure — that is, in the event of any litigation or settlement — the net funds will be distributed to the creditors. Here, if the Retained Claims generate funds in excess of Bluberi's total liabilities, the creditors will be paid in full; if there is a shortfall, a plan of arrangement or compromise will determine how the funds are distributed. Bluberi has committed to proposing such a plan (see supervising judge's reasons, at para. 68, distinguishing Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp., 2008 BCCA 327, 296 D.L.R. (4th) 577).
Determining whether litigation financing agreements can constitute a plan of arrangement is a case by case analysis that depends on the facts and circumstances of each CCAA proceeding. For example, a supervising judge may also determine that, despite an agreement itself not being a plan of arrangement, it should be packaged with a plan and submitted to a creditors' vote9.
Moreover, the SCC held that although the LFA was not a traditional form of interim financing, s. 11.2 CCAA does not mandate any standard form of terms of such financing, which allows certain flexibility for parties seeking to obtain same. In this regard, the Court stated as follows:
 That said, insofar as third party litigation funding agreements are not per se illegal, there is no principled basis upon which to restrict supervising judges from approving such agreements as interim financing in appropriate cases. We acknowledge that this funding differs from more common forms of interim financing that are simply designed to help the debtor "keep the lights on" (see Royal Oak, at paras. 7 and 24). However, in circumstances like the case at bar, where there is a single litigation asset that could be monetized for the benefit of creditors, the objective of maximizing creditor recovery has taken centre stage. In those circumstances, litigation funding furthers the basic purpose of interim financing: allowing the debtor to realize on the value of its assets.
The SCC's ruling in the Bluberi case provides useful guidance on the high-level deference that must be afforded to a supervising judge in CCAA proceedings by appellate courts, reaffirming the weight that must be given to the first instance judge's familiarity with the various facts and stakeholders of the proceedings. It will be interesting to see whether this ruling will have the effect of further increasing the already difficult burden of obtaining leave to appeal of a first instance judgment in CCAA matters, particularly with regards to the fact that case law has held that the prospective appellant must demonstrate that his appeal is prima facie meritorious10.
This case also interestingly incorporates the exercise of the Court's inherent jurisdiction pursuant to s. 11 CCAA with the newly-enacted s. 18.6 CCAA regarding the duty to act in good faith and the Court's power to make "any order that it considers appropriate" if an interested person is not acting in good faith in a CCAA proceeding. Although the latter provisions were not in effect during the developments of this matter, the SCC stated that the duty to act in good faith is a "well-established requirement". As such, we look forward to seeing whether Courts seeking to sanction parties acting with an "improper purpose" will continue to do so under s. 11 CCAA, or whether they will now do so pursuant to the newly-codified power set out in s. 18.6 CCAA.
Finally, the SCC has further cemented the validity of litigation financing agreements as interim financing insofar as they do not compromise creditors' rights. The SCC's guidance in this matter will no doubt have an impact on the emerging trend of litigation funding as a useful tool to realize claims and to secure the "pot of gold" that would have otherwise been too costly for a distressed debtor to pursue with its own limited resources. The SCC ruling may also be viewed by many as a blanket approval of the developing practice of litigation funding in Canada, including in the context of class action proceedings.
1. 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10 (the "SCC Decision").
2. RSC (1985), c. C-36 (the "CCAA").
3. Also known as "debtor-in-possession" or "DIP" financing.
4. Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), 2018 QCCS 1040 (Michaud J.). See also: SCC Decision, paras 23-31.
5. Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), 2019 QCCA 171 (Dutil, Schrager, Dumas (ad hoc), J.A.). See also: SCC Decision, paras 32-36.
6. SCC Decision, para 40.
7. SCC Decision, para 49.
8. Ibid, paras 100, 101.
9. SCC Decision, para 103.
10. See, for example, Kasirer J.A. (as he then was)'s reasons in Ville de Montréal c. Groupe SMI inc., 2019 QCCA 658, confirming the reasons of Hilton J.A. in Statoil Canada Ltd. (Arrangement relatif à), 2012 QCCA 665, paras 3,4.
Originally published 14 May, 2020.