Contributed by Danielle Maksimow (Norton Rose Fulbright Canada)
—
Canada v. Canada North Group Inc. 2021 SCC 30
Canadian Update: The Supreme Court of Canada Confirms the Broad Discretion the CCAA Vests in the Supervising Courts
Introduction
Last year, the Supreme Court of Canada (SCC) upheld the Alberta Court of Appeal’s majority decision in Canada v. Canada North Group Inc. (Canada North). In its decision, the SCC confirmed the broad discretionary power the Companies’ Creditors Arrangement Act (CCAA) gives to supervising courts to make any orders they consider appropriate in the circumstances. Such orders may include granting super-priority charges in favour of the experts assisting in the restructuring process, which can take priority over the interests of the Crown and other creditors.
Background
Canada North, an Alberta company that provides remote workforce accommodation, initiated a restructuring process under the CCAA. Of its outstanding debts, Canada North owed unremitted employee source deductions and goods and services tax to the Canada Revenue Agency (CRA).
The CCAA is part of Canada’s system of insolvency law, which includes the Bankruptcy and Insolvency Act and the Winding-up and Restructuring Act. The CCAA is a statute that enables financially distressed companies with liabilities of more than $5 million to restructure and thus avoid bankruptcy, foreclosure or asset seizure. Its regime is flexible with considerable judicial discretion allowing for more creative solutions for complex corporations.
During the restructuring process, the business will typically hire experts such as interim lenders, monitors, and lawyers to assist. As well, a court will oversee the restructuring for the benefit of all stakeholders with the ultimate objective of allowing companies to reorganize and emerge from the process as a going concern. If there are insufficient funds to repay all debts, the court will determine how to prioritize the creditors’ respective interests.
Within Canada North’s initial application, the CCAA court granted the requested relief package, including three priming charges or “court-ordered super-priority charges.” These super-priority charges included: an administration charge, an interim lender’s charge, and a charge in favour of the applicants’ corporate directors in various amounts (the priming charges). In doing so, the court made an order under s. 11 of the CCAA allowing the priming charges to take priority over a claim of any other secured creditor of Canada North.
The Crown filed a motion arguing that the Priming Charges failed to recognize the Crown’s legislative proprietary interest created by s. 227(4.1) of the Income Tax Act (ITA). The court dismissed the motion. On appeal, the appellate court agreed with the Crown that s. 227(4.1) creates a security interest. However, the court reasoned that if the deemed trust created by the security interest could not be subordinated, the result would undermine the objectives of the CCAA and the ITA as fewer restructurings could succeed and less tax could be collected. The appeal was dismissed. The Crown then appealed to the SCC.
The Ruling
The SCC dismissed the Crown’s appeal. The majority determined that s. 227(4.1) of the ITA does not prevent a court from granting an order creating super-priority charges if doing so is necessary to fulfill the broad, remedial objectives of the CCAA. The majority found no conflict between the ITA and the order made under s. 11 of the CCAA.
The SCC disagreed with the Crown’s argument determining that s. 227(4.1) does not create a proprietary interest in the debtor’s property, nor does it create a beneficial interest that can be considered a proprietary interest as it does not attach to any specific property. As such, the Crown’s interest lacks the necessary qualities for it to be considered a beneficial owner.
Judicial discretion is central to the CCAA regime. The jurisdiction granted by s. 11 is only constrained by the restrictions set out in the CCAA itself. Thus, an order made will be paramount to any other federal or provincial statute. Instead, courts are guided by legal principles to justify exercising discretion under s. 11, such as appropriateness in the circumstances, good faith and due diligence. These principals align with the overarching objectives of the CCAA.
In this case, the SCC agreed with the lower courts and found that in hiring experts, stakeholders are deriving the most value from the restructuring process. Without the super-priority charge, there would be a financial risk to experts and reduced incentive to assist in restructurings.
The SCC outlined guiding factors supervising courts may use to assist in deciding whether to exercise its discretion. Some of these factors include:
- whether the supervising court believes an interim lender or expert would not act without a super-priority charge, or where the interim lender, acting in good faith, has indicated it will not lend to the debtor without a super-priority charge; and
- whether there is a prospect of a successful restructuring, or the CCAA is likely to be used to sell the debtor’s assets.
The SCC did acknowledge that a supervising court will likely grant a super-priority charge where an interim lender or expert will refuse to act otherwise. That being said, a supervising court will only grant priority when it is deemed necessary and in the furtherance of the CCAA’s objective to maximize a company’s value for the benefit of stakeholders. It should be noted that courts will use different guiding factors to assist in deciding whether or not to exercise discretion to rank another creditor’s interests ahead of the Crown’s deemed trust.
Practical Considerations
The Canada North decision reiterates the central importance of the broad discretion given to the supervising courts under the CCAA. To facilitate the restructuring process, a court may make an order creating priority interests that subordinate existing creditors’ claims, such as the Crown’s deemed trust. Creditors of a company undergoing a CCAA process should be aware of this central feature of the CCAA system. Nonetheless, the SCC also clarified that granting a priority ranking is not automatic, and a court will only make such an order when absolutely necessary and if doing so will enhance the likelihood of a successful restructuring.
The decision provides greater certainty as to how CCAA courts will weigh and balance the relevant interests at play. As well, interim lenders and restructuring experts may now have the upper hand knowing that they are likely to be given a super-priority charge if they refuse to act without one, so long as they provide submission and evidence demonstrating why the request is necessary and how it is in line with the objectives of the CCAA restructuring process.
