The spate of cannabis insolvencies over the past several years have heralded a number of developments in Canadian insolvency law.
One of the more recent developments is the increasing number of regulatory “status quo” provisions being sought and obtained by debtors. These provisions not only stay the suspension or cancellation of debtor licences but also the expiry of those licences in the ordinary course. A summary of the most relevant cannabis proceedings is set out below.
In Tantalus Labs Ltd. (Re), 2023 BCSC 1450, Tantalus Labs Ltd. (“Tantalus”), the debtor company in its proposal proceedings under the Bankruptcy and Insolvency Act (Canada) (the “BIA”), was in the process of liquidating its cannabis inventory but was running up against the expiry of its excise licence issued under the federal Excise Act, 2001 (Canada). Both the relevant cannabis licence under the federal Cannabis Act (Canada) and an excise licence are necessary for a producer to possess, distribute and sell cannabis products in Canada.
While Tantalus tried to negotiate a limited extension of its excise licence with the Canada Revenue Agency (“CRA”) to allow certain impending transactions to close, the CRA did not grant an extension. As a result, Tantalus brought an urgent application before the Court to stay the ordinary course expiry of its excise licence to allow it to facilitate the nearly complete transactions. The Court recognized that allowing the excise licence to expire would result in a significant deterioration of value to the estate and stated: “I consider the CRA’s decision to refuse to renew the Excise License even for a short period of time to be inexplicable, given that the CRA is itself one of the substantial stakeholders who stands to benefit from a proper and orderly disposition of the inventory, given its substantial unsecured debt.” The Court granted, among other things, an interim extension of Tantalus’s excise licence to allow liquidation of the cannabis inventory.
In the subsequent proceedings of Aleafia Health Inc et al (“Aleafia”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), Aleafia sought, as part of its motion seeking approval of its sales and investment solicitation process, an order preserving the “status quo” in respect of the Aleafia’s Health Canada and cannabis excise licences (the “Licences”) during the pendency of its stay of proceedings. Relying on the precedent set by Canadian Courts in the CCAA proceedings of Just Energy Corp. (“Just Energy”), Abbey Resources Corp and Original Traders Energy Ltd. et al. where various licence extensions were granted, Aleafia pointed specifically to the following reasoning of the Court in Re Just Energy Corp., 2021 ONSC 1793 at para 79:
More plainly put, the CCAA automatically stays enforcement of any payments of money ordered by the regulator. It does not, however, automatically stay other steps that a regulator may take against a regulated entity. The Court may nevertheless stay such other steps if it is of the view that the failure to stay those other steps means that a viable compromise or arrangement could not be made, provided that the additional stay is not contrary to the public interest. [Emphasis added]
Aleafia’s motion was successful and the endorsement of the Honourable Justice Conway dated August 22, 2023, noted that the motion was unopposed and that CRA expressly confirmed it did not oppose the Licence extension relief while Health Canada was served but did not respond. In granting the order (the “SISP Approval Order”), Justice Conway further stated that:
The status quo order is consistent with those granted in Just Energy, Abbey Resources, Original Traders and Tantalus and will mitigate the risk of destruction of value that revoking the Licenses would have on the business. I am granting the status quo order.
The corresponding “status quo” language of the SISP Approval Order was as follows:
“STATUS QUO” OF APPLICANTS’ LICENSES
- THIS COURT ORDERS that (a) the status quo in respect of the Applicants’ Health Canada and cannabis excise licenses (collectively, the “Licenses”) shall be preserved and maintained during the pendency of the Stay Period, including the Applicants’ ability to sell cannabis inventory in the ordinary course under the Licenses; and (b) to the extent any License may expire during the Stay Period, the term of such License shall be deemed to be extended by a period equal to the Stay Period.
Likewise, in the CCAA proceedings of Bzam Ltd. et al (“Bzam”), Bzam, relying on the decisions in Tantalus and Aleafia, sought a similar declaration of “status quo” in respect of its Licences at its initial order application. In its materials, Bzam stated that the Licences “are among the [our] most valuable assets and are required to permit [us] to operate [our] underlying business. If the Licences lapse or are cancelled, [our] operation and delivery of products will need to be halted or suspended. Accordingly, the lapsing or cancellation of the Licences would terminate their ability to restructure or continue as a going-concern business”.
The “status quo” language in the Bzam’s initial order was the same as the Aleafia SISP Approval Order. In approving the relief, the endorsement of the Honourable Justice P. Osborne dated February 28, 2024 reiterated the discretion of the Court to grant expanded stays at paragraphs 48 and 49:
Canadian Courts have also granted stays to prevent the Canada Revenue Agency from seeking to enforce its rights through regulatory actions related to an excise licence for a cannabis company during the period in which it was under protection in an insolvency regime.
In Tantalus, the British Columbia Supreme Court granted an order as part of the BIA proposal maintaining the status quo of a cannabis excise licence during the course of the proposal proceeding. It did so, rejecting the submission of the CRA, which had submitted that a ministerial decision to not renew a licence could not be the subject of a stay under the BIA. The same principles apply to a CCAA proceeding. [Emphasis added]
In the recent CCAA proceedings of Heritage Cannabis Corp. et al (“Heritage”), Heritage also sought and obtained similar language in its initial order which is evidencing a trend of both debtor cannabis companies seeking this relief as a matter of course as well as demonstrating the Court’s recognition of the value of such licences to the restructuring process. It will also stymie the CRA’s current approach of issuing 30 or 45 day excise licence renewals to delinquent producers but will result in an increase in value to their respective estates by allowing the ongoing production and sale of inventory through their proceedings.
While Health Canada and CRA have not appeared to publicly oppose such “status quo” relief since Tantalus, this position is limited to restructuring proceedings under the CCAA and BIA. They have taken, and are expected to continue taking, active steps to seek cancellation of excise licences in restructuring proceedings where a receiver has been appointed over all or certain of a cannabis debtor’s property as they did in the concurrent proposal and receivership proceedings of OGEN Ltd. et al.
Contact MLT Aikins Insolvency & Restructuring practice group to learn more.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.