Authors: Vanessa Mensink, William E. J. Skelly
A recent decision from the B.C. Court of Appeal found that plans of arrangement or compromise aren’t prerequisites to refinancing a development.
In Port Capital Development (EV) Inc. v. 1296371 B.C. Ltd., the B.C. Court of Appeal granted a refinancing proposal after overturning a lower court decision to approve a sale of assets. The case involved the construction of Terrace House, a 19-storey luxury residential and commercial development in downtown Vancouver owned by Port Capital Development Inc. (“Port Capital”) and Evergreen House Development Limited Partnership (“Evergreen House”).
Construction Lender Halted Funding
CMLS Financial Ltd. (“CMLS”) was the construction lender on the Terrace House development. In May 2020, CMLS stopped funding construction and demanded payment. At that point, only the parkade and the structure for the first level of Terrace House had been substantially completed.
Port Capital and Evergreen House commenced proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The B.C. Supreme Court appointed a monitor who was tasked with finding offers for a sale of the property or an equity investment in the project. A Supreme Court judge heard the matter in May and June of 2021.
Supreme Court Dismissed Refinancing Proposal
The monitor’s efforts produced three asset purchase offers as well as a refinancing proposal from a numbered company, 1296371 B.C. Ltd. (“129”). The monitor told the court that “if 129’s proposal completed, it would result in a materially better outcome for the stakeholders” than any of the other offers. 129’s proposal was supported by the two secured creditors. The court heard that 129 was seeking to implement a restructuring without putting forward a plan of arrangement or compromise.
The Supreme Court judge considered section 11 of the CCAA, which gives the court broad discretion to make any order it considers appropriate in the circumstances. The court looked to the fundamental purpose of the CCAA as outlined in the long title of the statute, which is “an Act to facilitate compromises and arrangements between companies and their creditors.” The court concluded “there was no suggestion – let alone ‘the kernel of a plan’” – that any party intended to “put forward a plan of arrangement or compromise on which the creditors may vote.”
The Supreme Court judge concluded that the relief sought by 129 did not meet the “appropriateness” test applicable under s. 11. On June 15, 2021, she dismissed 129’s application and approved one of the offers to purchase the assets of the company. The sale was set to close on September 30, 2021. A division of the B.C. Court of Appeal granted 129 leave to appeal.
Court of Appeal Overturns Supreme Court’s Decision
The matter was heard by the Court of Appeal on September 21, 2021 and on September 22, 2021 the Court of Appeal provided its judgment. Justice Newbury, writing for the five-judge panel, overturned the lower court’s decision and approved 129’s refinancing proposal.
Justice Newbury held that the lower court erred in focusing the appropriateness test on the absence of a plan of compromise or arrangement. The unsecured creditors did not have the right to prevent Port Capital and Evergreen House from granting security that would rank ahead of the unsecured creditors. Therefore, compromises were not necessary for the granting of super-priority for interim financing. Justice Newbury found it would be inappropriate for a plan of compromise or arrangement to be seen as a legal “prerequisite” for a refinancing. This is especially true in situations where the refinancing (1) is superior in the eyes of the stakeholders; (2) was consented to by the secured creditors; and (3) would not affect the rights of unsecured creditors.
Justice Newbury noted that “giving primary importance to the statutory purpose stated in the CCAA’s long title seems to run contrary to the evolution of the CCAA and its objectives…and the evolution of the complex and innovative ‘solutions’ that now characterize CCAA applications.”
This case proves that the Court of Appeal will hear cases on tight timeframes. But more importantly, it emphasizes that the CCAA is flexible and must be given a broad interpretation to achieve its objectives. Those objectives are broader than the long title of the statute and don’t require a plan of compromise or arrangement.
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.