Authors: Vanessa Mensink, Dana Nowak, William E. J. Skelly
One year to the day from when EncoreFX Inc. made an assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act (BIA), Ernst & Young Inc. (EYI, initially the “Trustee” and currently the “Monitor”) brought an application on behalf of EncoreFX to initiate a proceeding under the Companies’ Creditors Arrangement Act (CCAA).
The Details of EncoreFx’s Bankruptcy
Due to the nature of its business, EncoreFX’s bankruptcy was complex to administer. EncoreFX provided foreign exchange (FX) risk management and cross-border payment services to clients to help mitigate exposure to fluctuating FX rates. These services included FX spot transactions and FX derivative contracts, including forward contracts and options (the “EncoreFX Derivatives”), the market value of which fluctuates every second of every day due to movements of underlying FX rates.
Realization of EncoreFX’s assets and the determination of claims against the EncoreFX estate (the “Estate”) during the bankruptcy raised several issues. One of these issues was whether the Trustee could terminate customers’ credit facilities and their existing FX contracts. Further, the Trustee:
- pursued recovery of customers’ post-bankruptcy reversals of pre-authorized margin deposits;
- issued 92 Notices of Civil Claim in respect of unpaid customer margin deposits and resulting closing out of forward positions, and
- evaluated the merits of various stakeholder property claims totaling more than $30 million.
The Trustee initiated the CCAA proceedings to streamline the collection of outstanding claims and liquidation of EncoreFX’s assets, and ultimately to present a plan of compromise and arrangement with the best recovery outcome to the creditors.
The Benefits of a CCAA Filing
In late 2020, the Trustee entered into negotiations with Gustavson Capital Corporation (GCC), the sole secured creditor with a claim of $35.9 million, and Andreas Wrede, the individual with the largest property claim in the amount of $29 million.
Lengthy discussions also took place with the Bank of Montreal (BMO) and the inspectors of the Estate (the “Inspectors”). The goal was to determine whether it would be possible to settle the various claims of GCC and Wrede against the Estate and the claim of the Estate against BMO.
In mid-January 2021, after approval by the Inspectors in the BIA proceedings, the Trustee executed a term sheet, which provided the basis for the material terms of a CCAA plan of compromise and arrangement (the “Plan”). The Plan sought to avoid depleting the Estate’s assets with extensive and uncertain litigation in the BIA proceedings.
On March 30, 2021, the Court granted an initial order pursuant to the provisions of the CCAA.
On April 8, 2021, the Court granted several orders within the CCAA proceedings. This included a claims process order, which established the process by which EncoreFX’s affected creditors may prove their respective claims within the CCAA proceedings. It also included the creditor’s meeting order, which established the processes by which the Monitor was to hold the creditor’s meeting and how EncoreFX’s affected creditors were to vote upon the Plan.
The creditors of EncoreFX overwhelmingly supported the Plan. At the sanction order hearing, EYI advised the Court that the Plan would provide a significant recovery to unsecured creditors. This recovery would likely be greater than any recovery the creditors might otherwise receive in the BIA proceedings. The Court determined that the Plan was procedurally and substantively fair and reasonable and in the best interest of EncoreFX’s creditors.
BIA proposal proceedings have been converted into CCAA proceedings. However, it is unusual for a bankrupt estate, which was initiated by an assignment in bankruptcy under the BIA, to be converted into a CCAA proceeding.
Justice Fitzpatrick carefully reviewed s. 11.6 of the CCAA, which limits the ability of the Court to grant relief under the CCAA to a bankrupt company. She determined that s. 11.6(a) applied to proposal proceedings commenced under Part III of the BIA and did not apply in the circumstances.
Section 11.6(b) describes the ability of the Court to grant relief under the CCAA in relation to a bankrupt. As there was no jurisprudence related to s. 11.6(b) analysis, Justice Fitzpatrick looked to the reasoning by Justice Brown in Clothing for Modern Times Ltd, which was in the context of a BIA proposal.
In the circumstances of EncoreFX, the Court addressed three key issues:
- Did EncoreFX qualify for relief under the CCAA?
- If so, was EncoreFX barred or limited from that relief by other provisions?
- Assuming qualifications were met and no limiting factors arise, should the Court exercise its discretion to grant CCAA relief as provided by s. 11.6(b) of the CCAA?
Justice Fitzpatrick determined that EncoreFX met the qualifications for relief under the CCAA as it was a debtor company with debts in excess of $5 million. The Trustee had obtained consent from the Inspectors and the bankruptcy was not a result of a failed proposal, so EncoreFX was not barred from the relief sought. Finally, Justice Fitzpatrick stated she was “more than satisfied” that granting the CCAA relief was appropriate.
As a result, the BIA proceedings were stayed and the Court granted the Initial Order.
To Annul or Not to Annul – that is the question
The ongoing status of the BIA proceedings was an unsettled issue when the Initial Order was granted. Under s. 11.6(b) of the CCAA there is no conversion or continuation of the BIA proceedings by the granting of the CCAA order. Justice Fitzpatrick exercised her underlying discretion to stay the BIA proceedings.
If the Plan did not receive creditor approval or was not sanctioned by the Court, EncoreFX would revert back to the BIA proceedings. Alternatively, if the creditors approved the Plan and the Court sanctioned it, it is unclear what exactly would happen to the BIA proceedings.
At the sanction order hearing, the Monitor suggested to the Court that, once the CCAA proceedings concluded, it would be reasonable to terminate, rescind or annul the BIA proceedings pursuant to section 183(1) of the BIA, while referring to s.61(1) of the BIA for guidance.
The BIA contains a functional gap regarding the treatment of bankruptcy proceedings upon the granting of a CCAA initial order. However, s.183(1) of the BIA invests the Court with such jurisdiction at law and in equity as will enable it to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings authorized by the BIA.
Similarly, section 61(1) of the BIA expressly authorizes the Court to annul a bankruptcy when it approves a proposal made pursuant to the provisions of the BIA. It is thought that the Court may exercise its authority pursuant to section 183 to rescind or annul the BIA proceedings, and the Monitor will propose language which is analogous to section 61(1).
Although the Court sanctioned the Plan, the BIA annulment issue remains outstanding. We will see how the Court deals with this issue as this unique and unusual proceeding continues to unfold.
The MLT Aikins insolvency and restructuring group comprises 18 lawyers practising in six offices across all four western Canadian provinces. Our insolvency and restructuring experience helps our clients preserve value, capture business opportunities and resolve disputes across various sectors of the western Canadian economy. If you require help navigating bankruptcy proceedings, please contact a member of the MLT Aikins insolvency and restructuring team.
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.