Canadian Prairies insolvency update Q4

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Periodically, Dentons Canada will be providing Canadian Prairies insolvency law updates featuring distinctive and applicable case law from Alberta, Saskatchewan and Manitoba. In this edition we will be featuring legal authorities pertaining to:

  1. Alberta - The subordination of interim lenders’ charges granted under the Companies Creditors’ Arrangement Act1 (“CCAA”) for new charges granted in a converted receivership;
  2. Saskatchewan - The application of Sale of Goods Act legislation in priority disputes governed under the Personal Property Security Act;
  3. Manitoba - The applicability of equitable set-off to the claims of a court appointed receiver.

Alberta

DGDP-BC Holdings Ltd. v. Third Eye Capital Corporation, 2021 ABCA 2262

Accel Holdings Canada Limited and Accel Energy Canada Limited (collectively “Accel”) carried on a CCAA proceeding in an effort to sell their assets through a sales process. DGDP-BC Holdings Ltd.’s (“DGDP”) and Third Eye Capital Corporation (“TECC”) provided debtor-in-possession financing and were beneficiaries of an interim lenders’ charge (“Interim Lenders’ Charge”) granted in the CCAA proceeding.

As part of the sales process, TECC applied under the Bankruptcy and Insolvency Act3 (“BIA”) for a court appointed receiver to replace the senior management of Accel and facilitate the conclusion of the sales process. The insolvency proceeding thereafter evolved from a CCAA proceeding into a court ordered receivership. PricewaterhouseCoopers (“PwC”) was appointed as receiver and sought the ability to borrow funds and have a borrowing charge over the assets of Accel in priority to the Interim Lenders’ Charge (“Receiver’s Borrowings Charge”). DGDP objected to the subordination of the Interim Lenders’ Charge and relied on the fact that it did not consent to its subordination, with its consent being a prerequisite under section 11.2(3) CCAA.4

After hearing the parties’ arguments, the supervising judge granted the Receiver’s Borrowings Charge and the Interim Lenders’ Charge was subordinated to it (the Interim Lenders’ Charge was also subordinated to a Receiver’s Charge in favour of PwC and its legal counsel). The supervising judge held that it had authority to re-arrange the priorities of the prior CCAA charges and dismissed DGDP’s objection, reasoning that changes to the “risk profile” for the stakeholders justified giving priority to the Receiver’s Borrowings Charge. More specifically, PwC required the ability to borrow funds in order to continue carrying on the operations of Accel through to the culmination of the sales process. If Accel had ceased operating, a liquidation may have followed, resulting in losses to many stakeholders.

DGDP appealed the supervising judge’s decision and leave to appeal was granted by the Alberta Court of Appeal. The issue on appeal was as follows:

Can an order made in proceedings under the BIA or pursuant to section 13(2) of the Judicature Act, legally override the validity and priority of the charges contained in an earlier order granted pursuant to the CCAA in the same insolvency proceedings, without the consent of the person in whose favour the provision relating to validity and priority was given?

The Alberta Court of Appeal reviewed section 11.2(3) CCAA; section 243(1)(c) BIA which allows a receiver to “take any other action that the court considers advisable”5; and section 31(1) BIA which grants a receiver the ability to borrow money and give security on a debtor’s property on any terms that may be authorized by the court, and provides that such advances will be repaid out of the debtor’s property in priority to other creditor claims.6

The Alberta Court of Appeal decided that the supervising judge had the authority and discretion under the BIA to grant priority to the Receiver’s Borrowings Charge. In particular, the change in risk profile in the proceedings justified the subordination of the Interim Lenders’ Charge; at the time of the application for the receivership order, Accel was in dire financial straights and PwC required additional funding to keep Accel operating. In that context, it was reasonable for the supervising judge to appoint PwC, to give PwC the power to borrow, and to provide it with a priority Receiver’s Borrowings Charge. Furthermore, section 11.2(3) CCAA was not applicable as the Receiver’s Borrowings Charge was granted pursuant to the BIA and not the CCAA. Accordingly, DGDP’s consent was not required for the supervising judge to grant and provide the Receiver’s Borrowings Charge in priority over the Interim Lenders’ Charge.

Takeaway: Actual and potential Interim lenders in restructuring proceedings under the CCAA and their advisors should be highly cognizant of the Alberta Court of Appeal’s decision in Accel. The decision provides the Court the authority and discretion to subordinate interim lenders’ charges in a CCAA for new charges created in a converted receivership, including a receiver’s charge and receiver’s borrowings charge. Furthermore, an interim lender under the CCAA who has provided debtor-in-possession financing is not required to provide its consent in a converted receivership for new charges to be granted and given priority over their prior interim lenders’ charge.

Saskatchewan

Calidon Financial Services Inc.-Calidon Equipment Leasing v. Magnes, 2021 SKCA 1067

Valley Side Sales Inc. (“Valley Side”) was a farm equipment dealer. Calidon Financial Services Inc.-Calidon Equipment Leasing (“Calidon”) provided financing to Valley Side for the purchase of a tractor and entered into a security agreement with Valleyside for the tractor. Calidon properly registered its serial number security interest in the tractor with the Saskatchewan Personal Property Registry (“Saskatchewan PPR”). Subsequently, Valley Side made lease payments to Calidon towards the purchase of the tractor.

Valley Side eventually entered into an agreement to sell the tractor to a purchaser (the “Magneses”) who had obtained financing from Farm Credit Canada (“FCC”). However, during the sale arrangements, Valley Side provided an incorrect serial number to the Magneses so that Calidon’s serial number registration was not discovered by the Magneses or FCC when performing a serial numbered goods search in the Saskatchewan Personal Property Registry.

Valley Side ultimately sold the tractor to the Magneses and the Magneses paid for the tractor in full using FCC’s financing. Valley Side thereafter assigned its ownership interest in the tractor to FCC. FCC registered its security interest in the tractor in the Saskatchewan PPR and claimed a priority purchase money security interest in the tractor. The Magneses used the tractor in their farm operations and made all of their requisite payments to FCC.

Valley Side did not advise Calidon of the sale and continued to make its lease payments to Calidon. Valley Side ultimately went bankrupt and when Calidon went to seize the tractor, it discovered that Valley Side had sold the tractor to the Magneses. Calidon thereafter sought a Declaration from the Court of Queen’s Bench of Saskatchewan that it took priority in the tractor over the Magneses and thus FCC. Calidon’s application was dismissed by the lower court judge. Calidon thereafter appealed to the Saskatchewan Court of Appeal.

The question reviewed on appeal was whether the Magneses took the tractor free of Calidon’s security interest as a result of the Magneses being a buyer of goods sold in the ordinary course of business of Valley Side. If the answer was “yes”, then FCC would have priority over Calidon to the tractor and Calidon would have no claim to the tractor.

The Saskatchewan Court of Appeal held that three requirements must be met for the Magneses/FCC to succeed: (i) the Magneses must be a “buyer”; (ii) the tractor must have been sold in the ordinary course of Valley Side’s business; and (iii) the Magneses must not have known that the sale violated Valley Side’s prior security agreement with Calidon. The Saskatchewan Court of Appeal was only concerned with the first requirement as all of the parties agreed that the second and third requirements had been satisfied. Accordingly, the principal issue was whether the tractor had been “sold” to the Magneses as a “buyer”.

The Sale of Goods Act9 (“SGA”) was reviewed as the applicable legal authority to ascertain whether the tractor had been sold at law under the Saskatchewan Personal Property Security Act (“PPSA”). The SGA provides that where there is a contract for the sale of specific or ascertained goods, the property in those goods transfers to the buyer “at the time the parties to the contract intended it to be transferred”10. Furthermore, “the terms of the contract, the conduct of the parties, and the circumstances of the case” are reviewed to determine the parties’ intentions.11 The SGA also sets out rules to aid in the determination of the parties’ intentions, including:

Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made and it is immaterial whether the time of payment or the time of delivery or both be postponed.12

The Saskatchewan Court of Appeal went on to discuss that under the SGA a “buyer” means “a person who buys or agrees to buy goods”13 and “sale” is defined to include “a bargain and sale as well as a sale and delivery”14. Given those definitions, the Saskatchewan Court of Appeal held that the Magneses qualified as “buyers” under the PPSA.

The Saskatchewan Court of Appeal thereafter held that it was undisputed that Valley Side sold tractors and other farm equipment in the ordinary course of its business. Furthermore, based on the terms of the agreement and the intentions of the parties at the time of contract formation, the sale agreement with Valley Side was an unconditional contract which thus transferred ownership of the tractor to the Magneses upon execution. Accordingly, the Magneses fell within the bona fide purchaser for value protections under the PPSA and as a result, FCC had priority in the tractor over Calidon.

Takeaway: Sale of Goods Act legislation is applicable in PPSA priority scenarios to determine whether a “sale” has occurred to a bona fide purchaser for value. Insolvency practitioners across Alberta, Saskatchewan and Manitoba where PPSA legislation is similar should have a strong grasp of applicable Sale of Goods Act legislation when advising clients with respect to their rights and priorities under personal property security act legislation.

Manitoba

Ernst & Young Inc. v. Shilo Farms Ltd., 2021 MBCA 5815

Ernst & Young Inc. (“E&Y”) was appointed receiver of Keller & Sons Farming Ltd. and Keller Holdings Ltd. (collectively “Keller”). Keller and the defendant Shilo Farms Ltd. (“Shilo”) owned neighbouring farmland and were involved in beneficial potato farming arrangements. At different times, each leased farm land from the other, and the terms of their agreements ultimately led to monetary claims being brought by E&Y against Shilo after Keller was placed into receivership. Shilo counterclaimed against the receiver, asserting that Keller owed it substantial funds for unpaid land rent and that Shilo was entitled to equitably set-off against the amount E&Y was seeking.

The Manitoba Court of Appeal reviewed the leading Supreme Court of Canada case on equitable set-off in Canada being Holt v. Telford16. The following requirements must be met to establish equitable set-off:

  1. The party relying on a set‑off must show some equitable ground for being protected against his adversary’s demands.
  2. The equitable ground must go to the very root of the plaintiff's claim before a set‑off will be allowed.
  3. A cross‑claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross‑claim.
  4. The plaintiff’s claim and the cross‑claim need not arise out of the same contract.
  5. Unliquidated claims are on the same footing as liquidated claims.

The Manitoba Court of Appeal went on to state that equitable set-off is available against a receiver. Furthermore, the third element of the Holt test, being the close connection of cross claims and whether denying set-off would be unjust, is often the most important factor.

The Manitoba Court of Appeal thereafter discussed the agreements between Keller and Shilo and found that parts were designed to facilitate the farming of potato crops and sharing of land between them. Accordingly, the agreements were closely connected and it would be manifestly unjust to permit E&Y to collect payments from Shilo without permitting Shilo the right to set-off, including given the fact that Shilo may not recover its debt as an unsecured creditor under the receivership. Refusing to permit set-off would effectively result in enforcement of only one of the contracts between the parties and, considering the contracts were closely connected long-term agreements, that would be unfair. Finally, both debts accrued prior to the receivership so equitable set-off was not precluded as against the receiver.

Takeaway: If facts are available, equitable set-off provides a viable avenue for a debtor of an insolvent party to reduce their payment exposure to a receiver. Receivers and their advisors should be cognizant of any close connections of pre-receivership contracts between an insolvent debtor and third parties which could create an equitable set-off as against a receiver.

 

1 Companies Creditors’ Arrangement Act, R.S.C., 1985, c. C-36 (“CCAA”).
2 https://www.canlii.org/en/ab/abca/doc/2021/2021abca226/2021abca226.html?autocompleteStr=2021%20ABCA%20226&autocompletePos=1 
3 Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”).
Section 11.2(3) CCAA.
5 Section 243(1)(c) BIA.
6 Section 31(1) BIA.
https://www.canlii.org/en/sk/skca/doc/2021/2021skca106/2021skca106.html?autocompleteStr=2021%20SKCA%20106&autocompletePos=1
8 Personal Property Security Act, SS 1993, c P-6.2 (“PPSA”), section 30(2).
9 The Sale of Goods Act, R.S.S. 1978, c. S-1 (“SGA”).
10 Section 19 SGA.
11 Section 19(2) SGA.
12 Section 20 – Rule I SGA.
13 Section 2(b) SGA.
14 Section 2(k) SGA.
15 https://www.canlii.org/en/mb/mbca/doc/2021/2021mbca58/2021mbca58.html?autocompleteStr=2021%20MBCA%2058&autocompletePos=
16 Holt v Telford, [1987] 2 SCR 193.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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