Joe Thorne and Madeleine Coats

On Friday, May 8, the Supreme Court of Canada released its unanimous written decision in 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10 (the “Decision”). The case was decided from the bench after the hearing of oral argument on January 23, 2020. The Decision, which overturned the Quebec Court of Appeal and reinstated the decision of the Quebec Superior Court, reinforces the significant discretion afforded to supervising judges during Companies’ Creditors Arrangement Act¹ (“CCAA”) proceedings.

The Decision focuses on a fairly unusual set of facts. Particularly, the supervising judge’s view that the creditors lacked alternatives; impropriety and unfairness by the primary secured lender; and the potential for the “pot of gold” realization if the debtor was successful in litigating the retained claim.

CCAA Judge’s decision

The Bluberi family of companies, including Bluberi Gaming Technologies Inc. (now 9354-9186 Quebec Inc.), and Bluberi Group Inc. (now 9354-9178 Quebec Inc.) (collectively, “Bluberi”) sought financing from the respondent, Callidus Capital Corporation (“Callidus”) in 2012. Callidus is an “asset-based or distressed lender”, and extended $24 million to Bluberi, secured in part by a share pledge agreement. Bluberi continued to accrue debt until 2015, at which point Bluberi owed Callidus $86 million.

In 2015, Bluberi was granted an initial order under the CCAA. Within its application, Bluberi alleged liquidity issues resulting from the conduct of Callidus. Callidus purchased Bluberi’s assets through a credit bid in early 2017. The sale was predicated on the discharge of almost the entirety of Callidus’s secured claim, except for an undischarged secured claim of $3 million. Further, this sale permitted Bluberi to retain its claim for damages against Callidus arising from the alleged interference leading to Bluberi’s financial difficulties. As a result, Callidus remained the top-ranking secured creditor of Bluberi. After this sale, the only remaining asset of Bluberi was the potential claim against Callidus.

In September 2017, Callidus proposed a plan of arrangement, which failed to receive sufficient creditor support. In February 2018, Callidus proposed a second plan of arrangement, which was virtually identical to the first. However, in the “new” plan, Callidus valued its remaining secured claim at zero, thereby allowing itself to vote as an unsecured creditor, and effectively guaranteeing a “win” given the size of its claim. Bluberi, with the support of the Monitor, opposed this application.

At the same time, Bluberi sought approval of litigation financing and a super-priority litigation financing charge. This proposed litigation financing would permit Bluberi to pursue its claim against Callidus.

Questions arose as to whether a litigation financing arrangement and super-priority charge was a “plan of arrangement” that had to be put to a creditor vote, and whether such a charge should be allowed. The supervising judge allowed Bluberi’s application, authorizing the litigation funding agreement. Further, the supervising judge excluded Callidus from any vote on the new plan on the basis that its participation would be for an improper purpose, and held the new plan of arrangement had no reasonable prospect of success.

Court of Appeal decision

The Court of Appeal set aside the supervising judge’s decision, holding that the litigation funding agreement should have been put to a vote as a plan of arrangement, and Callidus should have been permitted to vote on the plan.

The Court of Appeal held that settling the prospective litigation for consideration, as was part of the plan of arrangement proposed by Callidus, was not an improper purpose. The Court of Appeal further held that the lower court decision was not rooted in statutory discretion, and relied upon equity to exclude specific CCAA voting rights afforded to Callidus. Finally, the Court of Appeal held, in the name of fairness, the litigation funding agreement should be put to a vote of creditors as it was effectively a plan of arrangement.

Supreme Court of Canada decision

The Decision focused on the central role a supervising judge plays in CCAA proceedings. The two issues considered were:

1. whether a supervising judge has the discretion, under section 11 of the CCAA, to bar a creditor from voting on a plan of arrangement where the court determines that the creditor is acting for an improper purpose; and
2. whether a supervising judge can approve third-party litigation funding as interim financing under section 11.2 of the CCAA.²

The SCC’s answer to both questions was yes. The SCC held that the Court of Appeal had failed to give sufficient deference to the supervising judge.

On the issue of voting, the SCC focused on the fact the supervising judge had presided over the long Bluberi CCAA proceeding and had extensive knowledge of the proceeding and the dynamics between parties including, specifically, Callidus’ conduct throughout. Callidus was effectively attempting to strategically revalue its claim to gain control over the unsecured creditor vote, and circumvent the creditor democracy the CCAA seeks to protect. It was this conduct on which the SCC hung its hat with respect to Callidus’ “improper purpose”.³

The SCC further found the supervising judge had decided that the litigation financing agreement was not a plan of arrangement, thus avoiding a creditor vote, and that it met the criteria for third-party litigation funding. The percentage of return to the financier was deemed reasonable and the litigation financing charge was imposed as a super-priority on Bluberi’s assets. Given the potential damages claim, the supervising judge deemed the super-priority charge reasonable, particularly given it was on a contingency basis. Each of these considerations were confirmed by the SCC as being within the scope of the supervising judge’s discretion under section 11.2 of the CCAA.

The Decision emphasized the importance of the principles underpinning the CCAA, and more broadly Canada’s insolvency regime.⁴

The supervising judge in CCAA proceedings “acquires extensive knowledge and insight into the stakeholder dynamics and the business realities of the proceedings from their ongoing dealing with the parties.”⁵ As a result, these judges have broad discretion to make a variety of orders in “real time.” This discretion must be exercised with “baseline considerations” from section 11 of the CCAA:

1. the relief sought is appropriate in the circumstances;
2. the moving party has been acting in good faith and with due diligence.⁶

“Due diligence” demands that creditors act reasonably – they cannot “strategically maneuver or position themselves to gain an advantage.”⁷ Specifically, the SCC held (with emphasis added):

A high degree of deference is owed to discretionary decisions made by judges supervising CCAA proceedings. As such, appellate intervention will only be justified if the supervising judge erred in principle or exercised that discretion unreasonably.⁸

The Court has recognized that the CCAA is more flexible than the BIA, and the benefit of harmonizing the two statutes to the extent possible. In so considering, the Court highlighted that the discretion to bar a creditor from voting in furtherance of an improper purpose exists under the CCAA as it does under the BIA. Barring Callidus from voting on the new plan of arrangement “discloses no error justifying appellate intervention.”⁹

What this means for you

The Decision confirms that the supervising judge has broad discretion to make orders in CCAA proceedings and is entitled to deference by appeal courts.

The Decision was based on a set of facts that were unfavourable to the creditor. Specifically, the SCC reinstated the supervising judge’s decision because:

His conclusion was squarely based on Callidus’ attempt to manipulate the creditors’ vote to ensure that its New Plan would succeed where its First Plan had failed …. We see nothing in the Court of Appeal’s reasons that grapples with this decisive impropriety, which goes far beyond a creditor merely acting in its own self-interest.¹⁰

On the issue of interim financing, the SCC held that not all cases that involve a claim as an asset of the debtor company would result in litigation financing being approved without vote. Third-party litigation funding agreements may thus be approved as interim financing “… when the supervising judge determines that doing so would be fair and appropriate, having regard to all the circumstances and the objectives of the [CCAA].”¹¹

The SCC confirmation of a supervising CCAA judge’s broad discretion may prove important in the near future as the courts are asked to address the financial impact of the COVID-19 pandemic in future restructuring/insolvency proceedings. In particular, in proceedings where novel or unusual relief is requested.

¹ Companies’ Creditors Arrangement Act, RSC 1985 c C-36 [CCAA].
² See 9354-9186 Québec Inc v. Callidus Capital Corp, 2020 SCC 10 at para 2 [Callidus].
³ Ibid, beginning at para 65.
⁴ Ibid at para 40. For reference, these principles are: timely, efficient and impartial resolution of a debtor’s insolvency; preserving and maximizing the value of a debtor’s assets; ensuring fair and equitable treatment of the claims against a debtor; protecting the public interest; and, in the context of a commercial insolvency, balancing the costs and benefits of restructuring or liquidating the company.
⁵ Ibid at para 47.
⁶ Ibid at para 50.
⁷ Ibid at para 51.
⁸ Ibid at para 53.
⁹ Ibid at para 77.
¹⁰ Ibid at para 81.
¹¹ Ibid at para 97.

This update is intended for general information only. If you have questions about the above, please contact a member of our Litigation & Alternative Dispute Resolution or Bankruptcy, Receivership & Insolvency groups.

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