Can investors commence proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”)? Can those proceedings be brought against entities with no assets or operations in Canada? And can they target solvent entities?
The Alberta Court of Appeal (the “Court”) addressed these three questions in Angus A2A GP Inc v Alvarez & Marsal Canada Inc. This landmark decision illustrates the CCAA’s flexibility and the discretionary nature of orders made by the court of first instance under the Act. It also introduces certain nuances, discussed in more detail below.
Background
The case involved real estate projects in Texas. The Canadian and U.S. entities behind the projects (the “entities”) were linked through a complex corporate and trust structure.
Canadian equity investors learned through social media of an imminent sale of assets. They had not been informed or consulted in accordance with their rights.
Fearing an irreparable loss of value if the sale proceeded as anticipated, they urgently sought and obtained an ex parte initial order under the CCAA.
Some of the entities vigorously challenged the initial order. They argued that the CCAA was being misused to resolve a shareholder dispute, that equity investors lacked standing to seek an initial order under the Act, and that such an order cannot apply to entities with no assets or offices in Canada. They also argued that some of the entities were not insolvent within the meaning of the CCAA and therefore could not be subject to an initial order.
Are equity investors “interested persons” under the CCAA?
The CCAA gives courts the authority to make an order on the application of “any person interested in the matter”, but does not define “interested persons”. Based on a thorough examination of the statute, the Court held that this broad wording cannot be read as categorically excluding equity investors. Parliament did not restrict the right of equity investors to apply for an initial order, even though it limits some of their rights elsewhere in the CCAA.
The Court concluded that Parliament intended to allow investors to seek relief in certain circumstances where they qualify, on the facts, as interested persons. At a minimum, a party must demonstrate that it has a financial interest in the outcome of the proceedings.
Although equity investors generally cannot demonstrate such a financial interest in CCAA proceedings, the Court clarified that this is not an absolute rule. When a company faces a liquidity crisis, or cash flow insolvency, but holds assets whose value may exceed the claims of its creditors, equity investors may retain a real economic interest in the outcome of the proceedings. Despite their subordinate ranking, they could potentially receive payment under a CCAA compromise or arrangement. In this case, the information available at the outset of the proceedings did not conclusively establish whether the companies in question were solvent on a balance sheet basis. However, the absence of secured creditors and the apparently minimal claims of unsecured creditors led the Court to conclude that the investors qualified as interested persons.
Can an initial order apply to entities with no assets or offices in Canada?
The CCAA applies to companies incorporated in Canada and to foreign companies that conduct business or hold assets in Canada. Considered in isolation, the Texas companies did not meet any of these criteria and therefore did not qualify as “debtor companies” under the CCAA.
Nevertheless, the Court held that the courts had authority to subject these companies to the initial order, given their close ties to the Canadian entities and the broad discretion conferred by the Act.
The Court thus interpreted the CCAA provisions defining its scope not as a limit on jurisdiction, but as the basis for it.
The Court held that if at least one entity meets the CCAA’s definition of a “debtor company”, a court may, where circumstances warrant, exercise its discretion to extend the scope of the proceedings to closely related entities, even if those entities do not individually qualify as debtor companies under the Act.
The Court also confirmed that section 11 of the CCAA allows a court to grant a monitor “super-monitor” powers over these entities that do not qualify as debtor companies.
Can an initial order apply to solvent entities?
The Court held that an initial order can also apply to entities that are not individually insolvent. As long as the prerequisites for applying the CCAA are met, the court has authority under section 11 to subject solvent companies to an initial order where doing so is appropriate in the circumstances and advances the Act’s objectives. The Court also addressed the approach to assessing insolvency for the purposes of applying the CCAA: must insolvency be assessed separately, considering each company’s assets and liabilities in isolation, or can it be assessed collectively?
Drawing on case law, the Court confirmed that insolvency can be assessed collectively where circumstances warrant, in particular where the companies form an “intertwined whole” or their financial health is interdependent. In this case, the entities were intertwined in the investment structures for the real estate projects, so a collective approach was justified.
A broadening of remedies available to investors?
Investors facing an imminent risk of losing their investment already had certain remedies available to them, including under the general rules of contractual and tort liability and the specific regime established by the Securities Act. However, these remedies can be lengthy and difficult to pursue. Enforcing a favourable judgment can also be challenging, particularly when the company’s financial situation is precarious.
The Autorité des marchés financiers (the “AMF”) also has broad powers to fulfill its investor protection mandate. It can seek various measures, including freeze orders, to preserve assets that could ultimately be redistributed to investors who have suffered losses or used to pay damages. It can also request the appointment of a provisional administrator. Like a receiver or monitor, a provisional administrator can be granted broad powers to investigate, take possession of the assets of entities covered by the appointment order, and manage those entities. However, an investor who relies on proceedings brought by the AMF must wait patiently for their outcome and loses all control and decision-making authority over the matter.
The Court’s decision in Angus A2A may broaden investors’ options when a loss of value is imminent and time is critical. Its reach remains to be seen, given the unique circumstances of this case.