Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Disgruntled investor will appeal ABCP ruling

By Luis Millan

August 29 2008

A growing number of third parties may be demanding release covenants in plans of compromise or arrangement under the Companies’ Creditors Arrangement Act (CCAA), a federal statute that allows for court supervision of debt restructuring, following a ruling by the Ontario Court of Appeal that unanimously upheld a controversial $32-billion restructuring plan of frozen asset-backed commercial paper.

In a ruling hailed as a likely reference point for future CCAA proceedings, the three-panel judge determined that the CCAA permits the inclusion of third-party releases in a plan of compromise or arrangement to be sanctioned by the court “where those releases are reasonably connected to the proposed restructuring.”

Before this decision, said Craig Hill, who with colleagues at Borden Ladner Gervais LLP represents the monitor Ernst & Young, for “the connection between the parties receiving releases it tended to be officers, directors or insurance companies that were contributing proceeds to the plan of arrangement.”

“Now,” Hill said, “it is certainly going to open up possibilities of other parties in different types of relationships asking for, demanding and being entitled to seek releases under a plan of arrangement.”

The restructuring plan grants, albeit controversially, release covenants to financial institutions, rating agencies and other major funds that helped foster the market for the complex type of short-term funding, effectively shielding them from future regulatory sanctions or lawsuits. Brokerages or dealers, however, who may have fraudulently sold the notes to investors, are excluded from the releases under the plan. The committee that developed the plan, composed of 17 financial and investment institutions led by well-known corporate lawyer Purdy Crawford, has argued that the plan would fall apart without the releases.

In a 55-page ruling by Justice Robert Blair, the Ontario Court of Appeal noted that the case raises issues of “considerable importance” to restructuring proceedings under the CCAA nation-wide, including whether the court can sanction a plan that calls for creditors to provide releases to third parties who are themselves solvent and not creditors of the debtor company.

“The CCAA is a sketch, an outline, a supporting framework for the resolution of corporate insolvencies in the public interest,” said Justice Blair. “Parliament wisely avoided attempting to anticipate the myriad of business deals that could evolve from the fertile and creative minds of negotiators restructuring their financial affairs.

“It left the shape and details of those deals to be worked out within the framework of the comprehensive and flexible concepts of a ‘compromise’ and ‘arrangement.’ I see no reason why a release in favour of a third party, negotiated as part of a package between a debtor and creditor and reasonably relating to the proposed restructuring cannot fall within that framework.”

But less than 24 hours after the appellate court rejected the appeal by a small group of ABCP holders and held that the plan was fair and legal, a disgruntled investor opposed to the deal announced it plans to seek leave to appeal before the highest court in the land, marking the second time this summer that the Supreme Court of Canada may determine the fate of investors with billions dollars at stake. Last June, the SCC gave the go-ahead to the proposed $52-billion takeover of BCE Inc. by a group of private equity funds led by the Ontario Teachers’ Pension Plan.

“Mr. Justice Blair has inferred language into the skeletal statute of the CCAA which cannot be supported by law,” said Stephen Fitterman, co-counsel to Ivanhoe Mines Ltd, which holds $70.7-million in frozen asset-backed commercial paper. Justice Blair “has drawn inferences over Parliament’s intention from certain characteristics of the Act rather than from a specific statutory enactment or wording, apart from the meaning he applies to the words to ‘compromise’ or ‘arrangement’.”

The appeal will also likely raise the perceived discord between the Ontario Court of Appeal ruling and a decision of the Quebec Court of Appeal in 1993 in the insolvency of grocery store chain Steinberg Inc. (Steinberg Inc. c. Michaud).

In a decision written by Madam Justice Marie Deschamps, who has since joined the SCC, the Quebec appeal court refused to allow releases to parties not directly involved in a restructuring. The Act does “not go so far as offer an umbrella to all the persons within its orbit by permitting them to shelter themselves from any recourse.” said Justice Deschamps.

Justice Blair begged to differ, though, believing that Steinberg does not “express a correct view of the law, and I decline to follow it.”

“The modern approach to interpretation of the Act in accordance with its nature and purpose militates against a narrow interpretation and towards one that facilitates and encourages compromises and arrangements,” added Justice Blair.

Allan Sternberg, whose client has yet to decide whether to seek leave to appeal, believes the competing decisions “over the same issue” will likely become a basis for a leave to appeal before the SCC.

Hill is not so sure that the competing decisions will prove to be the foundation of an application to leave to appeal, if only because CCAA case law has developed significantly since Steinberg.

According to Benjamin Zarnett, counsel representing the committee, the two appellate courts in part reached different conclusions because the Quebec Court of Appeal rendered its ruling after the CCAA was amended in 1997. The amendments specifically dealt with releases pertaining to directors of the debtor company.

Reasons: Metcalfe & Mansfield Alternative Investments II Corp., (Re), [2008] O.J. No. 3164.