Help, Help, I’m Being Oppressed!

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Francis N.J. Taman and Ksena J. Court

It is one of the hallmarks of the Companies’ Creditors Arrangement Act[1] process that a stay of proceedings is granted to provide breathing space for a company to reorganize itself without one creditor having an advantage over the company or another creditor.[2]  So it was interesting to come across a recent CCAA case where two creditors sought an order permitting an oppression lawsuit filed prior to an Initial Order being granted to be permitted to go to trial notwithstanding the fact that the defendant was protected by a stay of proceedings.

In Re: Lightstream Resources Ltd. [3], two investment companies (the “Plaintiff Noteholders”) held close to $64 Million[4] in unsecured notes issued by Lightstream Resources Ltd. (“Lightstream”).  Lightstream had approximately $800 Million in unsecured notes outstanding in July 2015, when the actions which were the subject of the oppression action happened.[5]  The Plaintiff Noteholders had both been concerned about the possibility of Lightstream converting some of the unsecured notes into secured debt which would rank ahead of the unsecured notes (a “Debt Exchange Transaction”).  Both the Plaintiff Noteholders and Lightstream were aware that there was nothing to prevent Lightstream from doing so.  The Plaintiff Noteholders received assurances that Lightstream had sufficient liquidity and did not intend to carry out a Debt Exchange Transaction.  Lightstream indicated that if a Debt Exchange Transaction were ever undertaken, all unsecured noteholders would be permitted to participate.

In March, 2015, Lightstream was approached by two companies which held $465 Million in unsecured notes (the “Exchange Noteholders”) regarding potentially undertaking a Debt Exchange Transaction (the “Proposed Exchange Transaction”).  Lightstream retained a financial advisor to help them evaluate the Proposed Exchange Transaction.  In May, 2015, the Exchange Noteholders provided a proposal for the Proposed Exchange Transaction.  The Exchange Noteholders stated that they were not willing to be involved in the Proposed Exchange Transaction if any other unsecured noteholders were permitted to participate.[6]  Lightstream felt that any Debt Exchange Transaction that didn’t involve the Exchange Noteholders wouldn’t have any material upside for Lightstream.  The financial advisor indicated that Lightstream would need to seek some additional liquidity in 2016 as it would have liquidity issues in 2017.  The Proposed Exchange Transaction was seen as something to be weighed against having the flexibility to obtain secured financing elsewhere.

A statement was made at Lightstream’s Annual General Meeting that while Lightstream could add secured debt, it did not need to do so in order to add liquidity.[7]  Lightstream also continued to provide assurances to the Plaintiff Noteholders that they did not intend to carry out any Debt Exchange Transaction and if one was ever undertaken, all unsecured noteholders would be permitted to participate.

The Plaintiff Noteholders continued to be concerned about a possible Debt Exchange Transaction but in the circumstances did not sell off their positions. In June, 2015, Lightstream agreed to the Proposed Exchange Transaction.  The Proposed Exchange Transaction was carried out in July, 2015.  At the end of July, 2015, the Plaintiff Noteholders filed an oppression action against Lightstream (the “Oppression Action”).  One of the remedies sought was an order that would force Lightstream to carry out a Debt Exchange Transaction with the Plaintiff Noteholders on the same terms as the Proposed Exchange Transaction.

On September 26, 2016, an Initial Order under the CCAA was granted in favour of Lightstream.  By that time, the Oppression Action was at the point it was ready to be set down for trial.  The Plaintiff Noteholders sought an order under the CCAA that would exclude their claims from the CCAA process and to have the Oppression Action heard at trial before the CCAA proceeded.

The Court held that it did have the power under Section 11 of CCAA to grant such an order in the abstract.[8]  Section 11 permits the Court to issue any order it considers appropriate in the circumstances.  However, in considering what is appropriate, the Court must consider whether the order being sought actually advances the policy objectives underlying the CCAA.  The Court has no “at-large equitable jurisdiction to reorder priorities or to grant remedies as between creditors.  The orders reflected in the case law have addressed the business at hand: the compromise or arrangement”.[9]

The Court determined that in deciding the application, it would apply the same test as the Court would apply in summary judgment – is there a genuine issue to be tried or are the Plaintiff Noteholders bound to fail?  If the Plaintiff Noteholders were bound to fail, it would not be necessary to determine whether the granting of the requested relief was appropriate in the circumstances.  After undertaking a thorough analysis of the oppression claims, the Court determined that there was, in fact, a genuine issue for trial.[10]

However, the Court also felt that the remedy being sought – to impose a Debt Exchange Transaction on the same terms as the Proposed Exchanged Transaction – was inappropriate.  Damages would be an appropriate remedy if the Plaintiff Noteholders were successful.  “Investments have no intrinsic value beyond their financial return.”[11]  Moreover, if the Proposed Exchange Transaction was oppressive to the Plaintiff Noteholders, it would also be oppressive to the other unsecured noteholders who had also not participated.  The remedy sought amounted to oppression against those other noteholders as well as a potential breach of the terms of the unsecured notes.  It would also harm the Exchange Noteholders who would not have entered into the Proposed Exchange Transaction if the Plaintiff Noteholders were also permitted to participate.

Finally, to grant the proposed remedy would be contrary to the purpose of the CCAA.  There was no evidence that the Proposed Exchange Transaction was any sort of maneuvering by the Exchange Noteholders for advantage in the CCAA proceedings prior to the Initial Order being granted.  The effect of the proposed remedy would be to adversely affect other creditors.  The Plaintiff Noteholders would be put in a better position than the remaining unsecured noteholders.  This is inconsistent with the idea of maintaining a status quo between creditors while the compromise is negotiated.  As such, the application was denied and they remained unsecured creditors in the CCAA proceedings.

The takeaway for creditors is two-fold.  First, in the appropriate circumstances, it may be possible to use equitable remedies such as the one proposed in the Oppression Action as part of a CCAA order.  The second is that there will have to be some reason why damages would not be an appropriate remedy and, preferably, the impact on other creditors will have to be justifiable if not nominal.  However, it does highlight the scope for creativity that still remains under the CCAA for the imaginative practitioner.

Francis N.J. Taman and Ksena J. Court practice secured and unsecured realization and insolvency at Bishop & McKenzie LLP in Calgary, Alberta.

[1] R.S.C. 1985, c. C-36 (“CCAA”).

[2] Re: Woodward’s Ltd. [1993] BCWLD 769 (BCSC).

[3] 2016 ABQB 665.

[4] After the oppression action began, one of the Plaintiff Noteholders purchased an addition $36 Million in unsecured notes in Lightstream.

[5] Originally Lightstream had issued $900 Million in unsecured notes but had repurchased $100 Million in 2014.

[6] Other than in what was described as “certain follow-on exchanges”.  Re: Lightstream Resources at para. 22.

[7] These comments at the AGM came prior to the financial advisor’s advice regarding the need for increased liquidity in 2016.

[8] Section 42 of CCAA permits the provisions of the CCAA to be applied together with the provisions of any other Federal or Provincial Act that authorizes or makes provision for the sanction of compromises and arrangements between a company and its shareholders.

[9] Ibid. at para. 50, quoting Re: US Steel Canada Inc, 2016 ONCA 662 at para 82.

[10] Ibid. at para 73.

[11] Ibid. at para 86.

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