The Companies' Creditors Arrangement Act

2000 BCSC 879 Citation: In the Matter of the Companies' Creditors Arrangement Act2000 BCSC 879 Date: Docket No.: 2000606 L001146 Registry Vancouver IN THE SUPREME COURT OF BRITISH COLUMBIA IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT R.S.C. 1985, c. C-36 AND IN THE MATTER OF THE COMPANY ACT R.S.B.C. 1996, c. 62 AND IN THE MATTER OF AGRO PACIFIC INDUSTRIES LTD. PETITIONER REASONS FOR JUDGMENT OF THE HONOURABLE MR. JUSTICE THACKRAY Counsel for Agro Pacific Industries Ltd.: D.I. Knowles Counsel for Archer Daniels Midland Company, Interag, Calhoun Agri Services Ltd., Market Laboratory Inc., United Agri Products, United Grain Growers Limited and Van Waters & Rogers Ltd.: S.R. McGladery Counsel for the Monitor,KPMG Inc.:Counsel for National Bank of Canada: Counsel for Bank of Montreal: Counsel for Barenbrug USA Export, Inc., Cargill Limited, International Raw Materials, J.R. Simplot Company, Hydro Agri North America, Inc., IMC Kalium Canada Limited: Counsel for Agrium Inc. and Pioneer Hi-Bred: Counsel for IGI Resources Inc.: Counsel for James Richardson Int. Ltd., Buckerfield's Limited, Canbra Foods Ltd. and Topnotch Nutri Limited: Counsel for 219 Cathedral Ventures Ltd.: Appearing on behalf of Gramineae Holdings Limited: Date and Place of Hearing: R.J. Kearns M.A. Fitch, Q.C. J.I. McLean S.C. Fitzpatrick J.Lynch F.J. Weisberg M. Watt A. Brown A. Richardson May 31, 2000 Vancouver, BC [1] Agro Pacific Industries Ltd. ("Agro"), the petitioning company, applied for an extension of the stay order until September 6, 2000. [2] There are some changes requested to the initial order. The company wants the classification of creditors to be by Court order. It further asks that if a division of Agro is to be sold, it must be done with Court approval. These are not opposed and are granted. [3] Agro also asks that a Key Employee Retention Program be approved. This plan offers to key employees a bonus of 25% of their monthly salary until such time as the restructuring is completed. There is no opposition to this plan and it is approved. [4] The extension of the stay order has been agreed to by the three secured creditors. Mr. Colin Rogers, the Chief Restructuring Officer for Agro, deposed that National Bank of Canada ("NBC") and Bank of Montreal "have each agreed to support the application by Agro to apply for a 90 day extension." The third secured creditor, No. 219 Cathedral Ventures Ltd. ("Cathedral"), has similarly agreed. Their agreement is subject to several conditions. [5] NBC funds a demand operating loan for the company. It has agreed to continue this loan at a reduced maximum of $10 million "to be reduced by the receipt by NBC of proceeds from any sale of assets outside of the ordinary course of business against which NBC has security". As well, "Agro's banker's acceptance option and option to borrow in US dollars is to be eliminated" and "Agro's required margin surplus shall not be less the $5 million calculated on a daily basis." [6] These conditions have been accepted by Agro and no opposition to them was raised at the hearing. They thereby have acceptance by the Court. [7] So far so good. Now the problem. The secured creditors have demanded a "success fee" be agreed to by the company and have asked for Court approval. Agro has agreed but opposition to such a fee by Bank of Montreal and Cathedral is taken by the unsecured creditors represented on this application. [8] Mr. Rogers described the success fee for NBC as being calculated on the basis of 1% of the Loan Authorization which is only payable on the earlier of repayment of the operating loan during the CCAA proceedings or normalization of the banking relationship between itself and Agro upon a successful CCAA plan being approved by the Court. This is to be increased by .5% per month of the Loan Authorization for any extension beyond the proposed 90 day extension. [9] Bank of Montreal and Cathedral proposed that they receive a success fee on the same terms except the .5% increase will apply only to extensions beyond 180 days. Submissions [10] The Monitor concluded that "the terms do not appear unreasonable." Those words reflect exactly the position taken by counsel for Bank of Montreal. He said that his client had been asked for a number of concessions to which it had agreed, consequently "the success fee is not unreasonable". [11] The secured creditors represented by Ms. Fitzpatrick oppose the success fee to Bank of Montreal and to Cathedral. She submitted that the success fee "comes out of the unsecured creditors" and that Agro is "trying to buy peace." [12] Mr. McLean, on behalf of Bank of Montreal, agreed that the success fee is an attempt "to buy peace" but contended that this is a business judgment and as such should be left to the business people. Counsel for Cathedral submitted that in that it is in "third place" its risk is greater and that this accounts for its need for a success fee. [13] In that there was no opposition to a success fee being approved for his client, NBC, Mr. Fitch was content to remain mute. I cannot assume what position he would have taken towards the other secured creditors should there have been opposition to the success fee being granted to his client, but I will assume that he would have argued strongly in favour of a success fee to his client. [14] Ms. Fitzpatrick said that "it falls upon Your Lordship's shoulders to be sure the proposal is fair. It isn't." In support of that submission, she pointed to the Monitor's third report wherein it said that it "recognized that the fees proposed represent a special benefit to [secured creditors] not available to the other creditors." Ms. Lynch on behalf of her clients supported the position taken by Ms. Fitzpatrick. [15] Ms. McGladery said that her clients were prepared "to leave it in Your Lordship's hands." Discussion and Conclusions [16] The term "success fee" does not get this application off to a savoury start. Why should anyone be credited with the success of these proceedings? All parties in this matter face risks but the legislative scheme of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 is designed, as said in the reasons arising out of the application by the suppliers to trace and account for "their" goods, to allow a company to continue its business activities "in as normal a manner as possible while reorganizing." The legislation must be taken "as giving hope that reorganization, rather than bankruptcy, will eventually benefit all interested parties." [17] In Re Woodward's Ltd. (1993), 77 B.C.L.R. (2d) 332 (S.C.), Tysoe J. traced the purpose of the stay under the CCAA. He noted that it was first summarized by Wachowich J. in Meridian Developments Inc. v. Toronto Dominion Bank, [1984] 5 W.W.R. 215 (Alta. Q.B.). Tysoe J. continued his review of the legislative intent with reference to Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 80 C.B.R. (N.S.) 98 (B.C.S.C.) and Alberta-Pacific Terminals (1991), 8 C.B.R. (3d) 99 (B.C.S.C.). He then authored what he saw to be the three objectives of maintaining the status quo, the first of which is: To suspend or freeze the rights of all creditors as they existed as at the date of the stay order (which, in British Columbia, is normally the day on which the CCAA proceedings are commenced). This objective is intended to allow the insolvent company an opportunity to reorganize itself without any creditor having an advantage over the company or any other creditor. [my underlining] [18] Ms. Fitzpatrick used the term "level playing field" and said that Bank of Montreal and Cathedral are trying to manoeuvre. That is a way of referencing the status quo and of the call of Wachowich J. in Meridian "to prevent any manoeuvres" among creditors. He said that s.11 was designed "to prevent any manoeuvres for positioning among creditors during the interim period which would give the aggressive creditor an advantage to the prejudice of others who were less aggressive." [19] I would extend that thought to say that the Courts must guard against allowing secured creditors to run the process. This is not in any way suggesting that the secured creditors must not have their position recognized. As I said in my earlier reasons, the secured creditors are the ones "who make the financial means available so that companies such as Agro can operate." [20] However, it must be remembered that the relationships were made by the parties when they entered into commercial contracts, contracts that contemplated insolvency and litigation. Consequently, when that contemplation becomes reality, caution should be exercised in bettering the deal for specific creditors or classes of creditors. To do so alters commercial reality and might frustrate the legislative intent of maintaining the status quo. [21] Counsel for the Monitor, Cathedral and Bank of Montreal focused on the size of the success fee rather than on the principle. They categorized the amount as "not unreasonable." That definition arises from a comparison of concessions relative to the size of the success fee. While I hesitate to rule in a manner adverse to that recommended by the Monitor, I came away with the feeling that the Monitor was less than enthusiastic about the whole concept of a success fee. Rather, it simply concluded that it was to become a reality. [22] As for Bank of Montreal and Cathedral, my opinion is that they don't want to be treated substantially differently than NBC. I did not hear anything from any of the secured creditors that bore upon principles. Indeed, I must reflect that the Court was not favoured with any material from the secured creditors. [23] I hearken to what is often submitted in criminal sentence hearings. That is, that the major factor must be one of general deterrence. Regardless of the merit in the secured creditors' position, it is more important to let future contenders for favoured positions know that the Court is going to be most reluctant to move the goal posts. [24] The extension is approved to September 6, 2000 but without the success fee requested by the secured creditors, including NBC. I have no way of knowing what will flow from these reasons but if further appearances are necessary I will be in the Courthouse for the ceremony on behalf of the new Chief Justice on Friday June 9, 2000. I am prepared to hear any matters immediately thereafter. [25] Mr. Richardson brought a motion on behalf of his company, Graminae Holdings Limited. His motion is dismissed, much for the same reasons that appear in the earlier reasons in this matter and in these reasons. A.D. Thackray, J. The Honourable Mr. Justice A.D. Thackray