Crystallex International Corporation (Re)

Crystallex International Corporation (Re) Collection Decisions of the Court of Appeal Date 2018-09-25 Neutral citation 2018 ONCA 778 Docket numbers M49312 Judges Sharpe, Robert J.; Juriansz, Russell G.; Pepall, Sarah E. Subject Civil Decision Content COURT OF APPEAL FOR ONTARIO CITATION: Crystallex International Corporation (Re), 2018 ONCA 778 DATE: 20180925 DOCKET: M49312 Sharpe, Juriansz and Pepall JJ.A. BETWEEN IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CRYSTALLEX INTERNATIONAL CORPORATION Applicants Clifton P. Prophet and Nicholas Kluge, for the Moving Party, The Ad Hoc Committee of Shareholders of Crystallex International Corporation Timothy Pinos, Ryan C. Jacobs and Shayne Kukulowicz, for the Respondent, the DIP Lender Jay A. Swartz, James Doris and Robin Schwill for the Respondent, Crystallex International Corporation Aubrey E. Kauffman for the Respondents, Robert Fung and Marc Oppenheimer Heard: In Writing Application for leave to appeal from the order of Justice Glenn A. Hainey of the Superior Court of Justice, dated May 22, 2018. REASONS FOR DECISION [1] The Ad Hoc Committee of Shareholders of Crystallex International Corporation (the “Committee”) seeks leave to appeal the order of the motion judge dated May 22, 2018, which was made in the context of proceedings relating to Crystallex International Corporation (“Crystallex”) under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (“CCAA”). [2] The Committee represents the interests of over 200 shareholders who together hold approximately 30% of Crystallex’s common shares. The motion judge dismissed the Committee’s motion for an order lifting the stay of proceedings, imposed by the Initial Order granted in the CCAA proceedings, to allow the shareholders to commence an action. The Committee wished to vary Debtor in Possession (“DIP”) financing orders that had received court approval four to five years ago. The proposed action alleged oppression and breach of the criminal interest rate provisions in the Criminal Code. [3] When Crystallex sought CCAA protection in December 2011, its assets consisted of an arbitral claim for US$3.8 billion against the Bolivarian Republic of Venezuela for breach of an exclusive mining contract relating to the Las Cristinas gold mine. [4] Following an auction process supervised by the Monitor, Tenor KRY Cooperatief U.A., Tenor Special Situation 1, LLC, and Luxembourg Investment Company 31 S.a.r.l. (the “DIP Lender”) were selected to provide the DIP financing. Pursuant to an initial credit agreement, the DIP Lender proposed to provide US$36 million to Crystallex to fund its arbitral claim against Venezuela in exchange for a 35% interest in Crystallex’s potential recovery in that proceeding (the “Net Arbitration Proceeds” or “NAP”). An agreement containing a management incentive plan also provided for the discretionary compensation of Crystallex management who would receive a percentage of the NAP if the arbitration was successful. Management included Robert Fung and Marc Oppenheiner, both directors of Crystallex (the “individual respondents”). Fung is now the Chairman and CEO of Crystallex and Oppenheimer was previously the company’s CEO. On April 16, 2012, Newbould J. granted orders approving both agreements. [5] The Trustee of the Noteholders unsuccessfully appealed the April 16, 2012 orders to this court: Crystallex International Corp. (Re), 2012 ONCA 404, 293 O.A.C. 102. Hoy J.A., as she then was, concluded, at paras. 71-72, that there was no basis to interfere with Newbould J.’s discretionary decision to approve the DIP financing and the management incentive plan. [6] On June 5, 2013, April 14, 2014, and December 18, 2014, Newbould J. granted orders amending the initial credit agreement. Those amendments collectively increased Crystallex’s indebtedness to US$75 million and gave the DIP Lender an increasingly higher percentage interest in the NAP. The funding was primarily to enable the continuation of the arbitral proceedings. In the December 18, 2014 order, Newbould J. also approved a NAP transfer agreement which gave the individual respondents a further percentage of the NAP. [7] On April 4, 2016, Crystallex obtained an arbitral award of approximately US$1.4 billion against Venezuela. Subsequently, Venezuela and Crystallex entered into a settlement agreement which was approved by the motion judge on November 29, 2017. [8] The shareholders allege in their proposed action that the DIP financing amendments and the NAP transfer agreement severely diluted their interest in the arbitral award by assigning all but a small percentage of the proceeds to the DIP Lender and the individual respondents. They claim that these amendments were entered into in unfair disregard of and to the prejudice of the interests of the shareholders. [9] In its May 2018 motion, the Committee sought to vary the amending orders but did not impugn the initial orders approving the DIP financing and the management incentive plan. The Committee contended that the amending orders in 2013 and 2014 were granted without prior notice to the shareholders. [10] On May 22, 2018, the motion judge dismissed the shareholders’ motion to lift the stay of proceedings, thus precluding the Committee from commencing the proposed action. He concluded that the orders granted by Newbould J. approving the DIP financing amendments and the NAP transfer agreement were final in nature and constituted a complete bar to the relief requested. [11] The motion judge concluded that there was no basis in law to vary the impugned amending orders. He noted that the limited circumstances for varying a final, issued and entered order are: the court’s inherent jurisdiction to correct slips or errors in expression: r. 59.06(2) of the Rules of Civil Procedure; and r. 37.14 of the Rules of Civil Procedure. [12] He concluded that the Committee was not seeking to correct a slip or error but to overturn key provisions of the orders. He noted that the fairness and reasonableness of the terms had been determined at the time the orders were approved and at a time before the DIP Lender and Crystallex relied and acted upon them. Accordingly, he was not prepared to vary the orders on the basis of his inherent jurisdiction. Nor was he persuaded that the limited circumstances under r. 59.06(2) had been established. He concluded that this was not a case of fraud or newly discovered facts. [13] Finally, he rejected the argument that the orders should be varied under r. 37.14 because the shareholders had insufficient or no notice of the motions to approve the amendments. He concluded, at para. 19, that service and notice were effected in compliance with the Initial Order and with s. 23 of the CCAA. Based on the shareholders’ own materials, he concluded that they had been aware of the CCAA proceedings since early 2012. Any one of the complaining shareholders could have filed a notice of appearance and been added to the service list. Finally, the Committee had not moved forthwith, as required by r. 37.14, to vary the orders that had been granted some four to five years earlier. [14] He also noted various legal barriers to variation of the orders. He observed that courts are loathe to vary a CCAA order if persons relying on the order would be materially prejudiced and that, in this case, the DIP Lender had relied in good faith on the court orders. Furthermore, the claims for oppression and for breach of the Criminal Code interest rate provisions were time-barred. He stated that the complaining shareholders had had ample opportunity to challenge or oppose the terms of the orders but had failed to act with reasonable diligence within the applicable limitation period. [15] Finally, he stated that the claims regarding the criminal interest rate were bound to fail because the DIP financing agreements did not require, and in fact prohibited, the payment of interest at a criminal interest rate. Discussion [16] The test for leave to appeal from the decision of a judge supervising a CCAA proceeding is not contentious. The moving party must demonstrate serious and arguable grounds that justify the granting of leave. The court will consider whether the proposed appeal is: (i) prima facie meritorious and not frivolous; (ii) of significance to the practice; (iii) of significance to the proceeding, and (iv) whether the appeal will unduly hinder the progress of the action: Nortel Networks Corporation (Re), 2016 ONCA 332, 130 O.R. (3d) 481, at para. 34. [17] For the reasons that follow, we conclude that the applicant’s motion founders on the first factor, a consideration of the prima facie merits of the proposed appeal. [18] The issue to be addressed on this leave to appeal motion is the motion judge’s ability to vary the impugned orders. The motion judge was entitled to rely on the record before him. He fairly concluded that there was no slip or error in expression in the orders, nor had the shareholders alleged any fraud or newly discovered facts. In our view, there was no basis to vary the orders based on inherent jurisdiction or r. 59.06(2) of the Rules. The shareholders rely on Clatney v. Quinn Thiele Mineault Grodzki LLP, 2016 ONCA 377, 131 O.R. (3d) 511, a case involving variation of a consent order. Variation of such an order engages principles that differ from those applicable to variation based on inherent jurisdiction or r. 59.06(2). See Hebditch v. Birnie, 2017 ONCA 169, at para. 13. [19] Variation of an order pursuant to r. 37.14(1)(a) or (b) requires an absence of or insufficient notice. As the motion judge correctly observed, notice was effected in accordance with the Initial Order and with s. 23 of the CCAA. In this regard, the Monitor published notices of the CCAA proceeding and created a website on which it posted its reports, court orders, and motion materials. The Monitor issued a press release that identified the website’s address. With one exception, all of the motion materials disclosed the amounts of the additional loans and the proposed percentage of the NAP to be retained by the respondents. [20] None of the shareholders now represented by the Committee took any steps to be placed on the service list. They took no steps to participate and failed to attend the hearings in 2013 and 2014 when the orders in issue were granted. According to their own evidence, the shareholders knew of the CCAA proceeding since early 2012. The motion judge concluded that the shareholders had notice. In our view, he made no palpable and overriding error in this regard. The Committee has been unable to demonstrate that the motion judge exercised his discretion unreasonably or made any error in principle in dismissing its motion. [21] We are also of the view that the remaining factors to be considered on a motion for leave to appeal a CCAA order do not favour the Committee’s position. The use of litigation funding agreements in CCAA proceedings may well be of importance to the insolvency bar. However, this is not the issue on which this leave to appeal motion turns. To challenge these agreements, the Committee must first overcome the hurdle of varying the orders granted by Newbould J. The issue regarding variation of these CCAA orders is not of public importance as the law on varying orders is neither new nor contentious. The motion judge’s conclusion that there was no basis to vary the orders was a fact-specific determination which is of limited significance to the practice or to the public. [22] While we agree that the appeal may be of significance to the action, standing alone, this factor is insufficient to warrant granting leave to appeal: Nortel Networks, at para. 95. [23] Lastly, the motion judge accepted that varying the final orders would have a serious impact on the credit arrangements and would throw the CCAA proceedings into chaos. We see no basis on which to interfere with his conclusion. [24] In essence, this is a case of too little too late. Potentially interested stakeholders cannot sit idle and await the outcome of realization proceedings. They must act to protect their interests or suffer the attendant consequences. [25] In closing, we note that DIP financing was originally conceived as a means to fund operations while a company under CCAA protection restructured. The disposition of this motion should not be interpreted as an endorsement or a rejection of the amendments approved by Newbould J. Disposition [26] The motion for leave to appeal is dismissed. The parties are to bear their own costs. “Robert J. Sharpe J.A.” “R.G. Juriansz J.A.” “S.E. Pepall J.A.”