On May 8, 2020, the Supreme Court of Canada (Supreme Court) issued its reasons in the restructuring proceedings of Bluberi Gaming Technologies Inc., now 9354‑9186 Québec Inc., et al. (Bluberi) under the Companies’ Creditors Arrangement Act (CCAA), following the unanimous decision from the bench on January 23, 2020, which reversed the decision of the Quebec Court of Appeal (Court of Appeal) and upheld the supervising CCAA judge’s discretion to (i) prohibit a creditor from voting for improper purposes, and (ii) approve litigation financing as interim financing, without a plan of arrangement and creditor vote in favour.
In its decision, the Supreme Court confirmed a supervising CCAA judge’s broad discretion to make a variety of orders that respond to the factual circumstances of each case and to assess and balance the remedial objectives of the CCAA, while keeping in mind the “baseline considerations” of “appropriateness, good faith and due diligence.” The Supreme Court confirmed the high deferential standard of review on appeal of a judge supervising an insolvency proceeding.
On November 12, 2015, Bluberi obtained protection from its creditors under the CCAA.
After selling essentially all its assets, Bluberi’s sole remaining asset was a potential C$200-million claim (Retained Claim) against its primary secured lender (Lender).
On February 6, 2018, Bluberi sought approval of a litigation funding agreement (LFA) with a litigation funding firm (Litigation Funder), secured by a C$20-million charge on the Retained Claim in favour of the Litigation Funder.
The Lender contested the approval of the LFA and sponsored a plan of arrangement providing for a cash payment to unsecured creditors and full release of the Retained Claim in its favour (Plan). The Lender did not vote on the initial Plan put to creditors, which was defeated. Subsequently, the Lender sought to value its security in respect of its remaining C$3‑million claim as nil in order to vote such claim as an unsecured claim in respect of a revised Plan with a modest increase in distributions to unsecured creditors, and a full release in its favour. If allowed to vote such claim as an unsecured creditor, the Lender’s Plan would have been accepted by creditors. Otherwise, it would have failed.
DECISIONS OF THE LOWER COURTS
On March 16, 2018, the Superior Court of Quebec (Superior Court) decided that the Lender should not be permitted to vote as an unsecured creditor on the revised Plan it was putting forward, solely to obtain a release of the Retained Claim. In the Superior Court’s view, the Lender was acting with an improper purpose.
Further, the Superior Court found that the proposed litigation financing was not a plan of arrangement requiring creditor approval because it did not affect the rights of creditors. Rather, Bluberi was realizing its sole remaining asset: the Retained Claim. Any eventual proceeds—after payment of priority amounts to the Litigation Funder—could then be subject to a plan of arrangement for distribution to creditors.
Court of Appeal
The Court of Appeal reversed the Superior Court’s decision, finding that the Lender had a right to vote in its own self-interest, and that there was no legal basis for the judge’s discretion to prevent the Lender from voting on its own plan.
The Court of Appeal further held that the LFA was not an interim financing agreement, as its purpose was not to allow Bluberi to continue operations during a restructuring. Instead, it found that using the LFA to pursue the Retained Claim constituted a plan of arrangement requiring creditor approval.
For more information on the Court of Appeal’s decision, please see our February 2019 Blakes Bulletin: Improper Purpose by a Creditor? The Quebec Court of Appeal Weighs In.
DECISION OF THE SUPREME COURT
The Supreme Court confirmed the discretion of the supervising judge, who was intimately familiar with Bluberi’s CCAA proceedings, to bar a creditor from voting on a plan for an improper purpose. One such improper purpose is where the creditor is seeking to use its voting rights in a manner that frustrates, undermines or runs counter to the remedial objective of the CCAA. The Supreme Court affirmed the supervising judge’s finding that the Lender strategically valued its security to control the outcome of the vote on its own plan, thereby circumventing creditor democracy. Further, the Supreme Court found that the Lender failed to act with due diligence in valuing its security as nil more than two years into the CCAA proceedings, and after the failure of the initial Plan, contrary to the reasonable expectation of the parties.
The Supreme Court makes it clear that a creditor is entitled to vote on a plan presented by the debtor in its own best interests and that it is not improper to sponsor or support a debtor in formulating a plan for the creditors to vote. What additional facts would be necessary to demonstrate an improper purpose is left to the judges supervising cases. In this case, the supervising court focused on the fact that virtually the same Plan had been presented to the creditors and failed. The only substantial difference in the revised Plan was that the Lender’s vote would change the result.
With respect to litigation financing, the Supreme Court held that the question as to whether litigation financing should be approved as interim financing and granted any priority charge, is a case-specific inquiry that should have regard to the text of Section 11.2 of the CCAA and, more generally, to the remedial objectives of the CCAA. The supervising judge is therefore best placed to conduct this inquiry.
The Supreme Court found that the purpose of interim financing under the CCAA includes the preservation and realization of the value of the debtor’s assets. A third-party litigation funding agreement aimed at extending financing to a debtor company to pursue and potentially realize on the value of a litigation claim does not necessarily constitute a plan of arrangement.
Additionally, the Supreme Court found that in order to be approved as an interim financing agreement, a litigation funding arrangement cannot compromise creditors’ rights, effectively making it a plan of arrangement. The possibility that creditors may receive a small distribution is not a compromise of their rights to access whatever realizations are generated by the debtor’s assets. A litigation financing charge is not a compromise of creditors’ rights when it is granted pursuant to the supervising judge’s authority to grant an interim financing charge.
In light of the foregoing, the Supreme Court concluded that the supervising judge did not err in exercising his discretion to approve the LFA as interim financing in the absence of any vote by creditors.
The Supreme Court’s decision is a strong affirmation of a CCAA supervising judge’s broad discretion to assess and balance the remedial objectives of the CCAA based on such judge’s appreciation of the factual circumstances before the court. In this case, the supervising judge’s determination to limit creditor voting rights where a creditor acts with an improper purpose and to approve litigation financing as interim financing—and not as a plan of arrangement that would require a vote of creditors—were appropriate in the circumstances and should be given proper deference.
For further information, please contact:
Pamela Huff 416-863-2958
Sebastien Guy 514-982-4020
Milly Chow 416-863-2594
or any other member of our Restructuring & Insolvency group.
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