9354-9186 Québec inc. v. Callidus Capital Corp.

9354-9186 Québec inc. v. Callidus Capital Corp.
Collection
Supreme Court Judgments
Date
2020-05-08
Neutral citation
2020 SCC 10
Report
[2020] 1 SCR 521
Case number
38594
Judges
Wagner, Richard; Abella, Rosalie Silberman; Moldaver, Michael J.; Karakatsanis, Andromache; Côté, Suzanne; Rowe, Malcolm; Kasirer, Nicholas
On appeal from
Quebec
Notes
Case in Brief
SCC Case Information
Decision Content
SUPREME COURT OF CANADA
Citation: 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, [2020] 1 S.C.R. 521
Appeals Heard and Judgment Rendered: January 23, 2020 Reasons for Judgment: May 8, 2020 Docket: 38594
Between:
9354-9186 Québec inc. and 9354-9178 Québec inc.
Appellants
and
Callidus Capital Corporation, International Game Technology, Deloitte LLP,
Luc Carignan, François Vigneault, Philippe Millette, Francis Proulx and François Pelletier
Respondents
- and -
Ernst & Young Inc., IMF Bentham Limited (now known as Omni Bridgeway Limited),
Bentham IMF Capital Limited (now known as Omni Bridgeway Capital (Canada) Limited), Insolvency Institute of Canada and
Canadian Association of Insolvency and Restructuring Professionals
Interveners
And Between:
IMF Bentham Limited (now known as Omni Bridgeway Limited) and Bentham IMF Capital Limited (now known as Omni Bridgeway Capital (Canada) Limited)
Appellants
and
Callidus Capital Corporation, International Game Technology, Deloitte LLP,
Luc Carignan, François Vigneault, Philippe Millette, Francis Proulx and François Pelletier
Respondents
- and -
Ernst & Young Inc., 9354-9186 Québec inc., 9354-9178 Québec inc.,
Insolvency Institute of Canada and
Canadian Association of Insolvency and Restructuring Professionals
Interveners
Coram: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Rowe and Kasirer JJ.
Joint Reasons for Judgment: (paras. 1 to 117)
Wagner C.J. and Moldaver J. (Abella, Karakatsanis, Côté, Rowe and Kasirer JJ. concurring)
9354-9186 Québec inc. and
9354-9178 Québec inc. Appellants
v.
Callidus Capital Corporation,
International Game Technology, Deloitte LLP, Luc Carignan, François Vigneault, Philippe Millette, Francis Proulx and François Pelletier Respondents
and
Ernst & Young Inc.,
IMF Bentham Limited (now known as Omni Bridgeway Limited),
Bentham IMF Capital Limited (now known as Omni Bridgeway Capital (Canada) Limited), Insolvency Institute of Canada and Canadian Association of Insolvency and Restructuring Professionals Interveners
- and -
IMF Bentham Limited (now known as Omni Bridgeway Limited) and Bentham IMF Capital Limited (now known as Omni Bridgeway Capital (Canada) Limited) Appellants
v.
Callidus Capital Corporation,
International Game Technology, Deloitte LLP, Luc Carignan, François Vigneault, Philippe Millette, Francis Proulx and François Pelletier Respondents
and
Ernst & Young Inc.,
9354-9186 Québec inc.,
9354-9178 Québec inc.,
Insolvency Institute of Canada and Canadian Association of Insolvency
and Restructuring Professionals Interveners
Indexed as: 9354-9186 Québec inc. v. Callidus Capital Corp.
2020 SCC 10
File No.: 38594.
Hearing and judgment: January 23, 2020.
Reasons delivered: May 8, 2020.
Present: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Rowe and Kasirer JJ.
on appeal from the court of appeal for quebec
Bankruptcy and insolvency ⸺ Discretionary authority of supervising judge in proceedings under Companies’ Creditors Arrangement Act ⸺ Appellate review of decisions of supervising judge ⸺ Whether supervising judge has discretion to bar creditor from voting on plan of arrangement where creditor is acting for improper purpose ⸺ Whether supervising judge can approve third party litigation funding as interim financing ⸺ Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, ss. 11 , 11.2 .
The debtor companies filed a petition for the issuance of an initial order under the Companies’ Creditors Arrangement Act (“CCAA ”) in November 2015. The petition succeeded, and the initial order was issued by a supervising judge, who became responsible for overseeing the proceedings. Since then, substantially all of the assets of the debtor companies have been liquidated, with the notable exception of retained claims for damages against the companies’ only secured creditor. In September 2017, the secured creditor proposed a plan of arrangement, which later failed to receive sufficient creditor support. In February 2018, the secured creditor proposed another, virtually identical, plan of arrangement. It also sought the supervising judge’s permission to vote on this new plan in the same class as the debtor companies’ unsecured creditors, on the basis that its security was worth nil. Around the same time, the debtor companies sought interim financing in the form of a proposed third party litigation funding agreement, which would permit them to pursue litigation of the retained claims. They also sought the approval of a related super‑priority litigation financing charge.
The supervising judge determined that the secured creditor should not be permitted to vote on the new plan because it was acting with an improper purpose. As a result, the new plan had no reasonable prospect of success and was not put to a creditors’ vote. The supervising judge allowed the debtor companies’ application, authorizing them to enter into a third party litigation funding agreement. On appeal by the secured creditor and certain of the unsecured creditors, the Court of Appeal set aside the supervising judge’s order, holding that he had erred in reaching the foregoing conclusions.
Held: The appeal should be allowed and the supervising judge’s order reinstated.
The supervising judge made no error in barring the secured creditor from voting or in authorizing the third party litigating funding agreement. A supervising judge has the discretion to bar a creditor from voting on a plan of arrangement where they determine that the creditor is acting for an improper purpose. A supervising judge can also approve third party litigation funding as interim financing, pursuant to s. 11.2 of the CCAA . The Court of Appeal was not justified in interfering with the supervising judge’s discretionary decisions in this regard, having failed to treat them with the appropriate degree of deference.
The CCAA is one of three principal insolvency statutes in Canada. It pursues an array of overarching remedial objectives that reflect the wide ranging and potentially catastrophic impacts insolvency can have. These objectives include: providing for timely, efficient and impartial resolution of a debtor’s insolvency; preserving and maximizing the value of a debtor’s assets; ensuring fair and equitable treatment of the claims against a debtor; protecting the public interest; and, in the context of a commercial insolvency, balancing the costs and benefits of restructuring or liquidating the company. The architecture of the CCAA leaves the case-specific assessment and balancing of these objectives to the supervising judge.
From beginning to end, each proceeding under the CCAA is overseen by a single supervising judge, who has broad discretion to make a variety of orders that respond to the circumstances of each case. The anchor of this discretionary authority is s. 11 of the CCAA , with empowers a judge to make any order that they consider appropriate in the circumstances. This discretionary authority is broad, but not boundless. It must be exercised in furtherance of the remedial objectives of the CCAA and with three baseline considerations in mind: (1) that the order sought is appropriate in the circumstances, and (2) that the applicant has been acting in good faith and (3) with due diligence. The due diligence consideration discourages parties from sitting on their rights and ensures that creditors do not strategically manoeuvre or position themselves to gain an advantage. A high degree of deference is owed to discretionary decisions made by judges supervising CCAA proceedings and, as such, appellate intervention will only be justified if the supervising judge erred in principle or exercised their discretion unreasonably.
A creditor can generally vote on a plan of arrangement or compromise that affects its rights, subject to any specific provisions of the CCAA that may restrict its voting rights, or a proper exercise of discretion by the supervising judge to constrain or bar the creditor’s right to vote. Given that the CCAA regime contemplates creditor participation in decision-making as an integral facet of the workout regime, the discretion to bar a creditor from voting should only be exercised where the circumstances demand such an outcome. Where a creditor is seeking to exercise its voting rights in a manner that frustrates, undermines, or runs counter to the remedial objectives of the CCAA ⸺ that is, acting for an improper purpose ⸺ s. 11 of the CCAA supplies the supervising judge with the discretion to bar that creditor from voting. This discretion parallels the similar discretion that exists under the Bankruptcy and Insolvency Act and advances the basic fairness that permeates Canadian insolvency law and practice. Whether this discretion ought to be exercised in a particular case is a circumstance-specific inquiry that the supervising judge is best-positioned to undertake.
In the instant case, the supervising judge’s decision to bar the secured creditor from voting on the new plan discloses no error justifying appellate intervention. When he made this decision, the supervising judge was intimately familiar with these proceedings, having presided over them for over 2 years, received 15 reports from the monitor, and issued approximately 25 orders. He considered the whole of the circumstances and concluded that the secured creditor’s vote would serve an improper purpose. He was aware that the secured creditor had chosen not to value any of its claim as unsecured prior to the vote on the first plan and did not attempt to vote on that plan, which ultimately failed to receive the other creditors’ approval. Between the failure of the first plan and the proposal of the (essentially identical) new plan, none of the factual circumstances relating to the debtor companies’ financial or business affairs had materially changed. However, the secured creditor sought to value the entirety of its security at nil and, on that basis, sought leave to vote on the new plan as an unsecured creditor. If the secured creditor were permitted to vote in this way, the new plan would certainly have met the double majority threshold for approval under s. 6(1) of the CCAA . The inescapable inference was that the secured creditor was attempting to strategically value its security to acquire control over the outcome of the vote and thereby circumvent the creditor democracy the CCAA protects. The secured creditor’s course of action was also plainly contrary to the expectation that parties act with due diligence in an insolvency proceeding, which includes acting with due diligence in valuing their claims and security. The secured creditor was therefore properly barred from voting on the new plan.
Whether third party litigation funding should be approved as interim financing is a case-specific inquiry that should have regard to the text of s. 11.2 of the CCAA and the remedial objectives of the CCAA more generally. Interim financing is a flexible tool that may take on a range of forms. This is apparent from the wording of s. 11.2(1), which is broad and does not mandate any standard form or terms. At its core, interim financing enables the preservation and realization of the value of a debtor’s assets. In some circumstances, like the instant case, litigation funding furthers this basic purpose. Third party litigation funding agreements may therefore be approved as interim financing in CCAA proceedings when the supervising judge determines that doing so would be fair and appropriate, having regard to all the circumstances and the objectives of the Act. This requires consideration of the specific factors set out in s. 11.2(4) of the CCAA . These factors need not be mechanically applied or individually reviewed by the supervising judge, as not all of them will be significant in every case, nor are they exhaustive. Additionally, in order for a third party litigation funding agreement to be approved as interim financing, the agreement must not contain terms that effectively convert it into a plan of arrangement.
In the instant case, there is no basis upon which to interfere with the supervising judge’s exercise of his discretion to approve the litigation funding agreement as interim financing. A review of the supervising judge’s reasons as a whole, combined with a recognition of his manifest experience with the debtor companies’ CCAA proceedings, leads to the conclusion that the factors listed in s. 11.2(4) concern matters that could not have escaped his attention and due consideration. It is apparent that he was focussed on the fairness at stake to all parties, the specific objectives of the CCAA , and the particular circumstances of this case when he approved the litigation funding agreement as interim financing. Further, the litigation funding agreement is not a plan of arrangement because it does not propose any compromise of the creditors’ rights. The fact that the creditors may walk away with more or less money at the end of the day does not change the nature or existence of their rights to access the funds generated from the debtor companies’ assets, nor can it be said to compromise those rights. Finally, the litigation financing charge does not convert the litigation funding agreement into a plan of arrangement. Holding otherwise would effectively extinguish the supervising judge’s authority to approve these charges without a creditors’ vote, which is expressly provided for in s. 11.2 of the CCAA .
Cases Cited
By Wagner C.J. and Moldaver J.
Applied: Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; considered: Re Crystallex, 2012 ONCA 404, 293 O.A.C. 102; Laserworks Computer Services Inc. (Bankruptcy), Re, 1998 NSCA 42, 165 N.S.R. (2d) 296; referred to: Bayens v. Kinross Gold Corporation, 2013 ONSC 4974, 117 O.R. (3d) 150; Hayes v. The City of Saint John, 2016 NBQB 125; Schenk v. Valeant Pharmaceuticals International Inc., 2015 ONSC 3215, 74 C.P.C. (7th) 332; Re Blackburn, 2011 BCSC 1671, 27 B.C.L.R. (5th) 199; Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271; Ernst & Young Inc. v. Essar Global Fund Ltd., 2017 ONCA 1014, 139 O.R. (3d) 1; Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, 435 D.L.R. (4th) 416; Re Canadian Red Cross Society (1998), 5 C.B.R. (4th) 299; Re Target Canada Co., 2015 ONSC 303, 22 C.B.R. (6th) 323; Uti Energy Corp. v. Fracmaster Ltd., 1999 ABCA 178, 244 A.R. 93, aff’g 1999 ABQB 379, 11 C.B.R. (4th) 204; Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5, [2019] 1 S.C.R. 150; Stelco Inc. (Re) (2005), 253 D.L.R. (4th) 109; Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24; North American Tungsten Corp. v. Global Tungsten and Powders Corp., 2015 BCCA 390, 377 B.C.A.C. 6; Re BA Energy Inc., 2010 ABQB 507, 70 C.B.R. (5th) 24; HSBC Bank Canada v. Bear Mountain Master Partnership, 2010 BCSC 1563, 72 C.B.R. (5th) 276; Caterpillar Financial Services Ltd. v. 360networks Corp., 2007 BCCA 14, 279 D.L.R. (4th) 701; Grant Forest Products Inc. v. Toronto-Dominion Bank, 2015 ONCA 570, 387 D.L.R. (4th) 426; Bridging Finance Inc. v. Béton Brunet 2001 inc., 2017 QCCA 138, 44 C.B.R. (6th) 175; New Skeena Forest Products Inc., Re, 2005 BCCA 192, 39 B.C.L.R. (4th) 338; Canadian Metropolitan Properties Corp. v. Libin Holdings Ltd., 2009 BCCA 40, 308 D.L.R. (4th) 339; Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 296 D.L.R. (4th) 135; Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601; Re 1078385 Ontario Ltd. (2004), 206 O.A.C. 17; ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board), 2006 SCC 4, [2006] 1 S.C.R. 140; Nortel Networks Corp., Re, 2015 ONCA 681, 391 D.L.R. (4th) 283; Kitchener Frame Ltd., 2012 ONSC 234, 86 C.B.R. (5th) 274; Royal Oak Mines Inc., Re (1999), 6 C.B.R. (4th) 314; Boutiques San Francisco Inc. v. Richter & Associés Inc., 2003 CanLII 36955; Dugal v. Manulife Financial Corp., 2011 ONSC 1785, 105 O.R. (3d) 364; Montgrain v. Banque nationale du Canada, 2006 QCCA 557, [2006] R.J.Q. 1009; Langtry v. Dumoulin (1884), 7 O.R. 644; McIntyre Estate v. Ontario (Attorney General) (2002), 218 D.L.R. (4th) 193; Marcotte v. Banque de Montréal, 2015 QCCS 1915; Houle v. St. Jude Medical Inc., 2017 ONSC 5129, 9 C.P.C. (8th) 321, aff’d 2018 ONSC 6352, 429 D.L.R. (4th) 739; Stanway v. Wyeth, 2013 BCSC 1585, 56 B.C.L.R. (5th) 192; Re Crystallex International Corporation, 2012 ONSC 2125, 91 C.B.R. (5th) 169; Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp., 2008 BCCA 327, 296 D.L.R. (4th) 577.
Statutes and Regulations Cited
An Act respecting Champerty, R.S.O. 1897, c. 327.
Bankruptcy and Insolvency Act , R.S.C. 1985, c. B‑3, ss. 4.2 , 43(7) , 50(1) , 54(3) , 108(3) , 187(9) .
Budget Implementation Act, 2019, No. 1 , S.C. 2019, c. 29, ss. 133 , 138 , 140 .
Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C‑36, ss. 2(1) , 3(1) , 4 , 5 , 6(1) , 7 , 11 , 11.2(1) , (2) , (4) , (a), (b), (c), (d), (e), (f), (g), (5) , 11.7 , 11.8 , 18.6 , 22(1) , (2) , (3) , 23(1) (d), (i), 23 to 25 , 36 .
Winding-up and Restructuring Act , R.S.C. 1985, c. W-11, s. 6(1) .
Authors Cited
Agarwal, Ranjan K., and Doug Fenton. “Beyond Access to Justice: Litigation Funding Agreements Outside the Class Actions Context” (2017), 59 Can. Bus. L.J. 65.
Canada. Innovation, Science and Economic Development Canada. Archived — Bill C‑55: clause by clause analysis, last updated December 29, 2016 (online: https://www.ic.gc.ca/eic/site/cilp-pdci.nsf/eng/cl00908.html#bill128e; archived version: https://www.scc-csc.ca/cso-dce/2020SCC-CSC10_1_eng.pdf).
Canada. Office of the Superintendent of Bankruptcy Canada. Bill C-12: Clause by Clause Analysis, developed by Industry Canada, last updated March 24, 2015 (online: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br01986.html#a79; archived version: https://www.scc-csc.ca/cso-dce/2020SCC-CSC10_2_eng.pdf).
Canada. Senate. Standing Senate Committee on Banking, Trade and Commerce. Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. Ottawa, 2003.
Houlden, Lloyd W., Geoffrey B. Morawetz and Janis P. Sarra. Bankruptcy and Insolvency Law of Canada, vol. 4, 4th ed. Toronto: Thomson Reuters, 2009 (loose‑leaf updated 2020, release 3).
Kaplan, Bill. “Liquidating CCAAs: Discretion Gone Awry?”, in Janis P. Sarra, ed., Annual Review of Insolvency Law. Toronto: Carswell, 2008, 79.
Klar, Lewis N., et al. Remedies in Tort, vol. 1, by Leanne Berry, ed. Toronto: Thomson Reuters, 1987 (loose-leaf updated 2019, release 12).
McElcheran, Kevin P. Commercial Insolvency in Canada, 4th ed. Toronto: LexisNexis, 2019.
Michaud, Guillaume. “New Frontier: The Emergence of Litigation Funding in the Canadian Insolvency Landscape”, in Janis P. Sarra et al., eds., Annual Review of Insolvency Law 2018. Toronto: Thomson Reuters, 2019, 221.
Nocilla, Alfonso. “Asset Sales Under the Companies’ Creditors Arrangement Act and the Failure of Section 36” (2012), 52 Can. Bus. L.J. 226.
Nocilla, Alfonso. “The History of the Companies’ Creditors Arrangement Act and the Future of Re-Structuring Law in Canada” (2014), 56 Can. Bus. L.J. 73.
Rotsztain, Michael B., and Alexandra Dostal. “Debtor‑In-Possession Financing”, in Stephanie Ben-Ishai and Anthony Duggan, eds., Canadian Bankruptcy and Insolvency Law: Bill C‑55, Statute c. 47 and Beyond. Markham, Ont.: LexisNexis, 2007, 227.
Sarra, Janis P. Rescue! The Companies’ Creditors Arrangement Act , 2nd ed. Toronto: Carswell, 2013.
Sarra, Janis P. “The Oscillating Pendulum: Canada’s Sesquicentennial and Finding the Equilibrium for Insolvency Law”, in Janis P. Sarra and Barbara Romaine, eds., Annual Review of Insolvency Law 2016. Toronto: Thomson Reuters, 2017, 9.
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APPEALS from a judgment of the Quebec Court of Appeal (Dutil, Schrager and Dumas JJ.A.), 2019 QCCA 171, [2019] AZ-51566416, [2019] Q.J. No. 670 (QL), 2019 CarswellQue 94 (WL Can.), setting aside a decision of Michaud J., 2018 QCCS 1040, [2018] AZ-51477967, [2018] Q.J. No. 1986 (QL), 2018 CarswellQue 1923 (WL Can.). Appeals allowed.
Jean-Philippe Groleau, Christian Lachance, Gabriel Lavery Lepage and Hannah Toledano, for the appellants/interveners 9354‑9186 Québec inc. and 9354‑9178 Québec inc.
Neil A. Peden, for the appellants/interveners IMF Bentham Limited (now known as Omni Bridgeway Limited) and Bentham IMF Capital Limited (now known as Omni Bridgeway Capital (Canada) Limited).
Geneviève Cloutier and Clifton P. Prophet, for the respondent Callidus Capital Corporation.
Jocelyn Perreault, Noah Zucker and François Alexandre Toupin, for the respondents International Game Technology, Deloitte LLP, Luc Carignan, François Vigneault, Philippe Millette, Francis Proulx and François Pelletier.
Joseph Reynaud and Nathalie Nouvet, for the intervener Ernst & Young Inc.
Sylvain Rigaud, Arad Mojtahedi and Saam Pousht-Mashhad, for the interveners the Insolvency Institute of Canada and the Canadian Association of Insolvency and Restructuring Professionals.
The reasons for judgment of the Court were delivered by
The Chief Justice and Moldaver J.—
I. Overview
[1] These appeals arise in the context of an ongoing proceeding instituted under the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36 (“CCAA ”), in which substantially all of the assets of the debtor companies have been liquidated. The proceeding was commenced well over four years ago. Since then, a single supervising judge has been responsible for its oversight. In this capacity, he has made numerous discretionary decisions.
[2] Two of the supervising judge’s decisions are in issue before us. Each raises a question requiring this Court to clarify the nature and scope of judicial discretion in CCAA proceedings. The first is whether a supervising judge has the discretion to bar a creditor from voting on a plan of arrangement where they determine that the creditor is acting for an improper purpose. The second is whether a supervising judge can approve third party litigation funding as interim financing, pursuant to s. 11.2 of the CCAA .
[3] For the reasons that follow, we would answer both questions in the affirmative, as did the supervising judge. To the extent the Court of Appeal disagreed and went on to interfere with the supervising judge’s discretionary decisions, we conclude that it was not justified in doing so. In our respectful view, the Court of Appeal failed to treat the supervising judge’s decisions with the appropriate degree of deference. In the result, as we ordered at the conclusion of the hearing, these appeals are allowed and the supervising judge’s order reinstated.
II. Facts
[4] In 1994, Mr. Gérald Duhamel founded Bluberi Gaming Technologies Inc., which is now one of the appellants, 9354-9186 Québec inc. The corporation manufactured, distributed, installed, and serviced electronic casino gaming machines. It also provided management systems for gambling operations. Its sole shareholder has at all material times been Bluberi Group Inc., which is now another of the appellants, 9354-9178 Québec inc. Through a family trust, Mr. Duhamel controls Bluberi Group Inc. and, as a result, Bluberi Gaming (collectively, “Bluberi”).
[5] In 2012, Bluberi sought financing from the respondent, Callidus Capital Corporation (“Callidus”), which describes itself as an “asset-based or distressed lender” (R.F., at para. 26). Callidus extended a credit facility of approximately $24 million to Bluberi. This debt was secured in part by a share pledge agreement.
[6] Over the next three years, Bluberi lost significant amounts of money, and Callidus continued to extend credit. By 2015, Bluberi owed approximately $86 million to Callidus — close to half of which Bluberi asserts is comprised of interest and fees.
A. Bluberi’s Institution of CCAA Proceedings and Initial Sale of Assets
[7] On November 11, 2015, Bluberi filed a petition for the issuance of an initial order under the CCAA . In its petition, Bluberi alleged that its liquidity issues were the result of Callidus taking de facto control of the corporation and dictating a number of purposefully detrimental business decisions. Bluberi alleged that Callidus engaged in this conduct in order to deplete the corporation’s equity value with a view to owning Bluberi and, ultimately, selling it.
[8] Over Callidus’s objection, Bluberi’s petition succeeded. The supervising judge, Michaud J., issued an initial order under the CCAA . Among other things, the initial order confirmed that Bluberi was a “debtor company” within the meaning of s. 2(1) of the Act; stayed any proceedings against Bluberi or any director or officer of Bluberi; and appointed Ernst & Young Inc. as monitor (“Monitor”).
[9] Working with the Monitor, Bluberi determined that a sale of its assets was necessary. On January 28, 2016, it proposed a sale solicitation process, which the supervising judge approved. That process led to Bluberi entering into an asset purchase agreement with Callidus. The agreement contemplated that Callidus would obtain all of Bluberi’s assets in exchange for extinguishing almost the entirety of its secured claim against Bluberi, which had ballooned to approximately $135.7 million. Callidus would maintain an undischarged secured claim of $3 million against Bluberi. The agreement would also permit Bluberi to retain claims for damages against Callidus arising from its alleged involvement in Bluberi’s financial difficulties (“Retained Claims”).[1] Throughout these proceedings, Bluberi has asserted that the Retained Claims should amount to over $200 million in damages.
[10] The supervising judge approved the asset purchase agreement, and the sale of Bluberi’s assets to Callidus closed in February 2017. As a result, Callidus effectively acquired Bluberi’s business, and has continued to operate it as a going concern.
[11] Since the sale, the Retained Claims have been Bluberi’s sole remaining asset and thus the sole security for Callidus’s $3 million claim.
B. The Initial Competing Plans of Arrangement
[12] On September 11, 2017, Bluberi filed an application seeking the approval of a $2 million interim financing credit facility to fund the litigation of the Retained Claims and other related relief. The lender was a joint venture numbered company incorporated as 9364-9739 Québec inc. This interim financing application was set to be heard on September 19, 2017.
[13] However, one day before the hearing, Callidus proposed a plan of arrangement (“First Plan”) and applied for an order convening a creditors’ meeting to vote on that plan. The First Plan proposed that Callidus would fund a $2.5 million (later increased to $2.63 million) distribution to Bluberi’s creditors, except itself, in exchange for a release from the Retained Claims. This would have fully satisfied the claims of Bluberi’s former employees and those creditors with claims worth less than $3000; creditors with larger claims were to receive, on average, 31 percent of their respective claims.
[14] The supervising judge adjourned the hearing of both applications to October 5, 2017. In the meantime, Bluberi filed its own plan of arrangement. Among other things, the plan proposed that half of any proceeds resulting from the Retained Claims, after payment of expenses and Bluberi’s creditors’ claims, would be distributed to the unsecured creditors, as long as the net proceeds exceeded $20 million.
[15] On October 5, 2017, the supervising judge ordered that the parties’ plans of arrangement could be put to a creditors’ vote. He ordered that both parties share the fees and expenses related to the presentation of the plans of arrangement at a creditors’ meeting, and that a party’s failure to deposit those funds with the Monitor would bar the presentation of that party’s plan of arrangement. Bluberi elected not to deposit the necessary funds, and, as a result, only Callidus’s First Plan was put to the creditors.
C. Creditors’ Vote on Callidus’s First Plan
[16] On December 15, 2017, Callidus submitted its First Plan to a creditors’ vote. The plan failed to receive sufficient support. Section 6(1) of the CCAA provides that, to be approved, a plan must receive a “double majority” vote in each class of creditors — that is, a majority in number of class members, which also represents two-thirds in value of the class members’ claims. All of Bluberi’s creditors, besides Callidus, formed a single voting class of unsecured creditors. Of the 100 voting unsecured creditors, 92 creditors (representing $3,450,882 of debt) voted in favour, and 8 voted against (representing $2,375,913 of debt). The First Plan failed because the creditors voting in favour only held 59.22 percent of the total value being voted, which did not meet the s. 6(1) threshold. Most notably, SMT Hautes Technologies (“SMT”), which held 36.7 percent of Bluberi’s debt, voted against the plan.
[17] Callidus did not vote on the First Plan — despite the Monitor explicitly stating that Callidus could have “vote[d] . . . the portion of its claim, assessed by Callidus, to be an unsecured claim” (Joint R.R., vol. III, at p.188).
D. Bluberi’s Interim Financing Application and Callidus’s New Plan
[18] On February 6, 2018, Bluberi filed one of the applications underlying these appeals, seeking authorization of a proposed third party litigation funding agreement (“LFA”) with a publicly traded litigation funder, IMF Bentham Limited or its Canadian subsidiary, Bentham IMF Capital Limited (collectively, “Bentham”). Bluberi’s application also sought the placement of a $20 million super-priority charge in favour of Bentham on Bluberi’s assets (“Litigation Financing Charge”).
[19] The LFA contemplated that Bentham would fund Bluberi’s litigation of the Retained Claims in exchange for receiving a portion of any settlement or award after trial. However, were Bluberi’s litigation to fail, Bentham would lose all of its invested funds. The LFA also provided that Bentham could terminate the litigation of the Retained Claims if, acting reasonably, it were no longer satisfied of the merits or commercial viability of the litigation.
[20] Callidus and certain unsecured creditors who voted in favour of its plan (who are now respondents and style themselves the “Creditors’ Group”) contested Bluberi’s application on the ground that the LFA was a plan of arrangement and, as such, had to be submitted to a creditors’ vote.[2]
[21] On February 12, 2018, Callidus filed the other application underlying these appeals, seeking to put another plan of arrangement to a creditors’ vote (“New Plan”). The New Plan was essentially identical to the First Plan, except that Callidus increased the proposed distribution by $250,000 (from $2.63 million to $2.88 million). Further, Callidus filed an amended proof of claim, which purported to value the security attached to its $3 million claim at nil. Callidus was of the view that this valuation was proper because Bluberi had no assets other than the Retained Claims. On this basis, Callidus asserted that it stood in the position of an unsecured creditor, and sought the supervising judge’s permission to vote on the New Plan with the other unsecured creditors. Given the size of its claim, if Callidus were permitted to vote on the New Plan, the plan would necessarily pass a creditors’ vote. Bluberi opposed Callidus’s application.
[22] The supervising judge heard Bluberi’s interim financing application and Callidus’s application regarding its New Plan together. Notably, the Monitor supported Bluberi’s position.
III. Decisions Below
A. Quebec Superior Court, 2018 QCCS 1040 (Michaud J.)
[23] The supervising judge dismissed Callidus’s application, declining to submit the New Plan to a creditors’ vote. He granted Bluberi’s application, authorizing Bluberi to enter into a litigation funding agreement with Bentham on the terms set forth in the LFA and imposing the Litigation Financing Charge on Bluberi’s assets.
[24] With respect to Callidus’s application, the supervising judge determined Callidus should not be permitted to vote on the New Plan because it was acting with an “improper purpose” (para. 48 (CanLII)). He acknowledged that creditors are generally entitled to vote in their own self-interest. However, given that the First Plan — which was almost identical to the New Plan — had been defeated by a creditors’ vote, the supervising judge concluded that Callidus’s attempt to vote on the New Plan was an attempt to override the result of the first vote. In particular, he wrote:
Taking into consideration the creditors’ interest, the Court accepted, in the fall of 2017, that Callidus’ Plan be submitted to their vote with the understanding that, as a secured creditor, Callidus would not cast a vote. However, under the present circumstances, it would serve an improper purpose if Callidus was allowed to vote on its own plan, especially when its vote would very likely result in the New Plan meeting the two thirds threshold for approval under the CCAA .
As pointed out by SMT, the main unsecured creditor, Callidus’ attempt to vote aims only at cancelling SMT’s vote which prevented Callidus’ Plan from being approved at the creditors’ meeting.
It is one thing to let the creditors vote on a plan submitted by a secured creditor, it is another to allow this secured creditor to vote on its own plan in order to exert control over the vote for the sole purpose of obtaining releases. [paras. 45-47]
[25] The supervising judge concluded that, in these circumstances, allowing Callidus to vote would be both “unfair and unreasonable” (para. 47). He also observed that Callidus’s conduct throughout the CCAA proceedings “lacked transparency” (at para. 41) and that Callidus was “solely motivated by the [pending] litigation” (para. 44). In sum, he found that Callidus’s conduct was contrary to the “requirements of appropriateness, good faith, and due diligence”, and ordered that Callidus would not be permitted to vote on the New Plan (para. 48, citing Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 70).
[26] Because Callidus was not permitted to vote on the New Plan and SMT had unequivocally stated its intention to vote against it, the supervising judge concluded that the plan had no reasonable prospect of success. He therefore declined to submit it to a creditors’ vote.
[27] With respect to Bluberi’s application, the supervising judge considered three issues relevant to these appeals: (1) whether the LFA should be submitted to a creditors’ vote; (2) if not, whether the LFA ought to be approved by the court; and (3) if so, whether the $20 million Litigation Financing Charge should be imposed on Bluberi’s assets.
[28] The supervising judge determined that the LFA did not need to be submitted to a creditors’ vote because it was not a plan of arrangement. He considered a plan of arrangement to involve “an arrangement or compromise between a debtor and its creditors” (para. 71, citing Re Crystallex, 2012 ONCA 404, 293 O.A.C. 102, at para. 92 (“Crystallex”)). In his view, the LFA lacked this essential feature. He also concluded that the LFA did not need to be accompanied by a plan, as Bluberi had stated its intention to file a plan in the future.
[29] After reviewing the terms of the LFA, the supervising judge found it met the criteria for approval of third party litigation funding set out in Bayens v. Kinross Gold Corporation, 2013 ONSC 4974, 117 O.R. (3d) 150, at para. 41, and Hayes v. The City of Saint John, 2016 NBQB 125, at para. 4 (CanLII). In particular, he considered Bentham’s percentage of return to be reasonable in light of its level of investment and risk. Further, the supervising judge rejected Callidus and the Creditors’ Group’s argument that the LFA gave too much discretion to Bentham. He found that the LFA did not allow Bentham to exert undue influence on the litigation of the Retained Claims, noting similarly broad clauses had been approved in the CCAA context (para. 82, citing Schenk v. Valeant Pharmaceuticals International Inc., 2015 ONSC 3215, 74 C.P.C. (7th) 332, at para. 23).
[30] Finally, the supervising judge imposed the Litigation Financing Charge on Bluberi’s assets. While significant, the supervising judge considered the amount to be reasonable given: the amount of damages that would be claimed from Callidus; Bentham’s financial commitment to the litigation; and the fact that Bentham was not charging any interim fees or interest (i.e., it would only profit in the event of successful litigation or settlement). Put simply, Bentham was taking substantial risks, and it was reasonable that it obtain certain guarantees in exchange.
[31] Callidus, again supported by the Creditors’ Group, appealed the supervising judge’s order, impleading Bentham in the process.
B. Quebec Court of Appeal, 2019 QCCA 171 (Dutil and Schrager JJ.A. and Dumas J. (ad hoc))
[32] The Court of Appeal allowed the appeal, finding that “[t]he exercise of the judge’s discretion [was] not founded in law nor on a proper treatment of the facts so that irrespective of the standard of review applied, appellate intervention [was] justified” (para. 48 (CanLII)). In particular, the court identified two errors of relevance to these appeals.
[33] First, the court was of the view that the supervising judge erred in finding that Callidus had an improper purpose in seeking to vote on its New Plan. In its view, Callidus should have been permitted to vote. The court relied heavily on the notion that creditors have a right to vote in their own self-interest. It held that any judicial discretion to preclude voting due to improper purpose should be reserved for the “clearest of cases” (para. 62, referring to Re Blackburn, 2011 BCSC 1671, 27 B.C.L.R. (5th) 199, at para. 45). The court was of the view that Callidus’s transparent attempt to obtain a release from Bluberi’s claims against it did not amount to an improper purpose. The court also considered Callidus’s conduct prior to and during the CCAA proceedings to be incapable of justifying a finding of improper purpose.
[34] Second, the court concluded that the supervising judge erred in approving the LFA as interim financing because, in its view, the LFA was not connected to Bluberi’s commercial operations. The court concluded that the supervising judge had both “misconstrued in law the notion of interim financing and misapplied that notion to the factual circumstances of the case” (para. 78).
[35] In light of this perceived error, the court substituted its view that the LFA was a plan of arrangement and, as a result, should have been submitted to a creditors’ vote. It held that “[a]n arrangement or proposal can encompass both a compromise of creditors’ claims as well as the process undertaken to satisfy them” (para. 85). The court considered the LFA to be a plan of arrangement because it affected the creditors’ share in any eventual litigation proceeds, would cause them to wait for the outcome of any litigation, and could potentially leave them with nothing at all. Moreover, the court held that Bluberi’s scheme “as a whole”, being the prosecution of the Retained Claims and the LFA, should be submitted as a plan to the creditors for their approval (para. 89).
[36] Bluberi and Bentham (collectively, “appellants”), again supported by the Monitor, now appeal to this Court.
IV. Issues
[37] These appeals raise two issues