Canada | Publication | December 5, 2022
On November 13, 2022, Groupe Sélection inc. (Groupe Sélection) filed an application under the Companies’ Creditors Arrangement Act (CCAA) in order to proceed with the restructuring while protected from its creditors (GS Application). In response to this application, on November 14, 2022 National Bank of Canada, as agent of the banking syndicate (Syndicate) composed of several major Canadian banks and financial institutions acting as main lenders of Groupe Sélection, also filed its own competing application for the issuance of an initial order in which it proposed instead its own restructuring process and the appointment of PricewaterhouseCoopers LLP (PwC) as monitor (Syndicate Application).
Essentially, the Syndicate accused Groupe Sélection of not having met its contractual commitments and obligations resulting from several loan agreements and other complementary contracts by which the Syndicate advanced Groupe Sélection more than $272 million, now due and payable. As a result of these defaults, the Syndicate had withdrawn its financial support. This lack of financial support and chronic lack of liquidity with no prospect of improvement in the short term triggered the commencement of insolvency proceedings.
Faced with two competing applications, both with their own interim financing (DIP), Justice Pinsonnault ultimately granted the Syndicate Application in accordance with the conclusions sought under the terms of the initial order proposed by the Syndicate. This judgment, rendered in a context described by the Court as unusual and extraordinary, led the judge to use his broad discretion and rule on several important and, in some instances, controversial issues in the insolvency world that warrant discussion in this legal update.
The Court may issue an initial order under the CCAA at a creditor’s request
It has been well recognized in Canadian case law that the CCAA expressly grants creditors the right to commence proceedings under the CCAA and also allows them to file plans of arrangement for a debtor company. Although this procedure is intended to be less common, such applications have been granted in certain specific circumstances, such as when members of the debtor company's management have resigned, when management is unable or unfit to act under the circumstances, when any potential restructuring route available is doomed to fail, or when management has a conflict of interest in the restructuring process itself.1 In his decision, Justice Pinsonnault, while insisting on the exceptional nature of the Syndicate Application, nevertheless concluded that the circumstances and the unique context in which Groupe Sélection found itself unequivocally justified not only the filing of such an application by a creditor, but also its support by the Court. The reasons supporting the judge's position can be summarized as follows:
For all these reasons, the Court concluded that the critical state in which Groupe Sélection found itself argued in favour of accepting the Syndicate Application and appointing PwC as monitor, which would benefit from the powers of a "super monitor" in order to ease the problems linked to the instability of Groupe Sélection’s finance function and address the many issues raised during the hearing regarding the company’s worrisome management.
The choice of the appropriate monitor is based on their qualifications and the circumstances of the case
Since PwC had carried out certain mandates for various financial institutions that have been creditors of Groupe Sélection in the three years preceding the filing of the applications, Groupe Sélection's lawyers objected to its appointment as monitor on the grounds of a potential lack of impartiality. However, the Court rejected this argument and stated that until proven otherwise, it had no doubts about the impartiality of the members of PwC, insisting instead on their extensive experience.
In fact, the judge pointed out that the magnitude of the situation in which Groupe Sélection finds itself required the intervention of a monitor such as PwC, whose representative is an experienced and competent insolvency professional with the resources necessary to develop a contingency plan, who has often acted as a monitor under the CCAA and conducted several restructurings in the real estate and RPA sectors. Also, the fact that PwC has sound knowledge of the file is a great asset, even a necessity, considering the complexity of the file and the urgency to act resulting from the "financial hemorrhage" currently faced by Groupe Sélection.
The Court, in order to moderate apprehensions, also pointed out that although the monitor makes important decisions in the restructuring process, it must act impartially and consult with the management team of the company undergoing a restructuring when required, in addition to submitting any recommendations to the Court, which thus oversees the entire process.
In short, the judge again used his discretion, based on the evidence and testimony submitted and the circumstances of the case, to justify the choice of monitor.
Choosing the appropriate DIP financing is based on several considerations that extend way beyond the amount offered and the financing terms
Once again, the Court faced two proposals, this time on the DIP financing front. Groupe Sélection's proposal, supported by a private lender, provided for an amount of $50 million (GS DIP), while the Syndicate's proposal provided for an initial amount of $20 million, with more favorable conditions, for a shorter period of time and which could be increased if necessary (Syndicate DIP).
In the end, the judge approved the Syndicate DIP on the grounds that the conditions attached to the GS DIP raised certain doubts in the Court's mind. Indeed, the GS DIP did not offer any advantage to the stakeholders, while it greatly and evidently disadvantaged the creditors by taking priority over all the security interests held by Groupe Sélection's creditors and by endorsing an approach based on a "business as usual" model that was unreasonable, unrealistic and inequitable under the circumstances. The creditors’ unquestionable support for the Syndicate DIP, and clear opposition to the GS DIP, also argued in favour of the Court's choice of the former. In short, the justification and appropriateness of a DIP financing must be assessed in the context of the restructuring process with which it is associated, and not out of context and on the sole basis of the financial terms offered.
On November 28, 2022, the Quebec Court of Appeal dismissed Groupe Sélection's application for leave to appeal, which strongly contested, on several grounds, the decision previously rendered by Justice Pinsonnault.
In his judgment, Justice Kalichman confirmed that it is now well established that creditors could make an application for an initial order under the CCAA and conduct the restructuring process. He also supported Justice Pinsonnault's reasons, emphasizing in particular that Justice Pinsonnault had rendered an extremely detailed judgment, using his judicial discretion in an exceptional and urgent context, and that he had opted for the approach that he considered most consistent with the remedial objectives of the CCAA.
These decisions, although rendered in a unique and exceptional context, confirmed that even in the presence of two competing applications for a CCAA initial order (debtor versus creditors), the Court can grant the creditors' application and the DIP financing proposed by them, especially in a context where management no longer has the confidence of major stakeholders. This decision reflects the broad judicial discretion conferred on the Court by the CCAA in restructuring matters, allowing it to decide in favour of the solution that achieves the legislative objectives of the CCAA, that is the most beneficial to all stakeholders and that is most likely to succeed.
A team consisting of Mtres Luc Morin, Guillaume Michaud, Noah Zucker and Arad Mojtahedi acted on behalf of National Bank of Canada, as agent for the banking syndicate in this matter.
The authors wish to thank Marie-Geneviève Bélanger, articling student, for her help in preparing this legal update.
Publication
The US Supreme Court has ruled that a “pure omission” under Item 303 of Securities and Exchange Commission Regulation S–K cannot give rise to a private action for securities fraud under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023
