introduction

[1]           Structured Solutions Inc. asks the Court to recognize its status as the Interim Lender to the Debtors.

BACKGROUND

[2]           The Debtors sought the protection of the Court under the Companies’ Creditors Arrangement Act.[2] The Initial Order under the CCAA was issued by Madame Justice Mayrand on July 30, 2014. It was renewed on several occasions through May 2015.

[3]           On May 20, 2015, Mr. Justice Auclair rendered a judgment on a motion to extend the Initial Order and the stay period and to authorize the sale of the Debtors’ assets.

[4]           Mr. Justice Auclair authorized the sale, but he declined to extend the Initial Order or the stay period.

[5]           After the sale fell through and under pressure from their creditors who were no longer bound by any stay, the Debtors filed notices of intention to make proposals under the Bankruptcy and Insolvency Act.[3]

[6]           The Court ruled on Monday that the notices of intention were prima facie valid and had the effect of suspending proceedings under the CCAA, including the present motion. The Court then lifted the stay with respect to the present motion.

[7]           The issue raised by the present motion relates to the ‘’debtor in possession’’ or interim financing required by the Debtors.

[8]           In the Initial Order, Madame Justice Mayrand authorized the interim financing of the Debtors by Alternative Capital Group Inc. up to a maximum principal amount of $1,500,000 and gave ACG a priority charge over the Debtors’ assets.

[9]           ACG made advances totalling between $300,000 and $400,000, but refused to make any further advances after August 28, 2014.

[10]        By order dated October 8, 2014, Mr. Justice Auclair authorized the Debtors to borrow up to $2,000,000 in principal from Gardner Holding AG and gave Gardner a new charge ranking second only to the ACG charge. The intention was that Gardner would repay ACG.

[11]        Gardner failed to advance any funds to the Debtors and withdrew from the file on October 20, 2014.

[12]        The Debtors then entered into discussions with SSI to become the new interim lender.

[13]        SSI entered into an assignment and subrogation agreement with ACG on November 14, 2014.[4] Pursuant to the agreement, SSI paid US$330,842.03 to ACG, and ACG transferred and assigned to SSI “any and all rights and interests it has in the DIP Loan”. The Debtors intervened to acknowledge that SSI “is subrogated to the rights and interests of the Assignor as against RER in the DIP Loan”. ACG’s representation and warranty on its power and authority was “subject to any approval that may be required by the Court which authorized the DIP Loan and granted the first ranking security charge on the assets of RER”. SSI did not seek any Court authorization or approval for the assignment and subrogation.

[14]        SSI funded certain expenses for the Debtors in December 2014.

[15]        On January 15, 2015, SSI, as secured creditor, made a motion to appoint a receiver and for an approval and vesting order. The motion was contested by a number of secured creditors who contested, for the first time, the status of SSI as a secured creditor.

[16]        In a judgment dated February 9, 2015, Mr. Justice Auclair held that SSI had respected the conditions of Article 1651 of the Civil Code of Quebec to be subrogated in ACG’s debt. However, he added that Section 11.2(1) CCAA provides that a charge securing interim financing is “in favour of a person specified in the order”. Because the assignment and subrogation had not been authorized by the Court, Mr. Justice Auclair held that SSI could not benefit from the prior charge granted to ACG under the Initial Order.

[17]        SSI made a motion for leave to appeal from that judgment, which was granted. The question on which leave to appeal was granted is the following:

Étroitement circonscrite, la question précise que soulève le dossier est donc celle de savoir si un tiers peut, sans autorisation préalable du tribunal, être subrogé au détenteur d’une « charge ou sûreté » visée par l’article 11.2 de la Loi.[5]

[18]        The appeal is scheduled to be heard on September 23, 2015.

[19]        Meanwhile, SSI filed the present motion in which, without prejudice to its position on the appeal, it asks the Court to authorize the assignment and subrogation of the ACG position to SSI and to declare that SSI validly holds the position and rank of Interim Lender since November 14, 2014.

[20]        The other parties do not contest the motion, but they made certain representations and they leave the issue to the Court to decide.

Analysis

1.            Does the Court have jurisdiction to authorize a charge in favour of an interim lender after the advances have been made?

[21]        Section 11.2(1) CCAA provides as follows:

11.2 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the company’s property is subject to a security or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow statement. The security or charge may not secure an obligation that exists before the order is made.

(Emphasis added)

[22]        The final sentence appears to suggest that the charge in favour of the interim lender can only secure amounts advanced after the order authorizing the interim financing and the charge. However, SSI has produced authorities that satisfy the Court that the proper interpretation of the word “order” in that last sentence is the initial order, such that the last sentence ensures that the interim financing charge cannot cover a pre-filing obligation, i.e. an obligation that exists before the initial order is made:

·            Parliamentary Information and Research Service, Bill C-12:

Bill C-12 makes the following amendments to the above provisions:

[…]

·         It provides that the security or charge may not secure an obligation that exists before the order is made. Therefore, the special status accorded to interim financing loans will only apply to money lent to the company during the period of distress.[6]

·            Office of the Superintendant of Bankruptcy Canada, Bill C-12: Clause by Clause Analysis:

Subsection (1) is amended in order to clarify that the priority charge can be granted over all or only part of the debtor’s property. To prevent potential abuse, it is also clarified that the priority charge may not apply to existing debts. The practice of including pre-filing debts as part of the interim financing priority charge puts existing creditors at a disadvantage with no benefit for the debtor. In addition, since the court-ordered charge may affect existing secured creditors, subsection (1) is amended to require that notice of the court application be given to those secured creditors who are likely to be affected by the charge so that they may defend their interests.[7]

·            Hartford Computer Hardware Inc.:

[10]            The Information Officer and Chapter 11 Debtors recognize that in CCAA proceedings, a partial “roll up” provision would not be permissible as a result of s. 11.2 of the CCAA, which expressly provides that a DIP charge may not secure an obligation that exists before the Initial Order is made.[8]

·            Cinram International Inc.:

79.             As noted above, pursuant to Section 11.2(1) of the CCAA, a DIP financing charge may not secure an obligation that existed before the order was made. The requested DIP Lenders’ Charge will not secure any pre-filing obligations.[9]

[23]        As a result, there is nothing in the CCAA to prevent the Court from authorizing an interim financing charge after the funds have been advanced.

[24]        In a footnote in his judgment granting leave to appeal from Mr. Justice Auclair’s judgment, Mr. Justice Morissette seems to refer to the possibility of a subsequent authorization.[10]

[25]        The Court concludes that it has jurisdiction to authorize an interim financing charge after the funds have been advanced.

2.         Is this an appropriate case in which to authorize an interim financing charge after the advances have been made?

[26]        The Court will not automatically grant such orders merely because the funds have been advanced and it would be unfair to the lender that the advances not be secured.

[27]        In his footnote, Mr. Justice Morissette added “mais alors, le tiers subrogé l’aura été à ses risques et périls.” It is clear that the lender who advances funds without the benefit of a Court order authorizing the interim financing charge and who only asks for the authorization later assumes the risk that the Court will not authorize the interim financing charge with the result that whatever has been advanced is not secured.

[28]        In granting an interim financing charge after the advances have been made, the Court will consider why the lender did not seek authorization before advancing the funds, and in particular will consider whether there are circumstances such as urgency or a mistake. In the present case, it is not clear why SSI did not seek authorization before entering into the assignment and subrogation agreement with ACG. There is an allegation that SSI mistakenly believed that it was the Interim Lender without a Court order. There is some basis for that belief in that the interim financing charge had already been created by Court order and the only issue was the assignment and subrogation. There is no suggestion that SSI deliberately refrained from seeking prior authorization for an improper purpose such as concealing what it was doing.

[29]        Further, the Court will consider whether anyone was prejudiced by the delay in seeking authorization. In the present case, there is no allegation that anyone will be prejudiced if the Court now grants SSI the status of Interim Lender.

[30]        The Court must also consider the factors in Section 11.2(4) CCAA. Because SSI is seeking authorization with respect to the assignment and subrogation of the ACG position in November 2014 and the further advances that it made in December 2014, the Court will consider the factors in Section 11.2(4) CCAA as of November or December 2014.

[31]        Two judges have already decided that this is an appropriate case for interim financing: Madame Justice Mayrand in the Initial Order on July 30, 2014, and Mr. Justice Auclair in the October 8, 2014 order granting a charge to Gardner. The Court is satisfied that the conditions for authorizing an interim financing and a charge were still met in November and December 2014.

[32]        Under those orders, the maximum amount to be advanced by ACG was $1.5 million, and the maximum amount to be advanced by Gardner was higher, at $2 million. If SSI had advanced $3 million, there might be a problem. However, according to SSI, the balance of its loan, including interest through January 30, 2015, is $592,922.36.[11] The Court understands that there is some contestation of these amounts such that the actual amount advanced pursuant to the interim financing might be less.

[33]        As a result of the foregoing, the Court is satisfied that, if SSI had sought an authorization in November or December 2014, the Court would have authorized the assignment and subrogation of the ACG charge as well as further advances by SSI for a total amount well in excess of $600,000. Further, the Court is satisfied that this is a case where it is appropriate to make the order after the advances have been made.

3.    Would authorizing the assignment and subrogation of the ACG charge in favour of SSI contradict the judgment of Mr. Justice Auclair, or does it fall within the scope of the appeal?

[34]        The issue of granting the authorization after the advances have been made was not before Mr. Justice Auclair. As a result, it is not appropriate to read the language of his judgment, in particular in paragraph 46, so broadly so that he is deciding in advance a question not submitted to him.

[35]        Similarly, the question before the Court of Appeal, which is set out above, is narrow and does not extend to the issue of authorizing an interim financing charge or the assignment and subrogation of an existing interim financing charge after the advances had been made.

[36]        As a result there is nothing in Mr. Justice Auclair’s judgment or in the appeal to prevent the Court from issuing an order recognizing SSI as the Interim Lender for amounts which it advanced in December 2014.

[37]        The Court concludes that it is appropriate in the circumstances of this case to issue such an order.

WHEREFORE, THE COURT:

[38]        GRANTS Structured Solutions Inc.’s motion;

[39]        AUTHORIZES the subrogation and assignment of Alternative Capital Group Inc.’s DIP position to Structured Solutions Inc.;

[40]        DECLARES that Structured Solutions Inc. holds the position and rank of Interim Lender with respect to the amounts disbursed to acquire Alternative Capital Group Inc.’s position, the amounts advanced to or on behalf of the Debtors in December 2014, the fees and expenses of Structured Solutions Inc. and interest, to the extent that such amounts fall within paragraphs 20 to 27 of the Initial Order;

[41]        RESERVES the right of all parties to contest the amounts claimed by Structured Solutions Inc. under the DIP charge;

[42]        WITH COSTS to follow.