In late 2017, two Ontario decisions, released only one day apart, addressed (for the first time) whether a monitor appointed under the Companies’ Creditors Arrangement Act (CCAA) could move beyond their neutral role as officer of the court and bring an oppression action. Read together, these decisions state that a monitor should not bring an oppression action without authorization of the court, which will only be given in exceptional circumstances.
Last week, we explored the first of these precedent-setting decisions. This week, we delve into the second, by the Ontario Court of Appeal.
Ernst & Young Inc. was the court-appointed monitor during the restructuring proceedings of Essar Steel Algoma Inc. (Algoma)- one of Canada’s largest integrated steel mills.
The supervising CCAA judge authorized Ernst & Young to start an oppression action under s. 241 of the Canada Business Corporations Act (CBCA) against Algoma’s parent company, Essar Global Fund Limited (Essar).
The oppression action arose in the context of Algoma’s recapitalization and a subsequent transaction between Algoma and Port of Algoma Inc. (Portco) in which Algoma’s port facilities in Sault Ste. Marie were conveyed to Portco. Both companies were indirectly owned by Essar. The transaction left Portco with control over the Sault Ste. Marie port and provided Portco with the ability to veto any change in control of Algoma’s business.
The Original Trial Decision
The original trial judge, Justice Newbould noted that:
While it is the case that normally a Monitor, as an officer of the court, is to be neutral in its role and not take sides in favour of one stakeholder against another, there are exceptions. Under section 23(1)(k) of the CCAA, the Monitor shall carry out any function in relation to the debtor that the court may direct. In this case, the Monitor was authorized and directed to take this oppression action by court order. [emphasis added]
Justice Newbould noted that whether someone can be a complainant is a discretionary matter for the court. In bankruptcy proceedings, for instance, trustees in bankruptcy acting on behalf of the creditors of the bankrupt estate have been recognized as complainants in oppression actions against non-arm’s length parties who had entered into allegedly oppressive agreements with the debtor.
In such cases, courts have recognized that the Ontario Business Corporations Act (OBCA) provides a flexible discretion to determine whether a person is a proper complainant in an oppression case. Justice Newbould applied these principles to the question of whether a monitor in a CCAA proceeding could be a complainant and stated that:
I see no reason why the principle of collective action to pursue the claims of creditors in a bankruptcy should not be followed in this CCAA proceeding. There are very large amounts owing to trade creditors, pensioners and retirees. Aspects of the Port Transaction, such as the change of control clause in the Cargo Handling Agreement that gives the parent control over who can be a buyer of the Algoma business, are harmful to a restructuring process and negatively impact creditors. The Monitor has taken this action as an adjunct to its role in facilitating a restructuring.
Justice Newbould also noted that other cases had recognized that derivative actions and oppression remedies were not mutually exclusive remedies and can co-exist where there may be overlap, and that a number of cases exist where creditors successfully pursued an oppression remedy in circumstances where a derivative remedy also existed.
Justice Newbould concluded that Ernst & Young, as monitor, was a proper complainant in this claim. He also found that the transaction (as well as other conduct by Essar) was oppressive and granted a remedy that was intended to address that wrongdoing.
Essar appealed this decision, on the grounds that:
- Ernst & Young lacked standing to bring an oppression claim; and
- The alleged harm was to Algoma, and as such, the appropriate course of action was a derivative action not an oppressive remedy.
Can a Monitor Proceed with an Oppression Action: Factors the Court Will Consider
In considering the appeal, the Court of Appeal noted that “it will be a rare occasion that a monitor will be authorized to be a complainant”. In addition, factors that a judge should consider when exercising his or her discretion as to whether or not a monitor should be permitted to be a complainant include, at minimum:
- Whether there is a prima facie case that merits an oppression action or an application for an oppression action?
- Whether the proposed oppression action or application for such action have a restructuring purpose (i.e. materially advances or removes an impediment to a restructuring)?
- Is there any other stakeholder that is better positioned to be a complainant.
The Court of Appeal dismissed Essar’s appeal and upheld the original trial decision, which was the first in Canadian history that allowed a monitor to bring an action for an oppression remedy.
At Financial Litigation, Eli Karp strives to minimize the impact of commercial disputes on our client’s financial security, and resolve litigation as quickly as possible, so they can get back to business. We regularly receive referrals from other clients and law firms and have acted on behalf of companies of all sizes throughout Ontario. Schedule your consultation online, or by calling us at 416-769-4107 x1.