Canadian Broadcasting Corporation Pension Plan v. BF Realty Holdings Ltd., 2002 CanLII 44954 (ON CA)

DATE: 20020529 DOCKET: C34759

COURT OF APPEAL FOR ONTARIO

GOUDGE, MacPHERSON and CRONK JJ.A.

BETWEEN:

Thompson MacDonald, as trustee for the Canadian Broadcasting Corporation Pension Plan, Lillian Campbell, as trustee for the Canadian Broadcasting Corporation Pension Plan, George Jones, as trustee for the Canadian Broadcasting Corporation Pension Plan, Jim McColl, as trustee for the Canadian Broadcasting Corporation Pension Plan, M. Alain Paris, as trustee for the Canadian Broadcasting Corporation Pension Plan, Louise Tremblay, as trustee for the Canadian Broadcasting Corporation Pension Plan, M. George C.B. Smith, as trustee for the Canadian Broadcasting Corporation Pension Plan, A. MacKenzie Adamson, Haviland Allen, Tilak Raj Anand, Bankmont & Co., Clary Bijl, Cornelis Bijl, BIL Group Limited, Claude Blais, Joseph F. Blattler, Rudi Blattler, Paulette Borsook, Jean Bouteille, William C.B. Bowman and J. Douglas Bowman, as Executors of the Estate of John B. Bowman, P. Derrick Bowring, B.S.L. Development Ltd., C & J Management Limited, Eileen Joan Cardiff, William Andrew Cardiff, David G. Chapman, Chelhasa Limited, Edward M. Davis, Don Desrosiers, William Dickson, J. Arnold Denton, Duca Community Credit Union Ltd., William C. Fyvie, as trustee for Andrew Fyvie, Russell Gee, Gordon Gollifer, Robert D. Goodfellow, Bernard G.E. Guichon, Thomas P. Hansen, Fred Heimbecker, Audrey S. Hellyer Charitable Foundation, Helmhorst Investments Limited, David E. Howard, Dennis Charles Hutton, Illya Systems Ltd., Ernst G. Jessen, James Dennis Jones, Steven Jurick, Clare Keith, Clayton Keith, William Kudlac, John Landsdell, as Trustee for Gulf Pacific Properties Ltd., Robert Latowski, Harry A. Law, Warren C. Leonard, Lloyds Bank Plc Geneva Branch, as trustee, Loreen Long, Fred Marks, Joseph Martin, William V. Martin, Merchant (2000) U.S. Inc., Robert McCrindell, Nancy McDougall, Britta McNeill, James McPhail, Andrew Megaw, Betty Munro, Wesley Murphy, Norval Financial Services Inc., Bubpha Ongthet, Doreen L. Raymond, William J. Raymond, Stuart Ross, Benoit Roy, Roycan & Co., as trustee for Banque Hapoalim Luxembourg and Banque Cantonale de Geneve, Joan E. Rundle, Ronald J. Siblock, Viola Jean Sidey, Jean Slieker, Shirley W. Sloan, Laura Smith, James E. Sneyd, Bill Spetz, Glen Stewart, David G. Stocks, Robert E. Storie, Bernard F. Strohmann, Elaine Sweenie, Laurence J. Tarshis, Russell K. Thoman, Thelma J. Trickett, Andre Trudel, Margo J. Warrington, Edwin Weiss, Glen G. Williams, Herbert A. Willis, Michael Wyman, Cynthia Wyman, Saul Yablo, Kim Yee, Josie Yee, Ruth I. Young

Kenneth Prehogan, John M. Buhlman and Kerry A. Boniface for the Appellants

Edward J. Babin, Jane S. Bailey and Andrew E. Bernstein for the Respondents, BF Realty Holdings Limited and Brookfield Development Corporation

David R. Byers and Elizabeth Pillon for the Respondents, Carena Developments Limited, Partnerco Equities Ltd., Gordon E. Arnell, Jack L. Cockwell, Willard J. L’Heureux and Kevin Benson

Alan J. Lenczner, Q.C., M. Michael Title and Anne E. Posno for the Respondents, BCE Inc., Warren Chippindale, J. Stuart Spalding, Josef J. Fridman, C. Wesley M. Scott, J.V. Raymond Cyr, A. Jean de Grandpre, Lynton R. Wilson, Henry A. Roy and Gerald T. McGoey

Mark A. Gelowitz for the Respondents, Robert E. Kadlec, John R. McCaig, Allan S. Olson and John A. Rhind

Heard: December 5 and 6, 2001

Plaintiffs/Appellants

• and -

BF Realty Holdings Limited, BCE Inc., Carena Developments Limited, Partnerco Equities Ltd., Brookfield Development Corporation, Gordon E. Arnell, Warren Chippindale, Jack L. Cockwell, Josef J. Fridman, Willard J. L'Heureux, Robert E. Kadlec, John R. McCaig, Allan S. Olson, John A. Rhind, J. Stuart Spalding, Kevin Benson, C. Wesley M. Scott, J.V. Raymond Cyr, A. Jean de Grandpre, Lynton R. Wilson, Henry A. Roy and Gerald T. McGoey

Defendants/Respondents

On appeal from the judgment of Justice Peter Cumming dated June 29, 2000, reported at (2000), 2000 22677 (ON SC), 10 B.L.R. (3d) 188.

CRONK J.A.:

I. INTRODUCTION

1[1] The appellants hold debentures of BCE Development Corporation (“BCED”), which prohibit BCED from entering into any transaction which transfers all or substantially all of its assets to another corporation unless that corporation assumes the obligation to pay the debt owed under the debentures. The issue on this appeal is whether that prohibition was triggered by a set of transactions, by which BCED transferred assets to and among its subsidiaries and pledged assets as security for debt senior to the debentures.

2[2] The principal players in those transactions were BCED (subsequently known as BF Realty Holdings Limited), a wholly owned subsidiary of BCED known as Brookfield Development Corporation (“Brookfield”), and Partnerco Equities Limited (“Partnerco”), which was jointly owned by BCED’s parent BCE Inc. and Carena Developments Limited (“Carena”).

3[3] A trust indenture dated May 25, 1988 between National Trust Company, as trustee, and BCED (the “Trust Indenture”) provided for issuance of $100 million 8% convertible subordinated debentures (the “Debentures”). The appellants hold approxi-mately $24.8 million of the Debentures. The Debentures are unsecured and subordinated in right of payment to all present and future indebtedness of BCED.

4[4] Section 9.01 of the Trust Indenture is the focus of this appeal. It provides, in part:

Section 9.01 – Certain Requirements

The Company shall not enter into any transaction (whether by way of reconstruction, reorganization, … transfer, sale, … or otherwise) whereby all or substantially all of the undertakings, property and assets of the Company would become the property of any other person … unless, but may do so if, the other person … is a corporation (herein called the “Successor Company”) and: … [amongst other matters], the other person assumes the obligation to pay the debt under the Debentures. [Emphasis added]

5[5] By order of Cumming J. dated January 11, 1999, a trial of the following issue was directed, on the basis that the resulting judgment would bind the parties involved in various related actions:

Was the Conveyance (as defined in the Amended Statement of Claim) a breach of the Trust Indenture in that it resulted in a transfer of all, or substantially all, of the undertakings, property and assets of BF Realty [formerly known as BCED]?

6[6] The word “Conveyance” is defined in the Amended Statement of Claim as: “[T]he principal assets of [BCED] were … conveyed from [BCED] to Brookfield free from the liabilities of [BCED] to the Debentureholders and notwithstanding the restrictions and other provisions contained in the Trust Indenture”. As particularized in the pleading, the commercial steps comprising the Conveyance included:

(a) a reorganization in 1990 (the “1990 Reorganization”) involving

(i) secured financing arrangements, by which BCED provided a guarantee (the “1990 Guarantee”) and share pledge of all of its assets, including its shares in Brookfield, as security for a $500 million stand-by credit facility made available to Brookfield by BCE Inc. and Carena through Partnerco; and

(ii) various asset transfers by BCED or its wholly-owned subsidiaries (the “Asset Transfers”); and

(b) in 1993, the granting by BCED of a new guarantee (the “1993 Guarantee”) and share pledge to Partnerco, and a promissory note from Brookfield to Partnerco, allegedly as security for an additional $50 million loan by Carena to Brookfield (collectively, the “1993 Security Arrangements”). Carena’s interest in that loan and the related securities was subsequently assigned to Partnerco, which foreclosed in 1995 on BCED’s shares in Brookfield (the “Foreclosure”).

7[7] By judgment dated June 29, 2000, Cumming J. answered “no” to the issue tried, based on his interpretation of the Trust Indenture. The appellants appeal that decision. For the reasons that follow, I conclude that s. 9.01 of the Trust Indenture does not apply to the Asset Transfers or to the 1993 Guarantee and associated Foreclosure. Accordingly, I would dismiss the appeal.

II. THE ISSUES

8[8] The appellants’ position is that the Asset Transfers and, in combination, the 1993 Guarantee and the Foreclosure, each offended s. 9.01 because they resulted in “all or substantially all” of the undertakings, property and assets of BCED and its subsidiaries becoming the property of Partnerco, without any assumption by Brookfield or Partnerco of the obligation to pay the debt under the Debentures. As a result, they argue, the protection afforded to the debentureholders under s. 9.01 of the Trust Indenture was defeated, and they were deprived of any prospect for future recovery.

9[9] The appellants make three arguments in support of their position. First, they submit that the trial judge erred by concluding that the word “Company”, as used in s. 9.01 of the Trust Indenture, means BCED and its wholly-owned subsidiaries (including Brookfield), rather than BCED alone. They further assert that the trial judge correspondingly erred by interpreting the words “any other person”, as they appear in s. 9.01, as meaning persons other than BCED and its subsidiaries.

10[10] Second, the appellants contend that the trial judge erred by concluding that the Asset Transfers did not involve the transfer of “all or substantially all” of the undertakings, property and assets of BCED, with the result that they did not breach s. 9.01 of the Trust Indenture.

11[11] Third, the appellants argue that the trial judge erred by failing to hold that the 1993 Guarantee and the Foreclosure together constituted a second reorganization or other “transaction” which breached s. 9.01 of the Trust Indenture.

III. THE FACTS

12[12] BCED was a major office, commercial, retail and residential real estate developer in Canada and the United States. As of December 30, 1989, BCED directly held 16 Canadian real estate properties (the “Canadian Real Estate”) and various shares in wholly-owned subsidiaries, including all of the common shares of Brookfield, BCE Development Inc. (“BCED U.S.”) and 318892 B.C. Ltd. (“318 Ltd.”). BCED’s subsidiaries, in turn, held an interest in various major properties. Brookfield, for example, owned BCE Place in downtown Toronto, while BCED U.S. owned, or had an interest in, numerous properties in the United States.

(1) The Asset Transfers

13[13] Many of the real estate properties held by BCED were non-income producing commercial properties under development. In consequence, when the North American real estate market suffered a major recession commencing in 1989, BCED could not meet its cash commitments and required a significant infusion of new capital.

14[14] Efforts in 1989 to raise capital for BCED, or to sell the company, proved unsuccessful. However, in October 1989, BCE Inc. and Carena agreed to contribute the aggregate sum of $415 million to BCED as a stand-by credit facility, to be advanced by BCE Inc. and Carena in equal shares through Partnerco.

15[15] A business plan was formulated for BCED in late 1989. Its execution was overseen by an independent committee of BCED directors. The plan contemplated that approximately $1 billion in cash would be provided to BCED, by way of the infusion of $415 million by BCE Inc. and Carena and the sale of selected assets, to support BCED’s development program and to facilitate arrangements for additional outside financing. Under the plan, Brookfield was established as BCED’s principal operating subsidiary.

16[16] In the course of executing the plan, BCED’s assets were written-down by a $550 million asset provision on its 1989 financial statements. As a result, and due to other losses, BCED reported a $709 million loss and negative equity of $72 million in its consolidated financial statements as of December 31, 1989.

17[17] BCE Inc. owned 67% of the common shares of BCED, various warrants related to BCED, and 25% of the Debentures, once issued. The $550 million asset write-down by BCED triggered a consequential write-off by BCE Inc. of its entire equity position and warrants investment in BCED, in the amount of $440 million. Nonetheless, BCE Inc. and Carena agreed in January, 1990 to increase their original commitment to BCED from $415 million to $500 million. The funds were to be advanced through Partnerco directly to Brookfield and secured by diverse means.

18[18] The secured financing arrangements forming part of the 1990 Reorganization included: a) a secured credit agreement between Brookfield and Partnerco, which provided for charges on all of Brookfield’s assets, b) the 1990 Guarantee by which BCED guaranteed Brookfield’s existing and future debts to Partnerco, and c) a pledge by BCED of all of its assets, including its Brookfield shares, as collateral security for the guarantee.

19[19] The Asset Transfers involved the transfer by BCED to Brookfield of the Canadian Real Estate, all of its shares in 318 Ltd. (the “318 Shares”) and about $257.5 million in cash received from BCED U.S (the “U.S. Cash”). In addition, various properties in the United States and other assets were transferred from BCED wholly-owned subsidiaries to other wholly-owned subsidiaries of BCED.

20[20] In mid October 1990, a $200 million loan facility was provided to Brookfield by three major banks. It was secured by, among other things, a guarantee and share pledge agreement from BCED. BCED’s earlier pledge to Partnerco was subordinated to the banks’ security and Partnerco entered into an interlender priorities agreement to confirm the priority of the banks’ security over Brookfield’s assets. The subordinate ranking of the Debentures remained unchanged.

21[21] On December 28, 1990, BCED defaulted on its interest payment obligations under the Debentures. It reported a net loss of almost $262.7 million, and negative equity of approximately $445 million, for the year ending December 31, 1990. In consequence, the economic interests of the debentureholders in BCED were in jeopardy.

(2) The 1993 Security Arrangements

22[22] Neither BCED’s financial health nor the North American real estate market improved following the 1990 Reorganization. Both BCED and Brookfield reported negative equity, and took write-downs, in each of 1991, 1992 and 1993. By the end of December, 1992, the total principal and interest owing on the Partnerco loans was more than $948 million. At about that time, BCED ceased consolidating Brookfield’s financial position in BCED’s financial statements.

23[23] The fragile financial conditions of both Brookfield and BCED presented BCE Inc. and Carena with a difficult choice: they could continue financial support for BCED, in the hope of its recovery, or cauterize their losses by withdrawing from further financial commitments to the endangered corporation. Carena chose the former option. It advanced a further $50 million loan to Brookfield in 1992 and 1993. BCE Inc. did not contribute to that additional loan. The 1993 Security Arrangements, alleged by the respondents to be security for the fresh loan, included the 1993 Guarantee and share pledge agreement from BCED in relation to Brookfield’s indebtedness, and a promissory note from Brookfield to Partnerco in the amount of $50 million.

24[24] BCED’s 1993 Guarantee differs from its 1990 Guarantee in at least one significant respect. The 1990 Guarantee does not contain any waiver of BCED’s rights to be subrogated in the rights of the lender (Partnerco) and to be indemnified by the borrower (Brookfield). In contrast, under the 1993 Guarantee, BCED specifically waived both its subrogation and indemnification rights.

25[25] In 1993 a business valuator advised BCE Inc. that its entire BCED investment had a negative value, the Partnerco loans were negative $300 million based on Brookfield’s assets less liabilities, and the value of Brookfield’s debt ranking ahead of the Partnerco loans was in the range of $2 billion. As a result, in December 1993, BCE Inc. wrote-off all of its remaining investments in BCED, its subsidiaries and Partnerco, bringing its total write-down concerning BCED to more than $1 billion. It is significant, in this context, that BCE Inc. itself was the holder of a substantial number of the Debentures, valued at $25 million.

26[26] BCE Inc. sold its interests in Partnerco (including in the Partnerco loans) and BCED (including in Brookfield) to Carena for $1 million in April 1994. Concurrently, BCE Inc. purchased a $1 million buy-back option from Carena entitling BCE Inc., on terms, to purchase 10%-30% of Carena’s interest in Partnerco. The option was not exercised prior to its expiry. Thus, by April 1994, BCE Inc., in effect, had elected to abandon its entire interests in BCED and its subsidiaries, and in Partnerco.

27[27] The total interest and principal owing on the Partnerco loans continued to climb. By December 1994, they exceeded $1.16 billion.

(3) The Foreclosure

28[28] Notwithstanding continuing default on the Partnerco loans in 1994, Partnerco deferred enforcement of its security while attempts at a consensual restructuring of BCED were undertaken. These attempts failed and, on January 20, 1995, Partnerco demanded payment from Brookfield under its promissory note and from BCED under its 1993 Guarantee and share pledge. It also gave notice to BCED of its intention to enforce its security. It then carried out the Foreclosure on all of BCED’s common shares in Brookfield. In reliance on the waiver of subrogation rights language contained in the 1993 Guarantee, BCED did not attempt to enforce any rights of subrogation, nor did it object to the Foreclosure under the provisions of the Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”).

IV. ANALYSIS

29[29] All of the issues raised by the appellants involve the interpretation of s. 9.01 of the Trust Indenture. In its entirety, it reads as follows:

Section 9.01 – Certain Requirements

The Company shall not enter into any transaction (whether by way of reconstruction, reorganization, consolidation, amalgamation, merger, transfer, sale, lease or otherwise) whereby all or substantially all of the undertakings, property and assets of the Company would become the property of any other person or, in the case of any amalgamation, of the continuing company resulting therefrom unless, but may do so if, the other person or continuing company is a corporation (herein called the “Successor Company”) and:

(a) the Successor Company shall execute, prior to or contemporaneously with the consummation of the transaction, such instruments as are satisfactory to the Trustee and in the opinion of Counsel to the Company are necessary or advisable to evidence the assumption by the Successor Company of the liability for the due and punctual payment of all principal moneys on the Subordinated Debentures and the interest thereon and premium, if any, and all other moneys payable hereunder and the covenant of the Successor Company to pay the same and its agreement to observe and perform all the covenants and obligations of the Company under this Indenture;

(b) if such transaction is to be completed prior to the time of expiry of any rights of conversion of Subordinated Debentures to shares of any class of the authorized capital of the Company attaching to Subordinated Debentures of a particular series, the Successor Company shall reserve for issue out of its authorized capital and conditionally allot to the holders of Subordinated Debentures of such series prior to or contemporaneously with the consummation of the transaction, a sufficient number of shares of such class to satisfy such rights of conversion;

(c) the transaction shall to the satisfaction of the Trustee and in the opinion of Counsel to the Company be upon such terms as substantially to preserve and not to impair any of the rights and powers of the Trustee or of the Subordinated Debentureholders hereunder and thereunder and upon such terms as to be in no way prejudicial to the interests of the Subordinated Debentureholders; and

(d) no condition or event shall exist in respect of the Company, or the Successor Company, either at the time of the transaction and immediately after the reconstruction, reorganization, consolidation, amalgamation, merger, transfer, sale, lease or other transaction and after giving full effect thereto, or immediately after the Successor Company complying with the provisions of clause (c) of this Section 9.01, which constitutes or would constitute an Event of Default hereunder.

30[30] The appellants argue that the words “Company” and “any other person”, as they appear in s. 9.01 of the Trust Indenture, respectively mean BCED alone, and any person other than BCED. Under that interpretation, if the Asset Transfers involved “all or substantially all” of BCED’s undertakings, property and assets, s. 9.01 would apply, thereby requiring assumption of liability under s. 9.01(a) for the debt under the Debentures by the recipient of the transferred assets.

31[31] The respondents disagree with the appellants’ suggested interpretation of the words “Company” and “any other person” in s. 9.01. However, they argue, in any event, that the meaning of those words is irrelevant because the Asset Transfers did not involve “all or substantially all” of the undertakings, property and assets of BCED. Accordingly, they assert that s. 9.01 does not apply to the Asset Transfers, and no debt assumption issue arises in connection with the Debentures. That argument, if accepted, is dispositive of whether s. 9.01 is engaged by the Asset Transfers. In relation to the 1990 Reorganization, it also addresses the core question embodied in the issue tried by the trial judge. Accordingly, I first consider that submission.

(1)

Did the trial judge err by concluding that the Asset Transfers in 1990 did not involve the transfer of “all or substantially all” of the undertakings, property and assets of BCED, with the result that they did not breach s. 9.01 of the Trust Indenture?

(a) Structure of s. 9.01 as a whole

32[32] Section 9.01 has two basic elements. First, as relevant to this appeal, the section establishes a mandatory prohibition against certain types of transactions:

The Company shall not enter into any transaction … whereby all or substantially all of the undertakings, property and assets of the Company would become the property of any other person…unless, but may do so if, the other person … is a corporation (herein called the “Successor Company”) and …. [Emphasis added]

The defining feature of the prohibition is concerned with the result of transactions: only those transactions which effect a change in ownership of “all or substantially all” of the undertakings, property and assets of the transferor, come within the prohibition.

33[33] The second element of s. 9.01 is an exception to the prohibition. It is created by the language: “unless, but may do so if, …”. Five conditions must be satisfied to bring a transaction, otherwise caught by the prohibition, within the ambit of the exception. The conditions are cumulative. The first condition confines the exception to inter-corporate transactions. The remaining four conditions are set out in ss. 9.01(a) to (d). All of the appellants’ arguments are predicated on application of the condition established by s. 9.01(a). It imposes an obligation upon the transferee corporation to assume liability for the debt under the Debentures.

34[34] The condition created by s. 9.01(c) is also significant. It requires that the terms of any proposed transaction to which s. 9.01 applies be so structured “as substantially to preserve and not to impair any of the rights and powers of … the … Debentureholders” under the Trust Indenture and the transaction and, further, “as to be in no way prejudicial to the interests of the … Debentureholders …”. Accordingly, to invoke the exception under s. 9.01 so as to permit a transaction whereby “all or substantially all” of the undertakings, property and assets of the transferor would become the property of an “other person”, one of the requisite features of the transaction must be terms which satisfy s. 9.01(c).

35[35] The respondents do not rely on the exception in s. 9.01 as authority for the Asset Transfers. They maintain that resort to the exception is unnecessary because the Asset Transfers are not the type of transactions envisaged by s. 9.01. They argue that the Asset Transfers did not concern the movement of “all or substantially all” of the undertakings, property and assets of either BCED, or BCED and its wholly-owned subsidiaries, to a successor company. Accordingly, they submit, s. 9.01 has no application to the Asset Transfers.

36[36] The trial judge examined the Asset Transfers from two perspectives. He first considered whether they involved the transfer of “all or substantially all” of the assets of BCED alone. This analysis assumed, contrary to the trial judge’s ultimate finding on the issue, that the word “Company” in s. 9.01 means BCED alone. It thus favoured the appellants, and took their case concerning the Asset Transfers at its highest. The trial judge next considered whether the Asset Transfers involved the transfer of “all or substantially all” of the assets of BCED and its wholly-owned subsidiaries. This analysis favoured the respondents because it assumed that the word “Company” in s. 9.01 means the entire BCED corporate enterprise, that is, BCED and its wholly-owned subsidiaries. The trial judge concluded, from either perspective, that there had not been a movement of assets pursuant to the 1990 Reorganization within the meaning of s. 9.01. For the reasons that follow, I agree.

(b) Purpose of s. 9.01

37[37] Section 9.01 is contained in Article IX of the Trust Indenture, entitled “Successor Companies”. It is a form of “successor obligor” clause. The interpretation of such provisions flows from contract law. Accordingly: “[c]ontract language is thus the starting point in the search for meaning…”. (Sharon Steel Corporation v. Chase Manhattan Bank, 691 F. 2d 1039 (2d Cir., 1982), cert. denied 460 U.S. 1012 (1983), at p. 1049, per Winter C.J.).

38[38] In considering the purpose of s. 9.01 of the Trust Indenture, the trial judge stated (at paras. 42 and 43):

The Trust Indenture is a contract. Section 9.01 must therefore be interpreted to accord with the purpose of the contract as seen in its entirety: see Eli Lily & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at 166-167; Toronto Dominion Bank v. Leigh Instruments Ltd. (1999), 45 O.R. (3d) 417 at 420 (C.A.).

In seeking an interpretation of section 9.01 that accords with the purpose of the contract in which it is found, the court aims to give effect to the reasonable expectations of the parties involved: see Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co. (1979), 112 D.L.R. (3d) 49 (S.C.C.) at 58, 59.

39[39] The trial judge found that: “The intent of s. 9.01 is to maintain the position of the debentureholders in the enterprise that has the assets. The provision seeks to maintain an asset base to ensure the potential for repayment of the debentures …” (at para. 45). To the extent that this observation by the trial judge was intended to encapsulate the purpose of s. 9.01 from the perspective of the debentureholders, I agree. It does not follow, however, that s. 9.01 is a single purpose clause. To the contrary, in my view, s. 9.01 has the dual purpose of seeking to protect the interests of both the debentureholders, as lenders and investors, and BCED, as borrower and issuer of the Debentures. Successor obligor clauses are designed to afford protection to both borrowers and lenders. (Sharon Steel Corporation, at p. 1050).

40[40] The plain wording of s. 9.01 signifies an intention to protect the debentureholders from diminution of the borrower’s capacity to honour its contractual commitment to repay the debt under the Debentures, based on its asset base and holdings. The devices employed to afford such protection to the debentureholders are delineated in the conditions set out in s. 9.01, which collectively define the exception to prohibited transactions. They include the conditions embodied in ss. 9.01 (a) and (c), as above-described.

41[41] Those protections do not apply, and are unnecessary, where the transaction or transactions at issue do not come within the class of transactions otherwise prohibited under s. 9.01, that is, transactions involving “all or substantially all” of the borrower’s undertakings, property and assets. In this way, s. 9.01 also seeks to preserve flexibility for commercial dealings by the borrower, by permitting the borrower to deal with its undertakings, property and assets without regard to the lender protection provisions contained in s. 9.01, so long as the dealings fall short of involving “all or substantially all” of the borrower’s undertakings, property and assets. Without such a threshold requirement, a successor obligor clause in a trust indenture would constrain a borrower from any change in its asset base or holdings unless the debt obligation under the debentures is transferred. Such a constraint could make debenture financings unworkable for corporate borrowers by rendering them unattractive to future purchasers or transferees because of the requirement that they be willing and able to assume the debt under the debentures. Section 9.01 thus seeks to achieve a balance between the legitimate repayment interests of those who invest in a corporation through debentures, and the borrower’s need to preserve unrestricted freedom for commercial dealings, save in those circumstances expressly agreed upon by the parties as specified under the contract.

42[42] The fundamental question, therefore, is whether the Asset Transfers involved “all or substantially all” of the borrower’s undertakings, property and assets. As that phrase is not defined under the Trust Indenture, what test should be applied in determining its meaning?

(c) Test for determining the meaning of the phrase “all or substantially all”

43[43] The meaning of the words “all or substantially all”, or “substantially all”, has been considered by the courts in a variety of contexts involving the interpretation of contracts, taxation legislation, and statutes which provide for shareholders’ rights upon disposition by a corporation of material assets. The phrase appears in s. 189(3) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”) and in companion provisions of various provincial corporations statutes.¹

44[44] The phrase “substantially all” is not defined in the CBCA, and has received limited judicial consideration in Canada. When considered by Canadian courts, the interpretive principles developed in American case law have often been adopted. (See T. Hadden, R.E. Forbes and R.L. Simmonds in Canadian Business Organizations Law (Toronto: Butterworths, 1984), at p. 501). American jurisprudence on the issue demonstrates the distinction between, and the importance of, quantitative and qualitative aspects of the test for determining the meaning of “all or substantially all” of a corporation’s property or assets.

45[45] The quantitative aspect of the interpretative test is formulaic, requiring a comparison of the proportion, or relative value, of the transferred property to the total property of the transferor. American courts, while considering the quantitative features of an impugned transaction, have rejected a pure quantitative analysis in favour of an approach which also requires scrutiny of the qualitative aspect of the property transfer. (See Campbell v. Vose, 515 F. 2d 256 (10th Cir., 1975), at p. 260, per Seth C.J. and Good v. Lackawanna Leather Company, 233 A. 2d 201 (S.C.N.J., 1967), per Mintz, J.S.C.).

46[46] In contrast, a qualitative analysis seeks to determine the nature of a transferor’s core business activities, and the property involved in carrying out such activities. The purpose of the inquiry is to assess whether the transferred property is integral to the transferor’s traditional business, such that its disposition or transfer strikes at the heart of the transferor’s existence and primary corporate purpose.

47[47] In some cases, a qualitative analysis has been described as an examination of whether the effect of the property transfer or conveyance is to “destroy” the nature of the transferor’s business. Under this approach, the transfer of property which does not constitute the main financial worth of the corporation, or a substantial percentage of its total property, may nonetheless constitute a transfer of “substantially all” of the corporation’s property, depending upon the significance of the transferred property to the transferor’s primary corporate purpose and core business activities.

48[48] The appellants argue here, that quantitative considerations are sufficient to determine whether the Asset Transfers involved the transfer of “all or substantially all” of the assets of BCED, and that it is unnecessary to evaluate the qualitative features of the Asset Transfers. In my view, this argument cannot succeed. To adopt such an approach where less than all of a corporation’s property has been transferred would result in the rote application of a mechanistic and potentially arbitrary test, carrying with it an attendant risk of masking the true nature and impact of the transactions in issue. The meaning of “all or substantially all” is context-dependent, and does not lend itself to simple arithmetic calculations.

49[49] That conclusion is supported by existing Canadian jurisprudence. In 85956 Holdings Ltd. v. Fayerman Brothers Ltd. (1986), 32 B.L.R. 204 (Sask. C.A.), the Saskatchewan Court of Appeal held that the phrase “substantially all”, as used in s. 184(1) of the Business Corporations Act, R.S.S. 1978, c. B-10, was intended to mean a sale “which would effectively destroy the corporate business” (at pp. 210-211, per Vancise J.A.). In reaching that conclusion, that court was concerned with determining the true nature of the transaction at issue, and its impact on the normal business of the transferor. Accordingly, the qualitative aspects of the transfer were of central importance.²

50[50] The Quebec Court of Appeal in Cogeco Câble Inc. v. CFCF Inc. (1998), 136 D.L.R. (4th) 243 (Que. C.A.), endorsed a two-staged inquiry to determine the meaning of “all or substantially all” of the property of a corporation, within the meaning of s. 189(3) of the CBCA. That court concluded that a quantitative analysis should be conducted first, and if it proves inconclusive, a qualitative analysis should be undertaken. Biron J. (ad hoc) posited the following as guiding interpretive principles (at pp. 260-261):

(1) in the interpretation of s. 189(3) of the Act, it is appropriate to take into account both quantitative and qualitative criteria;

(2) the concept of “substantially all of the property” has acquired a special meaning in this particular area of the law;

(3) it is difficult to fix a percentage, but in my view, when the sale involves 75% of the value of the property, it ought to be submitted for shareholders’ approval;

(4) if the case cannot be decided by using the quantitative test, then we must proceed with a qualitative analysis of the transaction;

(5) in such a case, it must be determined whether the proposed transaction constitutes a fundamental reorientation which strikes at the heart of the company’s activities, in other words, whether this is a transaction which is out of the ordinary and which substantially affects the company’s purpose and existence; and

(6) application of the qualitative test must take quantitative criteria into account; the greater the proportion of property sold in relation to all the company’s property, the more likely we would be to conclude that the transaction strikes at the heart of the company and necessitates the shareholders’ approval. [Emphasis added]

51[51] Both the Fayerman Brothers Ltd. and Cogeco Câble Inc. cases concerned the interpretation of corporations statutes for the purpose of determining shareholders’ rights. Thus, they are not factually apposite to the case on appeal. Nevertheless, in my view, they are instructive. Both cases underscore the importance of considering the qualitative features of a corporate property transfer for the purpose of ascertaining the rights, or the impact on the interests, of those persons affected by the transfer. In Cogeco Câble Inc., it was held that a qualitative analysis cannot be undertaken without regard for a quantitative analysis. In my view, it is irrelevant in that respect whether the affected class of persons is comprised of shareholders or debentureholders. Both types of investors elect to invest in a corporate transferor, either through equities or debt instruments, based on the known state of the corporation’s activities, holdings and corporate purpose at the date of investment.

52[52] In this case, the quantitative features of the Asset Transfers place them in context, having regard to the overall position of BCED before and after the 1990 Reorganization. Examination of the qualitative features of the Asset Transfers, however, focuses the interpretive analysis on the true nature and impact of the transactions at issue. Accordingly, in my view, the proper test to be applied in interpreting the phrase “all or substantially all”, within the meaning of s. 9.01 of the Trust Indenture, requires consideration of both the quantitative and the qualitative aspects of the Asset Transfers.

(d) Application of the test to the Asset Transfers

53[53] The appellants argue that the trial judge misapplied both “the quantitative and the qualitative tests” in interpreting the phrase “all or substantially all”, as it appears in s. 9.01 of the Trust Indenture. I conclude that one interpretative test, having both quantitative and qualitative aspects, governs. The trial judge applied that test and determined, in respect of the Asset Transfers, that no transfer of “all or substantially all” of the assets of BCED occurred so as to engage s. 9.01 of the Trust Indenture. I agree with his conclusion, for the reasons that follow.

(i) Quantitative Factors

54[54] The appellants assert that the Asset Transfers offended s. 9.01 because they resulted in the transfer to Brookfield, or to other subsidiaries of BCED, of “all or substantially all” of BCED’s assets, without compliance with s. 9.01(a). They further assert that the trial judge erred by focusing only on the transfer of the Canadian Real Estate by BCED to Brookfield, without consideration of the other property transfers effected by BCED and by BCED’s wholly-owned subsidiaries.

55[55] In my view, this argument is flawed. The appellants urge an interpretation of the word “Company” in s. 9.01 that is limited to BCED, so that the Asset Transfers to BCED’s subsidiaries would attract the s. 9.01 prohibition. Thus, for the purpose of interpreting the word “Company” in s. 9.01, the appellants seek to confine the ambit of the word “Company” in s. 9.01 to BCED only, to the exclusion of its wholly-owned subsidiaries. Yet, for the purpose of interpreting the phrase “all or substantially all”, they also seek to have the property conveyances effected by those subsidiaries to other BCED wholly-owned subsidiaries taken into account. That requires regarding “BCED” as being comprised of BCED plus its subsidiaries, that is, as the entire BCED corporate enterprise. It is precisely that approach by the trial judge that the appellants otherwise criticize.

56[56] The appellants cannot have it both ways. If the word “Company” in s. 9.01 means BCED alone, as urged by the appellants, it must bear that meaning for all purposes under the section. It follows, on the appellants’ argument concerning the meaning of “Company”, that even if the trial judge did not take into account the property conveyances made by BCED’s wholly-owned subsidiaries when determining whether “all or substantially all” of BCED’s assets were involved in the Asset Transfers, he was not required to do so. Conversely, if the word “Company” in s. 9.01 means BCED and its wholly-owned subsidiaries, s. 9.01 is not engaged because no transfer to an “other person” occurred.

57[57] The trial judge concluded on a quantitative analysis of the Asset Transfers (at paras. 93 and 95):

As already discussed, if, as the plaintiffs submit, “Company” were to be construed as meaning simply BCED alone without including its wholly-owned subsidiaries, then only 8% to 10% of the book value of the directly held assets [the Canadian Real Estate] were transferred. The remainder of its properties were held by other persons, namely its subsidiaries. The transfer of the [Canadian Real Estate] would not meet the quantitative test.

On the other hand, if “Company” is properly to be interpreted, as I have held, to include BCED and its wholly-owned subsidiaries (in particular Brookfield), then there was no transfer to “any other person”. There was no transfer of assets outside the BCED corporate enterprise. The real assets of the enterprise continued to be held after the realignment by BCED and its subsidiaries.

In my view, those conclusions by the trial judge are sound.

58[58] If the word “Company” in s. 9.01 of the Trust Indenture means BCED alone, only the transfers by BCED to Brookfield of: a) the Canadian Real Estate, b) the 318 Shares, and c) the U.S. Cash are relevant. Property conveyances by BCED’s wholly-owned subsidiaries are irrelevant, because the “transferor” under s. 9.01 is confined to BCED.

59[59] The appellants acknowledge in their factum that, prior to the 1990 Reorganization, BCED directly held 18% of its assets by value, comprised of the Canadian Real Estate (8% to 10% of the book value of its directly held assets) and the 318 Shares, and that the remainder of its interests were shareholdings in various subsidiaries. The trial judge found that BCED was at the apex of a pyramid of subsidiary corporations which, in turn, had numerous subsidiaries (at para. 5). He further held (at para. 56):

All other real estate (some 90% of the total book value of the real estate within the overall corporate enterprise), held at the subsidiary level, was transferred by subsidiaries of BCED to Brookfield or to its subsidiaries. That is, the properties were transferred from a chain of subsidiaries under BCED to another chain of subsidiaries under Brookfield. However, the shares held by BCED in its subsidiaries were not transferred….

The appellants do not challenge those findings on this appeal.

60[60] Accordingly, when considering the property transfers made only by BCED, at most only 18% of BCED’s directly held assets were transferred, plus the U.S. Cash. Clearly, the Asset Transfers did not involve “all” of BCED’s undertakings, property and assets. Moreover, having regard to BCED’s equity interests in its subsidiaries, including in Brookfield, it cannot realistically be said that the Asset Transfers represented “substantially all” of BCED’s assets when measured on a quantitative basis. On that basis, the Asset Transfers made by BCED in 1990 do not meet the quantitative threshold for constituting a transfer of “all or substantially all” of BCED’s assets. Other reasons, however, also compel that conclusion.

61[61] In particular, it is not clear that the 318 Shares and the U.S. Cash were BCED “assets” in the sense that their transfer resulted in the depletion of BCED’s overall holdings. 318 Ltd.’s only asset prior to the 1990 Reorganization was a promissory note from BCED for $125 million (U.S.). That sum was provided to 318 Ltd. by BCE Inc. in exchange for preference shares. 318 Ltd. then lent those funds to BCED’s predecessor, which used them to acquire another company. In essence, 318 Ltd. functioned as a conduit for the provision of funds to BCED’s corporate predecessor. Viewed from the perspective of BCED’s balance sheet, therefore, there was no equity value in the 318 Shares because 318 Ltd.’s only asset was a note for a BCED liability. In addition, following the transfer to Brookfield of the 318 Shares, Brookfield assumed liability for payment on BCED’s promissory note. Thus, the transfer reduced BCED’s liabilities. This improvement in BCED’s debt position can only have worked to the notional benefit of BCED’s creditors, including the holders of the Debentures.

62[62] On those facts, I conclude that the transfer by BCED of the 318 Shares cannot be regarded as the transfer by it to Brookfield of an “asset” of any positive value. Counsel for the appellants appeared to acknowledge this when he indicated, in oral argument before this court, that “not much turned on” the transfer of the 318 Shares by BCED.

63[63] Similar reasoning applies to the U.S. Cash. The appellants do not dispute that the U.S. Cash, advanced as a loan by the Royal Bank of Canada to facilitate the reorganization of BCED’s U.S. properties, was repaid on the same day that it was advanced. Accordingly, the impact of the U.S. Cash on BCED’s consolidated balance sheet was neutral. It had no effect on the position of the debentureholders, or upon the undertakings, property and assets of BCED to which creditors might look for payment of outstanding indebtedness.

64[64] The appellants are critical of the trial judge’s failure to refer expressly in his reasons to the transfers of the 318 Shares and the U.S. Cash, and the property conveyances by BCED’s wholly-owned subsidiaries. In my view, that criticism is misplaced. A trial judge is not required in his or her reasons to demonstrate that all aspects of the evidence have been considered, nor is it necessary that reasons be given for every point raised in the case. (R. v. Burns, [1994] 1 S.C.R. 656, at p. 664, per McLachlin J. (as she then was)). In R. v. Sheppard 2002 SCC 26 and the companion case of R. v. Braich 2002 SCC 27, the Supreme Court of Canada recently identified the principles which govern appellate intervention based on the alleged insufficiency of the reasons of a trial judge. Those cases confirm that a contextual approach to the assessment of the sufficiency of a trial judge’s reasons is required. Further, they establish that appellate intervention may be justified only where a deficiency exists which has occasioned prejudice to the appellant’s exercise of his or her legal rights to an appeal, or which operates to impede or prevent an appellate court’s understanding of the basis for the trial judge’s decision. Those principles, I conclude, apply to the assessment of the sufficiency of a trial judge’s reasons in a civil case where the omitted matter, as in this case, could have had no appreciable influence on the result reached by the trial judge.

65[65] No prejudice to the appellants, or impediment to appellate review, exists in this case in consequence of the omission in the trial judge’s reasons of any reference to the identified property transfers. Whether viewed alone, or in combination with the transfer of the Canadian Real Estate, the transfers of the 318 Shares and the U.S. Cash did not involve the movement or conveyance of “all or substantially all” of BCED’s “assets”. The trial judge’s reasons concerning his analysis of the Asset Transfers were sufficient to permit the parties to know the reasons for his decision, and for this court to review the basis for his decision. In my view, no more was required.

66[66] Finally, in support of their argument that, on a quantitative analysis, the Asset Transfers offended s. 9.01 of the Trust Indenture, the appellants rely upon American and English case law which involves consideration of corporate property transfers for the purpose of ascertaining whether they constituted fraudulent conveyances designed to defeat the interests of creditors or, whether they triggered statutorily conferred shareholders’ rights.³ In my view, these cases are of limited precedential value on this appeal, for the following reasons.

67[67] First, we are not concerned here with shareholders’ statutory rights. Second, and of greater significance, this appeal does not involve proven intent by a transferor to defraud or defeat creditors. In particular, no finding was made by the trial judge in this case that the “Conveyance”, including the Asset Transfers, was intended to, or did, fraudulently defeat the interests of the debentureholders. Further, the good faith of BCED in effecting the Asset Transfers was not at issue before the trial judge and does not arise on this appeal. Rather, the bona fides of the Asset Transfers and the 1993 Security Arrangements remains to be determined in other pending proceedings. Finally, Brookfield was not created for the purpose of receiving the property or assets transferred to it under the Asset Transfers. Rather, it enjoyed a subsisting corporate existence and purpose prior to the 1990 Reorganization.

(ii) Qualitative Factors

68[68] The trial judge also undertook a qualitative analysis of the Asset Transfers. He posed the relevant question in these terms (at para. 92):

The proper question under the qualitative test is whether the consequence of the sale would be the effective destruction of the corporation’s business … In relation to statutory “all or substantially all” provisions meant to protect shareholders, the courts use the qualitative test to ascertain whether there is a transaction that resulted in “a fundamental change affecting the organic character of the corporation”. [Citations omitted]

69[69] That approach flows from judicial experience in examining whether dissenting shareholders’ rights are triggered under corporations statutes upon disposition of “substantially all” of a corporation’s property other than in the ordinary course of business. Statutory shareholders’ rights in such circumstances are designed to protect shareholders from fundamental change in the corporation in which they have chosen to invest. Language in corporations statutes creating such rights has been interpreted liberally. (See T. Hadden, R.E. Forbes and R.L. Simmonds in Canadian Business Organizations Law, at p. 503). Accordingly, in cases involving dissenting shareholders’ rights, the focus of the inquiry is to determine whether an event has occurred which has effected a fundamental or defining change in the corporation, so as to alter the basic nature of shareholders’ investments in the corporation.

70[70] The appellants do not dispute the appropriateness of the question posed by the trial judge. They argue that, in answering the question, the trial judge wrongly focused solely on how BCED held its properties, and failed to consider the nature of BCED’s business prior to and after the 1990 Reorganization. In support of that argument, they submit that, before the Asset Transfers, BCED was an operating company which held most of its assets through subsidiaries and that, after the Asset Transfers, Brookfield became the operating company and BCED became a passive holding company for a single asset – its shares in Brookfield.

71[71] In rejecting that submission, the trial judge made several key findings of fact (at paras. 5, 55 and 94):

BCED was a major developer of real estate -- including office buildings and commercial, industrial and residential developments -- in Canada and the United States at the times relevant to this action … BCED was at the apex of a pyramid of subsidiary corporations. In particular, [BCED U.S.] … and Brookfield were subsidiaries of BCED. These two corporations in turn had some 13 subsidiary corporations. The subsidiary corporations below BCED held an interest in some 45 major properties as of December 30, 1989.

[B]CED held only two types of assets directly: (1) some 16 properties [the Canadian Real Estate]; (2) shares in subsidiaries which, in turn, owned properties….

Both before and after the realignment of the 16 properties directly held [the Canadian Real Estate], BCED remained primarily a holding corporation with its principal properties held by subsidiaries. Through the Conveyance, BCED went from holding about 87% of the book value of its real property assets through subsidiaries, to holding 95% to 97% of the book value of these assets through subsidiaries. [Emphasis added]

72[72] It was open to the trial judge to make those findings based on the evidence before him. A trial judge’s findings of fact are to be accorded a high degree of deference, even where no oral evidence was heard, unless the trial judge made a palpable and overriding, clear or manifest error, that is, an error which may be plainly seen. (See Equity Waste Management of Canada v. Halton Hills (Town) (1997), 35 O.R. (3d) 321 (C.A.), at pp. 333-334, per Laskin J.A.); and Housen v. Nikolaisen, 2002 SCC 33). In my view, no such error was made in this case.

73[73] The trial judge also found that the North American real estate market suffered a “very major recession” beginning in 1989 and continuing “until perhaps 1995” (at para. 6). Many of BCED’s properties, or those in which it held an indirect interest, were under development and construction during this recession. As held by the trial judge: “[t]he result was that revenues could not meet the substantial cash injections required to meet commitments” and by early 1989 “it was apparent that BCED needed more capital” (at paras. 7 and 26).

74[74] It was against the factual backdrop described by the trial judge that: a) BCED’s 1989 business plan identified Brookfield as BCED’s chief operating subsidiary, b) BCED’s consolidated financial statements for the year ended December 1989 disclosed significant losses and negative equity far in excess of the asset write-down taken that year, and c) the Asset Transfers were carried out. The Asset Transfers were part of a major secured financing arrangement designed to stave off BCED’s insolvency. They were accompanied by an injection of urgently needed capital from Partnerco in the sum of $500 million. The appellants do not argue that the financing arrangements were impermissible under s. 9.01.

75[75] It is significant that the Asset Transfers did not involve divestiture by BCED of its shares in its subsidiaries, including its shares in Brookfield. Similarly, they did not benefit a new corporation created to derive the benefits of the BCED empire at the expense of BCED stakeholders, and to which all of BCED’s assets were diverted. They did not result in liquidation of BCED’s principal assets. BCED continued after the 1990 Reorganization to hold the vast majority of its interests through subsidiaries. It carried on its corporate existence and continued as a player in commercial real estate until 1995, despite many years of significant market recession. After the Asset Transfers, it was left with interests in numerous real estate properties held by its subsidiaries. These facts do not support the conclusion that the Asset Transfers effectively “destroyed” BCED’s business, or fundamentally altered the corporation’s intrinsic character and corporate purpose.

76[76] In Good v. Lackawanna Mintz, J.S.C. stated (at p. 211):

A successful business operation contemplates a course of business which necessarily changes over a long period of time. A corporation cannot be expected to remain stagnant in the light of modern advancements in a given industry, and its method of doing business must be altered as business situations and opportunities require.

I agree with that observation. I would add that it applies, of necessity, with equal or greater force to corporations struggling to survive in an adverse economy, or in the face of material market or industry decline. In such circumstances, it is a corporation’s ability to adjust to rapidly changing business situations and economic conditions that will determine its survival or demise. On the record before this court, it appears that the 1990 Reorganization, including the Asset Transfers, was the product of precisely such an adjustment strategy.

77[77] The appellants rely on Philadelphia National Bank v. B.S.F. Company, 41 Del. Ch. 509, 199 A. 2d 557 (Ch. 1964), rev’d on other grounds, 42 Del. Ch. 106, 204 A. 2d 746 (Supr. Ct. 1964), in support of their contention that the Asset Transfers resulted in the conveyance of “all or substantially all” of the assets of BCED. In that case, B.S.F. Company sold its stock in one of two corporations and retained its stock in the other corporation. The court held that the stock sold was the principal asset of B.S.F. Company and looked to the actual value of the sold stock in determining that its sale effected a disposition of “substantially all” of B.S.F. Company’s assets, contrary to the provisions of an indenture which limited the activities of B.S.F. Company for the purpose of creditor financial security. In my view, the critical facts in Philadelphia National Bank are starkly different from those in this case.

78[78] First, in Philadelphia National Bank the stock sold was held to constitute 75% of the vendor company’s total assets when the indenture was entered into, and approximately 90% of its total assets at the time of the sale of the stock. In this case, the Asset Transfers did not involve the vast majority of BCED’s assets.

79[79] Second, in Philadelphia National Bank, the stock sold represented B.S.F. Company’s only substantial income-producing asset and its only property with any significant growth potential, while the value of the stock retained was declining. Moreover, following the sale of the stock, cash became B.S.F. Company’s only asset of any consequence. On a qualitative analysis, the court essentially viewed the stock sold as vital to the principal business of B.S.F. Company. Here: a) both before and after the 1990 Reorganization, BCED was primarily a holding corporation with its principal properties held by subsidiaries, b) the Canadian Real Estate, viewed alone or in combination with the 318 Shares and the U.S. Cash, did not constitute BCED’s principal business, and c) BCED’s principal business as a real estate developer was effected through its holdings in its subsidiaries and the Canadian Real Estate.

80[80] Some of the respondents submit, contrary to the approach adopted by the trial judge, that the question to be posed under a qualitative analysis should not be fashioned on the inquiry which applies in examining shareholders’ rights under corporations statutes. They submit that, rather than determining whether the Asset Transfers resulted in the effective “destruction” of BCED’s business, the trial judge should have scrutinized the repayment potential of BCED in relation to the Debentures as it existed before and after the Asset Transfers. Under this approach, the proper question is whether the Asset Transfers brought about a fundamental change in the relationship between BCED and the debentureholders. In my view, they did not.

81[81] Both before and after the Asset Transfers, the Debentures were unsecured and subordinated in right of payment to all existing and future indebtedness of BCED. Against this priority ranking, s. 9.01 of the Trust Indenture establishes a prohibition against certain types of transactions unless conditions protective of the debentureholders are satisfied. As confirmed in Sharon Steel Corporation (at p. 1050): “[T]he decision to invest in the debt obligations of a corporation is based on the repayment potential of a business enterprise possessing specific financial characteristics…”.

82[82] The Debentures were issued in 1988 under the Trust Indenture. At that time, BCED’s financial statements were consolidated and, therefore, included the financial position and the results of its various wholly-owned subsidiaries. BCED’s Annual Reports described its commercial property assets and activities on a consolidated basis. Its financial statements did not disaggregate its financial position and operating results from those of its subsidiaries. As observed by the trial judge (at para. 54): “[i]nvestors would not have known whether the real estate assets of the enterprise were held directly by BCED or indirectly through a particular subsidiary”. BCED’s consolidated financial position was unaffected by the Asset Transfers, as was the Debentures’ priority ranking. On issuance, the Debentures were unsecured, junior debt instruments. That did not change after the Asset Transfers. The decision of the debentureholders to invest in the Debentures, therefore, necessarily was based on knowledge of the subordinated character of the Debentures and the repayment potential of BCED as presented to the market at the time of their investment. That potential was based on its consolidated financial position. Whatever risks were associated with that potential were risks known to the debentureholders as disclosed to the marketplace, and were voluntarily undertaken by them.

83[83] Accordingly, I agree with the trial judge’s conclusion that “[t]he subordinated debentureholders of BCED clearly have the same claim to the assets of BCED after [the 1990 Reorganization] as they had before” (at para. 102). It follows that, even if the qualitative analysis of the Asset Transfers is undertaken from the perspective of the potential for repayment of the Debentures, the Asset Transfers did not involve the transfer of “all or substantially all” of the undertakings, property and assets of either BCED alone, or of BCED and its wholly-owned subsidiaries.

(2)

Did the trial judge err by concluding that the word “Company”, as used in s. 9.01 of the Trust Indenture, means BCED and its wholly-owned subsidiaries (including Brookfield), rather than BCED alone, and, further, that the words “any other person”, as they appear in s. 9.01, mean persons other than BCED and its subsidiaries?

84[84] The trial judge held (at paras. 57 and 58):

In my view, and I so find, a purposive and contextual reading of s. 9.01 of the Trust Indenture leads to the conclusion that “Company” refers to the BCED corporate enterprise, which comprises BCED and its wholly-owned subsidiaries. This is the proper interpretation to be given to the word “Company” in s. 9.01.

Given this interpretation, it necessarily follows that “any other person” must mean any person outside the sphere of BCED and its wholly-owned subsidiaries….

85[85] Those conclusions by the trial judge are challenged by the appellants on the basis that BCED’s wholly-owned subsidiaries, including Brookfield, are not included within the term “Company” such that the Asset Transfers by BCED to Brookfield, and by some wholly-owned BCED subsidiaries to other BCED wholly-owned subsidiaries, constituted transfers by BCED to “other persons”. The respondents argue that the trial judge correctly interpreted the meaning of the words “Company” and “any other person”, as used in s. 9.01, having regard to the Trust Indenture as a whole, the purpose of s. 9.01, and the contents of a short form prospectus issued by BCED on May 6, 1988 which led to the issuance of the Debentures.

86[86] In my view, ascertaining the meaning of the words “Company” and “any other person” in s. 9.01 of the Trust Indenture is only necessary if s. 9.01 otherwise applies to the Asset Transfers. If, as I conclude, the Asset Transfers did not involve the transfer of “all or substantially all” of the undertakings, property and assets of either BCED alone, or BCED and its wholly-owned subsidiaries, s. 9.01 is not engaged and the meaning of various other words and phrases in s. 9.01 is irrelevant. Accordingly, it is unnecessary for the purpose of this appeal to address the appellants’ argument on this issue, and I decline to do so.

(3)

Did the trial judge err by failing to hold that the 1993 Guarantee and the Foreclosure together constituted a second reorganization or other “transaction” which breached s. 9.01 of the Trust Indenture?

87[87] The appellants do not challenge on this appeal BCED’s power to enter into the 1993 Security Arrangements, or its ability generally to grant security over its assets. Rather, they advance the following five main arguments: a) the 1993 Guarantee and the Foreclosure constitute a prohibited “transaction” under s. 9.01 of the Trust Indenture, b) BCED’s waivers of subrogation and indemnification rights under the 1993 Guarantee (the “Waivers”) are objectionable because they operated to separate the Brookfield shares from BCED and to place them beyond the reach of the debentureholders, c) the failure of the trial judge to explicitly refer to the Waivers in his reasons demonstrates that he had regard only to the form, and not the substance, of the 1993 Guarantee and the Foreclosure, d) the need for the 1993 Guarantee is suspect having regard to Carena’s prior existing rights, and e) BCED’s failure to object to the Foreclosure is evidence that the 1993 Guarantee, coupled with the Foreclosure, constituted a prohibited transaction under s. 9.01 of the Trust Indenture.

88[88] Under the 1993 Guarantee, BCED guaranteed Brookfield’s obligations to Partnerco as evidenced by Brookfield’s November 1993 promissory note to Partnerco in the principal amount of $50 million. The 1993 Guarantee provided that Partnerco, before being entitled to payment from BCED, was not obliged to first exhaust its recourse against Brookfield or any security or other guarantees held by it. In addition, under paragraph 8 of the 1993 Guarantee, BCED waived:

[A]ny right to be subrogated in the rights of [Partnerco] or any other right to be indemnified by [Brookfield] in respect of any amount paid by [BCED] hereunder. [Emphasis added]

Under paragraph 10, the 1993 Guarantee is expressed to be without prejudice to the 1990 Guarantee given by BCED in favour of Partnerco, which did not contain any release or waiver of subrogation and indemnification rights.

89[89] Prior to 1993, Partnerco was precluded from realizing upon Brookfield’s shares by its 1990 interlender priorities agreement with Brookfield’s bankers. Had it done so, BCED was entitled, under the provisions of the 1990 Guarantee, to exercise indemnification and subrogation rights. Further, by operation of s. 2 of the Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, BCED would have been deemed to have paid Brookfield’s debt to Partnerco, thus entitling BCED, under its subrogation rights, to obtain an assignment of the debt owed by Brookfield to Partnerco and giving BCED a claim to Brookfield’s assets in priority to Partnerco, as Brookfield’s common shareholder. Had this chain of events transpired, BCED, in effect, would have exchanged its legal position in relation to Brookfield for that of Partnerco.

90[90] The respondents argue that the Waivers were designed to avoid that commercially absurd result, which would have been unacceptable to any secured creditor, including Partnerco. The appellants, however, contend that the Waivers were intended to improperly facilitate an asset strip of BCED’s one remaining asset of value, the Brookfield shares, in the guise of a secured financing.

91[91] The appellants’ argument is centred on whether the word “transaction” in s. 9.01 of the Trust Indenture encompasses a guarantee and pledge of shares by BCED. If it does extend to such securities, the 1993 Guarantee and the Foreclosure fall within the class of transactions prohibited under s. 9.01, absent assumption of liability for the debt under the Debentures.

92[92] The trial judge rejected the appellants’ argument concerning the meaning of the word “transaction”, as used in s. 9.01, and concluded that “a borrowing secured by way of a guarantee and pledge of shares held by BCED in Brookfield is outside the meaning of “transaction” as used in s. 9.01 …” (para 84). He further stated (at paras. 87 and 88):

I find that the term “transaction” in s. 9.01 does not include a corporation’s act of acquiring additional financing through a borrowing coupled with the granting of security in the form of a mortgage, pledge or other instrument. The Trust Indenture allowed BCED not only to incur senior debt, but also to secure such debt by a pledge of its assets, without any input from the debentureholders.

If such security can lawfully be given, as I find, then it follows that the security is lawfully enforceable.

I agree with those conclusions by the trial judge, for the following reasons.

(a) and (b) Meaning of the word “transaction” in s. 9.01 and the grant of the Waivers

93[93] The prohibition contained in s. 9.01 applies to:

[A]ny transaction (whether by way of reconstruction, reorganization, consolidation, amalgamation, merger, transfer, sale, lease or otherwise) whereby all or substantially all of the undertakings, property and assets of the Company would become the property of any other person … [Emphasis added]

The word “transaction” is not defined under the Trust Indenture. The appellants argue that the reference in s. 9.01 to “any” transaction, and the use of the words “or otherwise”, supports a broad interpretation of “transaction”. They contend that, in combination, the 1993 Guarantee and the Foreclosure were a “reorganization”, within the meaning of s. 9.01, disguised as a financing. They also assert that the trial judge considered only the form, and not the substance, of the 1993 Guarantee and the Foreclosure by viewing them as part of a secured financing, rather than as a reorganization, and by failing to address the true purpose and effect of the Waivers.

94[94] The trial judge expressly indicated (at para. 62):

The form of “transaction” will not matter provided the purpose and result of the transaction is to move “all or substantially all” of the debtor’s assets to an “other person” beyond the corporate enterprise of the debtor.

That passage reveals that the trial judge was alert to the possibility that the labels attached to, and the form of, the commercial steps undertaken by BCED could obscure an understanding of the true nature of their purpose and effect. The trial judge thus directed himself to have regard to the substance of the impugned commercial steps, regardless of their form. That direction was clearly correct. In the context of the 1993 Guarantee and the Foreclosure, their true purpose and effect can only be assessed by regard to their substance, regardless of their form or the labels attached to them by the parties.

95[95] There is no doubt that “reorganizations” come within the s. 9.01 class of prohibited “transactions”. The trial judge observed that the word “transaction” enjoys a wide ordinary commonplace meaning (para. 61). That view is reinforced by the adjectival reference in s. 9.01 to the word “any” in relation to the word “transaction”. In addition, the trial judge stated (at para. 62):

The words “or otherwise”, which conclude the bracketed part, indicate the drafter’s intention to cast a wide net on the form of the transaction to which the prohibition applies.

I agree. In my view, although s. 9.01 does not explicitly refer to financing, borrowing or the granting of security, the ordinary meaning of the word “transaction” could include borrowing, lending or charging, depending upon the context in which the word is used.

96[96] Section 9.01 expressly enumerates the commercial acts which the parties intended should be included in the class of prohibited “transactions”. Reorganizations are an included act. However, the enumerated acts do not include instruments or encumbrances of any kind, including those in the nature of a mortgage, hypothec, guarantee, pledge, charge, lien or other encumbrance, nor do they include acts in the nature of a foreclosure, power of sale, seizure or other security realization measure. In contrast, various other sections of the Trust Indenture explicitly refer to one or more encumbrances. See, for example, the definition of the term “Senior Indebtedness” in s. 1.01(28)(a) and (b); the subordination provisions in s. 3.01(2); and the powers of the holders of the Debentures under s. 10.11(k), of the Trust Indenture. The omission of such language from the class of included acts set out in s. 9.01 suggests an intention to exclude the omitted acts and instruments from the scope of the word “transaction”, unless they are intended to be embraced by the words “or otherwise”.

97[97] To determine the meaning of the word “transaction”, as used in s. 9.01, it is necessary to have regard to the entire Trust Indenture. In Eli Lilly & Co. v. Novopharm Ltd., Iacobucci J., at p. 165, confirmed that the normal rules of construction require a court, in construing a contract, to examine the entirety of the contract to ascertain the intention of the parties at the time of entry into the contract. He further stated that, while the search for an interpretation which achieves a “sensible commercial result” is not to govern the interpretative exercise, such an approach remains relevant where no ambiguity arises on the wording of the contract under review (at pp. 166-167).

98[98] In my view, when the Trust Indenture is construed in its entirety, it is clear that s. 9.01 was not intended by the parties to restrict BCED’s ability to raise loan capital, and to grant security as consideration for such borrowings. Similarly, it does not restrict the ability of a secured lender, whose security ranks in priority to the Debentures, to enforce or realize upon such security if it is otherwise legally entitled to do so.

99[99] Article III of the Trust Indenture provides for the subordination of the Debentures and confirms that the indebtedness evidenced by them is “subordinated, subject and junior in right of payment to the prior payment” of all “Senior Indebtedness”. Section 3.01 of the Trust Indenture states:

Section 3.01 – Subordination

(1) The indebtedness evidenced by the Subordinated Debentures, including the principal thereof, premium, if any, and interest thereon, shall be subordinated, subject and junior in right of payment to the prior payment in full of the principal of, and interest, and premium, if any, on, and all other items of indebtedness in respect of, all Senior Indebtedness, whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed, to the extent and in the manner set forth in this Article III, and each holder of Subordinated Debentures and coupons, by his acceptance thereof, covenants and agrees, and shall be deemed to have covenanted and agreed, to such subordination and shall be bound by the provisions of this Article III.

(2) Nothing contained in this Article III is intended to or shall restrict the Company from incurring additional indebtedness or from mortgaging, pledging or otherwise charging its undertaking, properties or assets to secure any indebtedness or liability. [Emphasis added]

100[100] The term “Senior Indebtedness”, as defined in s. 1.01(28) of the Trust Indenture, specifically includes guarantees in respect of the obligations of others, pledges and charges. The definition reads:

“Senior Indebtedness” means and includes all items of indebtedness of the Company (other than the Subordinated Debentures, the 10-3/4% Debentures, liability for deferred income taxes and capitalized leases) which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date at which Senior Indebtedness is to be determined, but in any event including, without limitation:

(a) obligations secured by any mortgage, hypothec, pledge, charge, lien or other encumbrance on property owned, whether or not the obligations secured thereby shall have been assumed; and

(b) guarantees, endorsements (other than endorsements for collection in the ordinary course of business) and other contingent obligations in respect of, or any obligations to purchase or otherwise acquire or service, obligations of others;

unless it is provided by the terms of the instrument creating or evidencing such indebtedness that such indebtedness is not to rank superior to, or is to rank equally and rateably with, the Subordinated Debentures in right of payment. [Emphasis added]

101[101] The word “Company” in s. 3.01(2) means, at least, BCED as is urged by the appellants. Thus, under s. 3.01(2), BCED is expressly authorized to incur indebtedness, or to encumber its “undertaking, properties or assets” for the purpose of securing “any” indebtedness or liability. Having regard to the definition of “Senior Indebtedness” set out in s. 1.01(28), BCED’s authority to do so under the contract includes the power to pledge its assets or property and is not limited to the grant of security for exclusively its own indebtedness or liability. Under this broad language, even if the appellants’ suggested interpretation of the word “Company” governs (as meaning BCED alone), BCED is free to encumber its assets as security for the indebtedness of one or more of its wholly-owned subsidiaries. Under s. 1.01(28), security granted by BCED may take the form of a guarantee or pledge.

102[102] By the combined operation of ss. 3.01 and 1.01(28), therefore, guarantees granted by BCED in respect of the obligations of others rank in priority to the Debentures unless such guarantees, by their terms, provide to the contrary. Further, under s. 3.01, such “Senior Indebtedness” includes indebtedness of BCED created or incurred after the date of the Trust Indenture. The Debentures, and certain other specified liabilities, are specifically exempted from the class of liabilities constituting “Senior Indebtedness”. Section 3.01 of the Trust Indenture thus confers a wide authority on BCED to raise loan capital, and to engage in secured financing transactions, including through the grant of share pledges and guarantees. It also affirms BCED’s ability to incur additional indebtedness after the date of issuance of the Debentures and in priority to the Debentures.

103[103] Section 3.01 is not expressed to be subject to s. 9.01. It does not refer to s. 9.01, nor does s. 9.01 refer to s. 3.01 or provide, in any way, that its terms apply “notwithstanding” s. 3.01. The language of s. 9.01 does not suggest, expressly or by implication, that it overrides, or takes precedence over, s. 3.01. If such a result had been intended by the parties, some clear expression of such an intention would be contained in the Trust Indenture. At a minimum, if such a result had been intended, some drafting link between ss. 3.01 and 9.01 might reasonably be expected to be evident in a sophisticated commercial contract in the nature of the Trust Indenture. It is not argued before this court that such a link exists. In my view, such a link does not appear in, or arise from, the language of the contract.

104[104] I also agree with the following observations by the trial judge (at para. 81):

If “transaction” in s. 9.01 were to mean that there was a restriction upon the pledging of all of the assets of BCED, then, in effect, the subordinate debentureholders of BCED would be able to prevent the corporation from incurring debt with repayment priority superior to that of the debentures. This would be inconsistent with the language and intent of s. 3.01. This would be inconsistent with the ordinary commercial needs of a business such as the BCED corporate enterprise. This would be inconsistent with the intent of the Trust Indenture in Article III, which gives BCED the financial flexibility to meet the needs of its commercial reality by borrowing….

105[105] Section 3.01(2) of the Trust Indenture is permissive. It confirms in clear and unambiguous language that BCED’s rights to incur “Senior Indebtedness”, defined under s. 1.01(28) to include “guarantees … in respect of … obligations of others”, and to grant security for such indebtedness, is unfettered unless the instrument creating such Senior Indebtedness otherwise provides. Section 3.01(2) does not restrict the amount of additional indebtedness that may be incurred by BCED, nor does it control when, or how, such indebtedness might be secured. Further, s. 3.01(2) contains no restriction on BCED’s ability to waive subrogation or indemnification rights, or to otherwise compromise its interests when granting security. It does not oblige BCED, when granting security, to negotiate or require limitations on the security realization rights of the secured creditor. The Trust Indenture contains no limitation on the language of security instruments that can be granted by BCED. Language which might evidence such an intention, or impose such obligations or constraints on BCED, simply does not appear in ss. 3.01, 1.01(28) or 9.01, or elsewhere in the contract.

106[106] Indeed, the Trust Indenture evidences a contrary intention by the parties. Sections 3.07(1) and (2) read:

Section 3.07 – Renewal or Extension of Senior Indebtedness

(1) The holders of any Senior Indebtedness may at any time in their discretion renew or extend the time of payment of the Senior Indebtedness so held or exercise any other of their rights under the Senior Indebtedness including, without limitation, the waiver of default thereunder, all without notice to or assent from the holders of the [Debentures] or coupons or the Trustee.

(2) No compromise, alteration, amendment, modification, extension, renewal or other change or waiver, consent or other action in respect of any liability or obligation under or in respect of any Senior Indebtedness, or of any of the terms, covenants or conditions of an indenture or other document under which any class of Senior Indebtedness shall have been issued, shall in any way alter or affect any of the provisions of this Article III or of the [Debentures] relating to the subordination thereof. [Emphasis added]

107[107] Section 3.07(1) confirms the right of holders of any security senior to the Debentures to exercise their rights under their security without regard to the interests of the debentureholders, and without notice to them or obtaining their consent. The contingent obligations of BCED under the 1993 Guarantee are not expressed to be inferior to, or to rank equally and rateably with the Debentures. Accordingly, the 1993 Guarantee had priority over the Debentures. In addition, s. 3.07(2) provides that any “waiver … in respect of any Senior Indebtedness” shall not affect the subordinated character of the Debentures. The language of s. 3.07(2) is not confined to waivers by the creditor, as distinct from waivers by the debtor. Thus, the Debentures ranked in priority behind the 1993 Guarantee, regardless of the Waivers. Finally, neither s. 3.07(1) nor s. 3.07(2) refer to s. 9.01, nor are they expressed to be subject to s. 9.01. Accordingly, those provisions work against the appellants’ assertion that s. 9.01 should be read as prohibiting Partnerco’s Foreclosure and the Waivers by BCED, or otherwise restricting BCED’s financing and borrowing powers.

108[108] Limitations of the type urged by the appellants on BCED’s borrowing powers, on its rights to grant security over its assets, and on its secured creditors’ ability to realize upon or enforce their security, would handcuff BCED’s ability to borrow or raise capital in the course of business or for the purpose of adapting to changing economic, market or industry conditions. In my view, clear contractual language would be required to establish such constraints. To conclude otherwise, in the absence of clear evidence of such an intention by the parties, would not conform with the commercial needs of BCED and the interests of its creditors, and would not achieve a sensible commercial result. It must be presumed that the parties to the Trust Indenture intended the legal consequences of the words they used in ss. 1.01(28), 3.01, 3.07 and 9.01.

109[109] It is also useful to recall the nature of the Debentures, and the rights attaching to them. Debentures, by definition, either create or acknowledge a debt. They are often, but not invariably, coupled with a charge or security against the debtor’s property. The Debentures here are “naked” debt instruments, unaccompanied by any form of security. Accordingly, they vest no rights in rem in the debentureholders. Rather, the rights of the debentureholders are simply the contractual rights of unsecured lenders against the borrower corporation. (See P.L. Davies, Gower’s Principles of Modern Company Law, 6th ed. (London: Sweet & Maxwell, 1997) at pp. 321 and 356).

110[110] Moreover, the Debentures contain no negative pledge clause by which BCED might have committed not to grant any securities having priority to the claims of the debentureholders. Indeed, in this case, the reverse applies: the Debentures are expressly subordinated in right of payment to all present and future indebtedness of BCED, and the Trust Indenture expressly contemplates that BCED may grant security for debt senior to the Debentures. Thus, subject only to the obligations imposed by s. 9.01, the Debentures do not preclude BCED from freely using its assets, including by charging its assets as security for finance in the form of loan capital, and from compromising its rights under the language of security instruments granted or entered into by it. (See P.L. Davies, Gower’s Principles of Modern Company Law, at p. 360).

111[111] The subordinated nature of the Debentures created an investment risk for those who elected to acquire them. The terms of the Trust Indenture clearly established the right of BCED to incur additional indebtedness, the preferred priority ranking of new debt senior to the Debentures, and the subordinated character of the Debentures. Accordingly, upon acquisition of fully subordinated debt, the debentureholders accepted the risk of non-payment of the debt. In those circumstances, in the absence of clear language to the contrary, it cannot reasonably be concluded that there is a restriction under the Trust Indenture on the ability of BCED to grant the Waivers and to provide the 1993 Guarantee, or on the right of BCED’s secured creditors to realize upon their security.

112[112] Accordingly, I agree with the trial judge’s conclusion that s. 9.01 of the Trust Indenture does not preclude BCED from securing indebtedness through provision of the 1993 Guarantee (at paras. 80, 81, 85 and 87). Neither the 1993 Guarantee, nor the associated Foreclosure, alone or in combination, comes within the meaning of the term “transaction”, as used in s. 9.01, so as to trigger the prohibition and related debt assumption obligation established by that section.

(c) The trial judge’s failure to mention the Waivers

113[113] The appellants point to the trial judge’s failure to mention the Waivers in his reasons as evidence that he considered only the form, and not the substance, of the 1993 Guarantee and the Foreclosure. They argue that this omission demonstrates that the trial judge, in error, failed to address the true purpose and effect of the 1993 Guarantee and the Foreclosure. This argument cannot succeed.

114[114] The fact that the trial judge did not explicitly mention the Waivers in his reasons, does not mean that he failed to consider them, or to address the substance of the 1993 Guarantee and the Foreclosure. Trial judges do not err merely because they do not give reasons for deciding one way or the other on each problematic point. The question is whether the trial judge came to grips with the issues and explained sufficiently his or her conclusions and the reasons and basis for them. (See R. v. Sheppard and R. v. Braich).

115[115] In my view, a reading of the trial judge’s reasons as a whole leaves no doubt that the trial judge came to grips with, and directly addressed, the appellants’ central argument that the 1993 Guarantee, and the Foreclosure, constitutes a prohibited “transaction”, disguised as a financing, within the meaning of s. 9.01. The trial judge’s failure to specifically mention the Waivers does not alter the fact that: a) the Debentures are subordinated to the 1993 Guarantee regardless of its terms, b) BCED enjoyed express contractual authority to enter into the 1993 Guarantee and to incur the contingent obligation which it evidences, c) the Trust Indenture contains no restriction on the type, or content, of security instruments which BCED could grant, and d) s. 3.07 of the Trust Indenture, which the trial judge did reference, specifically confirms Partnerco’s authority to realize upon its security, as it elected to do by carrying out the Foreclosure.

(d) The issue of good faith

116[116] The appellants contend that the explanation offered by Carena representatives concerning the need for the 1993 Guarantee is suspect, having regard to the protections available to Carena under its 1990 agreements with BCE Inc. for funds advanced by it to Partnerco in excess of the amount of funds jointly loaned by Carena and BCE Inc. to Partnerco. This court is not in a position to assess the credibility of the testimony of any witness in the proceedings before the trial judge. In any event, as confirmed by the appellants’ counsel during argument of this appeal, the bona fides of the 1990 Reorganization and the 1993 Security Arrangements is not in issue on this appeal, and is the subject of other pending proceedings. Nothing in these reasons determines that question, or presumes good faith by the persons effecting the Asset Transfers and the 1993 Security Arrangements.

117[117] The appellants also argue, in this connection, that there was no, or inadequate, consideration for the 1993 Guarantee and BCED’s 1993 share pledge, because the $50 million loan had already been advanced by Carena when those securities were given. The appellants offer no authority for the proposition that effective security cannot be granted for past advances. I conclude that the trial judge was correct to regard the 1993 Guarantee as a form of security, the grant of which was precipitated by a financing evidenced by Brookfield’s borrowing of additional funds from Carena, as advanced through Partnerco.

(e) BCED’s failure to object to the Foreclosure

118[118] The appellants submit that because BCED was entitled to file an objection to the Foreclosure under the PPSA, which would have required Partnerco to sell the Brookfield shares in a commercially reasonable manner, its failure to do so demonstrates that the 1993 Guarantee, coupled with the Foreclosure, constituted a prohibited transaction under s. 9.01 of the Trust Indenture. I do not agree.

119[119] Section 65(3) of the PPSA permits a person who is entitled to notification of a proposed disposition of secured collateral, and whose interest in the collateral would be adversely affected by the proposed disposition, to deliver to the secured party a written objection to the disposition, within 30 days after service of the notice. Where such an objection is delivered, the combined operation of ss. 65(3) and 63(2) of the PPSA prevents the secured party from proceeding with a foreclosure and requires that the secured collateral be sold in such a manner that: “[e]very aspect of the [proposed] disposition [be] commercially reasonable”. If no objection is delivered, s. 65(6) deems the secured party to have irrevocably elected to accept the collateral in full satisfaction of the secured obligation. However, as observed by R.H. McLaren in The 2002 Annotated Ontario Personal Property Security Act (Toronto: Carswell, 2002), at p. 313:

[Section 65(3)] operates in conjunction with s. 65(5) which provides that the Ontario Superior Court of Justice upon application by the secured party may order an objection to the proposal ineffective.

120[120] In this case, by notice dated February 1, 1995 delivered under s. 65(2) of the PPSA, Partnerco notified BCED of its intention to foreclose on BCED’s shares in Brookfield to satisfy BCED’s obligations under the 1993 Guarantee. The notice provided that upon payment of BCED’s obligations under the 1993 Guarantee and the estimated expenses of the realization, in the approximate aggregate amount of $62.8 million, the shares could be redeemed. BCED filed no objection to Partnerco’s notice.

121[121] The appellants assert that the assets underlying BCED’s shares in Brookfield at the time of the Foreclosure had a book value of approximately $2.8 billion. They emphasize that no independent valuations of the Brookfield shares or underlying assets were carried out at the time of the Foreclosure. The respondents submit that, had an objection to the Foreclosure been filed by BCED, Partnerco would merely have been required to demonstrate, on application under s. 65(5) of the PPSA, that the value of the Brookfield shares was less than $62.8 million, in order to negate the objection. They argue that the evidence was overwhelming at the time of the Foreclosure that the value of the Brookfield shares was less than BCED’s outstanding indebtedness under the 1993 Guarantee. Essentially, they claim, the delivery of an objection by BCED under the PPSA would have resulted in needless, and futile, litigation.

122[122] While the appellants’ argument at first seems compelling, on close examination of the record before this court it is undermined by one overwhelming fact. BCE Inc., like the appellants, held some of the Debentures. Indeed, the value of its holdings in the Debentures ($25 million), paralleled the value of the Debentures held by the appellants ($24.8 million). In addition, BCE Inc. held warrants investments in BCED and, until 1994, owned 49.9% of Partnerco, thus entitling it to about a 50% interest in the outstanding original Partnerco loans to BCED in the amount of $500 million. Notwithstanding its sizable overall investment in BCED and its subsidiaries, which vastly exceeded the interests of the appellants as debentureholders, by the end of 1993 BCE Inc. had taken more than a $1 billion write-down of all of its investments in BCED and its subsidiaries, and in Partnerco. Within months thereafter, it sold its interest in Partnerco to Carena for $1 million, an amount which must be viewed as nominal in the context of BCE Inc.’s total investment in BCED.

123[123] Absent a demonstration of bad faith or collusion, it is difficult to conceive that BCE Inc. effectively would have abandoned its entire interests in BCED, its subsidiaries and Partnerco (including in the Partnerco loans), and advantaged Carena by so doing, if the net value of Brookfield’s underlying assets less liabilities in 1993 and 1994 (immediately prior to the Foreclosure) was at the level suggested by the appellants. That view is reinforced by the fact that BCE Inc. and Carena were unrelated corporations. Moreover, as argued by the respondents, Partnerco, as a secured creditor of BCED, was entitled to realize upon its security in 1995 directly against the individual assets of Brookfield and BCED’s other subsidiaries rather than electing to foreclose on the Brookfield shares. There is no evidence on the record before this court that, had it done so, the effect on the debentureholders would have been any different. It must be remembered, as observed by the trial judge (at para. 78):

The Trust Indenture contemplates that, if the assets of BCED were to be liquidated following a realization upon security given in respect of indebtedness, the assets would go to pay the claims of all other indebtedness before the holders of the [Debentures] would be entitled to repayment.

V. DISPOSITION

124[124] For the reasons given, I would dismiss the appeal. The respondents are entitled to their costs of the appeal, on a partial indemnity basis. In accordance with the rule that now requires this court to fix costs, the respondents are requested to file their respective bills of costs with this court, in the appropriate form, within 10 days. The appellants may respond thereto in writing within 10 days thereafter, and the respondents may reply in writing within 5 days after the appellants’ filing.

Footnotes

1. 1See, in Ontario, s. 184(3) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16.
2. 2See also Martin v. F.P. Bourgault Industries Air Seeder Division Ltd. (1987), 45 D.L.R. (4th) 296 (Sask. C.A.); Re Vanalta Resources Ltd., [1976] B.C.J. No. 47 (B.C.S.C.); Lindzon v. International Sterling Holdings Inc. (1989), 45 B.L.R. 57 (B.C.S.C.); Benson v. Third Canadian General Investment Trust Ltd. (1993), 14 O.R. (3d) 493 (Ont. Gen. Div.); and GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Gen. Div.).
3. 3See Hibernia Insurance Co. v. St. Louis and New Orleans Transportation Co., 13 F. 516 (Mo. Cir. Ct. 1882); Montgomery Web Co. v. H. Dienelt, 19 A. 428 (Pa. Sup. Ct. 1890); Sarpy Bethold v. Holladay-Klotz Land and Lumber Company (1901), Mo. App. 233 (Mo. 1901); Camden Interstate Railway Co. v. Lee, 84 S.W. 332 (Ken. Ct. App. 1905); Collinsville National Bank v. Esau, 176 P. 514 (Okla. 1918); Campbell v. Vose, supra; Re Carl Hirth, [1898] 1 Q.B. 612 (C.A.); Re David and Adlard Ex Parte Whinney, [1914] 2 K.B. 694; and Re Simms, [1930] 2 Ch. D. 22.