SVCM Capital Ltd. v. Fiber Connections Inc., 2005 CanLII 15454 (ON CA)

COURT OF APPEAL FOR ONTARIO

DATE: 20050510 DOCKET: M32409 (C43287)

ARMSTRONG J.A. (In Chambers)

IN THE MATTER OF the Proposal made by Fiber Connections Inc. of the Town of Schomberg in the Province of Ontario

B E T W E E N :

SVCM CAPITAL LTD. Moving Party

• and -

FIBER CONNECTIONS INC. Respondent

Counsel: Raymond M. Slattery, for the respondent Jonathan H. Wigley, for the moving party

Heard: April 19, 2005

ARMSTRONG J.A.:

1This is a motion for directions as to whether leave to appeal is required from an order of Colin Campbell J. (the “motions judge”) terminating a unanimous shareholders’ agreement and approving a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3 (the “BIA”). If leave to appeal is necessary, the moving party, SVCM Capital Ltd. (“SVCM”) seeks leave to appeal the order. The moving party, on consent, also seeks an order pursuant to ss. 6(2) and 6(3) of the Courts of Justice Act, R.S.O. 1990, c. C.43 as amended that a related appeal in the Divisional Court be transferred to the Court of Appeal and heard with this appeal in the event that leave is granted or is not required.

FACTUAL BACKGROUND

2SVCM is a creditor and major shareholder of Fiber Connections Inc. (“Fiber”). SVCM is a party to a unanimous shareholders’ agreement which provides that as long as SVCM holds more than 5% of the shares of Fiber, no changes can be made to Fiber’s share structure without SVCM’s consent. The agreement provides SVCM with other rights mentioned below.

3Fiber is insolvent and made a proposal under the BIA which was approved by 25 of 26 creditors representing approximately 98% of the company’s indebtedness.

4The proposal was opposed by SVCM because it provided for a significant change to the capital structure of the company involving the creation of a new class of shares, conversion of debt to the new class of shares and the issuance of new common shares which will have the effect of diluting existing common shareholders to about 1%.

5SVCM takes the position that in order for the proposal to receive court approval, SVCM must first consent in accordance with the unanimous shareholders’ agreement. SVCM has refused to consent.

6Fiber sought court approval for the proposal and in doing so first sought an order terminating the unanimous shareholders’ agreement. Fiber also brought an application in which it invoked the oppression remedies under the Ontario Business Corporations Act, R.S.O. 1990 c. B-16 (the “OBCA”).

7The motions judge concluded that SVCM’s purported exercise of a veto of the proposal was oppressive of the corporation, its shareholders and directors and he issued an order permitting the company to amend the unanimous shareholders’ agreement and other documents in accordance with the terms of the proposal. That order has been appealed by SVCM, as a right, to the Divisional Court.

8The motions judge also considered whether he had any authority to set aside the unanimous shareholders’ agreement under the inherent jurisdiction of the court. He concluded, “that the considerations expressed for the exercise of the court’s inherent jurisdiction under the C.C.A.A. [Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 as amended] are applicable under the BIA to the facts of this case.” He then proceeded to set aside the unanimous shareholders’ agreement and approve the proposal under the purported exercise of his inherent jurisdiction. It is common ground that there is no express authority to accomplish this under the BIA.

IS LEAVE TO APPEAL REQUIRED?

9The first issue before me is whether leave to appeal is required in respect of the order made under the BIA.

10Section 193 of the BIA provides:

Unless otherwise expressly provided, an appeal lies to the Court of Appeal from any order or decision of a judge of the court in the following cases:

a) if the point at issue involves future rights;

b) if the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings;

c) if the property involved in the appeal exceeds in value ten thousand dollars;

d) from the grant of or refusal to grant a discharge if the aggregate unpaid claims of creditors exceed five hundred dollars; and

e) in any other case by leave of a judge of the Court of Appeal.

11Counsel for SVCM relies upon s. 193(a) and submits that leave is not required because the termination of the unanimous shareholders’ agreement involves the termination of future rights. He argues that the unanimous shareholders’ agreement provides SVCM with ongoing rights which it may exercise in the future depending on the existing circumstances. These include the veto over changes in the share structure, the right to appoint a director, rights restricting transfer and certain rights related to a bid to purchase the company. He also argues that the unanimous shareholders’ agreement is, in fact, a constating document of the company which governs its affairs in the future and hence any alteration in its terms will affect the future rights of its shareholders.

12I do not agree that the termination of the unanimous shareholders’ agreement involves the termination of future rights. The rights under the unanimous shareholders’ agreement are rights which presently exist, although they are capable of being exercised in the future. Rights which presently exist are not future rights. See TFP Investments Inc. (Trustee of) v. Singhal, [1991] O.J. No. 323 (Ont. C.A.) p. 13; West Edmonton Mall Property Inc. v. Duncan and Craig, 2001 ABCA 40, [2001] A.J. No. 158 (Alta. C.A.) para. 5.

13Counsel for SVCM also submits that if SVCM should succeed in an appeal, the proposal may not be approved and in the result Fiber will go into bankruptcy. Given that the future rights of SVCM to a distribution are different in a proposal situation, than they are in a bankruptcy liquidation, it follows that future rights are, in fact, at issue in the appeal. While there may be some simplistic attraction to such an argument, I am not persuaded. To adopt such an argument leads to the conclusion that the result of almost every appeal involves the issue of future rights. See Re Catalina Exploration and Development Ltd. v. Hutchison, 1981 ABCA 31, [1981] A.J. No. 896 (Alta. C.A.) at para. 23.

14I therefore conclude that the points at issue in this matter do not involve future rights. There is no automatic right of appeal under s. 193(a) of the BIA. Leave to appeal is required pursuant to s. 193(e) of the BIA.

The Test for Leave to Appeal under S.193(e) of the BIA

15There would appear to be a measure of confusion as to what the test for leave to appeal is under s. 193(e) of the BIA. In R.J. Nicol Construction Ltd. v. Nicol, 1995 1371 (ON CA), [1995] O.J. No. 48 (Ont. C.A.) at para. 6, Goodman J.A. cited the following passage from Houlden and Morawetz Bankruptcy and Insolvency Law of Canada (Third Edition) Vol. II at 7-56:

The factors to be considered on an application for leave to appeal are (a) whether the point of appeal is of significance to the practice; (b) whether the point raised is of significance to the action itself; (c) whether the appeal is prima facie meritorious or, on the other hand, whether it is frivolous and (d) whether the appeal will unduly hinder the progress of the action: Power Consolidated (China) Pulp Inc. v. British Columbia Resources Investment Corp. (1988), 19 C.P.C. (3d) 396 (B.C.C.A.); Med Finance Co. S.A. v. Bank of Montreal (1993), 1993 270 (BC CA), 22 C.B.R. (3d) 279, 24 B.C.A.C. 318, 40 W.A.C. 318 (C.A.).

Section 193(3) gives a judge of the Court of Appeal a discretion, but leave should only be granted if the judgment appears to be contrary to law, amounts to an abuse of judicial power, or involves an obvious error, causing prejudice, for which there is no remedy: MacNab v. B.S. & B. Enterprises Ltd. (1951), 32 C.B.R. 53 (Que. K.B.); Re Leard (1994), 1994 2673 (ON CA), 25 C.B.R. (3d) 210, 114 D.L.R. (4th) 135 (Ont. C.A.). If the order sought to be appealed from is discretionary, leave will not be granted unless the matter is of importance either to the administration of justice generally or to the respective rights of the parties to litigation: Zurich Indemnity Co. of Canada v. Reemark Rideau Developments Ltd. (1992), 1992 624 (BC CA), 22 C.B.R. (3d) 291, 84 B.C.L.R. (2d) 283, 18 B.C.A.C. 221, 31 W.A.C. 221 (C.A.).

Goodman J.A. proceeded to apply the test set out in the second paragraph of the passage from Houlden and Morawetz without reference to the test in the first paragraph of the passage. The test described in the first paragraph is the familiar test applied for leave to appeal orders under the C.C.A.A. See Re Stelco, 2005 4850 (ON SC), [2005] O.J. No. 729 (Ont. C.A.) para. 24.

16Osborne J.A. in Re Baker (1995), 1995 353 (ON CA), 22 O.R. (3d) 376 (Ont. C.A.) referred to the test applied by Goodman J.A. in R.J. Nicol, supra. He also made reference to the first test referred to in the Houlden and Morawetz passage as follows at p. 381:

An alternative test for determining whether leave to appeal should be granted was proposed by McLachlin J.A. (as she then was) in Power Consolidated (China) Pulp Inc. v. British Columbia Resources Investment Corp. (1988), 19 C.P.C. (3d) 396 (B.C.C.A.). McLachlin J.A. set out the following consideration: (a) is the point appealed of significance to the practice; (b) is the point raised of significance in the action itself; (c) is the appeal prima facie meritorious; and (d) will the appeal unduly hinder the progress of the action?

Osborne J.A. then concluded at p. 381:

In my view, the factors generally relevant to the issue whether leave to appeal should be granted are set out by Goodman J.A. in R.J. Nicol Construction Ltd. I do not, however, think that in each case all of the listed factors should be given equal weight. It seems to me that in this case, the question whether the trustee’s failure to provide the notice required by s. 168.1 of the Act can be remedied by resort to s. 187(9) of the Act is a matter of considerable general importance in bankruptcy practice. It seems to me to be likely that from time to time trustees handling a large number of personal bankruptcies will, due to administrative errors, not comply with the requirements of s. 168.1 (see annotation to Re Tong (1993), 23 C.B.R. (3d) 39 (Ont. Gen. Div.)). In addition, while I am satisfied that there are arguable grounds of appeal, I do not express any view as to whether the appeal will, or will not, succeed.

17In spite of his stated preference for the test adopted by Goodman J.A. in Nicol, Osborne J.A. was not prepared to adopt the test without some flexibility. He considered that the issues before him were of general importance to the bankruptcy practice which displayed arguable grounds of appeal. In effect, he invoked two of the factors considered by McLachlin J.A. in Power Consolidated, supra.

18More recently, Feldman J.A. in GMAC Commercial Credit Corporation Canada v. T.C.T. Logistics Inc., [2003] O.J. No. 5761 considered the test for granting leave under s. 193(e) of the BIA. At para. 9 of her endorsement, she said:

The test for granting leave to appeal under s. 193(e) of the BIA has been described as containing the following criteria: leave should only be granted if the judgment is contrary to law; amounts to an abuse of judicial power or involves an obvious error, causing prejudice for which there is no remedy: McNab v. B.S. & B. Enterprises Ltd. (1951), 32 C.B.R. 53 (Que. K.B.), and from Power Consolidated (China) Pulp Inc. v. British Columbia Resources Investment Corp. (1988), 19 C.P.C. (3d) 396 (B.C.C.A.): whether the point of the appeal is of significance to the practice; whether the point raised is of significance to the action itself; whether the appeal is prima facie meritorious or frivolous; and, whether the appeal will unduly prejudice the progress of the action. When the order appealed from is discretionary, the issue must be of importance to the administration of justice or to the rights of the parties: Zurich Indemnity Co. of Canada v. Reemark Rideau Developments Ltd. (1992), 1992 624 (BC CA), 22 C.B.R. (3d) 291 (B.C.C.A.). Finally, the significance of the issue in bankruptcy law can determine whether leave is granted: Re Nagy (1987), 1998 ABCA 15, 1 C.B.R. (4th) 179 (Alta. C.A.).

Feldman J.A. proceeded to grant leave to appeal on the ground that the issues before her were significant to commercial practice regulating bankruptcy and receivership and ought to be considered by this court. As well, she found the issues were of significance to the action.

19It is apparent that judges of our court have not adopted a rigid approach to the factors which a chambers judge should consider on an application for leave under s. 193(e) of the Bankruptcy and Insolvency Act. There is a variety of factors to consider depending upon the circumstances presented to the court.

Should Leave be Granted in this Case?

20The approach taken by the motions judge in invoking the inherent jurisdiction of the court to set aside the unanimous shareholders’ agreement represents a case of first impression. Like Osborne J.A. in Re Baker, supra, I do not think I need to express a view as to whether the appeal will succeed. Like him, I am satisfied that there are arguable grounds of appeal and like Feldman J.A. in GMAC Commercial Credit Corporation of Canada, supra, the issues raised are significant to bankruptcy practice and ought to be considered and addressed by this court.

21There is also an additional reason to grant leave to appeal in this case. If leave were not granted, such an order would effectively render the companion appeal to the Divisional Court moot. SVCM has an appeal as of right to the Divisional Court in respect of the oppression remedy. In my view, it would be unfair to effectively frustrate the prosecution of that appeal by denying leave to appeal the order under the BIA to this court.

22Leave to appeal is therefore granted. An order will also go transferring the Divisional Court appeal (court file no. 116/05) to this court to be heard and determined by the Court of Appeal with this appeal.

23SVCM shall have its costs of this motion on a partial indemnity basis fixed at $5,000 including disbursements and Goods and Services Tax.

RELEASED:

“RPA” “Robert P. Armstrong J.A.”