BDC Venture Capital Inc. v. Natural Convergence Inc., 2009 ONCA 637

CITATION: BDC Venture Capital Inc. v. Natural Convergence Inc., 2009 ONCA 637

DATE: 20090902

DOCKET: M37941/M37942 (C50876)

COURT OF APPEAL FOR ONTARIO

Lang J.A. (in chambers)

IN THE MATTER OF an Application under Section 101 of the Courts of Justice Act, R.S.O. 1990, c.c.43, as amended, and Section 47 of the Bankruptcy and Insolvency Act, R.S.C.1985, c. B-3, as amended

BETWEEN

BDC Venture Capital Inc.

Applicant (Respondent in Appeal)

and

Natural Convergence Inc.

Respondent (Respondent in Appeal)

Graham D. Smith and Jason Wadden, for the moving party, Broadview Networks Inc.

Matthew J. Halpin, for the responding party, BluArc Communications Inc.

Sam Babe, for the creditor, MMV Financial Inc.

Ian B. Houle, for the interim receiver, PriceWaterhouseCoopers Inc.

Heard: September 1, 2009

On appeal from the orders of Justice Stanley J. Kershman of the Superior Court of Justice dated July 31, 2009 and on a motion and cross-motion to impose or cancel a stay pending appeal.

Lang J.A. (in chambers):

[1] The moving party, Broadview Networks Inc. (Broadview), seeks relief that will allow PriceWaterhouseCoopers (PwC), the interim receiver, to sell the assets of Natural Convergence Inc. (NCI) to Broadview. The respondent, BluArc Communications Inc. (BluArc) opposes that relief.

[2] In separate orders on July 31, 2009, the application judge appointed the receiver (the Receivership Order) and ordered the asset sale to Broadview (the Sale Order). BluArc appealed from these orders. On appeal, the Orders were stayed automatically pursuant to s. 195 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA). Broadview moves to cancel the stay. MMV Financial Inc. (MMV), a secured creditor, supports Broadview’s motion. PwC also filed materials and made submissions on this motion.

[3] All parties agreed during argument that the appeal should be expedited. Accordingly, the appeal is expedited to be heard by this court on September 10, 2009. Forty-five minutes are allotted to the appellant BluArc and 40 minutes are allotted to the respondent Broadview. The parties agree they will be able to perfect the appeal in a timely manner because their facta for this motion can be readily adapted for the purposes of the appeal. However, no party to this motion filed the material that was before the application judge or the application judge’s reasons for granting the Orders. These materials must be included in the appeal book. Subject to any other order, I also note that the September 10 date may, if appropriate, allow for a panel review of this decision.

[4] I am advised that BluArc is seeking a variation of the Orders pursuant to s. 187(5) of the BIA and the parties are scheduled to appear before the application judge tomorrow, September 3, 2009. BluArc advises that it will deliver its material for that motion today.

[5] Although BluArc appealed both the Receivership and Sale Orders, it became clear during argument that it did not object to PwC’s appointment as receiver; it merely challenged PwC’s right to proceed with the asset sale. Thus, the real issue is not about the appointment of the receiver but about whether the sale proceeds pending the appeal. Broadview primarily seeks cancellation of the automatic stay of all appealed proceedings pursuant to s. 195 of the BIA. This court has a broad discretion to vary or cancel the automatic stay if “the appeal is not being prosecuted diligently, or for such other reason as the [court] may deem proper”.

[6] While the moving party did not abandon its secondary “abuse of process” stay argument definitively, nor its argument for a stay of the appeal, neither did it pursue these issues in oral argument. In any event, I see no abuse of process arising from BluArc’s stated intention to also bring a variation motion before the application judge. Accordingly, these reasons focus on whether the s. 195 automatic stay should be cancelled in the circumstances of this case.

[7] In light of the need to deliver a decision on this motion expeditiously, these reasons refer only to facts essential to the disposition. However, a brief overview will provide some context.

[8] NCI developed software that enabled its licensees, including Broadview and BluArc, to sell voice-over-internet-protocol telephone support services to customers. As early as March 2008, NCI was in financial straits and began attempting to market its business or to secure financing. As a way of providing financial assistance to NCI, Broadview purchased software licences from NCI in March 2009 for approximately $444,000.

[9] With financial problems continuing, on July 16, 2009, Broadview offered to purchase NCI’s assets. NCI agreed with the terms. The offer included a “no shop” provision that prohibited NCI from seeking other purchasers. The offer was also said to include a premium on the purchase price.

[10] On July 22, 2009, BDC Capital Inc. (BDC), a secured creditor, served a Notice of Intention to Enforce Security on NCI pursuant to s. 244 of the BIA. On July 24, 2009, Broadview provided NCI with an unsecured loan to pay its remaining employees. The remaining employees were said to be necessary to maintain the software’s source code.

[11] Although PwC initially asked for approval of the sale to Broadview, it apparently delivered an amended notice later on July 31 that simply asked the court for directions regarding the sale. In its accompanying report to the application judge about Broadview’s offer, PwC stated that it was “uncertain as to the level of interest” that other parties expressed in buying NCI’s assets and that in the “absence of contacting” other interested parties, the receiver “cannot comment on the commercial reasonableness of the Agreement”. PwC sought “the Court’s direction with respect to the completion of the Agreement”. The application judge granted both orders.

[12] While I do not have the benefit of any of the materials filed before the application judge, or the application judge’s reasons, the material before me indicates that all NCI’s senior secured creditors, including BDC and MMV and Comerica, agreed to the asset sale, even though the proceeds of sale would be less than NCI’s total indebtedness to those creditors. No one opposed the sale. While PwC’s second report, filed in this court, suggests that BDC is now amenable to a more open sale process, BDC did not appear on this motion. MMV, the only secured creditor who did appear, continues to support the Sale Order made by the application judge.

[13] In any event, Broadview argues that the stay should be cancelled because BluArc has no standing to challenge the Orders that it has appealed. Broadview describes BluArc as a “bitter bidder” and argues that the test for cancellation of the stay should be based on the following discussion in Skyepharma PLC v. Hyal Pharmaceutical Corporation, [2000] O.J. No. 467 (C.A.):

[14] Although the issues considered in these cases are not identical to the case at bar, the reasoning applies to the issue raised on this appeal. If an unsuccessful prospective purchaser does not acquire an interest sufficient to warrant being added as a party to a motion to approve a sale, it follows that it does not have a right that is finally disposed of by an order made on that motion.

[15] There are two main reasons why an unsuccessful prospective purchaser does not have a right or interest that is affected by a sale approval order. First, a prospective purchaser has no legal or proprietary right in the property being sold. Offers are submitted in a process in which there is no requirement that a particular offer be accepted. Orders appointing receivers commonly give the receiver a discretion as to which offers to accept and to recommend to the court for approval. The duties of the receiver and the court are to ensure that the sales are in the best interests of those with an interest in the proceeds of the sale. There is no right in a party who submits an offer to have the offer, even if the highest, accepted by either the receiver or the court: Crown Trust v. Rosenberg, supra.

[16] Moreover, the fundamental purpose of the sale approval motion is to consider the best interests of the parties with a direct interest in the proceeds of the sale, primarily the creditors. The unsuccessful would be purchaser has no interest in this issue. Indeed, the involvement of unsuccessful prospective purchasers could seriously distract from this fundamental purpose by including in the motion other issues with the potential for delay and additional expense.

[17] In making these comments, I recognize that a court conducting a sale approval motion is required to consider the integrity of the process by which the offers have been obtained and to consider whether there has been unfairness in the working out of that process. Crown Trust v. Rosenberg, supra; Royal Bank of Canada v. Soundair Corp. (1991), 4 O.R. (3d) 1 (C.A.). The examination of the sale process will in normal circumstances be focussed on the integrity of that process from the perspective of those for whose benefit it has been conducted. The inquiry into the integrity of the process may incidentally address the fairness of the process to prospective purchasers, but that in itself does not create a right or interest in a prospective purchaser that is affected by a sale approval order.

[19] In limited circumstances, a prospective purchaser may become entitled to participate in a sale approval motion. For that to happen, it must be shown that the prospective purchaser acquired a legal right or interest from the circumstances of a particular sale process and that the nature of the right or interest is such that it could be adversely affected by the approval order. A commercial interest is not sufficient.

[20] There is a sound policy reason for restricting, to the extent possible, the involvement of prospective purchasers in sale approval motions. There is often a measure of urgency to complete court approved sales. This case is a good example. When unsuccessful purchasers become involved, there is a potential for greater delay and additional uncertainty. This potential may, in some situations, create commercial leverage in the hands a disappointed would be purchaser which could be counterproductive to the best interests of those for whose benefit the sale is intended.

[14] Similarly, in Consumers Packaging Inc. (Re) (2001), 150 O.A.C. 384 (C.A.) this court stated at para. 7:

Further, despite its protestations to the contrary, it is evident that Ardagh is a disappointed bidder that obtained its security interest in the assets of Consumers in order to participate in their restructuring and obtain a controlling equity position in the restructured entity. There is authority from this court that an unsuccessful bidder has no standing to appeal or to seek leave to appeal. As a general rule, unsuccessful bidders do not have standing to challenge a motion to approve a sale to another bidder (or to appeal from an order approving the sale) because the unsuccessful bidders "have no legal or proprietary right as technically they are not affected by the order": see the statement of Farley J., dealing with a receiver's motion to approve a sale, that is quoted with approval by O'Connor J.A. of this court in Skyepharma plc v. Hyal Pharmaceutical Corp. (2000), 47 O.R. (3d) 234 at 238 (C.A.).

[15] On the basis of these authorities, Broadview asks me to conclude that BluArc is without standing to bring its appeal and that the appeal should be stayed and the s. 195 stay lifted. Both Skyepharma and Consumers Packaging were heard by a panel of this court and not by a single judge sitting in chambers. In my view, a single judge does not have the jurisdiction in the circumstances of this case to decide that an appellant lacks standing to bring an appeal and to stay the appeal. To do so would be tantamount to quashing the appeal. A motion to quash an appeal, which may result in the final disposition of the appeal, is heard by a panel of the court.

[16] An analogous situation arose in 1730960 Ontario Ltd. (Re), August 6, 2009, unreported (Ont. C.A. [In Chambers]). Based on Skyepharma, Juriansz J.A. was not satisfied in that case that the “prospective purchaser [who moved to stay a sale order] has any standing to bring this appeal”. Since “the appeal is destined to be quashed”, he dismissed the motion on the basis there was “no serious issue to be decided on the appeal”. Juriansz J.A. would also have dismissed the motion on the basis of the merits of the appeal, irreparable harm and the balance of convenience.

[17] BluArc argues that the stay should not be lifted based on the relevant criteria referenced by Juriansz J.A. in 1730960 Ontario Ltd. and discussed in After Eight Interiors Inc. v. Glenwood Homes Inc. (2006), 391 A.R. 202 (C.A.) at paras. 5-6, which provides for a variation of the test set out in RJR-MacDonald Inc. v. Canada (A.G.), [1994] 1 S.C.R. 311. The criteria include whether there is a serious issue to be appealed, whether the moving party would suffer irreparable harm if the stay is not lifted, and whether the moving party would suffer greater harm than the responding party if the stay is not lifted. At the same time, in view of the broad discretion provided in s. 195 of the BIA, After Eight adopts a contextual approach.

[18] A consideration of these criteria necessarily includes consideration of whether the particular appellant can succeed on the appeal. Broadview has persuaded me that, whatever the merits of the underlying issues, it is highly unlikely that BluArc has the requisite standing. BluArc is neither a creditor nor a contingent creditor. At most, BluArc is a licensee of software. As such, it is entitled to the remedies set out in its licence. That licence requires NCI to provide the software’s source code for the software to an Escrow Agent (the Agent) and for the Agent to provide the source code to BluArc in certain circumstances, which may well include the circumstances that have occurred in the past month. BluArc sought the source code from the Escrow Agent. The Agent declined to provide it on the basis of an e-mail from PwC that its consent was required to any such release. Apparently, BluArc has not sought PwC’s consent, which may simply be because the Receivership Order is currently stayed. In any event, both in its material and in its submissions, Broadview has taken the position that it would not interfere with the Escrow Agent’s obligation to comply with the licences because the licences are not part of the assets that Broadview has agreed to purchase.

[19] It follows that at its highest, BluArc has a licence agreement with NCI that, if breached, will give BluArc a potential cause of action against NCI. In my view, such a potential cause of action would not appear to warrant BluArc being added as a party to a motion to approve a sale of NCI’s assets.

[20] In addition, on the material before me, BluArc’s main interest in the sale appears to be that of a belated and disappointed potential purchaser. It does not appear to have a legal or proprietary right to either participate in the sale process or attack that process. In coming to this conclusion, I observe that the Sale Order proceeded with the consent of all secured creditors and without opposition from any entity entitled to notice of the application.

[21] In view of BluArc’s agreement to fund the costs of a continuing stay pending appeal, Broadview has not persuaded me that it will suffer irreparable harm if the stay remains in force for the next eight days. However, Broadview has persuaded me that it does not appear that BluArc will suffer any undue harm if the stay is lifted. Indeed, it appears that BluArc will continue to have its contractual recourse to obtain the source codes that it claims are its primary interest. In any event, if I am wrong, it may well be that BluArc will be able to “unscramble the egg” if a panel of the court so decides next Thursday.

[22] For these reasons, I dismiss the responding party’s cross-motion and grant the moving party’s motion to cancel the stay under s. 195 of the BIA. This disposition, of course, does not preclude the application judge from proceeding with the scheduled variation motion tomorrow. As well, since these reasons provide only a preliminary view of the matter, it does not dispose of the underlying appeal scheduled to be heard in eight days.

[23] For the purposes of the appearance in this court on September 10, 2009, counsel are directed to file the appeal book and appellant’s factum by 4:30 pm on Friday, September 4, 2009 and the respondent’s factum by noon on Tuesday, September 8, 2009.

[24] Costs of this motion are awarded to Broadview fixed in the amount of $12,000, inclusive of disbursements and GST.

“S.E. Lang J.A.”