In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended and in the Matter of a Proposed Plan of Compromise or Arrangement with Respect to Stelco Inc., and the Other Applicants Listed Under Schedule "A" Application Under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended [Indexed as: Stelco Inc. (Re)]
78 O.R. (3d) 241
[2005] O.J. No. 4883
Dockets: C44436 and M33171
Court of Appeal for Ontario,
Goudge, Sharpe and Blair JJ.A.
November 17, 2005
Debtor and creditor -- Companies' Creditors Arrangement Act -- Creditors -- Classification -- Classification of creditors should be determined by their legal rights in relation to debtor company as opposed to their rights as creditors in relation to each other.
The appellant represented unsecured creditors who held convertible unsecured subordinated debentures issued by the debtor company pursuant to a Supplemental Trust Indenture. Their claims were subordinated to Senior Debt Holders. The Supplemental Trust Indenture provided that if the Subordinated Debenture Holders received any payment from the company, or any distribution from the assets of the company, before the Senior Debt was fully paid, they were obliged to remit any such payment or distribution to the Senior Debt Holders until the latter had been paid in full, but that no such payment or distribution by the company shall be deemed to constitute payment on the Subordinated Debenture Holders' debt. The parties referred to these provisions as the "Turnover Payment" provisions. In the company's Proposed Plan, the Subordinated Debenture Holders and the Senior Debt Holders were included in the same class (along with Trade Creditors) for the purposes of voting on the Proposed Plan. The appellant sought an order from the supervising judge classifying the Subordinated Debenture Holders as a separate class for voting purposes, arguing that their interests were different than those of the Senior Debt Holders and that creditors who do not have common interests should not be classified in the same group for voting purposes. The motion was dismissed. The appellant appealed.
Held, the appeal should be dismissed.
The classification of creditors is a fact-driven exercise, dependent upon the circumstances of each particular case. It is determined by the creditors' legal rights in relation to the debtor company, as opposed to their rights as creditors in relation to each other. The supervising judge did not err in finding that there was no material distinction between the legal rights of the Subordinated Debenture Holders and those of the Senior Debt Holders vis-à-vis the company. Each was entitled to be paid the moneys owing under their respective debt contracts. The only difference was that the former creditors were subordinated in interest to the latter and had agreed to pay over to the latter any portion of their recovery received until the Senior Debt had been paid in full. As between the two groups of creditors, this merely reflected the very deal the Subordinated Debenture Holders bought into when they purchased their subordinated debentures. The supervising judge was also entitled to determine that th is was not a case involving any confiscation of legal rights. Finally, the supervising judge's finding that there was no realistic conflict of interest between the creditors was supported on the record. [page242] Each had the same general interest in relation to the company, namely to be paid under their contracts, and to maximize the amount recoverable from the company through the Plan negotiation process. The Senior Debt Holders' efforts would not be moderated in some respect because they would be content to make their recovery on the backs of the Subordinated Debenture Holders through the Turnover Payment process. In order to carry the class, the Senior Debt Holders would require the support of the Trade Creditors, whose interest was not affected by the subordination agreement. Thus, the Senior Debt Holders would be required to support the maximization approach.
APPEAL from an order of Farley J., 2005 41379 (ON SC), [2005] O.J. No. 4814, 143 A.C.W.S. (3d) 623 (S.C.J.) dismissing a motion for an order classifying the appellants as a separate class of creditors for voting purposes.
Canadian Airlines Corp. (Re), 2000 28185 (AB QB), [2000] A.J. No. 1693, 19 C.B.R. (4th) 12 (Q.B.), apld NsC Diesel Power Inc. (Re), 1990 4211 (NS SC), [1990] N.S.J. No. 484, 97 N.S.R. (2d) 295, 258 A.P.R. 295, 79 C.B.R. (N.S.) 1 (T.D.), not folld Other cases referred to Campeau Corp. (Re), [1991] O.J. No. 2338, 86 D.L.R. (4th) 570, 10 C.B.R. (3d) 100 (Gen. Div.); Country Style Food Services Inc. (Re), 2002 41751 (ON CA), [2002] O.J. No. 1377, 158 O.A.C. 30, 112 A.C.W.S. (3d) 1009 (C.A.); Elan Corp. v. Comiskey (1990), 1990 6979 (ON CA), 1 O.R. (3d) 289, [1990] O.J. No. 2180, 41 O.A.C. 282, 1 C.B.R. (3d) 101 (C.A.) (sub nom. Nova Metal Products v. Comiskey); Fairview Industries Ltd. (Re), 1991 4266 (NS SC), [1991] N.S.J. No. 456, 109 N.S.R. (2d) 32, 11 C.B.R. (3d) 71, 30 A.C.W.S. (3d) 376 (T.D.); Norcen Energy Resources Ltd. v. Oakwood Petroleums Ltd., 1988 3570 (AB QB), [1988] A.J. No. 1226, [1989] 2 W.W.R. 566, 64 Alta. L.R. (2d) 139, 72 C.B.R. (N.S.) 20 (Q.B.); Northland Properties Ltd. v. Excelsior Life Insurance Co. of Canada, 1989 2672 (BC CA), [1989] B.C.J. No. 63, 34 B.C.L.R. (2d) 122, [1989] 3 W.W.R. 363, 73 C.B.R. (N.S.) 195 (C.A.); Northland Properties Ltd. (Re), 1988 3212 (BC CA), [1988] B.C.J. No. 1937, 32 B.C.L.R. (2d) 309 (C.A.), affg 1988 3146 (BC SC), [1988] B.C.J. No. 1530, 31 B.C.L.R. (2d) 35, 73 C.B.R. (N.S @@.) 166 (S.C.); Pacific Coastal Airlines Ltd. v. Air Canada, [2001] B.C.J. No. 2580, 2001 BCSC 1721, 19 B.L.R. (3d) 286, 110 A.C.W.S. (3d) 259 (S.C.); Resurgence Asset Management LLC v. Canadian Airlines Corp., [2000] A.J. No. 610, 2000 ABCA 149, 80 Alta. L.R. (3d) 213, 261 A.R. 12, 19 C.B.R. (4th) 33, 97 A.C.W.S. (3d) 844 (C.A.); Savage v. Amoco Acquisition Co., 1988 ABCA 148, [1988] A.J. No. 330, 59 Alta. L.R. (2d) 260, 40 B.L.R. 188, 68 C.B.R. (N.S.) 154 (C.A.) (sub. nom. Amoco Acquisition Co. v. Savage); Sklar- Peppler Furniture Corp. v. Bank of Nova Scotia, 1991 8306 (ON SCDC), [1991] O.J. No. 2288, 86 D.L.R. (4th) 621, 8 C.B.R. (3d) 312 (Gen. Div.); Sovereign Life Assurance Co. v. Dodd (1892), [1891-4] All E.R. Rep. 246, [1892] 2 Q.B. 573, 8 T.L.R. 684, 36 Sol. Jo. 644, 41 W.R. 4, 62 L.J.Q.B. 19, 67 L.T. 396 (C.A.); Stelco Inc. (Re) (2005), 2005 8671 (ON CA), 75 O.R. (3d) 5, [2005] O.J. No. 117, 1196 O.A.C. 142, 253 D.L.R. (4th) 109, 9 C.B.R. (5th) 135, 2 B.L.R.(4th) 238 (C.A.); Wellin gton Building Corp. Ltd. (Re), 1934 93 (ON SC), [1934] O.R. 653, [1934] 4 D.L.R. 626, 16 C.B.R. 48 (H.C.J.); Woodward's Ltd. (Re), 1993 870 (BC SC), [1993] B.C.J. No. 852, 84 B.C.L.R. (2d) 206, 20 C.B.R. (3d) 74 (S.C.) Statutes referred to Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 Joint Stock Companies Arrangement Act 1870 (U.K.), 33 and 34 Vict., c. 104 Authorities referred to Edwards, S.E., "Reorganizations Under the Companies' Creditors Arrangement Act" (1947) 25 Can. Bar Rev. 587 Robertson, Q.C., R.N., "Legal Problems on Reorganization of Major Financial and Commercial Debtors" (Canadian Bar Association -- Ontario Continuing Legal Education, April 5, 1983) [page243]
Paul Macdonald, Andrew Kent and Brett Harrison, for Informal Independent Converts' Committee. Michael E. Barrack and Geoff R. Hall, for Stelco Inc. Robert Staley and Alan Gardner, for Senior Debenture Holders. Fred Myers, for Her Majesty the Queen in Right of Ontario, and the Superintendent of Financial Services. Ken Rosenberg, for United Steelworkers of America. A. Kauffman, for Tricap Management Ltd. Kyla Mahar, for Monitor. Murray Gold, for Salaried Retirees. Heath Whitley, for CIBC. Steven Bosnick, for U.S.W.A. Loc. 5328 and 8782.
The judgment of the court was delivered by
BLAIR J.A.:--
Background
[1] This appeal arises out of the reorganization of Stelco Inc., and related companies, pursuant to the Companies' Creditors Arrangement Act ("CCAA") [See Note 1 at the end of the document]. Stelco has been in the midst of this fractious process for approximately 21 months. Justice Farley has been the supervising judge throughout.
[2] Stelco has presented a Proposed Plan of Compromise or Arrangement to its creditors for their approval. The vote was scheduled for Tuesday, November 15, 2005. On Thursday, November 10, a group of creditors known as the Informal Independent Converts' Committee (the "Converts' Committee) sought an order from the supervising judge, amongst other things, classifying the Subordinated Debenture Holders whom they represent as a separate class for voting purposes. Justice Farley dismissed the motion. In the face of the pending vote, the Converts' Committee sought leave to appeal on Thursday afternoon (the courts were closed on Friday, November 11, for Remembrance Day). Rosenberg J.A. dealt with the matter and directed that the application for leave, and if leave be granted, the appeal, be heard by a panel of this court on Monday, November 14, 2005. [page244]
[3] This panel heard the application for leave and the appeal on Monday. We concluded that leave should be granted, but that the appeal must be dismissed, and at the conclusion of argument -- and in order to clarify matters so that the vote could proceed the following day -- we issued a brief endorsement with our decision, but indicating that more detailed reasons would follow.
[4] The endorsement read as follows:
In our view, the appellants have not demonstrated a different legal interest from the other unsecured creditors vis à vis the debtor, nor any basis for setting aside the finding of Farley J. that there are no different practical interests such that the appellants deserve a separate class. We see no legal error or error in principle in his exercise of discretion.
Leave to appeal is granted, but the appeal must therefore be dismissed. Because of the importance of the issue for Ontario practice in this area, we propose to expand somewhat on these reasons in due course.
[5] These are those expanded reasons.
Facts
[6] Stelco's Proposed Plan is made to unsecured creditors only. It is not intended to affect the claims of secured creditors.
[7] The Converts' Committee represents unsecured creditors who hold $90 million of convertible unsecured subordinated debentures issued by Stelco pursuant to a Supplemental Trust Indenture dated January 21, 2002, and due in 2007. With interest, the claims of the Subordinated Debenture Holders now amount to approximately $110 million. Those claims are subordinated to approximately $328 million in favour of Senior Debt Holders. In addition, Stelco has unsecured trade debts totalling approximately $228 million. In the Proposed Plan, these three groups of unsecured creditors -- the Subordinated Debenture Holders (represented by the Converts' Committee), the Senior Debt Holders and the Trade Creditors -- have all been included in the same class for the purposes of voting on the Proposed Plan or any amended version of it.
[8] The Converts' Committee takes issue with this, and seeks to have the Subordinated Debenture Holders classified as a separate class of creditors for voting purposes. They argue that their interests are different than those of the Bondholders and that creditors who do not have common interests should not be classified in the same group for voting purposes. They submit, therefore, that the supervising judge erred in law in not granting them a separate classification. In that regard, they rely upon this court's decision in Elan Corp. v. Comiskey (1990), 1990 6979 (ON CA), 1 O.R. (3d) 289, [1990] O.J. No. 2180 (C.A.). They also argue that the supervising [page245] judge was wrong, on the facts contained in the record, in finding that the Subordinated Debenture Holders and the Bondholders did not have conflicting interests.
[9] In making their argument about a different interest, the appellants rely upon their status as subordinated debt holders as shaped particularly by Articles 6.2 and 6.3 of the Supplemental Trust Indenture. In essence those provisions reinforce the subordinated nature of their debt. They stipulate (a) that if the Subordinated Debenture Holders receive any payment from Stelco, or any distribution from the assets of Stelco, before the Senior Debt is fully paid, they are obliged to remit any such payment or distribution to the Senior Debt Holders until the latter have been paid in full (Art. 6.2(3)), but (b) that no such payment or distribution by Stelco shall be deemed to constitute a payment on the Subordinated Debenture Holders' debt (Art. 6.3). The parties refer to these provisions as the "Turnover Payment" provisions.
[10] In short, although Stelco is obliged to pay both groups of creditors in full, as between the Subordinated Debenture Holders and the Senior Debt Holders, the latter are entitled to be paid in full before the former receive anything. The Supplemental Trust Indenture makes it clear that the provisions of Article 6 "are intended solely for the purpose of defining the relative rights of [the Subordinated Debenture Holders] and the holders of the Senior Debt" (Art. 6.3).
[11] The appellants contend that the Turnover Payment provisions distinguish their interests from those of the Subordinated Debenture Holders when it comes to voting on Stelco's Proposed Plan. They say that the Subordinated Debenture Holders' interest in maximizing the amounts to be made available to unsecured creditors ends once they have received full recovery, in part as a result of the Turnover Payments that the Subordinated Debenture Holders will be required to make from their portion of the funds. On the other hand, the Subordinated Debenture Holders will have an interest in seeking more because their recovery, for practical purposes, will have only begun once that point is reached.
[12] The respondents submit, for their part, that the appellants are seeking a separate classification for a collateral purpose, i.e., so that they will be able to veto the Proposed Plan, or at least threaten to veto it, unless they are granted a benefit to which they are not entitled -- the elimination of their subordinated position by virtue of the Turnover Payment provisions.
[13] Farley J. rejected the appellants' arguments. The thrust of his decision in this regard is found in paras. 13 and 14 of his reasons: [page246]
I would note as well that the primary and most significant attribute of the ConCom debt and that of the BondCom debt/ Senior Debt [See Note 2 at the end of the document] plus the trade debt vis-à-vis Stelco is that it is all unsecured debt. Thus absent valid reason to have separate classes it would be reasonable, logical, rational and practical to have all this unsecured debt in the same class. Certainly that would avoid any unnecessary fragmentation -- and in this respect multiplicity of classes does not mean that that fragmentation starts only when there are many classes. Unless more than one class is necessary, fragmentation would start at two classes. Fragmentation if necessary, but not necessarily fragmentation.
Is it necessary to have more than one class? Firstly, it would not appear to me that as between Stelco and the unsecured creditors overall there is any material distinction. Secondly, there would not appear to me to be any confiscation of any rights (or the other side of the coin any new imposition of obligations) upon the holders of the ConCom debt. The subrogation issue was something which these holders assumed on the issue of that debt. Thirdly, I do not see that there is a realistic conflict of interest. Each group of unsecured creditors including the ConCom debt holders and the BondCom debt holders has the same general interest vis-à-vis Stelco, namely to extract from Stelco through the Plan the maximum value in the sense of consideration possible . . . . That situation is not impacted for our purposes here in this motion by the possibility that in a subsequent dispute between the ConCom holders and the BondCom holders there may be a difference of opinion as to the variation of the considerat ion obtained.
[14] We agree with his conclusion and see no basis to interfere with his findings in that regard.
The Leave Application
[15] The principles to be applied by this court in determining whether leave to appeal should be granted to someone dissatisfied with an order made in a CCAA proceeding are not in dispute. Leave is only sparingly granted in such matters because of their "real time" dynamic and because of the generally discretionary character underlying many of the orders made by supervising judges in such proceedings. There must be serious and arguable grounds that are of real and significant interest to the parties. The court has assessed this criterion on the basis of a four-part test, namely,
(a) whether the point on appeal is of significance to the practice;
(b) whether the point is of significance to the action;
(c) whether the appeal is prima facie meritorious or frivolous; and [page247]
(d) whether the appeal will unduly hinder the progress of the action.
See Stelco Inc. (Re) (2005), 2005 8671 (ON CA), 75 O.R. (3d) 5, [2005] O.J. No. 1171 (C.A.), at para. 24; Country Style Food Services Inc. (Re), 2002 41751 (ON CA), [2002] O.J. No. 1377, 158 O.A.C. 30 (C.A.), at para. 15; Resurgence Asset Management LLC v. Canadian Airlines Corp., 2000 ABCA 149, [2000] A.J. No. 610, 19 C.B.R. (4th) 33 (C.A.), at para. 7.
[16] Here, we granted leave to appeal because the proposed appeal raised an issue of significance to the practice, namely the nature of the "common interest" test to be applied by the courts for purposes of the classification of creditors in CCAA proceedings. Although the law seems to have progressed in the lower courts along the lines developed in Alberta, beginning with the decision of Paperny J. in Canadian Airlines Corp. (Re), 2000 28185 (AB QB), [2000] A.J. No. 1693, 19 C.B.R. (4th) 12 (Q.B), this court has not dealt with the issue since its decision in Elan Corp. v. Comiskey, supra, and the Converts' Committee argues that the Alberta line of authorities is contrary to Elan.
[17] A brief further comment respecting the leave process may be in order.
[18] The court recognizes the importance of its ability to react in a responsible and timely fashion to the appellate needs arising in the "real time" dynamics of CCAA restructurings. Often, as in the case of this restructuring, they involve a significant public dimension. For good policy reasons, however, appellate courts in Canada -- including this one -- have developed relatively stringent parameters for the granting of leave to appeal in CCAA cases. As noted, leave is only sparingly granted. The parameters as set out in the authorities cited above remain good law.
[19] Merely because a corporate restructuring is a big one and money is no object to the participants in the process, does not mean that the court will necessarily depart from the normal leave to appeal process that applies to other cases. In granting leave to appeal in these circumstances, we do not wish to be taken as supporting a notion that the fusion of leave applications with the hearing of the appeal in CCAA restructurings -- particularly in major ones such as this one involving Stelco -- has become the practice. Where there is an urgency that a leave application be expedited in the public interest, the court will do so in this area of the law as it does in other areas. However, where what is involved is essentially an attempt to review a discretionary order made on the facts of the case, in a tightly supervised process with which the judge is intimately familiar, the collapsed process that was made available in this particular situation will not generally be afforded. [page248]
[20] As these reasons demonstrate, however, the issues raised on this particular appeal, and the timing factor involved, warranted the expedited procedure that was ordered by Justice Rosenberg.
The Appeal
No error in law or principle
[21] Everyone agrees that the classification of creditors for CCAA voting purposes is to be determined generally on the basis of a "commonality of interest" (or a "common interest") between creditors of the same class. Most analyses of this approach start with a reference to Sovereign Life Assurance Co. v. Dodd (1892), [1891-4] All E.R. Rep. 246, [1892] 2 Q.B. 573 (C.A.) which dealt with the classification of creditors for voting purposes in a winding-up proceeding. Two passages from the judgments in that decision are frequently cited. At pp. 249-50 All E.R., Lord Esher said:
The Act provides that the persons to be summoned to the meeting, all of whom, it is to be observed, are creditors, are persons who can be divided into different classes, classes which the Act [See Note 3 at the end of the document] recognizes, though it does not define. The creditors, therefore, must be divided into different classes. What is the reason for prescribing such a course? It is because the creditors composing the different classes have different interests, and, therefore, if a different state of facts exists with respect to different creditors, which may affect their minds and judgments differently, they must be separated into different classes.
At p. 251 All E.R., Bowen L.J. stated:
The word "class" used in the statute is vague, and to find out what it means we must look at the general scope of the section, which enables the court to order a meeting of a "class of creditors" to be summoned. It seems to me that we must give such a meaning to the term "class" as will prevent the section being so worked as to produce confiscation and injustice, and that we must confine its meaning to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.
[22] These views have been applied in the CCAA context. But what comprises those "not so dissimilar" rights and what are the components of that "common interest" have been the subject of debate and evolution over time. It is clear that classification is a fact-driven exercise, dependent upon the circumstances of each particular case. Moreover, given the nature of the CCAA process and the underlying flexibility of that process -- a flexibility which is its genius -- there can be no fixed rules that must apply in all cases.
[23] In Canadian Airlines Corp. (Re), supra, Paperny J. nonetheless extracted a number of principles to be considered by the courts in dealing with the commonality of interest test. At para. 31 she said: [page249]
In summary, the cases establish the following principles applicable to assessing commonality of interest:
Commonality of interest should be viewed based on the non- fragmentation test, not on an identity of interest test;
The interests to be considered are the legal interests that a creditor holds qua creditor in relationship to the debtor company prior to and under the plan as well as on liquidation;
The commonality of interests are to be viewed purposively, bearing in mind the object of the C.C.C.A., namely to facilitate reorganizations if at all possible;
In placing a broad and purposive interpretation on the C.C.C.A., the court should be careful to resist classification approaches which would potentially jeopardize viable plans.
Absent bad faith, the motivations of creditors to approve or disapprove [of the Plan] are irrelevant.
The requirement of creditors being able to consult together means being able to assess their legal entitlement as creditors before or after the plan in a similar manner.
[24] In developing this summary of principles, Paperny J. considered a number of authorities from across Canada, including the following: Sklar-Peppler Furniture Corp. v. Bank of Nova Scotia, 1991 8306 (ON SCDC), [1991] O.J. No. 2288, 86 D.L.R. (4th) 621 (Gen. Div.); Norcen Energy Resources Ltd. v. Oakwood Petroleums Ltd., 1988 3570 (AB QB), [1988] A.J. No. 1226, 72 C.B.R. (N.S.) 20 (Q.B.); Fairview Industries Ltd. (Re), 1991 4266 (NS SC), [1991] N.S.J. No. 456, 11 C.B.R. (3d) 71 (T.D.); Woodward's Ltd. (Re), 1993 870 (BC SC), [1993] B.C.J. No. 852, 84 B.C.L.R. (2d) 206 (S.C.); Northland Properties Ltd. (Re), 1988 3146 (BC SC), [1988] B.C.J. No. 1530, 73 C.B.R. (N.S.) 166 (S.C.); Northland Properties Ltd. v. Excelsior Life Insurance Co. of Canada, 1989 2672 (BC CA), [1989] B.C.J. No. 63, 73 C.B.R. (N.S.) 195 (C.A.); NsC Diesel Power Inc. (Re), 1990 4211 (NS SC), [1990] N.S.J. No. 484, 79 C.B.R. (N.S.) 1 (T.D.); Savage v. Amoco Acquisition Co., 1988 ABCA 148, [1988] A.J. No. 330, 68 C.B.R. (N.S.) 154 (C.A.) (sub nom. Amoco Acquisition Co. v. Savage); Wellingt on Building Corp. (Re), 1934 93 (ON SC), [1934] O.R. 653, 16 C.B.R. 48 (H.C.J.). Her summarized principles were cited by the Alberta Court of Appeal, apparently with approval, in a subsequent Canadian Airlines decision: Canadian Airlines Corp. (Re), supra, at para. 27.
[25] In the passage from his reasons cited above (paras. 13 and 14) the supervising judge in this case applied those principles. In our view, he was correct in law in doing so.
[26] We do not read the foregoing principles as being inconsistent with the earlier decision of this court in Elan Corp. v. Comiskey. There the court applied a common interest test in determining that the two creditors in question ought not to be grouped in the same class of creditors for voting purposes. But the differing interests in question were not different legal interests as between the [page250] two creditors; they were different legal interests as between each of the creditors and the debtor company. One creditor (the Bank) held first security over the debtor company's receivables and the other creditor (RoyNat) held second security on those assets; RoyNat, however, held first security over the debtor's building and realty, whereas the Bank was second in priority in relation to those assets. The two creditors had differing commercial interests in how the assets should be dealt with (it was in the interests of the bank, with a smaller claim, to collect and retain the more realizable receivable assets, but in the interests of RoyNat to preserve the cash flow and have the business sold as a going concern). Those differing commercial interests were rooted in differing legal interests as between the individual creditors and the debtor company, arising from the different security held. Because of the size of its claim, RoyNat would dominate any group that it was in, and Finlayson J.A. was of the view that RoyNat, as the holder of second security, should not be able to override the Bank's legal interest as the first secured creditor with respect to the receivables by virtue of its voting rights. On the basis that there was "no true community of interest" between the secured creditors (p. 299 O.R.), given their different legal interests, he ordered that the Bank be placed in a separate class for voting purposes.
[27] Elan Corp. v. Comiskey did not deal with the issue of whether creditors with divergent interests as amongst themselves -- as opposed to divergent legal interests vis-à-vis the debtor company -- could be forced to vote as members of a common class. Nor did it apply an "identity of interest" test -- a test that has been rejected as too narrow and too likely to lead to excessive fragmentation: see Sklar-Peppler Furniture Corp. v. Bank of Nova Scotia, supra); Norcen Energy Resources Ltd. v. Oakwood Petroleums Ltd., supra; Fairview Industries Ltd. (Re), supra; Woodward's Ltd. (Re), supra. In our view, there is nothing in the decision in Elan Corp. that is inconsistent with the evolutionary set of principles developed in the Alberta jurisprudence and applied by the supervising judge here.
[28] In addition to commonality of interest concerns, a court dealing with a classification of creditors issue needs to be alert to concerns about the confiscation of legal rights and about avoiding what the parties have referred to as "a tyranny of the minority". Examples of the former include Elan Corp. v. Comiskey [See Note 4 at the end of the document] and [page251] Wellington Building Corp. Ltd. (Re), supra [See Note 5 at the end of the document]. Examples of the latter include Sklar-Peppler, supra [See Note 6 at the end of the document] and Campeau Corp. (Re), [1991] O.J. No. 2338, 10 C.B.R. (3d) 100 (Gen. Div.) [See Note 7 at the end of the document].
[29] Here, as noted earlier in these reasons, the respondents argue that the appellants are seeking a separate classification in order to extract a benefit to which they are not entitled, namely a concession that the Turnover Payment requirements of their subordinated position be extinguished by the Proposed Plan, thus avoiding their obligation to transfer payments to the Senior Debt Holders until they have been paid in full, and freeing up all of the distribution the appellants will receive from Stelco for payment on account of their own claims. On the other hand, the appellants point to this conflict between the Subordinated Debenture Holders and the Senior Debt Holders as evidence that they do not have a commonality of interest or the ability to consult together with a view to whatever commonality of interest they may have vis-à-vis Stelco.
[30] We agree with the line of authorities summarized in Canadian Airlines (Re) and applied by the supervising judge in this case which stipulate that the classification of creditors is determined by their legal rights in relation to the debtor company, as opposed to their rights as creditors in relation to each other. To the extent that other authorities at the trial level in other jurisdictions may suggest to the contrary -- see, for example NsC Diesel Power Inc. (Re), supra -- we prefer the Alberta approach.
[31] There are good reasons for such an approach.
[32] First, as the supervising judge noted [at para. 7], the CCAA itself is more compendiously styled "An Act to facilitate compromises and arrangements between companies and their creditors." There is no mention of dealing with issues that would change the nature of the relationships as between the creditors themselves. As Tysoe J. noted in Pacific Coastal Airlines Ltd. v. Air Canada, 2001 BCSC 1721, [2001] B.C.J. No. 2580, 19 B.L.R. (3d) 286 (S.C.), at para. 24 [page252] (after referring to the full style of the legislation):
[The purpose of the CCAA proceeding] is not to deal with disputes between a creditor of a company and a third party, even if the company was also involved in the subject matter of the dispute. While issues between the debtor company and non-creditors are sometimes dealt with in CCAA proceedings, it is not a proper use of a CCAA proceeding to determine disputes between parties other than the debtor company.
[33] In this particular case, the supervising judge was very careful to say that nothing in his reasons should be taken to determine or affect the relationship between the Subordinate Debenture Holders and the Senior Debt Holders.
[34] Secondly, it has long been recognized that creditors should be classified in accordance with their contract rights, that is, according to their respective interests in the debtor company: see Stanley E. Edwards, "Reorganizations Under the Companies' Creditors Arrangement Act" (1947) 25 Can. Bar Rev. 587, at p. 602.
[35] Finally, to hold the classification and voting process hostage to the vagaries of a potentially infinite variety of disputes as between already disgruntled creditors who have been caught in the maelstrom of a CCAA restructuring runs the risk of hobbling that process unduly. It could lead to the very type of fragmentation and multiplicity of discrete classes or sub- classes of classes that judges and legal writers have warned might well defeat the purpose of the Act: see Stanley Edwards, "Reorganizations under the Companies' Creditors Arrangement Act", supra; Ronald N. Robertson Q.C., "Legal Problems on Reorganization of Major Financial and Commercial Debtors", Canadian Bar Association -- Ontario Continuing Legal Education, April 5, 1983 at 19-21; Norcen Energy Resources Ltd. v. Oakwood Petroleums Ltd., supra, at para. 27; Northland Properties Ltd. v. Excelsior Life Insurance Co. of Canada, supra; Sklar- Peppler, supra; Woodwards Ltd. (Re), supra.
[36] In the end, it is important to remember that classification of creditors, like most other things pertaining to the CCAA, must be crafted with the underlying purpose of the CCAA in mind, namely facilitation of the reorganization of an insolvent company through the negotiation and approval of a plan of compromise or arrangement between the debtor company and its creditors, so that the debtor company can continue to carry on its business to the benefit of all concerned. As Paperny J. noted [at para. 31] in Canadian Airlines (Re), "the Court should be careful to resist classification approaches that would potentially jeopardize viable plans". [page253]
Discretion and fact finding
[37] Having concluded that the supervising judge made no error in law or principle in his approach to the classification issue, we can find no error in his factual findings or in his exercise of discretion in determining that the Subordinate Debenture Holders should remain in the same class as the Senior Debt Holders and Trade Creditors in the circumstances of this case.
[38] We agree that there is no material distinction between the legal rights of the Subordinated Debenture Holders and those of the Senior Debt Holders vis-à-vis Stelco. Each is entitled to be paid the moneys owing under their respective debt contracts. The only difference is that the former creditors are subordinated in interest to the latter and have agreed to pay over to the latter any portion of their recovery received until the Senior Debt has been paid in full. As between the two groups of creditors, this merely reflects the very deal the Subordinated Debenture Holders bought into when they purchased their subordinated debentures. For that reason, the supervising judge was also entitled to determine that this was not a case involving any confiscation of legal rights.
[39] Finally, the supervising judge's finding that there is no "realistic conflict of interest" between the creditors is supported on the record. Each has the same general interest in relation to Stelco, namely to be paid under their contracts, and to maximize the amount recoverable from the debtor company through the Plan negotiation process. We do not accept the argument that the Senior Debt Holder's efforts will be moderated in some respect because they will be content to make their recovery on the backs of the Subordinated Debenture Holders through the Turnover Payment process. In order to carry the class, the Senior Debt Holders will require the support of the Trade Creditors, whose interest is not affected by the subordination agreement. Thus the Senior Debt Holders will be required to support the maximization approach.
[40] We need not deal with whether a realistic and genuine conflict of interest, produced by different legal positions of creditors vis-à-vis each other, could ever warrant separate classes, as we are satisfied that even if it could, this is not such a case.
Disposition
[41] Accordingly, we would not interfere with the supervising judge's decision that the appellants had not made out a case for a separate class. The appeal is therefore dismissed.
Appeal dismissed. [page254]
Notes
Note 1: R.S.C. 1985, c. C-36, as amended.
Note 2: Farley J. uses the term "ConCom debt" to refer to the debt represented by the Converts' Committee (i.e., that of the Subordinated Debenture Holders), and the term "BondCom debt" to refer to that of the Senior Debt Holders.
Note 3: The Joint Stock Companies Arrangement Act 1870 (U.K.), 33 & 34 Vict., c. 104.
Note 4: A second secured creditor with superior voting power was separated from a first secured creditor for the voting purposes, in order [to] prevent the former from utilizing its superior voting strength to adversely affect the latter's prior security position.
Note 5: The court refused to allow subsequent mortgagees to vote in the same class as a first mortgagee because in the circumstances the subsequent mortgagees would be able to use their voting power to destroy the priority rights and security of the first mortgagee.
Note 6: Borins J., as he then was, warned against the dangers of "excessive fragmentation" and of creating "a special class simply for the benefit of the opposing creditor, which would give that creditor the potential to exercise an unwarranted degree of power" [at p. 627 D.L.R.].
Note 7: Montgomery J. declined to grant a separate classification to a minority group of creditors who would use that classification to extract benefits to which it was not otherwise entitled.