DATE: 20060523

DOCKET: C45225

COURT OF APPEAL FOR ONTARIO

RE:

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 ON SCHEDULE “A”

APPLICATION UNDER THE COMPANIES’S CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

BEFORE:

MCMURTRY C.J.O., WEILER and BLAIR JJ.A.

COUNSEL:

Paul Macdonald and Brett Harrison for Sunrise Partners Ltd.

Larry Ellis for the Monitor

Robert Staley and Derek Bell for Informal Committee of Senior Debenture Holders

Aubrey Kauffman for 2074600 Ontario Inc.

HEARD & RELEASED ORALLY:

May 16, 2006

On appeal from the order of Justice Farley of the Superior Court of Justice dated March 7, 2006.

E N D O R S E M E N T

[1] The appellants are the holders of certain Convertible Notes of Stelco. They seek to set aside the order of Farley J. dated March 7, 2006, which they describe as imposing “an expedited, summary ‘CCAA-style’ claims process” for the determination of certain inter-creditor claims in the Stelco restructuring. They assert that the order was made without jurisdiction either under the CCAA or through the exercise of the court’s inherent jurisdiction, and that the order deprives them of their rights to require those who wish to assert Subordination Claims as against other Stelco creditors to prove those claims in a ordinary civil lawsuit with all the bells and whistles that go with such a proceeding.

[2] The respondents say that the March 7 order was a discretionary, interlocutory, scheduling order made in the course of the CCAA proceedings by the experienced supervising judge, familiar with those proceedings, and that the decision should be granted deference and left in place.

[3] We agree with the respondents.

[4] The Stelco restructuring Plan under the CCAA was negotiated and approved by all creditors – including the appellant Convertible Noteholders and the respondent Senior Bondholders. It was sanctioned by Justice Farley on January 20, 2006.

[5] The Plan establishes a pool of cash, warrants, and securities of various kinds for purposes of satisfying the claims of Stelco’s creditors. These are known as the “Turnover Proceeds”. Distributions cannot be made out of the pool in relation to the Convertible Noteholders and the Senior Bondholders until the issue of the latter’s subordination claims has been determined. This is because the instruments establishing the rights of the Convertible Noteholders and the Senior Bondholders provide that the latter are entitled to be paid in full before the former can recover anything. Thus, it is necessary to fix the Senior Bondholder’s claim – which in turn requires a valuation of the securities in the pool – to determine the respective distributions from the Turnover Proceeds.

[6] Section 6.01(2) of the Plan specifically provides that the Plan is not to prejudice the rights of the holders of the Senior Debt to pursue their subordination claims or the rights of the Convertible Noteholders to raise any defences. “In that regard”, it then stipulates that the Monitor (who holds the Turnover Proceeds) will apply within 30 days of the Plan Implementation Date for an order “seeking directions in respect of a process to determine on a timely basis entitlements to the Turnover Proceeds”.

[7] The appellants are creditors of Stelco and at least some of them participated in the negotiation of the Plan. In any event they voted on approval and the Plan was approved and is binding on them.

[8] In short, the parties negotiated as part of the Plan, and agreed to – and the Court sanctioned -- a mechanism for resolving “entitlements to the Turnover Proceeds”. That is what this dispute is about. The evidence before Farley J. indicated that a significant portion of the Turnover Proceeds consists of potentially volatile marketable securities that could not be traded until this dispute is resolved. The procedure created by Farley J. reflects this dynamic of the Stelco process and responds to the particular exigencies of this restructuring.

[9] Mr. Macdonald argues that the appellants should be entitled to their full rights of process under the Rules of Civil Procedure and to put the respondents to compliance with the Class Proceedings Act. We do not agree. That is not what the Plan calls for, nor is it what we would expect in the context of a complicated and time-driven CCAA proceeding such as the Stelco restructuring. The Plan contemplates directions with respect to a process to determine entitlements to the Turnover Proceeds on a timely basis. If the parties and the Court had intended the subordination claims issue to be resolved by way of a regular lawsuit, they would simply have said so or left the Convertible Noteholders and the Senior Bondholders to their normal remedies. They did not.

[10] This is not a pure inter-creditor dispute that is unconnected to the debtor, Stelco. It is a dispute that invokes – at least insofar as the subordination claims that have to be resolved for purposes of distribution of the Turnover Proceeds are concerned – the provisions of the Plan and the court’s control of its own process in relation to matters pertaining to the roll out of the Plan.

[11] Thus, the circumstances differ from those involved in either of the two prior Stelco cases to which we were referred. In Re Stelco (2005), 75 O.R. (3d) 5 (C.A.) – the directors case – the court was dealing with a matter relating to the company’s role in the restructuring process as opposed to the court’s role in the restructuring process. The present case pertains to the court’s control over the restructuring process. In Re Stelco, [2005] O.J. No. 4883 (C.A.) – the classification case – the court observed that it is not a proper use of a CCAA proceeding to determine disputes between parties other than the debtor company. As pointed out above, however, the present case is not simply an inter-creditor dispute that does not involve the debtor company; it is a dispute that is inextricably connected to the restructuring process.

[12] The Monitor duly applied to the Court, as required, and Farley J., exercising his jurisdiction as the supervising judge of the Stelco restructuring put a timely process in place – in CCAA Commercial List fashion – to resolve the entitlements to the Turnover Proceeds. His jurisdiction over the process of the CCAA restructuring extends at least to continued process-related matters concerning the rollout of the Plan in accordance with its provisions.

[13] Farley J. is entitled to considerable deference in respect of this type of discretionary decision, which, as the respondent submits, is in the nature of an interlocutory, scheduling order. We see no basis for interfering with his order

[14] Accordingly, the appeal is dismissed.

[15] The respondent Informal Committee of Senior Debenture Holders is entitled to the costs of the motion before Labrosse J.A., fixed at $500.00, and to the costs of the appeal, fixed in the total amount of $12,500.00 inclusive of disbursements and GST.

“R.R. McMurtry C.J.O.”

“K.M. Weiler J.A.”

“R.A. Blair J.A.”