BDC Venture Capital Inc. v. Natural Convergence Inc., 2009 ONCA 665

CITATION: BDC Venture Capital Inc. v. Natural Convergence Inc., 2009 ONCA 665

DATE: 20090922

DOCKET: C50876

COURT OF APPEAL FOR ONTARIO

O’Connor A.C.J.O., Blair and Juriansz JJ.A.

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)

Orestes Pasparakis and Jamie Macdonald, for BluArc Communications Inc.

Jason Wadden, for Broadview Networks Inc.

David Elliott, for PricewaterhouseCoopers

Heard and released orally: September 10, 2009

On appeal from the orders of Justice Stanley J. Kershman of the Superior Court of Justice dated July 31, 2009.

ENDORSEMENT

[1] BluArc Communications seeks to set aside the orders of Kershman J. dated July 31, 2009, appointing PricewaterhouseCoopers (PwC) as interim receiver of the assets of Natural Convergence Inc. (NCI) and authorizing the sale of those assets to Broadview Networks Inc. The principal attack on appeal is with respect to the sale order and the vesting order that accompanied it.

[2] NCI develops software that enables its licensees, including Broadview and BluArc, to sell voice-over-internet protocol telephone services to customers. Its financial position was perilous and beginning in early 2008, it commenced attempts to market its business or to secure new financing. These efforts proved unsuccessful.

[3] Ultimately, however, Broadview – the holder of 50% of its licences – came to its assistance. It provided a certain amount of initial financial support to prop up NCI’s operations and then, on July 16, 2009, offered to purchase NCI’s assets through a Term Sheet that included a “no shop” clause. Broadview says that its offer included a premium on the purchase price in exchange for that clause.

[4] Broadview’s offer was accepted by the NCI board and supported by NCI’s secured creditors. On July 31, 2009, Kershman J. was asked to appoint PwC as receiver and to authorize the sale. At the time, BluArc and others were disclosed as parties who had contacted the receiver to express an interest in acquiring the assets. The receiver was unable, however, to communicate with other interested parties because of the “no shop” clause in the sale agreement. In its report to the court, the receiver indicated that it could not comment on the commercial reasonableness of the sale. However, all of NCI’s secured creditors agreed to the sale, even though the proceeds would be less than NCI’s total indebtedness to those creditors. BluArc was not given notice of these proceedings.

[5] After the orders were made and BluArc became aware of them, BluArc tendered what the receiver described as “a comparable” offer to purchase the assets and filed a notice of appeal from the orders of Justice Kershman. This led to a motion by Broadview before Lang J.A. in this court seeking an order lifting the automatic stay imposed under the Bankruptcy and Insolvency Act R.S.C. 1985 c. B-3. On that motion, the reality put squarely to the Court was that if the stay were lifted, the transaction would be closed, notwithstanding the pending appeal. Lang J.A. considered this fully and granted an order on September 2, 2009, lifting the stay. She also expedited the appeal to today’s date. The transaction was closed on September 3, 2009.

[6] Although BluArc moved to set aside the order of Lang J.A., counsel did not pursue that motion in the circumstances. Before us, it is argued that

(a) BluArc does not have standing to appeal the orders of Kershman J;

(b) the appeal should be dismissed as moot; and

(c) the appeal should be dismissed on the merits.

Mr. Pasparakis, on behalf of BlueArc, makes the opposite arguments. We find it necessary to deal only with the first of these, as in our view, BluArc does not have standing in the circumstances.

[7] BluArc argues that it has standing on the basis that its relationship with the debtor NCI will be affected through the sale process. Mr. Pasparakis submits that BluArc’s customer/licensee relationship with NCI will be affected because if NCI sells its assets, BluArc will not be able to receive the support, maintenance and upkeep services required to enable it to service its own customers with the licensed software product that is affecting its business. BluArc is therefore not a “bitter bidder” or merely a creditor of the type that this court has said is not entitled to insert itself into receivership sale proceedings he argues. See Skyepharma PLC v. Hyal Pharmaceutical Corporation, 2000 CanLII 5650 (ON CA), [2000] O.J. No. 467 (C.A.).

[8] We do not accept this argument. In our view, the relationship of BluArc with NCI does not give rise to an interest that is sufficiently connected with the sale process so as to warrant standing in the sale proceedings. BluArc does not have a legal or proprietary right in the property being sold. It is not a creditor or, even at this stage, a contingent creditor. To the extent it has an interest it is as licensee under its Master Licence Agreement. Under that Agreement, however, BluArc chose to be protected in insolvency proceedings through the establishment of an escrow provision that entitles it to receive NCI’s source code and “all supporting information, tools, notes and other information necessary and sufficient to allow a reasonably qualified person to support and maintain the software.” Thus, it has a remedy that will address the very critical interest that BluArc argues is in need of protection through the bidding process. There is nothing in the expanded record on this appeal, or in the record that was before Kershman J., to indicate that this remedy is illusory. BluArc is therefore not “a party with a direct interest in the proceeds of the sale” in the sense referred to by this court in Skyepharma. As the Court said in that case at paras. 15-20:

[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), 1991 CanLII 2727 (ON CA), 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.

[18] In Soundair, the unsuccessful would be purchaser was a party to the proceedings and the court considered the fairness of the sale process from its standpoint. However, I do not think that the decision in Soundair conflicts with the position I have set out above for two reasons. First, the issue of whether the prospective purchaser had a legal right or interest was not specifically addressed by the court. Indeed, in describing the general principles that govern a sale approval motion, Galligan J.A., for the majority, adopted the approach in Crown Trust v. Rosenberg. Under the heading “Consideration of the interests of all the parties”, he referred to the interests of the creditors, the debtor and a purchaser who has negotiated an agreement with the receiver. He did not mention the interests of unsuccessful would be purchasers. Second, the facts in Soundair were unusual. The unsuccessful offeror was a company in which Air Canada had a substantial interest. The order appointing the receiver specifically directed the receiver “to do all things necessary or desirable to complete a sale to Air Canada” and if a sale to Air Canada could not be completed to sell to another party. Arguably, this provision in the order of the court created an interest in Air Canada which could be affected by the sale approval order and which entitled it to standing in the sale approval proceedings.

[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.

[9] Accordingly, we are of the view that BluArc does not have standing to bring the appeal. The appeal is therefore quashed. In view of this disposition, it is not necessary to deal with the argument that the appeal, for all practical and legal purposes, is moot, or to deal with the merits of the appeal.

[10] The appellants shall pay the respondents costs fixed in the amount of $20,000 inclusive of disbursements and GST.

“D.R. O’Connor A.C.J.O.”

“R.A. Blair J.A.”

“R.G. Juriansz J.A.”