COURT OF APPEAL FOR ONTARIO

2016 ONCA 485

DATE: 20160616

DOCKET: M46301 (C61637)

CV-14-274

Weiler, Cronk and Benotto JJ.A.

BETWEEN

2403177 Ontario Inc.

Applicant (Respondent)

and

Bending Lake Iron Group Limited

Respondent

(Appellant/Moving Party)

Robert MacRae, for the moving party, Bending Lake Iron Group Limited

Kenneth Kraft, John Salmas and Jordan Schultz, for the responding party, A. Farber & Partners Inc., in its capacity as court-appointed receiver of Bending Lake Iron Group Limited

Heard: In writing

On motion for leave to appeal from the order of Justice D.C. Shaw of the Superior Court of Justice, dated January 8, 2016, with reasons reported at 2016 ONSC 199.

BY THE COURT:

A. Overview

[1] On September 11, 2014, Bending Lake Iron Group Limited (“BLIG”) went into receivership (the “Receivership Order”). A. Farber & Partners Inc. was appointed receiver over BLIG’s property (the “Receiver”) pursuant to s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). On November 27, 2014, the court approved a Sales and Investor Solicitation Process for BLIG’s property (the “SISP Order”). BLIG consented to the SISP Order.

[2] In December 2015, the Receiver moved for court approval of an asset purchase agreement with Legacy Hill Resources Ltd. (“Legacy Hill”) for the sale to Legacy Hill of substantially all BLIG’s assets (the “Sale Agreement”). BLIG opposed the motion and brought its own cross-motion seeking various relief, including the postponement of the sale. On January 8, 2016, the motions judge approved the Sale Agreement and ordered the vesting of BLIG’s property in Legacy Hill upon the filing of a receiver’s certificate (the “Approval and Vesting Order”).

[3] BLIG filed a notice of appeal dated January 13, 2016, seeking to set aside the Approval and Vesting Order. By order of this court dated March 22, 2016, Brown J.A. (In Chambers) ruled that BLIG required leave to appeal under s. 193(e) of the BIA. Accordingly, he quashed BLIG’s notice of appeal and set a timetable for the filing of BLIG’s leave materials.

[4] BLIG now seeks leave to appeal the Approval and Vesting Order. Should leave be granted, it proposes to argue on appeal that the motions judge erred: i) in finding that the Receiver had acted reasonably and fairly in negotiating the sale of BLIG’s property, and that the actions of BLIG in undertaking parallel negotiations with Legacy Hill contravened the Receivership and the SISP Orders; and ii) in failing to consider whether the Receiver discharged its obligation to consult with “affected Aboriginal communities” in approving the Sale Agreement. BLIG submits that the proposed appeal is of general significance to insolvency practice, is prima facie meritorious and would not unduly delay the insolvency proceedings.

[5] For the reasons that follow, we are not satisfied that the test for granting leave to appeal has been met. Accordingly, the leave application is dismissed.

B. Facts

[6] BLIG is an iron ore mining development company with its major asset being a mine site in Thunder Bay, Ontario. While BLIG was initially successful in raising equity financing to develop the mine site, it was unable to arrange any major financing in 2011 and 2012. In 2012, BLIG engaged in negotiations with a foreign company to raise significant debt and equity financing. In anticipation of successful financing, 2403177 Ontario Inc. advanced a series of loans to BLIG to fund development of the mine. Unfortunately, the financing fell through and development of the mine was suspended in 2013.

[7] At the date of its receivership in September 2014, BLIG owed in excess of $3.5 million to secured creditors, more than $8 million to unsecured creditors and approximately $450,000 to the Canada Revenue Agency. Pursuant to the SISP Order, the Receiver compiled a list of interested parties, through consultation with BLIG and the Receiver’s network of investors in the mining and investment communities. In excess of 120 interested parties were contacted by the Receiver and 12 signed confidentiality agreements. However, no offers or proposals for purchasing, refinancing or restructuring BLIG were received by the extended deadline of March 27, 2015.

[8] While the SISP was underway, and without informing the Receiver, the President and CEO of BLIG, Henry Wetelainen, commenced separate discussions with an interested party, Legacy Hill. Mr. Wetelainen claimed in a subsequent affidavit that he pursued these discussions as part of his “continued effort on behalf of BLIG and its creditors, stakeholders, shareholders and affected Aboriginal communities” to rescue BLIG from receivership. On March 12, 2015, BLIG and Legacy Hill entered into a Confidentiality Agreement and BLIG subsequently provided confidential documents to Legacy Hill. The Receiver was unaware that the parties had signed a Confidentiality Agreement, and of the existence of many of the confidential documents BLIG provided to Legacy Hill.

[9] When the Receiver learned of the discussions between Mr. Wetelainen and Legacy Hill, it notified Mr. Wetelainen that all negotiations with Legacy Hill would be conducted by the Receiver pursuant to the Receivership and the SISP Orders. The Receiver then commenced its own discussions with Legacy Hill and entered into a Confidentiality Agreement with it. It also undertook due diligence on Legacy Hill and provided the results of that due diligence in its Third Report, filed with the court in the insolvency proceedings.

[10] From April to September 2015, the Receiver received no firm proposals or expressions of interest for the restructuring of BLIG or the purchase of its assets. However, on September 30, 2015, Legacy Hill executed a non-binding letter of intent to purchase the assets of BLIG. The sale concluded on November 27, 2015, with the Receiver and Legacy Hill signing the Sale Agreement.

[11] On December 10, 2015, the Receiver moved for approval of the Sale Agreement. It argued that the purchase price represented the best and highest offer for BLIG’s assets in a depressed iron ore market. It further argued that the actions of Mr. Wetelainen and BLIG, in undertaking a parallel sales process, failing to provide confidential documents to the Receiver, and negotiating agreements with Legacy Hill directly, contravened the Receivership Order.

[12] BLIG’s secured creditors approved the proposed sale.

[13] BLIG opposed approval of the sale, arguing that the Receiver had shown a lack of impartiality in its conduct with Legacy Hill, that the Receiver had become an advocate for Legacy Hill, and that the Receiver should have made inquiries as to why there had been a parting of the ways between Legacy Hill and BLIG (in a movement away from refinancing/restructuring and toward sale of the assets). BLIG also maintained that, by agreeing to purchase BLIG’s assets, Legacy Hill had breached its fiduciary duty to BLIG, its shareholders, stakeholders and Aboriginal communities under the Confidentiality Agreement.

[14] In defence of its conduct, BLIG further argued that, because the Receiver had not been appointed manager of BLIG and did not take possession or control of BLIG’s property, Mr. Wetelainen was entitled, on behalf of BLIG, to enter into the Confidentiality Agreement with Legacy Hill and provide the confidential documents in furtherance of a joint venture/restructuring and refinancing of BLIG.

[15] Before the motions judge, BLIG did not pursue its argument that the Receiver had breached its duty to consult with “affected Aboriginal communities”. Rather, it argued that the sale should be postponed and that the Receiver should be required to develop a process to inform creditors, shareholders, stakeholders and “affected Aboriginal communities” of opportunities to participate in the funding of the amount set out in the Sale Agreement.

[16] All parties agreed on the principles to be applied when reviewing a proposed sale by a court-appointed receiver, as set out in Royal Bank of Canada v. Soundair Corp., 1991 CanLII 2727 (ON CA), [1991] O.J. No. 1137 (C.A.). Those principles require that a reviewing court should consider:

(a) whether the receiver made a sufficient effort to obtain the best price and has not acted improvidently;

(b) the interests of all parties;

(c) the efficacy and integrity of the process by which the offers are obtained; and

(d) whether there has been unfairness in the working out of the process.

[17] Applying this framework to the facts of this case, the motions judge granted the Approval and Vesting Order. He made the following critical findings:

(a) the Receiver had made adequate effort at marketing the property and continued to market the property after the expiry of the bid deadline. The Receiver received no concrete proposals or expressions of interest for a restructuring or sale of BLIG, in what continued to be very depressed market conditions for the mining sector. Legacy Hill’s offer was the only offer made on the property;

(b) although the Receiver owed a duty to all stakeholders, its primary duty was to maximize the return for the secured creditors. Even with the sale, the secured creditors stood to incur a shortfall on their security. Nevertheless, they supported the sale and did not want to hold out in the hopes of attracting a better offer. While the interest of the debtor must be taken into account, approval of the sale should not be denied, and the modest recovery by the secured lenders jeopardized, on the mere possibility that BLIG could match the Legacy Hill offer. BLIG presented no evidence on the motions that it was able to refinance or restructure the company;

(c) the Receiver negotiated in good faith and had no reason to reject the only offer it received for the property. The court will not lightly interfere with the commercial judgment of a receiver or examine the minutiae of the circumstances leading up to the sale. Provided the Receiver has acted reasonably, prudently and fairly, its decision should be given deference. The speculative nature of BLIG’s proposal to be given time to match or better the Legacy Hill offer would adversely affect the integrity of the process undertaken by the Receiver; and

(d) the Receivership Order gave the Receiver broad powers, to the express exclusion of the debtor. Under paragraph 3(g), the Receiver alone had the right to market any and all of the assets, undertakings and properties of BLIG. Under the SISP Order, the Receiver was empowered to solicit offers to purchase, or to invest in, the debtor and/or the property. The SISP Order also contemplated confidentiality agreements between the Receiver and prospective purchasers. Even if the Receiver had been aware of the discussions between BLIG and Legacy Hill about possible refinancing or restructuring, the Receiver was not required to work toward restructuring or refinancing rather than an asset purchase. The SISP Order did not require the Receiver to consult with BLIG before finalizing the agreement, nor did any provision of the Receivership Order. Moreover, the Receiver was never presented with a refinancing/restructuring proposal from either BLIG or Legacy Hill, nor did BLIG present any evidence that it was able to refinance the company.

[18] The motions judge also concluded that BLIG’s pursuit of refinancing or restructuring without the knowledge or consent of the Receiver was contrary to the provisions of the Receivership and the SISP Orders. He rejected BLIG’s submission that, because the Receiver was not appointed manager of BLIG and was not operating the business, Mr. Wetelainen had licence to engage in parallel negotiations with Legacy Hill. In his view, if this submission was accepted, it would result in BLIG working at cross-purposes with the Receiver.

C. proposed issues on appeal

[19] BLIG identifies three proposed issues for argument on appeal:

(1) Did the motions judge err in law in finding that representatives of BLIG acted in contravention of the Receivership Order?

(2) Does the Receivership Order, which left the management of the company in the hands of existing management, deprive the existing management of the right to seek refinancing and/or restructuring of the company?

(3) Did the motions judge err in approving the Sale Agreement by failing to address the rights of “affected Aboriginal communities”?

D. test for leave to appeal in bia proceedings

[20] Granting leave to appeal under s. 193(e) of the BIA is discretionary and must be approached in a flexible and contextual way. The threshold criterion for granting leave is whether the moving party has raised arguable points that create a reasonable prospect of success on appeal. As Doherty J.A. of this court explained in Ravelston Corp. (Re), 2005 CanLII 63802, at paras. 28-29:

The inquiry into whether leave to appeal should be granted must […] begin with some consideration of the merits of the proposed appeal. If the appeal cannot possibly succeed, there is no point in granting leave to appeal regardless of how many factors might support the granting of leave to appeal.

A leave to appeal application is not the time to assess, much less decide, ultimate merits of a proposed appeal. However, the applicant must be able to convince the court that there are legitimately arguable points raised so as to create a realistic possibility of success on the appeal. Granting leave to appeal if the merits fall short of even that relatively low bar would be a waste of court resources and would needlessly delay and complicate insolvency proceedings.

[21] In Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 29, Blair J.A. (In Chambers) incorporated this consideration in proposing a unified approach to granting leave to appeal:

Beginning with the overriding proposition that the exercise of granting leave to appeal under s. 193(e) is discretionary and must be exercised in a flexible and contextual way, the following are the prevailing considerations in my view. The court will look to whether the proposed appeal,

(a) raises an issue that is of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole, and is one that this Court should therefore consider and address;

(b) is prima facie meritorious, and

(c) would unduly hinder the progress of the bankruptcy/insolvency proceedings.

[22] At para. 31 of Pine Tree Resorts, Blair J.A. explained that, although the “prima facie meritorious” criterion is different than the “arguable point” notion referred to in some other decisions of this court, the somewhat higher standard of a prima facie meritorious case on appeal is more in keeping with the evolution of the case law in this area.

[23] Finally, at para. 32, Blair J.A. noted that, given the evolution in the applicable jurisprudence, the test for leave to appeal is not simply merit-based. Rather, it requires a consideration of all the factors set out above.

[24] This articulation of the test has been affirmed on numerous occasions by this and other courts: see Enroute Imports Inc., Re, 2016 ONCA 247, at para. 7; Global Royalties Ltd. v. Brook, 2016 ONCA 50, at para. 26; Farm Credit Canada v. Gidda, 2015 BCCA 236, at paras. 11-12; Impact Tool & Mould Inc. (Receiver of) v. Impact Tool & Mould (Trustee of), 2013 ONCA 697, at para. 3.

E. ANALYSis

[25] In our view, the first two proposed grounds of appeal identified by BLIG, which concern the motions judge’s findings that BLIG contravened the Receivership Order, do not raise questions requiring consideration by this court. Both grounds involve highly fact-driven issues. The question whether particular conduct contravenes a Receivership Order will be determined by the particular facts of each case. In this case, the motions judge’s interpretation and application of specific terms within the Receivership and the SISP Orders, leading him to conclude that BLIG’s conduct contravened those terms, are not of general importance to bankruptcy/insolvency practice or the administration of justice as a whole. Rather, his conclusions on this issue were highly fact – and case – specific.

[26] Further, BLIG’s materials provide no support for its contention that the motions judge erred in concluding that BLIG’s disclosure of confidential information (without the Receiver’s knowledge or consent) and withholding information from the Receiver, violated the clear provisions of the Receivership Order. In reaching his conclusion on this issue, the motions judge noted and applied the well-recognized principle that a debtor has a duty to make full and frank disclosure and production of information and documents to the Receiver. We see no merit to BLIG’s challenge to the motion’s judge’s approach to or his conclusion and reasoning on this issue.

[27] We also see little, if any, merit to BLIG’s argument that Mr. Wetelainen had authority to negotiate directly with Legacy Hill. BLIG’s reliance on the “indoor management rule” is misplaced. BLIG’s actions, in negotiating directly with Legacy Hill and disclosing confidential information to it without first notifying the Receiver, did not reflect standard practices and procedures for a company in receivership. The power to engage in negotiations regarding the company’s assets was specifically assigned to the Receiver under the Receivership and the SISP Orders. As the motions judge pointed out, at para. 83, “The fact that the Receiver did not operate the business does not derogate from the exclusivity of the powers that the Receiver was given under the Receivership Order and the SISP Order.” We agree.

[28] In any event, the motions judge’s reasons reveal that he approved the Sale Agreement based on the totality of the circumstances and application of the factors set out in Soundair. His findings about BLIG’s conduct had no bearing on those factors and were not part of his assessment whether the Receiver had negotiated fairly and in good faith.

[29] Finally, the proposed appeal would unduly hinder the insolvency proceedings, as Legacy Hill is not prepared to close the Sale Agreement until BLIG has exhausted its appeal rights in this court.

[30] We reach a similar conclusion regarding BLIG’s final proposed ground of appeal, namely, that the Receiver breached its duty to consult with “affected Aboriginal communities”. In our view, given the history of the proceedings, it is not open to BLIG to now raise this issue on appeal.

[31] There is no question that the Crown (or a Crown agent) has a duty to consult with “affected Aboriginal communities” where the Crown’s actions might adversely impact potential or established Aboriginal or treaty rights. In Haida Nation v. British Columbia (Minister of Forests), 2004 SCC 73, [2004] 3 S.C.R. 511 and Taku River Tlingit First Nation v. British Columbia (Project Assessment Director), 2004 SCC 74, [2004] S.C.J. No. 69, the Supreme Court indicated that the Crown's duty to consult with Aboriginal peoples and accommodate their interests is grounded in the Honor of the Crown, which derives from the Crown's assertion of sovereignty in the face of prior Aboriginal occupation.

[32] The duty to consult arises when the Crown has knowledge, real or constructive, of the potential existence of the Aboriginal right or title and contemplates conduct that might adversely affect it. The Supreme Court has also confirmed that the Honor of the Crown cannot be interpreted narrowly or technically, but must be given full effect in order to promote the process of reconciliation between the Crown and Aboriginal peoples mandated by s. 35(1) of the Constitution Act, 1982: Taku, at para. 24.

[33] BLIG raised the issue of “affected Aboriginal communities” before Brown J.A. in the context of arguing that it was entitled to leave to appeal in this case as of right under ss. 193 (a), (b) and (c) of the BIA. In particular, BLIG argued that the proposed issues on appeal implicate the “future rights” of “affected Aboriginal communities” and other cases of a similar nature, namely, its motion seeking leave to commence an action against the Receiver for damages for the Receiver’s alleged breach of its fiduciary duty to Aboriginal peoples.

[34] In concluding that an appeal did not lie as of right under ss. 193(a), (b) or (c) of the BIA, and that leave to appeal was required, Brown J.A. comprehensively reviewed the evidence placed before the motions judge about “affected Aboriginal communities”. He made a number of findings that bear on the issue of BLIG’s ability to raise this issue on appeal.

[35] First, and importantly, BLIG did not raise the issue of the Receiver’s duty to consult in the context of the SISP proceeding and, in fact, consented to the order allowing the Receiver to proceed with the sale process. At para. 26, Brown J.A. found that the time to raise the issue of the “affected Aboriginal communities” was in the SISP process. We agree.

[36] Second, Brown J.A. held, at para. 35, that BLIG did not advance the argument that the Receiver failed in its duty to consult “affected Aboriginal communities” before the motions judge on the motion to approve the sale. This finding is supported by the record.

[37] Given that the issue was not raised before the motions judge, BLIG is faced with the burden of establishing that all the facts necessary to address this issue are before this court as fully as if the matter had been raised in the court below: Kaiman v. Graham, 2009 ONCA 77, at para. 18. BLIG has not discharged this burden.

[38] Specifically, the record before this court does not clearly establish which Aboriginal communities, if any, have interests in the property affected by the sale, the extent and nature of those interests, and how the actions of the Receiver will negatively impact those interests. A clear articulation of the nature and extent of the asserted right is necessary, in the interest of balancing any Aboriginal rights at stake with the rights of others. As Binnie J. noted in Lax Kw'alaams Indian Band v. Canada (Attorney General), 2011 SCC 56, [2011] S.C.J. No. 56, at para. 12:

At this point in the evolution of Aboriginal rights litigation, the contending parties are generally well resourced and represented by experienced counsel. […] It is true, of course, that Aboriginal law has as its fundamental objective the reconciliation of Canada’s Aboriginal and non-Aboriginal communities, and that the special relationship that exists between the Crown and Aboriginal peoples has no equivalent to the usual courtroom antagonism of warring commercial entities. Nevertheless, Aboriginal rights litigation is of great importance to non-Aboriginal communities as well as to Aboriginal communities, and to the economic well-being of both. The existence and scope of Aboriginal rights protected as they are under s. 35(1) […] must be determined after a full hearing that is fair to all the stakeholders. [Emphasis added.]

[39] In our view, it would be prejudicial and unfair to the interests of BLIG’s secured creditors, and contrary to the normal rules of procedure, to permit BLIG to raise this issue at this late stage, when it elected not to raise it in the SISP proceeding or before the motions judge on the motion to approve the sale. As a result of its failure to raise the matter on a timely basis, there is no adequate evidentiary record supporting the claim. Nor does this court have the benefit of the motions judge’s consideration and ruling on the issue.

[40] Third, and in any event, we agree with Brown J.A.’s observation that it is doubtful whether BLIG has standing to assert this claim on behalf of Aboriginal communities. As LeBel J. indicated in Behn v. Moulton Contracting Ltd., 2013 SCC 26, [2013] S.C. J. No. 26, at para. 30, the Crown’s duty to consult is intended to protect the s. 35 constitutional rights of Aboriginal peoples, which are collective in nature. While an Aboriginal group can authorize an individual or organization to represent it for the purpose of asserting its s. 35 rights, there is no evidence that this occurred in this case.

[41] Moreover, regardless of the standing issue, as the record does not disclose the nature and extent of any Aboriginal community’s interests, if any, in BLIG’s property, we are unable to conclude that this proposed ground of appeal warrants the granting of leave to appeal.

F. disposition

[42] For the reasons given, the application for leave to appeal is dismissed. The Receiver is entitled to its costs of this motion and the motion for advice and directions before Brown J.A., fixed in the total amount of $3,000, inclusive of disbursements and all applicable taxes.

“K.M. Weiler J.A.”

“E.A. Cronk J.A.”

“M.L. Benotto J.A.”