U.S. Steel Canada Inc. (Re), 2016 ONCA 662

COURT OF APPEAL FOR ONTARIO

CITATION: U.S. Steel Canada Inc. (Re), 2016 ONCA 662

DATE: 20160909

DOCKET: C61331

Strathy C.J.O., Lauwers and Benotto JJA.

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 U.S. Steel Canada Inc.

Gordon Capern, Kristian Borg-Olivier and Denise Cooney, for the appellant United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (the “Union”), Appellant

Andrew Hatnay and Barbara Walancik, for SSPO and non-union retirees and active employees of U.S. Steel Canada Inc.

Tamryn Jacobson, for Her Majesty the Queen in Right of Ontario and the Superintendent of Financial Services (Ontario)

Michael E. Barrack, Jeff Galway and John Mather, for United States Steel Corporation, Respondent

Sharon Kour, for U.S. Steel Canada Inc.

Heard: March 17, 2016

On appeal from the order of Justice H. Wilton-Siegel of the Superior Court of Justice, dated August 13, 2015.

Strathy C.J.O.:

[1] U.S. Steel Canada Inc. (“USSC”) is in CCAA[^1] protection. Its former employees claim that its American parent, United States Steel Corporation (“USS”), ran the company into insolvency to further its own interests. An issue arose in the court below as to whether the CCAA judge could apply an American legal doctrine called “equitable subordination” to subordinate USS’s claims to the appellant’s claims.

[2] The CCAA judge held he had no jurisdiction to do so. For reasons different than the ones he gave, I agree, and would dismiss the appeal.

FACTUAL BACKGROUND

[3] USS is one of the largest steel producers in North America. In 2007, it acquired Stelco, which was in CCAA protection at the time, and changed its name to USSC.

[4] Seven years later, on September 16, 2014, USSC was again granted CCAA protection by order of the Superior Court of Justice (Commercial List).

[5] The CCAA judge made a Claims Process Order on November 13, 2014, establishing a procedure for filing, reviewing and resolving creditors’ claims against USSC.

[6] The order set out a separate procedure for resolving claims of approximately $2.2 billion by USS against USSC. Most of the claims arose from USS’s acquisition and reorganization of Stelco and from advances of working capital. Those claims were to be determined by the court, rather than by the Monitor.

[7] USS filed its proofs of claims. The Monitor recommended they be approved and USS moved for court approval of the claims.

[8] Notices of Objection were filed by four parties: (a) the Province of Ontario and the Superintendent of Financial Services in his capacity as administrator of the Pension Benefits Guarantee Fund; (b) the United Steelworkers, Locals 8782 and 1005; (c) Representative Counsel to the Non-USW Active Salaried Employees and Non-USW Salaried Retirees; and (d) Robert Milbourne, a former president of Stelco, and his wife, Sharon Milbourne, both of whom are beneficiaries of a pension agreement with USSC.

[9] These objections overlapped to some extent. The CCAA judge had to develop a procedure to address the objections. He had to decide whether they should be dealt with within the CCAA process, outside it, or not at all.

[10] The Province made two allegations. The first was that loans by USS to USSC should be characterized as shareholders’ equity, because of the circumstances in which they were made. They should therefore be subordinated to all other claims pursuant to s. 6(8) of the CCAA[^2](the “Debt/Equity Objection”). Second, the Province argued that the security for the loans should be invalidated pursuant to provincial and federal fraudulent assignment and fraudulent preference legislation (the “Security Objection”). USS disputed both allegations, but was content to have the issues determined under the Claims Process Order.

[11] The Union made objections similar to the Province’s, but it added a third based on oppression and breach of fiduciary duty arising out of USS’s conduct in relation to the Canadian plants, pensioners, pension plan members and beneficiaries (the “Conduct Objections”).

[12] The CCAA judge described the Conduct Objections as allegations that USS caused USSC to underperform, thereby requiring it to incur significant debt and to be unable to meet its pension obligations. The Union sought, among other things, an order subordinating the USS claims in whole or in part to its claims.

[13] The Milbournes’ objections were based on USS’s alleged conduct and relied primarily on the doctrine of equitable subordination. They asked that the USS claims be dismissed entirely or subordinated to the claims of the other unsecured creditors.

[14] The CCAA judge scheduled a motion to establish a litigation plan for USS’s motion for approval of its claims against USSC. The parties agreed that the Security Objection and the Debt/Equity Objection could be determined pursuant to the Claims Process Order and within the CCAA proceedings.[^3]

[15] The primary disagreement concerned the procedure and timing for the determination of the other objections. The Union argued that the Conduct Objections should be resolved as part of the Claims Process Order and that an evidentiary record was required to do so. USS and USSC took the position that the Conduct Objections should be litigated outside the CCAA claims process.

[16] The CCAA judge found that some of the claims of the Union and the Milbournes could be approached as third party claims against USS for oppression for the purpose of s. 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, and for breach of fiduciary duty. He found that neither the Claims Process Order nor the CCAA contemplated that such claims would be addressed by or would be relevant to a plan of arrangement or compromise under the CCAA. The third party claims fell outside the claims process unless specifically incorporated into the restructuring plan as approved by the parties or otherwise ordered.

[17] The CCAA, he said at para. 65, “is directed towards the creation, approval and implementation of a plan of arrangement or compromise proposed between a debtor company and its secured and unsecured creditors”. It did not contemplate incorporation of inter-creditor claims into any plan of arrangement or compromise or into the voting process in respect of any proposed plan.

[18] He concluded, at para. 84, that under s. 11 the court had authority to order the remaining claims of the Union and the Milbournes, except the claim for equitable subordination, to be “determined by a process within the CCAA proceedings, other than the process contemplated by the Claims Process Order, if the Court is of the opinion that, on balance, such action is likely to further the remedial purpose of the CCAA.” He held that those claims could be determined within the CCAA proceedings, rather than in a separate action in the Superior Court, but not under the Claims Process Order. He noted that the court retained jurisdiction to order that the claims be continued outside the CCAA if it was determined that pursuing them within the process would no longer further the remedial process of the CCAA.

[19] He held, however, that he had no jurisdiction under the CCAA to apply the doctrine of equitable subordination. Before turning to his reasons, I will explain the doctrine of equitable subordination.

EQUITABLE SUBORDINATION

[20] Equitable subordination was developed as an equitable remedy in American insolvency law to subordinate a creditor’s claim based on its inequitable conduct. The principles were articulated in Re Mobile Steel (1977) 563 F. (2d) 692 (5th Cir.), which set out a three-part test:

a. the claimant must have engaged in some type of inequitable conduct;

b. the misconduct must have resulted in injury to creditors of the bankrupt or conferred an unfair advantage on the claimant; and

c. equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy statute.

[21] Paragraph 105(a) of the U.S. Bankruptcy Code authorizes bankruptcy courts to use equitable principles to alter the provisions of Title 11 or to prevent an abuse of process. One year after Mobile Steel, the Code was amended to give legislative effect to equitable subordination: Bankruptcy Reform Act, 11 U.S.C. §510(c)(1).

[22] The Supreme Court of Canada considered the doctrine on two occasions. In both, the court found it unnecessary to determine whether equitable subordination should be applied, because the underlying facts did not meet the test: Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 CanLII 49 (SCC), [1992] 3 S.C.R. 558, at p. 609; and Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271, at para. 77. This court also found it unnecessary to decide the issue in Olympia & York Developments Ltd. v. Royal Trust Co. (1993), 1993 CanLII 8578 (ON CA), 14 O.R. (3d) 1 (C.A.).

[23] The availability of the doctrine has been considered in various Canadian superior courts at the trial level, in various contexts and with inconclusive results: see e.g. Harbert Distressed Investment Fund, L.P. v. General Chemical Canada Ltd., [2006] O.J. No. 3087 (S.C. [Commercial List]), (in the context of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3); Christian Brothers of Ireland in Canada (Re) (2004), 2004 CanLII 66324 (ON SC), 69 O.R. (3d) 507, (in the context of the Winding-up and Restructuring Act, R.S.C. 1985, C. W-11, as amended).

[24] In AEVO Co. v. D & A Macleod Co. (1991), 1991 CanLII 7215 (ON SC), 4 O.R. (3d) 368 (Gen. Div.), Chadwick J. rejected the application of equitable subordination in Canadian law, observing, at p. 372, that to introduce the doctrine would create chaos and would lead to challenges to security agreements based on the conduct of the secured creditor. In I. Waxman & Sons Ltd. (Re) (2008), 2008 CanLII 8791 (ON SC), 89 O.R. (3d) 427 (S.C.), Pepall J. queried, at para. 33, whether statutory priorities should be upset by a doctrine “divorced from its legal home”. This observation was followed, however, with the comment that “a vibrant legal system must be responsive to new developments in the law and the need for reform. Jurisprudence from other jurisdictions often provides the impetus or basis for much needed legal developments.”

[25] On the other hand, the Newfoundland and Labrador Supreme Court (Trial Division) applied the doctrine in a bankruptcy case in Oppenheim v. J.J. Lacey Insurance Limited, 2009 NLTD 148, 291 Nfld. & P.E.I.R. 149.

[26] The Supreme Court of Canada’s silence on the issue of equitable subordination in CDIC and Indalex cannot be taken, as the CCAA judge appears to have thought, as an outright rejection of the doctrine. In my view, the Supreme Court simply left the issue for another day.

[27] It is unnecessary to decide that issue in order to resolve this appeal. The only issue is whether the CCAA judge was right in deciding that he had no jurisdiction to grant equitable subordination under the CCAA, assuming the remedy is available in Canadian law.

SUBMISSIONS AND ANALYSIS

A. Procedural objection

[28] The appellant’s first submission is procedural. It claims that it was unnecessary for the CCAA judge to determine whether he had jurisdiction to grant equitable subordination. The Union essentially says it was blindsided. It says it made no submissions on the doctrine of equitable subordination and the CCAA judge did not indicate that he was going to address the issue in the context of the scheduling motion. It was inappropriate and unnecessary for the court to shut the door on a novel and controversial remedy without a full factual record.

[29] The respondent acknowledges that equitable subordination was not a central issue in the oral submissions before the CCAA judge, but points out that it was raised in some of the factums and memoranda filed before and after the hearing. The CCAA judge was required to determine what conduct-based inter-creditor claims would be litigated, either under the Claims Process Order or under the CCAA. He was entitled to determine whether he had jurisdiction to grant equitable subordination within the CCAA.

[30] I do not accept the appellant’s submission. The issue of equitable subordination was plainly before the CCAA judge in submissions made before and after the hearing. The Milbournes’ factum made extensive submissions on equitable subordination and argued that it, along with fiduciary duty and oppression, were “live issues which should be the subject matter of a robust evidentiary record and subject to a fair and thorough due process in this court”. The Union’s factum suggested that some of USS’s unsecured claim could be subordinated to the claims of other creditors “on account of a breach of fiduciary duty, a finding of oppression, or otherwise.” USSC’s factum argued that the Union’s claim for equitable subordination should be rejected and that suitable remedies were available outside the Claims Process. In supplementary written submissions, the Union argued, in response to USSC’s submissions, that the determination of the issue of equitable subordination should await an evidentiary record.

[31] Moreover, the issue before the CCAA judge was not simply scheduling. The motion sought directions on the extent and nature of production and discovery with respect to the various objections. The Union argued that the objections had to be resolved before there could be approval of a plan of restructuring, a sale process or a distribution to creditors. The allegations that USS’s claims should be re-characterized, invalidated, disallowed or subordinated had to be resolved and the CCAA judge had to determine a process for their resolution. Some might be dealt with under the Claims Process Order and some might be dealt with outside that Order but nevertheless in the CCAA proceedings. Some might not be dealt with under the CCAA at all.

[32] The CCAA judge was plainly aware that a determination of the inter-creditor claims could have implications for the approval of any subsequent reorganization, sale of the business or credit bid. It was appropriate for him to consider whether the court had jurisdiction to address those claims and, if so, how and when.

[33] An evidentiary record was unnecessary. The CCAA judge was not deciding whether equitable subordination applied on the facts of this case. The issue was whether he had jurisdiction to grant equitable subordination under the CCAA.

[34] I turn now to the question whether the CCAA judge correctly held that he had no jurisdiction under the CCAA to order equitable subordination of USS’s claims.

B. Jurisdiction to order equitable subordination

[35] I will begin by summarizing the CCAA judge’s reasons on this issue. I will then set out the submissions of the parties, identify the standard of review, describe the methodology I will use and apply that methodology to the legislation.

(1) The CCAA judge’s reasons

[36] The CCAA judge noted that although the CCAA gives authority to re-characterize debt as equity and to invalidate a preference or assignment, there is no express provision conferring jurisdiction to grant equitable subordination. He was of the view that any jurisdiction to do so would have to be found in s. 11, which provides that “the court … may, subject to the restrictions set out in this Act … make any order that it considers appropriate in the circumstances.”

[37] He observed that there is no Canadian case law supporting that authority and, when given the occasion to confirm the existence of equitable subordination on two occasions, the Supreme Court of Canada had declined to do so: Canada Deposit Insurance Corp.; and Indalex. He suggested that one might infer from this that the Supreme Court had rejected the principle of equitable subordination.

[38] He found, however, that to the extent the issue remained open, the CCAA evidenced an intention to exclude equitable subordination. When Parliament amended the legislation in 2009, it gave authority under s. 6(8) to subordinate debt as being in substance equity, but it did not enact any provision to subordinate a claim based on the conduct of the creditor. Nor had it drafted s. 36.1, which permitted the court to invalidate preferences and assignments, broadly enough to permit the court to make an order for equitable subordination. These provisions, he said, were “restrictions set out in this Act”, limiting the court’s broad discretion under s. 11. Parliament’s failure to include equitable subordination in the remedies introduced in 2009 must be taken as indicative of an intention to exclude the operation of the doctrine under the CCAA. This, he said, was a policy decision the court must respect.

(2) The submissions of the parties

[39] The appellant submits the CCAA judge had jurisdiction to grant equitable subordination pursuant to s. 11 of the CCAA in the absence of express “restrictions” on that jurisdiction. He erred in implying restrictions based on Parliament’s failure to amend the legislation.

[40] The respondent submits that Canadian courts have all the tools they need to assess, review and, where necessary, subordinate or invalidate creditors’ claims in a manner consistent with the underlying legislation, without the need for equitable subordination. Some of these tools are the result of the 2009 amendments to the BIA and the CCAA. Parliament might have expanded those amendments to incorporate equitable subordination or some other conduct-based remedy, but declined to do so. The court should not invoke a controversial doctrine that Parliament declined to adopt when it had the opportunity to do so.

(3) The standard of review

[41] The parties agree that the applicable standard of review is correctness: Housen v. Nikolaisen, 2002 SCC 33, at para. 8; and ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp.), 2008 ONCA 587, 92 O.R. (3d) 513, at para. 40.

(4) Framework for analysis

[42] In Century Services v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at paras. 65ff., the Supreme Court of Canada gave guidance on the approach to the scope of statutory remedies under the CCAA, and, if need be, under related sources of judicial authority. The court adopted the analysis proposed by Justice Georgina R. Jackson of the Court of Appeal for Saskatchewan and Professor Janis Sarra in an article entitled, “Selecting the Judicial Tool to get the Job Done: An Examination of Statutory Interpretation, Discretionary Power and Inherent Jurisdiction in Insolvency Matters” in Sarra, ed., Annual Review of Insolvency Law, 2007 (Toronto: Thomson Carswell, 2007), at p. 41. Blair J.A. also approved of this approach in Metcalfe & Mansfield, at paras. 48-49.

[43] Jackson and Sarra note that the CCAA is skeletal legislation and advocate a transparent and consistent methodology as judges define the scope of their jurisdiction under the statute. They propose that the courts should take a hierarchical view of the powers at their disposal, adopting a broad, liberal and purposive interpretation of the statute and applying the principles of statutory interpretation before turning to other tools such as the common law or the exercise of inherent jurisdiction.

[44] At para. 66 of Century Services, the Supreme Court held that in most cases, the search for jurisdiction under the CCAA should be an exercise in statutory interpretation. The starting point is the “big picture” principles of statutory interpretation.

[45] Driedger’s modern principle is the crucial tool for construing skeletal legislation such as the CCAA. A court must go beyond an examination of the wording of the statute and consider the scheme of the Act, its object or the intention of the legislature and the context of the words in issue:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

See: Jackson and Sarra, at p. 47; Elmer A. Driedger, The Construction of Statutes, 2d ed (Toronto: Butterworths, 1983) at p. 87, cited in Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, at para. 26. See also: Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, at paras. 23, 40.

[46] With this in mind, I will apply the framework in Century Services to the search for jurisdiction. I turn first to a consideration of the purpose and scheme of the CCAA, before considering the language of the statute.

(5) Application of the framework

(i) The purpose of the CCAA

[47] There is no dispute about the purpose of the CCAA. It describes itself as “An Act to facilitate compromises and arrangements between companies and their creditors”. Its purpose is to avoid the devastating social and economic effects of commercial bankruptcies. It permits the debtor to continue to carry on business and allows the court to preserve the status quo while “attempts are made to find common ground amongst stakeholders for a reorganization that is fair to all”: Century Services,at para. 77.

[48] The CCAA has proven to be a flexible and successful tool to enable businesses to avoid bankruptcy. As Professor Sarra notes, “[i]t has been the statute of choice for debtor corporations in every major Canadian restructuring in the past quarter century, including national airlines, major steel and forestry companies, telecommunications companies, major retail chains, real estate and development groups, and the national blood delivery system”: Janis P. Sarra, Rescue! The Companies’ Creditors Arrangement Act, 2d ed. (Toronto: Carswell, 2013), at p. 1.

[49] The CCAA achieves its goals through a summary procedure for the compromise or arrangement of creditors’ claims against the company. It was described in Stelco Inc. (Re) (2005), 2005 CanLII 8671 (ON CA), 75 O.R. (3d) 5 (C.A.), at para. 36, as:

a statutory framework to extend protection to a company while it holds its creditors at bay and attempts to negotiate a compromised plan of arrangement that will enable it to emerge and continue as a viable economic entity, thus benefiting society and the company in the long run, along with the company’s creditors, shareholders, employees and other stakeholders.

[50] The process has been effective because it is summary, it is practical, it is supervised by an independent expert monitor and it is managed in real time by an experienced commercial judge.

[51] Century Services is a good example of how the purpose of the CCAA informs the exercise of the court’s authority. At issue in that case were the reconciliation of another federal statute with the CCAA and the scope of a CCAA judge’s discretion. At para. 70, the orders of the CCAA judge were considered squarely within the context of the purpose of the Act:

The general language of the CCAA should not be read as being restricted by the availability of more specific orders. However, the requirements of appropriateness, good faith, and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority. Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully further efforts to achieve the remedial purpose of the CCAA — avoiding the social and economic losses resulting from liquidation of an insolvent company. I would add that appropriateness extends not only to the purpose of the order, but also to the means it employs. Courts should be mindful that chances for successful reorganizations are enhanced where participants achieve common ground and all stakeholders are treated as advantageously and fairly as the circumstances permit. [emphasis added]

[52] The Supreme Court concluded, at para. 75, that the order advanced the underlying purpose of the CCAA.

(ii) The scheme of the CCAA

[53] The CCAA has been described as “skeletal” or “under-inclusive” legislation, (Jackson and Sarra at p. 48) which grants broad powers to the courts in general terms.

[54] The Act has five parts. Part I, entitled “Compromises and Arrangements” permits the court to sanction a compromise or arrangement between a company and its secured or unsecured creditors, or both.

[55] The powers of the court are found in Part II, entitled “Jurisdiction of Courts”. The statute gives the court jurisdiction to receive applications, order stays, approve debtor-in-possession financing and appoint a monitor, among other things. Proceedings are commenced by an application to the Superior Court. The court generally grants an initial stay, appoints a monitor with authority to repudiate leases and other agreements and authorizes debtor in possession financing. A process is established for the identification and review of creditors’ claims by the monitor and to deal with disputed claims, with the ultimate purpose of establishing classes of creditors who will vote, by class, on the compromise or arrangement.

[56] One possible outcome is the preparation of a plan of arrangement. Creditors vote by class on the plan at a meeting called for that purpose. A majority by number of creditors in each class, together with two-thirds of the creditors in that class by dollar value, must approve the plan. If a class of creditors approves the plan, it is binding on all creditors within the class, subject to the court’s approval of the plan. If all classes of creditors approve the plan, the court must then approve the plan as a final step.

[57] Part III, entitled “General”, deals with such issues as the determination of the amount of creditors’ claims, classes of creditors, the duties of monitors, the disclaimer of agreements between the company and third parties and preferences and transfers at undervalue.

[58] Section 19 identifies “claims” that may be dealt with in a compromise or arrangement. Those are claims provable in bankruptcy that relate to debts or liabilities, present or future, to which the debtor company is subject or may become subject before the compromise or arrangement is sanctioned.[^4]

[59] The significance of this definition is that the focus of the plan of arrangement is claims against the debtor company that are provable in bankruptcy. The CCAA judge identified this significance at para. 59 of his reasons, where he noted that s. 19(1) of the CCAA provides, effectively, “that a plan of compromise or arrangement may only deal with claims that relate to debts or liabilities to which a debtor company is subject at the time of commencement of proceedings under the CCAA”. At para. 61, he noted that neither the Claims Process Order nor the CCAA contemplated that inter-creditor claims would be addressed by or be relevant to a plan of arrangement.

[60] Section 20 sets out the method for determining the amount of the claim of any secured or unsecured creditors. In most cases, it will be the amount “determined by the court on summary application by the company or by the creditor”.

[61] Section 22 provides for the establishment of classes of creditors for the purpose of voting on a compromise or arrangement, based on, among other things, the nature of their claims, the nature of the security in respect of their claims and the remedies available to them in relation to their claims. Creditors may be included in the same class “if their interests or rights are sufficiently similar to give them a commonality of interest”.

[62] Part IV deals with Cross-Border Insolvencies. Its stated purposes are to give mechanisms to provide for the fair and efficient administration of such insolvencies, to promote cooperation with courts of other jurisdictions, to promote “the rescue of financially troubled businesses to protect investment and preserve employment” and to protect the interests of creditors, of other interested persons and of the debtor company. Part V deals with Administration.

[63] The CCAA was amended in 2009. The amendments were the product of extensive discussion of the BIA and the CCAA in the Standing Senate Committee on Banking, Trade and Commerce. The Committee recommended amendments to the legislation, including an expanded power to review, invalidate or subordinate creditors’ claims under the CCAA.

[64] These recommendations were reflected in the 2009 amendments in two respects. First, s. 6(8) provides that a compromise or arrangement will not be approved unless it provides that all other claims are to be paid in full before an equity claim is paid.

[65] This provision, coupled with the definition of “equity interest”[^5] and “equity claim”[^6] in s. 2(1), permits the court to determine whether a creditor’s claim is in substance a share, warrant or option. This is the underpinning of the Debt/Equity Objection, an objection based on a disagreement as to the proper characterization of the disputed claims.

[66] Section 22.1, also added in 2009, provides that all creditors with equity claims are to be in the same class unless the court otherwise orders, and may not, as members of that class, vote at any meeting unless the court otherwise orders.

[67] Second, the 2009 amendments harmonized the rules of reviewable transactions under the BIA and the CCAA. Creditors in a CCAA proceeding are now entitled to invoke the provisions of the BIA to invalidate security granted by a debtor corporation to a creditor where a fraudulent preference or transfer at undervalue is established. Section 36.1 of the CCAA provides that ss. 38 and 95 to 101 of the BIA apply, with any required modifications, in respect of a compromise or arrangement, unless the compromise or arrangement provides otherwise.

[68] USS says that the 2009 amendments reflected Parliament’s decision concerning the extent of the court’s jurisdiction over “reviewable transactions” in CCAA proceedings and the extent to which a creditor’s claim can be subordinated to other claims as a result of its conduct. It says Parliament might have included jurisdiction to rearrange priorities between creditors, for example through equitable subordination, but it declined to do so.

[69] The scheme of the CCAA focuses on the determination of the validity of claims of creditors against the company and the determination of classes of claims for the purpose of voting on a compromise or arrangement. Except as contemplated by ss. 2(1), 6(8), 22.1 and 36.1, the statute does not address either conflicts between creditors or the order of priorities of creditors. Priorities are, however, part of the background against which the plan of compromise or arrangement is negotiated.

[70] There is nothing in the record before us to indicate that the issue of equitable subordination was given serious consideration at the time of the 2009 amendments or that those amendments were intended to import other remedies.

(iii) Interpreting the particular provisions before the court

[71] I now turn to the words of the statute itself, considered in context and having regard to the scheme of the CCAA, the object of the act and the intentions of Parliament.

[72] As Blair J.A. put it when deciding whether the CCAA granted the court the power to sanction the disputed order in Metcalfe & Mansfield, at para. 58, “[w]here in the words of the statute is the court clothed with authority to approve a plan incorporating a requirement for third-party releases?” The question before us is “where (if at all) in the words of the statute is the court (implicitly or explicitly) clothed with authority to make an order for equitable subordination of the USS claims?”

(a) Section 11: “The engine that drives the statutory scheme”

[73] The parties focussed their arguments on whether the powers granted by s. 11 include the power to grant the remedy of equitable subordination. In order to inform the scope of s. 11, they urge us to consider the treatment of “equity” claims in s. 6(8) of the CCAA and the remedies available under s. 36.1.

[74] In Stelco, at para. 36, Blair J.A. described s. 11 as“the engine that drives this broad and flexible statutory scheme”.Section 11 states, in full:

Despite anything in the Bankruptcy and Insolvency Act or the Winding-up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances. [Emphasis added.]

[75] Prior to amendment in 2005 (S.C. 2005, c. 47, s. 128), the underlined portion above had read “subject to this Act”. In Century Services, the Supreme Court, at paras. 67-68, interpreted this amendment as being an endorsement of the broad reading of CCAA jurisdiction that had been developed in the jurisprudence.

[76] The jurisdiction under s. 11 has two express limitations. First, the court must find that the order is “appropriate in the circumstances”. Second, even if the court considers the order appropriate in the circumstances, it must consider whether there are “restrictions set out in” the CCAA that preclude it.

[77] As I have noted, the CCAA judge held that s. 11 did not confer jurisdiction to apply the doctrine of equitable subordination. The statute could have provided the authority to subordinate claims on this basis, as it did with equity claims, but it did not. He also held that the definition of “equity claim” and the option to bring proceedings under s. 36.1 were “restrictions” within the meaning of s. 11.

[78] In my view, the interpretative process should start with the scope of s. 11 before the restrictions are considered in the analysis. The broad powers exercised by CCAA judges evolved in the jurisprudence before the concept of “restrictions” was legislated.

[79] Moreover, it is inconsistent with the anatomy and history of the CCAA to maintain that if Parliament had intended that a CCAA judge would have the authority to make a certain type of order, it would have said so. The Supreme Court has made it clear that “[t]he general language of the CCAA should not be read as being restricted by the availability of more specific orders”: Century Services, at para. 70.

[80] What is apparent from the many creative orders that have been made, before and since the 2009 amendments, is that such orders are made squarely in furtherance of the legislature’s objectives. In Century Services, at para. 59, the Supreme Court observed that “[j]udicial discretion must of course be exercised in furtherance of the CCAA’s purposes”, to avoid the devastating social and economic effects of bankruptcy while an attempt is made to organize the affairs of the debtor under court supervision.

[81] The words “may … make any order it considers appropriate in the circumstances” in s. 11 must, in my view, be read as “may … in furtherance of the purposes of this act, make any order it considers appropriate in the circumstances.”

[82] There is no support for the concept that the phrase “any order” in s. 11 provides an at-large equitable jurisdiction to reorder priorities or to grant remedies as between creditors. The orders reflected in the case law have addressed the business at hand: the compromise or arrangement.

[83] I turn to the second limit on the court’s jurisdiction under s. 11, the “restrictions set out in this Act”. The first question is whether such restrictions must be express or can be implied.

[84] It bears noting that there are numerous express restrictions on the court’s jurisdiction contained within the CCAA itself. Some are contained in Part II (Jurisdiction of Courts) and some are actually preceded by the heading “Restriction”. In North American Tungsten Corp. v. Global Tungsten and Powders Corp., 2015 BCCA 426, 81 B.C.L.R. (5th) 102, at para. 34, the British Columbia Court of Appeal observed that “where other provisions of the statute are intended to restrict the powers under ss. 11 and 11.02 of the statute, they do so in unequivocal terms.”

[85] The CCAA judge found that there were “restrictions set out” in the CCAA that prevented the court from applying equitable subordination, namely the definition of “equity claim” in s. 2(1) and the provisions of s. 36.1. Essentially, he found that Parliament could have introduced equitable subordination into the CCAA when it amended the legislation in 2009, but declined to do so. “The court must respect that policy decision”, he said at para. 53. The respondent supports this interpretation.

[86] I agree with the appellant that “equity claim” is not a restriction at all, but a definition. Together with s. 6(8), it codifies what was essentially the law before the 2009 amendments. The purpose of this involvement in the priority of claims is to remove shareholders from the process of arriving at a compromise or arrangement, absent permission of the court. It has nothing to do with any wrongdoing by the person with the equity interest. The only “restriction”, if any, would be the lack of flexibility to reverse this statutory subordination, as Pepall J. pointed out in Nelson Financial Group Ltd. (Re), 2010 ONSC 6229, 75 B.L.R. (4th) 302, at para. 34. However, this has to do only with subordination flowing from the characterization of a claim and not equitable subordination.

[87] I also agree that the plain meaning of the words “subject to the restrictions set out in this Act” refers to express restrictions, of which there are a number.

(b) Subsection 6(8): Subordination of “equity claims”

[88] In the court below, and in the appellant’s submissions in this court, there was a blurring of the distinction between the separate concepts of “equity claim” and the doctrine of “equitable subordination”. The CCAA judge’s reasons referred at times to the “subordination claims” of the Union and the Milbournes as including the equitable subordination claims and the claims for oppression and breach of fiduciary duty.

[89] As explained earlier, s. 6(8) of the CCAA effectively subordinates “equity claims”, as defined, to the claims of all other creditors. No compromise or arrangement can be approved unless it provides for other claims to be paid, in full, before equity claims are paid.

[90] With the exception of environmental claims, ss. 6(8) and 22.1 are the only provisions of the CCAA to deal expressly with priorities between creditors.[^7] There is a clear rationale for these provisions. In E. Patrick Shea, BIA, CCAA & WEPPA: A Guide to the New Bankruptcy & Insolvency Regime (Markham: LexisNexis Group, 2009), at p. 89, the author explains that “[t]he intention of these amendments is to remove the shareholder/creditor from the reorganization process, unless the court orders that they have a seat at the table.”

[91] “Equitable subordination”, on the other hand, refers to the doctrine at issue here: a form of equitable relief to subordinate the claim of a creditor who has engaged in inequitable conduct. Such a claim is not an “equity claim”, as defined. If it were, it would be subordinated without the need for intervention by the court.

[92] Pepall J. dealt with these different principles and distinguished them clearly in I. Waxman & Sons Ltd., a Commercial List decision that predated the 2009 amendments. There, a trustee in bankruptcy brought a motion for advice and directions as to whether a judgment creditor’s claim should be allowed. Other creditors argued that his claim was rooted in equity and was not a debt claim. In the alternative, they argued that even if it was a debt claim, it should be subordinated to their claims pursuant to the doctrine of equitable subordination.

[93] Pepall J. addressed the argument that the judgment creditor’s claim was an equity claim under the heading “Characterization” (paras. 18-26), because the issue was whether his claim was properly characterized as one of equity or debt, with the attendant priority consequences. Next she considered whether, even though she had found that the claim was a debt claim, it should be subordinated pursuant to the doctrine of equitable subordination (paras. 27-35). She noted, at para. 27, that “[a]s its name suggests, the basis for development of the doctrine is the equitable jurisdiction of the court”. She held that even if it applied in Canada, which was not established, there was no evidence on which to apply it in that case.

[94] By contrast, the CCAA judge in this case disposed of these issues under one heading, “The Authority of the Court to Adjudicate Claims for Debt Re-Characterization and for Equitable Subordination”, at paras. 38-53. He found, at para. 51, that the absence of any provision in the CCAA that would permit the application of equitable subordination was indicative of an intention to exclude the operation of the doctrine.

[95] The CCAA judge appears to have treated equitable subordination as akin to equity claims as defined in s. 2(1), the subordination of equity claims in s. 6(8) and the remedies under s. 36.1. He found that because equitable subordination is not mentioned in the context of these remedies, Parliament must have intended to exclude it.

[96] The distinction between these terms undermines the argument that equitable subordination does not exist because it was not included as part of the definition of (or together with the subordination of) equity claims. Equity claims are subordinated in order to keep shareholders away from the table while the claims of other creditors are being sorted out. Even prior to being explicitly subordinated by statute in 2009, they generally ranked lower than general creditors: Sino-Forest Corp. (Re), 2012 ONCA 816, 114 O.R. (3d) 304, at para. 30. The purpose of the 2009 amendments appears to have been to confirm and clarify the law: see The Report of the Standing Senate Committee on Banking, Trade and Commerce, Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (Ottawa, November 2003), at p. 158-59.

(c) Section 36.1: Preferences and Assignments

[97] Section 36.1, which was part of the 2009 amendments, incorporates by reference provisions of the BIA permitting the court to invalidate prior fraudulent preferences or fraudulent assignments.

36.1 (1) Sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act apply, with any modifications that the circumstances require, in respect of a compromise or arrangement unless the compromise or arrangement provides otherwise.

[98] The respondent argues that the inclusion of these express provisions implies that no other form of equitable remedy was contemplated. Its argument is that, had Parliament wished to invalidate or subordinate claims of creditors who had engaged in inequitable conduct in relation to other creditors, it could have expressly included that remedy.

[99] I would not read anything into s. 36.1, one way or the other. Nor would I regard it as a “restriction” set out in the Act within the meaning of s. 11.

(6) Summary

[100] The appellant requested “a declaration that the CCAA contains no restrictions within the meaning of s. 11 on the court’s ability to apply the doctrine of equitable subordination.” In my view, this is the wrong inquiry and this is why I reach the same result as the CCAA judge, but for different reasons.

[101] I would not grant the relief sought because, applying the principles of statutory interpretation, nowhere in the words of the CCAA is there authority, express or implied, to apply the doctrine of equitable subordination. Nor does it fall within the scheme of the statute, which focuses on the implementation of a plan of arrangement or compromise. The CCAA does not legislate a scheme of priorities or distribution, because these are to be worked out in each plan of compromise or arrangement. The subordination of “equity claims” is directed towards a specific group, shareholders, or those with similar claims. It also has a specific function, consistent with the purpose of the CCAA: to facilitate the arrangement or compromise without shareholders’ involvement.

[102] The success of the CCAA in fulfilling its statutory purpose has been in large measure due to the ability of judges to fashion creative solutions, for which there is no express authority, through the exercise of their jurisdiction under s. 11. As Blair J.A. noted in Metcalfe and Mansfield, however, the court’s powers are not limitless. They are shaped by the purpose and scheme of the CCAA. The appellant has not identified how equitable subordination would further the remedial purpose of the CCAA.

[103] At this stage of the analysis, I am mindful of the Supreme Court’s observation in Century Services that in most cases the court’s jurisdiction in CCAA matters will be found through statutory interpretation. I am also mindful of its observation in Indalex,at para. 82, that courts should not use an equitable remedy to do what they wish Parliament had done through legislation. In my view, there is no “gap” in the legislative scheme to be filled by equitable subordination through the exercise of discretion, the common law, the court’s inherent jurisdiction or by equitable principles.

[104] There is no provision in the CCAA equivalent to s. 183 of the BIA or§105(a) of the U.S. Bankruptcy Code. Section 183 invests the bankruptcy court with “such jurisdiction at law and in equity” as will enable it to exercise its bankruptcy jurisdiction. This is significant, because if equitable subordination is to become a part of Canadian law, it would appear that the BIA gives the bankruptcy court explicit jurisdiction as a court of equity to ground such a remedy and a legislative purpose that is more relevant to the potential reordering of priorities.

CONCLUSION

[105] For these reasons, I would dismiss the appeal. I would order that counsel may make written submissions as to costs, not to exceed five pages in length, excluding costs outlines. I would assume counsel can agree on a timetable for delivery of all costs submissions within 30 days of the release of these reasons.

“George R. Strathy C.J.O.”

“I agree P. Lauwers J.A.”

“I agree M.L. Benotto J.A.”

Released: “GRS” September 09, 2016

[^1]: Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.

[^2]: 6(8) No compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the court unless it provides that all claims that are not equity claims are to be paid in full before the equity claim is to be paid.

[^3]: In a subsequent ruling, U.S. Steel Canada Inc., (Re), 2016 ONSC 569, the CCAA judge dismissed the Debt/Equity objection, finding that approximately $2 billion of USSC’s unsecured claims and $73 million in secured claims were properly characterized as debt rather than equity. He also dismissed the objection that approximately $118 million in secured claims should be invalidated due to lack of consideration or as a fraudulent preference.

[^4]: CCAA, s. 2(1): “claim means any indebtedness, liability or obligation of any kind that would be a claim provable within the meaning of section 2 of the Bankruptcy and Insolvency Act.” Section 121 of the BIA states that claims provable in bankruptcy are those to which the bankrupt is subject: “121(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt's discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.”

[^5]: “Equity interest means (a) in the case of a company other than an income trust, a share in the company — or a warrant or option or another right to acquire a share in the company — other than one that is derived from a convertible debt, and (b) in the case of an income trust, a unit in the income trust — or a warrant or option or another right to acquire a unit in the income trust — other than one that is derived from a convertible debt.”

[^6]: “Equity claim means a claim that is in respect of an equity interest, including a claim for, among others, (a) a dividend or similar payment, (b) a return of capital, (c) a redemption or retraction obligation, (d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or (e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d).”

[^7]: Subsection 11.8(8) gives the federal and provincial Crowns priorities for environmental claims against the debtor.