SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-11-9532-00CL
DATE: 20121130

IN MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , 1985, c.C-36 AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CRYSTALLEX INTERNATIONAL CORPORATION

BEFORE: Newbould J.

COUNSEL: Markus Koehnen, for Crystallex International Corporation

Jay A. Carfagnini and Fred Myers, for Computershare Trust Company of Canada

David R. Byers, for Ernst & Young Inc., Monitor

Blake Moran, for Tenor Special Situations Fund LP

DATE HEARD: November 29, 2012

E N D O R S E M E N T

[ 1 ] Crystallex applies for the approval of a claims procedure order to establish a process for the identification and determination of claims against Crystallex and its current and former officers and directors except for the debt claims of the Noteholders which will be dealt with in a subsequent order.

[ 2 ] Although the Noteholders’ debt claims will be dealt with in a subsequent order, they raise issues with the order sought by Crystallex. If they intended to make any D & O claim, the order would affect them. Whether this is so, or whether the Noteholders decide to buy up any unsecured claim, is unknown. However, the points raised by the Noteholders should be dealt with.

[ 3 ] The draft order provides that the Monitor, with the assistance of Crystallex, shall review the pre-filing and restructuring claims. The Monitor will have the right to accept, revise or disallow any claim less than $100,000. The decision of the Monitor regarding any claim over that amount requires either the consent of Crystallex or court approval. The Noteholders contend that for claims over $100,000, the consent of the Noteholders should also be required, failing which court approval would be required.

[ 4 ] The Monitor advises that a review of the books and records of Crystallex indicates that there are only five possible claims against Crystallex over $100,000 and that the largest one is approximately $2.5 million.

[ 5 ] Crystallex opposes giving the Noteholders a veto right to any settlement, which would be the effect of requiring their consent in order to obviate the need for a court order. Crystallex submits that creditors normally do not have consent rights to other creditor claims, and there is no reason to depart from that in this case. Crystallex also contends that it would be prejudiced because of the history of aggressive actions in this case by the Noteholders in attempting to obtain leverage against Crystallex. This has been costly for Crystallex with very limited funds, and it is concerned that for some reason the Noteholders will take action with respect to the claims for tactical purposes that will incur further expense. I think it fair to say that regardless of where fault may lie, the differences between the Noteholders and Crystallex in this ongoing CCAA process has been expensive for Crystallex and further unnecessary expense should best be avoided. It is in all stakeholders’ interests that there be sufficient funds to prosecute the arbitration against Venezuela.

[ 6 ] Crystallex points out that there is protection to the Noteholders and all stakeholders by the fact that it is the Monitor that will be involved in any decision with respect to the claims. It can be expected that the Monitor as a court officer will be responsible in its dealing with the claims. The Monitor is content with the draft order. It points out that management of Crystallex has an incentive not to readily agree to pay out too much on a claim because any amount paid out will reduce the funds available to management under the Management Incentive Program approved some time ago.

[ 7 ] During argument, counsel for the Noteholders said their concern is that some large unknown claim in excess of $2.5 million may come in and be paid and that they want to have the right to be involved in any decision to accept the claim. Mr. Byers for the Monitor said that it is likely that if some large claim came in, the Monitor would either disallow it or come to the Court for advice and direction or give notice to the Noteholders and other interested stakeholders of its intention to permit an application by the Noteholders or others to make some application to the Court regarding it.

[ 8 ] I do not think that the Noteholders should have the right to require their consent to any claim over $100,000. There is sufficient protection to all concerned in the fact that that the Monitor is central to the claims process and the Monitor will no doubt review the claims with management of Crystallex, who are the appropriate persons for the Monitor to deal with. The extra cost and expense of the Monitor or Crystallex having to deal with the Noteholders on these claims is not warranted.

[ 9 ] It is not known if there will be any claim in excess of $2.5 million. The Monitor and Crystallex are not aware of any such claim, but it could occur. During argument I asked counsel if they could live with a compromise provision in the order by which the Monitor would give notice to the Noteholders and any other stakeholder it thought appropriate before accepting any claim in excess of $2.5 million, and giving the Noteholders or other stakeholder a reasonable time within which to apply to Court regarding the claim, failing which the Monitor with the consent of Crystallex could accept the claim. Counsel indicated agreement to that, and the order made should contain such a provision. The $2.5 million figure may need to be re-jigged depending on the precise amount of the known possible claims on the books of Crystallex.

[ 10 ] The draft order contains provisions dealing with set-off. The Noteholders object to any such provision. They contend that the provisions deal with substantive rights of parties, and that a claims process order should not deal with substantive rights. The CCAA provides for set-off rights for all claims and they contend that there is no need to add rights to the order. The draft order provides as follows:

41. THIS COURT ORDERS that Crystallex may set off (whether by way of legal, equitable or contractual set-off) against the Claims of any Claimant, any claims of any nature whatsoever that any of Crystallex may have against such Claimant arising prior to the Filing Date, provided that it satisfies the requirements for legal, equitable or contractual set-off as may be determined by the Court if there is any dispute between Crystallex and the applicable Claimant, however, neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by Crystallex of any such claim that Crystallex may have against such Claimant.

[ 11 ] This draft paragraph 41 does two things. First, it provides to Crystallex set-off rights against claims. Mr. Koehnen in argument said that it was not intended to provide for set-off rights different than as provided in the CCAA. I was referred to section 73(1) of the Winding-Up and Restructuring Act, R.S.C. 1985, c. W-11, and while it is essentially the same as the set-off provision in the CCAA, it is the provision in the CCAA that is applicable. Section 21 of the CCAA provides:

21. The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may be.

[ 12 ] The second thing draft paragraph 41 contains is the caveat that the failure of Crystallex to set-off any claim against a claimant shall not constitute a waiver or release by Crystallex of the claim against the claimant. This is a substantive provision that may or may not be in accordance with the set-off principles as they would apply to the facts of any case. The provision would affect the rights of any claimant without that claimant having an opportunity to contest them.

[ 13 ] I agree with the Noteholders that paragraph 41 should not be in the claims procedure order. If the intent of the first part of paragraph 41 is to be consistent with section 21 of the CCAA, there is no need for it. If the intent were to effect a change from section 21, that would be a substantive provision that should not be part of a claims procedure order.

[ 14 ] The second part of paragraph 41 is a substantive provision. Mr. Koehnen contended that recent case law in the U.K. had created some confusion as to when a right of set-off need be asserted, and the provision was included in the draft order in order to avoid such confusion. He also pointed out that a recent claims procedure order in Canwest contained a similar provision. He was not able to say if that provision went in the order by consent, and thus its use as a precedent is somewhat weakened.

[ 15 ] Mr. Koehnen contended that the provision would permit Crystallex to accept a claim of a creditor without any set-off being claimed by Crystallex and leave it open to Crystallex to later claim a right of set-off when making payment to the creditor pursuant to a successful plan of arrangement. Mr. Koehnen also contended that it would be open to Crystallex to wait until after it emerged from the CCAA process to commence an action against any creditor whose claim had been compromised and paid. Whether or not set-off rights in any particular case would permit this, I fail to see fairness to the creditors to have such a situation foisted on them at this stage regardless of the situation that may occur. It would be preferable if at all possible that a creditor know when being asked to vote on a plan of compromise and arrangement what amount the debtor concedes is owing to that creditor.

[ 16 ] In my view the second part of paragraph 41 should not be included in the order, with the result that paragraph 41 in its entirety is to be removed from the draft order.

[ 17 ] Paragraph 42 of the draft order also contains set-off provisions.

42. THIS COURT ORDERS that Crystallex may set off (whether by way of legal, equitable or contractual set-off) against payments or other distributions to be made to any Claimant, any claims of any nature whatsoever that any of Crystallex may have against such Claimant arising after the Filing Date, provided that it satisfies the requirements for legal, equitable or contractual set-off as may be determined by the Court if there is any dispute between Crystallex and the applicable Claimant, however, neither the failure to do so nor the allowance of any Claim hereunder shall constitute a waiver or release by Crystallex of any such claim that Crystallex may have against such Claimant.

[ 18 ] This paragraph permits Crystallex to exercise a right of set-off arising after the filing date of the CCAA against a payment or other distribution to be made to a claimant. It suffers from the same problems as paragraph 41. Paragraph 42 should not be included in the claims process order.

[ 19 ] A third set-off provision is contained at the end of paragraph 43, which deals with notice required to be given to a transferee or assignee of a claim made after the filing date. The paragraph then adds the following:

A transferee or assignee of a Claim takes the Claim subject to any right of set-off to which Crystallex may be entitled with respect to such Claim. For greater certainty, a transferee or assignee of a Claim is not entitled to set off, apply, merge, consolidate or combine any Claims assigned or transferred to it against or on account or in reduction of any amounts owing by such Person to any of Crystallex.

[ 20 ] In my view, this provision should not be included in the claims procedure order as it is substantive in nature. It may or may not be that what is stated in the provision would be the result of the application of set-off principles to any particular claimant, but that should not be settled in the claims procedure order.

[ 21 ] The other issue raised by the Noteholders is that the draft order provides for a claims officer and that Crystallex may with the consent of the Monitor appoint the claims officer. The Noteholders contend that the appointment of a claims officer should require the approval of the Court. I agree with that and the draft order should be amended accordingly.

[ 22 ] If the parties are unable to agree on the form of the order, it may be settled at a 9:30 am appointment.

Newbould J.

DATE: November 30, 2012