SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

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 and Jeffrey Levine, for Crystallex International Corporation

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

David R. Byers and Maria Konyukhova, for Ernst & Young Inc., Monitor

R. Shayne Kukulowicz, Jane O. Dietrich and Ryan C. Jacobs for Tenor Special Situations Fund LP

John T. Porter, for J.A. Reyes

Erik Penz, for Forbes & Manhattan Inc. and Aberdeen International Inc.

DATE HEARD: January 31, 2013

E N D O R S E M E N T

[1] Crystallex moves to extend the stay of proceedings originally granted in the Initial Order and for directions on how to proceed in this CCAA application. The Noteholders move for an order directing a meeting of creditors to vote on a plan of arrangement delivered by the Noteholders with their motion record and staying Crystallex from commencing or continuing any proceedings against the Noteholders by way of claim, defence or set off.

[2] On November 30, 2012 I approved 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 were to be dealt with in a subsequent order. At that time the issue regarding the debt claims of the Noteholders was not made apparent. It now appears from the material filed that Crystallex asserts that the Noteholders may have mis-used confidential information received from Crystallex in earlier litigation contrary to the implied undertaking rule and that as a penalty the Court has the power to deny the Noteholders the ability to propose a plan, vote on a plan and/or limit Noteholder recovery to the principal amount they paid for their Notes.

[3] Thus the directions that Crystallex seeks on its motion deal with the procedure for the Noteholders proving their claims and the resolution of the alleged improper use of information by the Noteholders.

[4] Crystallex says that it would like to complete a plan of arrangement and that it has tried without success to negotiate a plan with the Noteholders. It says that the next logical step in the process would be to have creditors prove their claims but that the Noteholders have taken steps in the general proof of claim process to make that extremely expensive. They have filed proofs of claim against Crystallex and 25 present and former directors and officers asserting a number of causes of action and have reserved their rights to discovery for all of those claims. In accordance with the claims procedure order of November 30, 2012, the proof of claim against Crystallex does not include a claim on the debt owing under the Notes.

[5] In the proofs of claim by the Ad Hoc Committee of Noteholders of Crystallex against Crystallex and against 12 directors and 13 officers of Crystallex, the claims filed are for unliquidated claims that are described in the proofs of claim as:

"all Claims it may hold… Including, without limitation, any Claims it may hold for negligence, oppression, defamation, unlawful interference with economic interest, intimidation, abuse of process, derivative actions, malicious prosecution, breach of all duties owed by Crystallex to the Creditor by statute, by agreement, at law or in equity and any Claims arising as a result of any action or omission of Crystallex (but excluding, for the avoidance of doubt, the Noteholder Claim, which is not subject to the Claims Procedure Order), all plus interest and costs on a full indemnity basis."

[6] It became apparent during argument on the motions that these claims filed by the Ad Hoc Committee of Noteholders were made as a matter of retaliatory tactics to the claim of Crystallex.

[7] There have been without prejudice negotiations between Crystallex and the Noteholders for several months, some taking place in mediations with Justice Campbell. Each side has plenty of criticism of the other and blames the other side for the lack of progress in the negotiations. If there is a resolution between Crystallex and the Noteholders, the Crystallex claim of mis-use of information and the damage claims by the Ad Hoc Committee of Noteholders will go away. It is unfortunate that these competing claims have been made at this late date in the negotiations. They are not helpful to a resolution. All sides agree that a resolution between Crystallex and the Noteholders is critical so that the main business of Crystallex will be to pursue the arbitration against Venezuela and the expense of litigating against each other will stop.

[8] The Noteholders say that the best way to create a framework is for a meeting of creditors to be called to vote on their plan of arrangement. They ask that the meeting be held on March 6, 2013 and that if the plan is approved the sanction hearing be scheduled for March 19, 2013. That process, it is said, will put a tight timeline on Crystallex and the Noteholders which will facilitate a settlement. In my view, ordering a meeting of creditors to vote on the Noteholders’ plan of arrangement is not appropriate at this time, for a number of reasons.

[9] First, the plan contains a number of provisions that are contrary to the terms of the DIP facility with Tenor and thus the plan could not be implemented in its present form. I am in agreement with Tysoe J. (as he then was) in Re Doman Industries Ltd. (2003), 2003 BCSC 376, 41 C.B.R. (4th) 29 that if the court does not have jurisdiction to approve a plan, it would be inappropriate to authorize the calling of a meeting of creditors to consider the plan. Mr. Myers says that the Noteholders are now negotiating with Tenor to see if the issues can be resolved, but in my view the process proposed by the Noteholders puts the cart before the horse. The plan appears to have been quickly drafted without due regard to all applicable circumstances.

[10] Second, the Noteholders sprung their plan on Crystallex and the other stakeholders only a few days before the motion by including it in their motion record. It was not preceded by a term sheet or discussed with Crystallex and apparently its contents are entirely new to Crystallex. This is hardly a preferred way to have done it. The plan is complex and Crystallex has given it to its financial expert to review. This is not a situation in which the creditors can say that all avenues for a resolution with the debtor have been exhausted and that they require their plan to be voted on in the absence of a plan by the debtor being put forward.

[11] Third, there are large issues outstanding in the present state of play that should be dealt with if a vote is to take place. The claims against Crystallex and the officers and directors now made by the Noteholders would need to be dealt with. The officers and directors would be expected to make indemnity claims against Crystallex. The issue raised by Crystallex regarding the alleged mis-use of information and the effect on the right of the Noteholders to vote would also need to be dealt with.

[12] The Noteholders say that all of this can be dealt with at the stage of the court application for sanction approval. They point to Re Sino-Forest 2012 ONCA 816 in which a number of issues, including the validity and quantum of any claim, had not been determined and yet an order was made requiring the holding of a meeting to vote on a plan. However, that was an unusual case and the order was made on the consent of all parties. That is not the situation here at all.

[13] In my view the motion by the Noteholders to now have a meeting to vote on its plan of arrangement is tactical and raised to get a perceived leg up in negotiations. It is dismissed, without prejudice to the Noteholders to later bring it back on if so advised. I decline to deal with the issue raised by Crystallex as to whether a plan would require the consent of Crystallex.

[14] I am also of the view that the request of Crystallex to require the Noteholders to disclose records should not be granted at this time. The parties should concentrate on negotiating if at all possible a resolution leading to a consensual plan. There should be a down tooling on both sides of litigation threats in order to facilitate further negotiations.

[15] I have of course not been a party to any of the negotiations between Crystallex and the Noteholders, and thus do not know what has been discussed. I do not wish, however, to leave the impression that I view the fault of unsuccessful negotiations to lie at the feet of only one side. From what I can discern, it appears to me that both sides bear some blame.

[16] The Monitor has been involved in the negotiations of Crystallex and the Noteholders and is of the view that their positions are not so far apart as to be insurmountable and that the entrenchment of the parties may be softening. There is evidence that the parties are still willing to negotiate.

[17] Mr. Near, the designated director of Crystallex responsible for conducting negotiations with the Noteholders, views the new plan by the Noteholders as an opportunity for a fresh start. Mr. Koehnen said that Crystallex intends to deliver a response to the Noteholders within three weeks from the date of the hearing of this motion. Mr. Myers in his letter to Mr. Kent of January 24, 2013 referred to the possibility of a consensual plan and in court stated that the parties should be put in a room under time pressure in order to negotiate. I agree with that sentiment so long as the playing field is as level as may be possible.

[18] An extension of the stay of proceedings is required. At the conclusion of the hearing I reserved my decision but ordered that the stay be continued pending the release of this decision.

[19] Crystallex in its factum takes the position that an extended stay while Crystallex pursues an arbitration award or settlement would be the least costly as it would obviate the need to litigate the claims filed by the Noteholders and would preserve the rights of the Noteholders to pursue their claim when they knew the results of the arbitration. Mr. Koehnen did not push this during argument. Mr. Reyes, a shareholder, also takes this position and relies on a statement of Deschamps J. in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379 at para. 14 that the best outcome of a CCAA proceeding is achieved when the stay of proceedings provides the debtor with some breathing space during which solvency is restored and the CCAA process terminates without reorganization being needed.

[20] In my view, without deciding whether such an order is legally possible, to make such an order now would not be helpful to the process. This should not, however, be viewed as any indication that serious negotiations on the part of both parties are not expected to occur in a timely fashion.

[21] The stay of proceedings was last ordered in December to be extended on consent to January 31, 2013. The motion that day had requested an extension to May 17, 2013 and the cash flow prepared by Crystallex and contained in the Monitor’s report indicated sufficient cash to carry on to at least May 31, 2013. An updated cash flow has been prepared for the period up to May 31, 2013 which Crystallex and the Monitor believe remains appropriate.

[22] In my view, it is appropriate to extend the stay of proceedings to May 17, 2013 on the following conditions:

(a) Crystallex is to deliver its response to the Noteholders’s plan no later than February 21, 2013.

(b) The parties are directed to attend a further mediation session with Campbell J., to be held subject to Campbell J.’s schedule, within one month from today’s date.

(c) If there is no resolution of all issues, a 9:30 appointment is to be held with me to discuss further steps that need be taken. No motion by either side is to be brought without my approval.

[23] Order to go in accordance with these reasons.

Newbould J.

DATE: February 05, 2013