CITATION: Re Essar Steel Algoma Inc. et al, 2016 ONSC 6459
COURT FILE NO.: CV-15-11169-00CL
DATE: 20161017
SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF ESSAR STEEL ALGOMA INC., ESSAR TECH ALGOMA INC., ALGOMA HOLDINGS B.V., ESSAR STEEL ALGOMA (ALBERTA) ULC, CANNELTON IRON ORE COMPANY AND ESSAR STEEL ALGOMA INC. USA
Applicants
BEFORE: Newbould J.
COUNSEL: Jeremy Opolsky and Alexandra Shelley, for the Port of Algoma Inc. Stephen J. Weisz, for the GIP Primus, LP John A. MacDonald, for Deutsch Bank AG Ashley Taylor, for the applicants Clifton Prophet and Nicholas Klug, for the Monitor L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders Massimo Starnino and Debra McKenna, for USW and Local 2724 Lou Brzezinski, for USW Local 2251 Karenn Ensslen, representative counsel for the retirees Jeremy Nemers, for the City of Sault St. Marie
HEARD: October 6, 2016
ENDORSEMENT
[1] On June 29, 2016 I dismissed a motion by Port of Algoma Inc. (Portco) for orders (i) that Essar Algoma (Algoma) make payment of the post-filing amounts now owing and all future payments coming due under a Cargo Handling Agreement, and (ii) for an administrative charge over the assets of Algoma million to secure the obligations of Algoma to Portco.
[2] At the hearing of that motion there were issues raised by the DIP lenders regarding the unpaid US $19.8 million promissory note made by Portco to Algoma that was assigned to Essar Global Fund Limited (EGFL), the indirect parent company of both Algoma and Portco. The DIP lenders asserted that there was an equitable set-off issue that would have to be dealt with and that it was premature to deal with the Portco motion for payment under the Cargo Handling Agreement until that equitable set-off issue was dealt with.
[3] The Monitor in its report had expressed concerns regarding the entire Portco Transaction and the preceding recapitalization of Algoma that took place in 2014 under the CBCA and expressed the view that the Portco motion for payment under the Cargo Handling Agreement could not be determined in isolation and must be linked to a full understanding of both the Portco Transaction and the preceding recapitalization. The Monitor stated that the ability of Portco to rely on the release contained in the assignment and assumption agreement regarding the Portco promissory note and the applicability of set-off rights in relation to amounts due under the promissory note and the Cargo Handling Agreement might be affected by the views of the Court concerning the overall context of the Portco Transaction and the recapitalization.
[4] At the conclusion of my decision on the Portco motion I stated:
[29] I agree with the DIP lenders that it is premature to make an order at this stage requiring Algoma to make any further payments under the Cargo Handling Agreement and I decline to make such an order or to order any security to be provided to Portco. The Portco motion is dismissed without prejudice to it being brought back on after the set-off issue is determined. The parties are directed to confer as to the most appropriate way to quickly deal with the set-off issue and the other issues raised by the Monitor. If there is no agreement, a conference is to be held during the first week of July to settle how to deal with the issues.
[5] Not a whole lot has changed although the amount of payments not made to Portco is approaching the amount of the unpaid Portco promissory note. Portco however says that the parties have not quickly conferred as to the most appropriate way to deal with the set-off or other issues and that it is now entitled to raise all of the issues that it raised on its first motion. It blames the other side for the delay.
[6] I cannot say that Algoma, the Monitor or the DIP lenders have let things slide. It was the Monitor’s view that the validity of the Portco Transaction could well affect the equitable set-off issue on the Portco note and that the Portco motion could not be determined in isolation but must be linked to a full understanding of both the Portco Transaction and the recapitalization. At a 9:30 conference after the first decision, there was a discussion to the effect that the set-off issue should be looked at together with the review of the Portco Transaction.
[7] There was nothing to prevent Portco from applying earlier for a determination of the equitable set-off point on the Portco note, if it thought it could be determined in isolation and that the other parties were dragging their feet.
[8] On September 26, 2016 on order was made authorizing and directing the Monitor to commence an oppression proceeding (the “Related Party Proceeding”) in relation to the Portco Transaction and certain other Related Party Transactions identified in the Monitor’s Sixteenth Report. The order directs the Monitor to commence those proceedings by October 21, 2016. The DIP lenders and the Monitor remain of the view and have contended that determinations concerning the relief now sought in the Portco motion cannot be made until the Related Party Proceedings have been dealt with.
[9] I must say that when I stated that the first Portco motion was dismissed without prejudice to it being brought back on after the set-off issue was determined, it was not intended to enable Portco to raise anew those issues that had been decided against it. It was intended to permit Portco to come back if it succeeded on the set-off point or the issues raised by the Monitor. Portco however continues to raise issues already decided against it.
[10] Portco again raises section 11.01 of the CCAA that prevents parties in a CCAA proceeding from being forced to perform a contract without payment after a stay order. The section provides:
11.01 No order made under section 11 or 11.02 has the effect of
(a) prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made; or…
[11] Portco raised this section on its first motion. I held against Portco and said:
[20] Portco says that under the Cargo Handling Agreement, it is responsible for providing to Algoma the cargo handling services required on the Port property. It says that if Algoma does not pay it for those services, it will mean that Portco is obliged to provide the services without being paid, contrary to section 11.01(a). I do not agree. The persons providing the services are not Portco employees but employees of Algoma. Under the Shared Services Agreement, Algoma provides all of the services as may be necessary for Portco to fulfill its obligations under the Cargo Handling Agreement. Those services are paid for by Algoma.
[12] Portco raises the same argument again. It is not open to Portco to do so. It has been decided against Portco and there was no appeal from that decision. In any event, I am not persuaded that anything has changed regarding how the port is operated.
[13] As in the first motion, Portco contends that while it is Algoma that provides the employees under the Shared Services Agreement, it is Portco that manages and directs the provision of the services. That is not what the evidence is. There is no management or direction given by Portco to Algoma. Portco has no operating management at all. It is insolvent. As stated in my prior decision, under the Shared Services Agreement it is Algoma that provides all of the services as may be necessary for Portco to fulfill its obligations under the Cargo Handling Agreement. Mr. Dwivedi has been the CEO of Portco since May 2015. He acknowledged in his affidavit that as a result of the Shared Services Agreement, Algoma provides Portco with employees “who attend to cargo handling, logistics and other operations for Portco.”
[14] Portco now raises other arguments as to why section 11.01(a) requires payment under the Cargo Handling Agreement. I see this as no more than coming up with arguments that it could have raised in its first motion when it relied on that section. Litigation like this in piecemeal is not permitted. When relying on a section and having lost, it is not open to a party to come back and say that there are further arguments why that section requires the result the party was looking for in the first place.
[15] Portco says now that under the Master Purchase and Sale Agreement, Algoma sold the Port assets, including the docks, to Portco and under the Lease Agreement leased to Portco the real property upon which the Port is located. Portco contends that the rights granted to Algoma in the Cargo Handling Agreement to the use of the Port facilities and equipment (i.e. mechanical conveyors) are properly classified as providing a license for the use of Portco’s property.
[16] This argument should have been made the first time. I will comment on it but in doing so do not accept that it is properly before me. It is not.
[17] The Cargo Handling Agreement states that Algoma has non-exclusive access to a number of things described as the Cargo Handling Facilities. That was obviously necessary because it is Algoma under the Shared Services Agreement that is to provide all of the services as may be necessary for Portco to fulfill its obligations under the Cargo Handling Agreement. There is no mention in the Cargo Handling Agreement of any licence from Portco to Algoma, and it has an entire agreements clause.
[18] Portco argues that a licence is merely a right that allows a licencee to do some act upon the land that would otherwise constitute a trespass. Thus it says the right of access to Algoma to the Portco facilities that were leased to Portco amounts to a licence that should be paid for. I do not agree. In the lease from Algoma to Portco, it expressly reserves to Algoma in section 6.2 the right to enter the Portco premises, including the docks, to exercise its access rights under the Cargo Handling Agreement. Algoma is required under the Shared Service Agreement to provide the services required by the Cargo Handling Agreement. There can be no issue of any trespassing.
[19] The argument of Portco essentially suggests that it is some independent supplier of premises or goods which amount to a licence granted to Algoma and should be treated as such in considering the various agreements and CCAA provisions. But Portco is not at arm’s length. It and Algoma are controlled by the same Essar entity and the Portco transactions in 2014 were not arms’ length transactions between Algoma and Portco. They were undertaken to put cash in the hands of Algoma. The parent of each, EGFL, refuses to pay on the Portco promissory note assigned to it as part of the Portco transaction that is now under attack.
[20] Whether in these circumstances Portco should be looked at as a party to be protected by section 11.01(a), assuming it were open to Portco to continue arguing that issue, cannot be divorced from the Related Party Proceeding being brought by the Monitor. The entire Portco transaction will be looked at through the lens of an oppression proceeding. I would not order the payment of amounts due under the Cargo Handling Agreement in the face of those proceedings.
[21] Portco again argues as it did in its prior motion that the Initial Order must be interpreted to require the payments under the Cargo Handling Agreement to be made to Portco and that otherwise the result would be an impermissible ignoring of the provisions in section 11.01(a) of the CCAA. The argument is based on its interpretation of paragraph 10 of the Initial Order of language “for greater certainty” the debtors shall continue to pay Portco. I dealt with this thoroughly in my previous decision in paragraphs 13 to 18. The provisions of the DIP financing and the terms of the Initial Order made clear that money could not be paid without the consent of the DIP lenders, and that has not changed.
[22] Portco argues that to permit Algoma not to make payments under the Cargo Handling Agreement is in effect obtaining execution before judgment. By November 2016 (the exact date is contested) Algoma will have withheld as much money under the Cargo Handling Agreement as the entire amount of the Portco promissory note that EGFL has refused to pay. To continue to permit Algoma not to pay any further mount will be an execution before judgment.
[23] I understand the force of the argument and the colourful language used by Estey J. in Aetna Financial Services Ltd. v Feigelman, 1985 CanLII 55 (SCC), [1985] 1 S.C.R. 2 (“litigious blackmail”) in dealing with the then relatively new remedy of mareva injunctions. I have serious doubts about the use of the concept of execution before judgment in the context of a CCAA proceeding. While the action of the Monitor will be an oppression action, it is still under the auspices of a CCAA proceeding in which there is a stay of proceedings, just as was the breach of contract case by Cliffs against Algoma. We are not dealing with a claim in which the only interests are a plaintiff and defendant as is the case with a typical mareva injunction case. We are dealing with attempts to have a debtor, in this case Algoma, survive to see another day under a new owner. There must be choices made as to who gets paid and who does not. As the Monitor says, these are often tough choices but a balance must be made between the debtor and its stakeholders and the party claiming payment.
[24] In this case, the Monitor has expressed the view that additional cash requirements, including those which would arise from the resumption of payments under the Cargo Handling Agreement, will increase risks to Algoma’s projected liquidity. I do not read that statement, as counsel for GIP Primus suggests, to mean that the Monitor is saying the payments can be made without difficulty. There were already serious risks to Algoma’s liquidity.
[25] Portco asks that if it is not entitled to payment under the Cargo Handling Agreement because the DIP lenders will not consent to it, then an order should be made varying the provisions of the Initial Order to permit Portco to cease operation of the Portco facilities and cease performance under the agreements with Algoma, and that for that purpose there should be a lift of the stay of proceedings to permit Portco to pursue its remedies for breach of agreement.
[26] I would not make such orders. First of all, as stated, the validity of the agreements is to be dealt with in the Related Party Proceedings. To permit Portco to effectively shut down the operations of Algoma would be completely contrary to the interests of all stakeholders, not the least of which are the employees and retirees, none of whom have supported the position of Portco on this motion. Such an order would have the effect of giving Portco complete control of this entire proceeding. That may be the wishes of its Essar parent who has in the past indicated an interest in acquiring all of the assets in the CCAA sales process, albeit now as a non-qualified bidder, but it is not in the interests of the majority of the stakeholders. As well, Portco has said it has no money and whatever it receives from Algoma under the Cargo Handling Agreement has gone straight to its lender GIP Primus. In those circumstances nothing would be achieved for Portco in being able to stop Algoma personnel from operating the Portco facilities.
[27] Portco also has contained argument in its factum that equitable set-off on the Portco promissory note is not available to Algoma. This issue is not properly before me and I am not prepared to deal with it divorced from the proceedings to be started by the Monitor.
[28] The motion is dismissed.
Newbould J.
Date: October 17, 2016