Court File and Parties

COURT FILE NO.: 15-CV-0011169-00CL DATE: 20170428 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

BEFORE: Newbould J.

COUNSEL: Monique Jilesen, for the GIP Primus, L.P. and Brightwood Loan Services LLC Jeremy R. Opolsky, for the Essar Defendants Eliot Kolers and Sanja Sopic, for the Applicants Nicholas Kluge and Delna Contractor, for the Monitor Steven L. Graff and Ian Aversa, for the City of Sault Ste. Marie L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders Debra McKenna, for USW and its Local 2724 Alex Cobb, for Deutsche Bank AG

HEARD: April 20, 2017

Endorsement

[1] GIP Primus, L.P. and Brightwood Loan Services LLC (together “GIP”) move for an order (i) directing Essar Steel Algoma Inc. (“Algoma”) to resume all payments owing under the Cargo Handling Agreement as they become due and that all such payments, net of the payments owed to Algoma under the Shared Services Agreement, be made directly to GIP to be applied to the GIP Loan to Portco; (ii) directing the immediate payments by Algoma of the arrears owing under the Cargo Handling Agreement and that such payments be made directly to GIP to be applied to the GIP Loan; (iii) in the alternative, granting Portco for itself and on behalf of GIP a charge in an amount equal to any unpaid arrears under the Cargo Handling Agreement ranking in priority to the claims of all secured creditors of Algoma and Court ordered charges (except for the Administration Charge); (iv) directing that payments under the proposed Third DIP Amendment not occur until determination of this motion and Court approval of the Third DIP Amendment. On the hearing of this motion, no argument for the relief sought in (iv) was made.

[2] After the status of GIP to be asking for the relief in its motion was questioned, Portco filed a motion seeking an order that Algoma resume all payments owing under the Cargo Handling Agreement as well as the arrears.

[3] The relevant background to this motion is contained in my reasons for judgment dated March 6, 2017 in the oppression action brought by the Monitor to set aside the Portco Transaction and to have the shares of Portco held by the Essar Defendants transferred to Algoma. In that action, I held the Portco Transaction and the relevant agreements were to continue until the loan from GIP to Portco has matured and been paid, after which Algoma shall have at any time thereafter while the Lease exists the option of terminating the Lease to Portco and the other relevant agreements. Thus the obligations of Algoma to pay Portco under the Cargo Handling Agreement continue and the $150 million loan from GIP to Portco secured by Portco's assets remains as an obligation of Portco in accordance with its terms save for a revision ordered with respect to a change of control clause that was in favour of the Essar Defendants.

[4] As part of the Port Transaction in 2014, Portco gave to Algoma a promissory note for $19.8 million payable to Algoma by Portco with interest at 10% per annum (the “Portco Note”). Under an assignment and assumption agreement dated the same day, the Portco Note was assigned by Portco to Essar Global Fund Limited (“EGFL”) which is now the obligor under the Portco Note, and Algoma released Portco from any obligation under the Portco Note. The Portco Note matured and was payable in full on November 13, 2015. It has not been paid.

[5] The Initial Order of November 9, 2015 provided for the payment of post-filing expenses by Algoma pursuant to a cash flow budget that under the DIP loan agreement required the approval of the DIP lenders. The cash flows were required to be approved periodically by the DIP lenders and until May 2016 they included the payments to be made under the Cargo Handling Agreement to Portco and were approved by the DIP lenders.

[6] However, by letter dated May 12, 2016, the agent under the DIP Agreement, on the direction of the requisite DIP lenders, delivered a letter to the applicants’ counsel advising that the DIP lenders did not approve the May 4, 2016 budget due to the fact that the budget contemplated a cash payment by Algoma to Portco under the Cargo Handling Agreement while amounts remained unpaid to Algoma under the Portco Note obligation of EGFL. Since then no payment of amounts otherwise owing under the Cargo Handling Agreement has been made by Algoma to Portco.

[7] On June 29, 2016 I dismissed a motion by Portco asking that Algoma be ordered to continue to make payments under the Cargo Handling Agreement. At that time, the outstanding payments owing by Algoma to Portco under the Cargo Handling Agreement were less than the outstanding amount of $19.8 million plus interest owing under the Portco Note and the question of whether Algoma was entitled to offset payments owing under the Cargo Handling Agreement against the outstanding Portco Note was not yet decided. On October 17, 2016 I dismissed a second motion by Portco to order Algoma to make payments under the Cargo Handling Agreement, brought on essentially the same grounds as its first motion for that relief.

[8] Now, the amounts owing by Algoma to Portco under the Cargo Handling Agreement exceed the amount owing by EGFL under the Portco Note. GIP and Portco want all past and future payments owing by Algoma under the Cargo Handling Agreement to be made.

[9] GIP and Portco argue that the post-filing payments under the Cargo Handling Agreement must be made because of section 11.01(a) of the CCAA which 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;…

[10] This is the third time that this argument has been advanced. It was unsuccessfully argued by Portco on two previous motions requesting orders that the payments under the Cargo Handling Agreement resume. On the first occasion, it was argued that Portco was providing services to Algoma on the Port facilities and that section 11.01(a) required immediate payment. I held that Portco was not providing the services but rather Algoma personnel who were doing all of the work. On the second occasion Portco added the argument that Portco was licensing the Port facilities to Algoma and that the payments under the Cargo Handling Agreement were for that purpose and therefore had to be made. I held that it was not open to Portco to make that new argument but that in any event I did not accept it. On that second occasion I said the following in my endorsement of October 17, 2016:

[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. …

[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] Portco adds another argument why the access of Algoma to the Port facilities is a licence. Again, that should have been argued in the first go-around on the point. It says that under the Cargo Handling Agreement, Algoma can enter the property only if it makes payment under that agreement. I do not agree. What the Cargo Handling Agreement provides in section 3.3 is that notwithstanding that Algoma's access to the Port is non-exclusive, Algoma shall have priority access so long as it makes its payments due under the Cargo Handling Agreement. That in no way can be construed to be a licence. That section recognizes Algoma's right to access to the Port facilities as provided for in the Lease.

[20] In short, even if it were permissible for Portco or GIP to again raise section 11.01(a), which it is not, I cannot find that there was a licence relationship between Algoma and Portco regarding the Port assets.

[21] So far as the balance now owing by Algoma to Portco under the Cargo Handling Agreement and future amounts owing is concerned, it is necessary to balance the various interests in determining whether the stay under section 11 of the CCAA should be lifted to require those payments to be made. I have concluded in balancing those interests that the stay should not be lifted.

[22] With respect to the claim that Algoma should pay Portco the arrears under the Cargo Handling Agreement up to the amount of the Portco Note, the Essar Defendants, which includes Portco and EGFL, have asserted in their counterclaim in the oppression action that the Portco Note has been paid in full as a result of set-off by EGFL of the Portco Note against amounts owing by Algoma under the Cargo Handling Agreement. In the circumstances now in which EGFL claims that the Portco Note has been paid, I do not think it appropriate for the Essar Defendants to now claim that the amount owing under the Cargo Handling Agreement up to the amount of the Portco Note should now be paid by Algoma.

[23] Therefore, while the issue of whether Algoma can claim an equitable set-off of the amounts owing by it to Portco under the Cargo Handling Agreement against the obligations of EGFL under the Portco Note have not yet been the subject of a motion by Portco, I find it difficult to think that Portco could now seriously argue that those amounts are still owing under the Cargo Handling Agreement. GIP is in no better position than Portco. The amount owed by Algoma to Portco under the Cargo Handling Agreement is not, as GIP asserts, “effectively a debt owed to GIP”. As I held in my reasons for judgment of March 6, 2016 in the oppression action, GIP would only lend to a new entity that would purchase the Portco assets from Algoma if that entity was separate and distinct from Algoma and the whole Portco transaction was structured at the request of GIP that way. The only obligation of Algoma under the Cargo Handling Agreement is to Portco.

[24] GIP argues that Algoma now has money available to make payment under the Cargo Handling Agreement. It relies on improving iron prices and the cash flow in the Monitor’s 27th report. That cash flow indicates an ending cash balance of $28 million at the end of the week of May 5. However, the Monitor has said throughout these CCAA proceedings that Algoma needs a cash cushion of $25 to $30 million. Also, under the terms of the DIP financing, there is a cash sweep of any extra cash used to pay down the DIP loan. As well, there is no cash flow yet filed by the Monitor for any period after the week ending May 5, 2017 and so it is speculative as to what cash may be available. This is exacerbated by the question of what may happen to the DIP loan at the end of April.

[25] Under the current DIP financing, it would be a breach of the terms of the DIP loan to permit payments to be made by Algoma under the Cargo Handling Agreement without the approval of the DIP lenders, who have not so approved. The DIP loan expires on April 30, 2017 although it is not yet known what will happen to that loan and whether it will be extended or on what terms. It would not be proper to make an order that would permit a breach of the terms of the DIP loan that were approved by the Court, even if the DIP loan becomes due on April 30, 2017.

[26] There are other creditors of Algoma, not the least of which is the City of Sault Ste. Marie which is owed approximately $26 million in taxes which represents approximately 25% of the City’s entire annual tax levy. Approximately $12 million of this is for post-filing taxes, which under the Initial Order were required to be paid. However, payment of the post-filing taxes was stayed by order of June 15, 2016, one reason being that other post-filing obligations were also not being paid. On the eve of the hearing of these motions by GIP and Portco, the City brought a motion for an order lifting the stay and requiring all post-filing tax obligations to be paid by Algoma. That motion was not heard on this motion as the respondents needed time to file material. However, Portco has no basis to be improving its position as against other creditors, including the City which has a statutory lien for unpaid taxes, which would happen if payments under the Cargo Handling Agreement were now ordered to be made by Algoma. GIP is in no better position than Portco.

[27] I cannot find that there is sufficient cash available to Algoma to now start to pay Portco and other creditors such as the City any amounts on their post-filing claims.

[28] GIP holds a guarantee from EGFL for the loan made by GIP to Portco. No demand has been made on that guarantee. It is said by GIP that there are some terms of that guarantee that may give rise to some defence of EGFL to any claim. Neither the Essar Defendants nor GIP have produced the guarantee and therefore it is not possible to know the strength of the assertion by GIP that it may not be able to act on the guarantee. It remains therefore an open question whether GIP has the right to call on EGFL to pay the loan. While that strictly speaking is not a defence to GIP’s right to have the GIP loan payments made by Portco, which were intended to be funded by the net amount to be paid by Algoma to Portco under the Cargo Handling Agreement and the Shared Services Agreement, it is something that I can and do take into account in considering the exercise of my discretion under section 11 of the CCAA.

[29] There are two other outstanding oppression claims that due to time constraints could not be heard together with the oppression claim relating to the Portco transaction. One relates to the Trinity Coal Corporation contracts and the other to related party expenses involving a jet and an apartment in New York that are alleged to have been a misuse of Algoma's money. The amounts claimed are in excess of $35 million. The Monitor is attempting to have these two claims tried quickly and contends that if any order were made that payments under the Cargo Handling Agreement are to resume, such payments should be stayed pending a decision on these two remaining oppression claims. GIP contends that payments under the Cargo Handling Agreement are not linked to these remaining oppression claims and that the payments under the Cargo Handling Agreement should not be set-off.

[30] Whether or not an equitable set-off were available, I would stay any decision that payments under the Cargo Handling Agreement resume pending a determination of these two remaining oppression claims. The statement of claim alleges that EGFL through its control of Portco engaged in a course of conduct that resulted in Algoma entering into a number of transactions that benefited EGFL, including the Portco transaction, the Trinity Coal Corporation contract and the related party expense payments. I expect these claims to be tried shortly. EGFL has not made any payments to Algoma on the Portco Note that is long overdue and there is no certainty at all that it would be able to pay any judgment on these other oppression claims. It was denied the right to be a bidder for the Algoma assets on the SISP as a result of being unable to provide evidence of its financial ability to complete any such purchase. It would be manifestly unjust to Algoma's creditors that payments now be made to Portco under the Cargo Handling Agreement in these circumstances.

[31] GIP argues in the alternative that if payments are not ordered to be made by Algoma under the Cargo Handling Agreement, a critical supplier charge should be ordered in favour of “Portco for itself and on behalf of GIP” securing amounts owed by Algoma. A critical supplier charge is governed by section 11.4 of the CCAA that provides:

Critical supplier

11.4 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied that the person is a supplier of goods or services to the company and that the goods or services that are supplied are critical to the company’s continued operation.

Obligation to supply

(2) If the court declares a person to be a critical supplier, the court may make an order requiring the person to supply any goods or services specified by the court to the company on any terms and conditions that are consistent with the supply relationship or that the court considers appropriate.

Security or charge in favour of critical supplier

(3) If the court makes an order under subsection (2), the court shall, in the order, declare that all or part of the property of the company is subject to a security or charge in favour of the person declared to be a critical supplier, in an amount equal to the value of the goods or services supplied under the terms of the order.

[32] Section 11.4 permits an application by the debtor company, in this case Algoma. Algoma has not asked for relief under that section in connection with amounts owed to Portco. I do not see how GIP can rely on that section.

[33] GIP also relies on section 11 of the CCAA. It says that the Court has a broad discretionary power under section 11 of the CCAA to make any order it considers appropriate in the circumstances and that in the unique circumstances of this case, Portco should be granted a charge, for itself and on behalf of GIP, in the amount equal to any unpaid arrears under the Cargo Handling Agreement arising prior to the next payment date, which is April 17, 2017. It says that this charge should rank in priority to the claims of all secured creditors and Court ordered charges, which the exception of the Administrative Charge as defined in the Initial Order.

[34] I have serious doubts that a critical supplier charge should be made under the general discretion provided under section 11 in the face of a specific provision in section 11.4 dealing with that subject. However, even if it could be done, I would not do so.

[35] First, Portco has not requested such a charge in its notice of motion. GIP is not Portco and has no greater rights than Portco. If Portco has not asked for a charge to secure its claims to payment, I fail to see how GIP can do so. GIP is not a creditor of Algoma.

[36] Second, a finding that a person is a critical supplier requires a finding that the person is a supplier of goods or services to the company. I previously held that Portco is not a supplier of goods or services to Algoma and no appeal was taken from that decision. GIP is not a supplier of anything to Algoma and there is no basis for a critical supplier charge be made on behalf of GIP.

[37] Third, to make the order requested would be contrary to the DIP loan terms under which the DIP lenders are protected by a typical DIP charge. In this case, the DIP loan terms permit only the Administration Charge, perfected purchase money security interests and a prior ordered critical suppliers’ charge capped at a maximum amount of C$15 that has already been reached. The DIP lenders are entitled to that charge whether or not the DIP loan is extended.

[38] Fourth, to make a charge in favour of Portco and GIP that ranks ahead of secured claims would not be appropriate. In this case, the City has a statutory lien for unpaid taxes. I see no basis whatsoever to permit a charge in favour of Portco or GIP that would rank in priority to the City’s lien. The obligations of Algoma under the Cargo Handling Agreement are unsecured and, even if they were secured, there would be no reason for those obligations to be secured ahead of the City’s lien.

[39] In the circumstances, the motions of GIP and Portco are dismissed.

[40] No party has asked for costs and there will therefore be no cost order.

Newbould J. Date: April 28, 2017