Superior Court of Justice - Ontario

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

• Eliot Kolers and Sanja Sopic, for the Applicants
• Monique Jilesen, for GIP Primus, LP and Brightwood Loan Services LLC
• Andrew Gray and Alexandra Shelley, for Port of Algoma Inc. and Essar Global Fund Limited
• Nicholas Kluge, for the Monitor
• L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders
• John MacDonald, for the Term and DIP Lenders
• Debra McKenna, for USW and its Local 2724
• Karen Ensslen, for the Retirees
• Jeremy Nemers, for the City of Sault Ste. Marie

Heard

May 17, 2017

Endorsement

[1] The applicants (“Algoma”) move for (i) a declaration that any amounts owing to Algoma under a promissory note dated November 14, 2014 given by Port of Algoma Holdings Inc. (“Portco”) to Algoma have been set off against amounts owing by Algoma to Portco under the Cargo Handling Agreement between Algoma and Portco dated the same day; and (ii) a declaration that Algoma’s right to terminate the Cargo Handling Agreement, the Master Sale and Purchase Agreement, the Portco lease and the Shared Services Agreement all dated November 14, 2014 (together the “Port Agreements”) is not subject to the payment by Portco to GIP Primus and Brightwood Loan Services LLC (together “GIP”) of any amounts that Algoma would otherwise owe to Portco which are subject to the set-off sought in (i).

[2] Portco does not oppose the request by Algoma for the declaration sought in (i) regarding set-off but opposes the declaration sought in (ii) regarding the termination rights of the Port Agreements. GIP opposes both heads of relief and says that Portco has no right to consent to the Algoma claim for set-off in (i).

Background facts

[3] The relevant facts for this motion have been set out in several decisions in this CCAA proceeding, and in the oppression decision dated March 6, 2017 Essar Steel Algoma Inc. et al Re, 2017 ONSC 1366. However, it is necessary to understand the issues to refer to some of those facts.

[4] Pursuant to a Master Sale and Purchase Agreement dated November 14, 2014 (the “MSPA”), Algoma sold its commercial port assets to Portco and leased to Portco the real property upon which the port is located (the “Port Transaction”).

[5] The consideration paid to Algoma under the MSPA totaled US$171.5 million, of which US$150 million was funded in cash through a loan from GIP to Portco (the “GIP Loan”), US$19.8 million was paid by way of the Promissory Note given by Portco to Algoma, and US$4.2 million was paid in cash by Portco directly. The GIP Loan was guaranteed by Essar Global Fund Limited (“EGFL”) and Algoma Port Holding Company Inc., a subsidiary of EGFL that in turn owns Portco, (collectively, the “Parent Guarantee”).

[6] The Promissory Note was assigned concurrently with the closing of the Port Transaction, such that EGFL, the indirect parent company of both Algoma and Portco, became the obligor under the Promissory Note, and Portco was released of its obligations under the Promissory Note. The Promissory Note matured and was payable in full on November 13, 2015, but it was never paid.

[7] The other agreements between Algoma and Portco dated November 14, 2014 governing the lease and ongoing service arrangements are:

(a) a 50-year long-term lease (the “Lease”) pursuant to which Portco leases from Algoma the premises on which the port is located;

(b) a Cargo Handling Agreement pursuant to which Portco commits to provide services to Algoma relating to the port; and

(c) a Shared Services Agreement pursuant to which Algoma provides services to Portco in respect of the operations of the port.

[8] Portco’s cash stream consisted entirely of its monthly revenue from Algoma under the Cargo Handling Agreement, less its monthly payments to Algoma under the Shared Services Agreement, with a net annual EBITDA stream to Portco of approximately US$25 million, which Portco used to make the required payments to GIP under the GIP Loan.

[9] Algoma ceased making the required payments to Portco under the Cargo Handling Agreement (the “Portco Payments”) in May 2016, at which time it advised Portco that it would not be making any further payments because its DIP Lenders would not approve an Algoma budget which contemplated payments to Portco while the amount due to Algoma under the Promissory Note remained outstanding. Following Algoma’s cessation of the Portco Payments, Portco defaulted under the GIP Loan.

[10] In June 2016 and October 2016, Portco brought motions to obtain an order directing Algoma to resume the payments owing to it under the Cargo Handling Agreement. These motions were dismissed on the basis that it was premature to decide the motions before the availability and quantum of Algoma’s entitlement to equitable set-off was determined.

[11] Algoma’s entitlement to set-off was raised in the oppression proceeding in relation to the Port Transaction. In the oppression proceeding, Portco and EGFL crossclaimed against Algoma for amounts owing to Portco under the Cargo Handling Agreement and took the position that the US$19.8 million owed to Algoma under the Promissory Note had been set-off by the accumulated arrears under the Cargo Handling Agreement and that the payments to Portco should resume for the amounts in excess of the value of the Promissory Note.

[12] In the oppression proceeding, I held in reasons released on March 6, 2017 that the Port Transaction was unfairly prejudicial to, and unfairly disregarded the interests of Algoma and its trade creditors, pensioners and retirees. I ordered that the Port Agreements be amended to provide Algoma with a right to terminate them following the satisfaction in full in cash of all amounts due and owing in respect of the GIP Loan. I further ordered that, following the termination of the Port Agreements, Algoma must repay to Portco US$4.2 million with interest.

[13] With respect to the counterclaim of Portco and the set-off issue, I deferred it to the CCAA proceeding.

[14] Following the oppression judgment, GIP and Portco brought motions to compel payment of the amounts owing by Algoma to Portco under the Cargo Handling Agreement, both for post-filing arrears and future payments. The motions were denied on April 28, 2017 for several reasons. With respect to the claim for arrears I discussed the set-off issue as follows:

[14] 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.

[15] 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, 201[7] 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.

Analysis

(i) Equitable set-off

[15] As stated, Portco and EGFL in their crossclaim against Algoma in the oppression action took the position that the US$19.8 million owed to Algoma under the Promissory Note had been set-off by EGFL by the accumulated arrears owing by Algoma to Portco under the Cargo Handling Agreement. They rely on the set-off rights in the Promissory Note as follows:

9. Set-Off Rights. Notwithstanding anything else contained herein or elsewhere, the Holder acknowledges and agrees that the Issuer shall be entitled to set off any amounts due by it hereunder against any amounts due and payable by the Holder under the [Cargo Handling Agreement] which are not paid when due.

[16] Under the Promissory Note the Holder is Algoma. The Issue under the note was Portco. However, under clause 11 of the Promissory Note, it was agreed that the Promissory Note could be assigned ultimately to EGFL, the ultimate parent of both Algoma and Portco, and that

“…Portco…shall be irrevocably and unconditionally released from its obligations hereunder and EGFL shall for all purposes hereof be deemed to be the Issuer.”

[17] Therefore, the set-off provision in the Promissory Note after the assignment to EGFL reads-

9. Set-Off Rights. Notwithstanding anything else contained herein or elsewhere, [Algoma] acknowledges and agrees that [EGFL] shall be entitled to set off any amounts due by it hereunder against any amounts due and payable by [Algoma] under the [Cargo Handling Agreement] which are not paid when due.

[18] EGFL says it exercised this right by off-setting the amounts it owed to Algoma under the Promissory Note against payments due by Algoma to Portco under the Cargo Handling Agreement. When it did that and where is was recorded is not in the record.

[19] GIP takes the position that EGFL does not have the right to set off amounts owing by Algoma to Portco against an obligation EGFL owes to Algoma. It says that while the Promissory Note contains an express right of set-off, EGFL took its title to the Promissory Note under the Assignment and Assumption Agreement, which clearly stipulates that only Portco’s obligations were assigned, not its rights:

1.1 Assignor hereby assigns, transfers and conveys to Assignee 1 all of the Assignor’s obligations under the VTB Notes as and from the date hereof without representation and on an “as is, where is” basis, and without recourse to the Assignor. [2]

[20] Under this argument, Portco assigned to EGFL all of its obligations under the Promissory Note owing to Algoma, but the assignment did not include an assignment of Portco’s rights under the Promissory Note to EGFL. Therefor the argument goes, EGFL did not obtain the set-off rights of Portco contained in the Promissory Note. I do not agree. The language of the Promissory Note says otherwise, as EGFL became the “Issuer” for all purposes of the Promissory Note, which meant EGFL became the Issuer in clause 9 of the Promissory Note with the set-off rights contained in that clause.

[21] EGFL therefore had the right to off-set its obligations to Algoma under the Promissory Note against the amounts owed by Algoma to Portco under the Cargo Handling Agreement. In these circumstances, can it be said that Algoma still owes to Portco the amounts otherwise owing under the Cargo Handling Agreement that EGFL set off against EGFL's obligations to Algoma under the Promissory Note? Put another way, can it be said that Portco can require payment from Algoma of the unpaid amounts under the Cargo Handling Agreement?

[22] This brings into play the principles of equitable set-off as articulated in Holt v. Telford [1987] 2 S.C.R. 1993. In that case the principles were enunciated as follows:

(a) The party relying on equitable set-off must show some equitable ground for being protected against his adversary’s demands.

(b) The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed.

(c) A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking the cross-claim into consideration.

(d) The plaintiff’s claim and the cross-claim need not arise out of the same contract.

(e) Unliquidated claims are on the same footing as liquidated damage claims.

[23] In my view, the application of equitable set-off principles leads to the conclusion that Algoma is entitled to set off its obligations to Portco under the Cargo Handling Agreement against the payments not made to it by EGFL under the Promissory Note for the following reasons:

(1) EGFL controls both Algoma and Portco. The entire Port Transaction, as found in the oppression proceeding, was driven by EGFL and its sister company Essar Capital Limited, both companies controlled by the Ruia family in India.

(2) While technically the Promissory Note, its assignment to EGFL and the Cargo Handling Agreement are separate contracts, they were all made pursuant to the Master Sale and Purchase Agreement on the same day and they are clearly closely connected. All of the parties are related.

(3) EGFL refused or was unable to make payment of the Promissory Note to Algoma when it became due. It was because EGFL failed to make that payment that Algoma became unable to make the payments under the Cargo Handling Agreement during the CCAA process due to the required consent of the DIP Lenders who refused their consent while the Promissory Note went unpaid. EGFL later took the position that it was entitled to set off its obligation to pay the Promissory Note against the payments not made by Algoma under the Cargo Handling Agreement.

(4) To now require Algoma in these circumstances to make the payments to Portco under the Cargo Handling Agreement, which GIP says Portco should enforce, would be manifestly inequitable.

[24] GIP argues that in considering what is inequitable, the interests of the parties should be taken into account and that as it is a party to a loan agreement with Portco, its interests in seeing that Portco receives due funds from Algoma cannot be disregarded.

[25] GIP relies on the case of Canada Trustco Mortgage Co. v. Sugarman (1999), 12 C.B.R. (4th) 1 (CA). I do not think that case is apt. The parties in that case were an accounting firm, two partners who were owed their capital accounts and the bank that funded the partners’ capital accounts. After the two partners went bankrupt, it was held that the firm could not set off amounts paid to the bank against its obligations to pay the partners their capital because once they had gone bankrupt, their creditors could not be ignored. It was the intervening bankruptcy that was the critical fact in that case, not that the two partners had creditors. Charron J.A. said that had the two partners not gone bankrupt she had no doubt that equity would allow the accounting firm to set off its obligation to the bank against the debt owing to the two partners. While GIP may be a creditor of Portco, the debt owed by Algoma to Portco is not a debt to GIP. GIP insisted on that structure for the Port Transaction. GIP is not standing in the shoes of Portco.

[26] GIP also argues that because Portco was released from its obligations under the Promissory Note when the Note was assigned, no equitable set-off should be permitted. I do not see that. Allowing equitable set-off in this case does not require or reinstitute the obligation of Portco to pay the Promissory Note. Moreover, the agreements did not say that there could be no equitable set-off and mutuality of agreements is not a requirement. The fact that Portco does not have to pay the note would preclude legal set-off between Algoma and Portco but it does not preclude equitable set-off.

[27] In all of the circumstances, a declaration is granted that any amounts owing to Algoma under the Promissory Note given by Portco to Algoma have been set off against amounts owing by Algoma to Portco under the Cargo Handling Agreement. [3]

(ii) Termination rights of the Port Agreements

[28] Algoma moves for a declaration that its right to terminate the Port Agreements is not subject to the payment by Portco to GIP of the amounts that Algoma would otherwise owe to Portco which are subject to the set-off.

[29] As stated, in the oppression decision of March 6, 2017 I ordered that the Port Agreements be amended to provide Algoma with a right to terminate them following the satisfaction in full in cash of all amounts due and owing in respect of the GIP Loan. The order that was taken out stated explicitly that the termination rights of the Port Agreements by Algoma required confirmation that the GIP Loan had been paid in full in cash. More particularly, the order provided:

5. THIS COURT ORDERS THAT the following provisions be and are hereby incorporated into each of the Cargo Handling Agreement, the Shared Services Agreement between Algoma and Portco dated as of November 14, 2014 (the “Shared Services Agreement”), the Port Lease between Algoma and Portco dated as of November 14, 2014 (the “Lease”) and the Master Purchase and Sale Agreement between Algoma and Portco dated as of November 14, 2014 (the “Master Purchase and Sale Agreement):

(a) Upon satisfaction in full in cash of all amounts due and owing in respect of the GIP Loan (the “Payment”), before, on or after the Maturity Date (as defined below), Algoma shall have at any time after Payment during the term of the Lease the option of terminating the Lease, the Cargo Handling Agreement, the Shared Services Agreement, and the Master Purchase and Sale Agreement (collectively, the “Material Agreements”).

6. THIS COURT ORDERS that Algoma shall not terminate the Material Agreements until:

(a) receiving confirmation in writing from GIP of Payment of the GIP Loan (the “Notice of Payment”), which shall be delivered by GIP forthwith upon receipt of Payment and a copy of which shall be sent to the Monitor; or

(b) receiving Notice of Payment following foreclosure by GIP…after GIP has received in cash all amounts that would otherwise have been due and owing under the GIP Loan if such foreclosure had not occurred (the “GIP Loan Balance”)…

[30] GIP, supported by Portco, argues that what Algoma now seeks is contrary to the oppression decision and the formal judgment as it would result in the termination of the Port Agreements without the GIP Loan being paid in full by Portco. GIP says it expected its loans to be paid by Portco from the net annual EBITDA stream received by Portco from Algoma of approximately US$25 million resulting from the revenue to be paid by Algoma to Portco under the Cargo Handling Agreement, less Portco's monthly payments to Algoma under the Shared Services Agreement.

[31] Algoma counters by saying that set-off was raised in the oppression action but that it was held that it was to be dealt with in the CCAA proceedings. The reasons for judgment stated:

[147] Portco has made a counterclaim for a declaration that the $19.8 million note has been paid in full as a result of set-off and for payments beyond that amount said to be owing under the Cargo Handling Agreement. When and how the set-off occurred is not in the record and whether that could be affected by the stay of proceedings in the CCAA has not been argued. Nor are the amounts said to be owing set out with any precision. In my view the appropriate place to make this claim is in the CCAA proceedings and I do not intend to deal with it in this counterclaim.

[32] Algoma says that its right to set-off the amount of the unpaid Promissory Note against its obligations under the Cargo Handling Agreement would be a hollow victory if in order to terminate the Port Agreements it had to pay to Portco the amount of the set-off so that Portco could pay the remaining balance on the GIP Loan. Algoma says that GIP has a guarantee from EGFL, the ultimate parent of Portco, and that GIP can look to EGFL for payment of the guarantee or that EGFL can fund Portco with sufficient money to retire the GIP Loan. Algoma says that while the judgment in the oppression action requires the GIP Loan to be paid in cash before the Port Transaction can be terminated, it does not say who is to pay the cash and that it is Portco's obligation, not Algoma's, to pay the GIP Loan.

[33] The Monitor in support of Algoma concedes that the formal judgment in the oppression action omitted a provision reflecting paragraph 147 of the reasons for judgment but says that it is the kind of slip that can be amended by the court on its own motion even after the judgment has been signed and entered. Therefore the Monitor says, the fact that the formal judgment can be amended to state that the set-off issues raised in the oppression action should be dealt with in the CCAA proceedings means that it would not be contrary to the oppression judgment to permit the relief that Algoma now seeks. It may be that such power exists, but in this case I do not think it matters.

[34] Set-off is a matter amongst Algoma, Portco and EGFL. It does not involved the GIP Loan. Likewise, the GIP Loan involves Portco, EGFL and GIP. It is a separate though contemporaneous transaction. To permit set-off between Algoma and Portco cannot change the terms of the GIP Loan. Even if it could be said that set-off is a form of payment, as it has been argued, could not affect GIP’s rights. The payment by Algoma to Portco by set-off would be a payment to Portco but not to GIP.

[35] What Algoma seeks is really something that it ought to have raised in the oppression action before the judgment was settled. I recognize that the problem so far as Algoma sees it is that EGFL is unlikely to fund Portco to pay off the balance of the GIP Loan leaving Algoma with no choice but to eventually pay the amount that has been ordered to be set off. The relief in the oppression action brought by the Monitor may not have been foreseen by Algoma, but once it was, Algoma at the least ought to have sought some kind of relief or reopening of the matter before the judgment was signed and entered.

[36] Algoma also relies on the formal judgment which refers any dispute regarding payment of the GIP Loan to the Court and says that paragraph gives the Court in this CCAA proceeding jurisdiction to make the order now sought by Algoma. Paragraph 7 of the formal judgment provides:

7. THIS COURT ORDERS that any dispute as to whether the Payment of the GIP Loan has been made shall be referred back to this Court.

[37] I do not think that provision assists Algoma. The word Payment referred to is defined earlier in the judgment as “Upon satisfaction in full in cash of all amounts due and owing in respect of the GIP Loan (the “Payment”)…”. This provision deals with payment issues between Portco and GIP, which presumably could arise over expense or interest claims by GIP or some such matter.

[38] GIP also raises a provision in the Assignment of Material Contracts to which Algoma and GIP are parties. In clause 6(f) of that agreement, Algoma has agreed that as long as the GIP Loan remains unpaid, it will not terminate the Port Agreements. GIP says that the relief sought by Algoma would amount to a breach of that provision. I agree with GIP. Under the oppression judgment no breach would occur because the GIP Loan would have to be paid in full before Port Agreements would be terminated by Algoma. Under the relief now sought by Algoma there would be a breach of clause 6(f).

[39] In all of the circumstances, the relief sought by Algoma with respect to the termination rights of the Port Agreements is denied.

Costs

[40] Algoma and GIP have had partial success. In the circumstances, there shall be no costs of the motion to or against either. EGFL caused the problem in the first place by its refusal to pay the Promissory Note when it was due, and it was that breach that caused Algoma to stop making payments under the Cargo Handling Agreement due to the position taken by the DIP lenders whose consent was required. I award no costs to EGFL/Portco.

Newbould J.

Date: June 26, 2017

[1] 2017 ONSC 1366

[2] The assignment is first to Assignee 1 (Algoma Port Holding Company Inc.) which subsequently assigns it to “Assignee 2”, Essar Ports Algoma Holding Inc., which subsequently assigns it to “Assignee 3”, being Essar Global Fund Limited. Each assignment language is identical but for the assignee.

[3] There is a dispute between Algoma and Portco as to the outstanding amounts owing under the Cargo Handling Agreement, based on a claim for interest made by Portco up to December 29, 2016. I agree with Algoma that the interest claim is not appropriate. EGFL had a right of set-off from the time the payments under the Cargo Handling Agreement stopped, and cannot claim interest during that period as if the set-off occurred only on December 29, 2016.