Jun 9, 2020

When will the court overturn the chair's determination of the appropriate vote at a meeting of creditors?

FT ENE Canada Inc. (Re), 2019 ONSC 5793 (CanLII)

1. FTE Canada is a wholly-owned subsidiary of Finetex. Park, the founder of FTE Canada, had a falling out with Finetex and was removed from office as a “representative director” of Finetex.

2. Finetex is embroiled in insolvency proceedings in Korea under the Debtor Rehabilitation and Bankruptcy Act. In February 2019, FTE Canada filed an NOI to avoid being drawn into and controlled by Finetex’s Korean insolvency proceedings. In August 2019, Finetex called a special meeting of shareholders of FTE Canada and, as 100% shareholder, passed a resolution removing Park as a director of FTE Canada.

3. A proposal was made to the trustee by FTE Canada on August 2019, and notice was given to all creditors of a meeting to consider the proposal. The trustee concluded that Finetex, being the 100% shareholder of FTE Canada, was “related” to FTE Canada. Finetex’ claim of $7.5 million overwhelms all other debts. Its claim was accepted for voting purposes at $3.5 million. At the meeting of creditors, the chair concluded that, by virtue of ss. 54(3) and 109(6) of the Bankruptcy and Insolvency Act, Finetex’ vote against the proposal should be disregarded. The remaining creditors voted in favour of the proposal.

4. The trustee sought an order approving the proposal. by virtue of ss. 54(3) and 109(6) of the Bankruptcy and Insolvency Act. Having had its vote disregarded, Finetex asserted its rights under s. 109(6) of the BIA to ask the court to include its vote and to determine that the proposal had been rejected. The BIA provides that the vote as counted by the chair excluding a related party vote stands, unless the court considers it appropriate to include the creditor’s vote and determines another outcome.

5. The exercise of the court’s discretion under s. 109(6) involves a consideration of six factors:

a. the rehabilitation of the debtor;

b. rapid and orderly realization of the debtor’s property;

c. cancellation of preferential payments and revisable transactions;

d. fair distribution of the debtor’s assets;

e. effective business reorganization of companies in financial difficulty;

f. protection of the public interest; and

g. the person asking for the exercise of judicial discretion must be acting in good faith and have “clean hands”.

6. No one factor is determinative. Not all factors must be met, but they all inform the exercise of judicial discretion.

7. Finetex argued that the chair of the creditors’ meeting was wrong to conclude that just because it was “related” to FTE Canada, it was not dealing with the debtor at arm’s length within the prior year. Specifically, it argued that Park had caused FTE Canada to shut out Finetex from both information about and control of FTE Canada, such that Finetex was not a party dealing at arm’s length with FTE Canada.

8. The trustee argued that if the vote of Finetex was counted, Finetex would be achieving a result where the insider determines the acceptance or rejection of a proposal to the detriment of ordinary, unrelated creditors.

9. The Court assessed the above-noted factors as follows:

a. the proposal advanced the rehabilitation of FTE Canada;

b. the proposal involved a rapid and orderly realization of FTE Canada’s property;

c. there was no evidence of any preferential payments or revisable transactions;

d. there was nothing unfair about the distribution of FTE Canada’s assets under the proposal because, once the proposal is approved, Park resigns and Finetex can take control of FTE Canada and its assets;

e. there was no evidence that the proposal did not entail an effective business reorganization in light of FTE Canada’s financial difficulty;

f. under the proposal, FTE Canada’s business survives and continues to employ local workers;

g. there was no evidence of bad faith.

10. The Court held that it these factors supported non-interference with the vote. It refused to use its discretion to overturn the chair’s determination of the appropriate vote at the meeting of creditors.