Will the court grant a reverse vesting order if it is opposed by certain creditors?Arrangement relatif à Nemaska Lithium inc., 2020 QCCA 1488 (CanLII)
CCAA proceedings were commenced in December 2019 with respect to the debtor companies, which were involved in the development of a lithium mining project in Quebec. In January 2020, the Court approved an uncontested sale or investment solicitation process (“SISP”) which led to the acceptance of an offer in the form of a bid that was made subject to the condition that a reverse vesting order (“RVO”) be issued.
The proposed RVO provided for the acquisition by the purchaser of the shares of the debtor companies free and clear of the claims of creditors. It would allow the purchaser to continue to carry on the operations of the debtor companies in a highly regulated environment by maintaining their existing permits, licences, authorizations, essential contracts and fiscal attributes. It was essentially a credit bid whereby the shares of the companies were acquired in return for the assumption of the secured debt.
Two shareholders (one of whom was also a creditor) objected on various grounds, including the impossibility under the CCAA for debtor companies to emerge from CCAA protection outside a compromise or arrangement. Nevertheless, the CCAA judge held that the criteria set out in s. 36 of the CCAA had been met and issuing the RVO was a valid use of the Court’s discretion, given that it would serve to maximize creditor recoveries while maintaining the debtor companies as a going concern and allowing an efficient transfer of the necessary permits, licences and authorizations to the purchaser.
On seeking leave to appeal, the shareholders reiterated that the CCAA judge did not have the power to approve a transaction that was structured to allow the debtor companies to emerge from CCAA protection free and clear of their pre-filing obligations outside the confines of a plan of compromise or arrangement and without the benefit of an approval by the required majority of creditors. They also argued that the CCAA judge focused exclusively on the outcome of the proposed transaction which he qualified to be the “best and only alternative available in the circumstances”, while failing to give any meaningful consideration to creditor rights.
All parties agreed that RVOs are a novelty and that, until now, they have only been granted by consent. In these cases, the only determination the courts are asked to make is whether or not to approve the RVO, without having the power to dictate its terms. The Court of Appeal noted that the value of the shareholders’ provable claims represented a mere 4% of the total value of unsecured creditors’ claims as determined by the Monitor. This begged the question: whose interest was being served by the proposed appeal?
The applicants failed to establish that their appeal would not hinder the progress of the proceedings and that it was not purely strategic or theoretical. There were serious concerns that the RVO may be compromised if the closing (which had already been postponed on more than one occasion since the acceptance of the offer in June 2020) could not take place by December 31, 2020. These concerns were compounded by the risk of a potential cash depletion at a monthly rate of $2.5 to $3 million. It was also unlikely that an alternative or any other new plan of arrangement could generate a distribution to unsecured creditors in the range estimated in the RVO (between $6 million and $14 million).
This made the proposed appeal a risky proposition that could turn into a potential catastrophe in which all stakeholders, including creditors, employees, suppliers, the Cree community and the local economies stood to lose. The proposed RVO would bring an outcome to creditors more favourable than the alternatives. Accordingly, the Court dismissed the applications for leave to appeal with costs.