Canada’s Supreme Court endorses CCAA interim financing in the form of third-party litigation funding by Omni Bridgeway (formerly Bentham IMF), represented by Woods
Third-party litigation funding is now unequivocally part of an insolvent debtor’s restructuring toolkit in Canada.
The supervising judge has broad discretion to sanction creditor conduct in CCAA proceedings, and is due “a high degree of deference” when exercising discretionary authority under the act.
Having ruled from the bench in January in favour of appellants Omni Bridgeway (represented by Neil Peden of Woods LLP) and the appellant corporations formerly known as Bluberi Gaming Technologies and Bluberi Group (“former Bluberi”), the Supreme Court of Canada released its reasons in 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10 on May 8, 2020. The reasons were delivered jointly by Chief Justice Wagner and Justice Moldaver on behalf of a unanimous panel of seven justices. The appeals were supported by the Monitor, Ernst & Young, and an intervention was filed by the Insolvency Institute of Canada and the Canadian Association of Insolvency and Restructuring Professionals.
In its first ever decision dealing with the appropriateness of third-party litigation funding, the Supreme Court of Canada held that the third-party litigation funding provided by Omni Bridgeway (then known as Bentham IMF) could be approved as interim financing under the Companies’ Creditors Arrangement Act (CCAA).
The approval of the third-party litigation funding as interim financing is notable in several important respects:
- Moving beyond its analysis in Century Services (in which liquidation under the Bankruptcy and Insolvency Act was presented as the end point of a failed CCAA restructuring), Canada’s highest court has endorsed the increasing use of CCAA for orderly liquidations as consistent with the “remedial purposes” of the statute. This endorsement will be welcomed by many, as the greater flexibility of the CCAA can be indispensable not merely for “true” restructurings, but also used to achieve more favourable outcomes in liquidations by preserving and maximizing value.
- Settling uncertainties in the jurisprudence, the Supreme Court confirmed that interim financing is not limited to what is necessary to “keep the lights on,” or even to the funding of the debtor’s commercial operations—thereby overruling the position adopted on this issue by a unanimous panel of the Quebec Court of Appeal. This also allows for greater flexibility and potentially better outcomes, particularly where an orderly liquidation or a complex realization of assets is required.
- This focus on maximizing value is consistent with the approval of third-party litigation funding, which can permit the realization of litigious rights that would otherwise be lost to the debtor and its creditors.
- The Supreme Court confirmed that in order to be considered a plan of arrangement, the rights of creditors must be compromised. The litigation funding agreement, while affecting the rights of creditors, did not compromise creditor rights and could therefore be approved by the court as interim financing with no vote of creditors being required.
The defendant in the lawsuit being funded was former Bluberi’s operating lender and sole secured creditor. It had proposed its own CCAA plan to unsecured creditors that—if approved by creditors and sanctioned by the court—would have forced former Bluberi to release the claims. Having failed to obtain the necessary level of creditor support, the defendant sought to value its security at nil and use the resulting unsecured claim to cast the deciding vote in favour of its own plan.
Overruling a unanimous panel of the Quebec Court of Appeal, the Supreme Court held that the supervising judge did not overstep the bounds of his discretion to disallow the defendant’s vote as having been cast for an improper purpose under the circumstances, particularly in light of the objective sought and the defendant’s prior conduct in the CCAA proceedings. This is also significant in several important respects:
- The CCAA does not prevent a creditor from voting in favour of a plan it proposes, but the right of a creditor to vote can be disallowed by the court under appropriate circumstances.
- A supervising judge has broad discretion under the CCAA to sanction improper conduct where appropriate. Moreover, Canada’s highest court has confirmed that the supervising judge, being best placed to appreciate all of the relevant factors, is therefore due considerable deference when exercising discretionary authority. The intervention of appellate courts is justified only if the supervising judge erred in principle or exercised his or her discretion unreasonably.
The decision emphasizes the duty of parties to act diligently, in good faith and in furtherance of the insolvency statute’s objectives, failing which they may be sanctioned by the court.
To read the Supreme Court's written reasons, click here.