Over the past year, we have seen the Companies’ Creditors Arrangement Act (the CCAA) used in a novel way to execute prearranged sale transactions of distressed companies’ assets, potentially indicating a new manner in which companies and their advisors are using the CCAA.
In the typical asset sale under the CCAA, the applicant company obtains an order from the presiding court approving a competitive sale or auction process for the assets in question (be they all or only part of the assets of the company). The sale process is run by the court-appointed monitor (normally the restructuring specialists at an accounting firm), who will promote the sale of the assets, identify and contact potential purchasers and invite them to make bids on the assets. Once a winning bidder has been identified and an asset purchase agreement entered into, the sale is then approved by the court and the assets are vested in the purchaser by court order.
Yet while this has been how asset sales under the CCAA have traditionally been carried out, the recent examples of Nelson Education Ltd. (commenced in May 2015) and Primus Telecommunications, Inc., et al. (commenced just recently in January 2016) suggest an alternative approach. In each case, the debtor company ran a sales process of the sort that would normally be ordered by a court and identified a winning bidder for their assets, however they did so before commencing a CCAA filing.
This approach offers the insolvent seller a number of advantages. It minimizes the time spent in creditor protection, thereby reducing some of the court process’ high cost, and keeps disruption of the business to a minimum. Further, by significantly reducing uncertainty and by (to the extent possible) achieving a full going-concern sale, it also can create a “good news” story for creditors, suppliers, employees and other stakeholders right at the time of filing. That can in turn further minimize disruption of the business for the benefit of all stakeholders. As such, a pre-packaged sale can be helpful where the debtor is trying to preserve customer goodwill or other market value and time is of the essence in working out its financial distress.
For buyers, the situation can be a little more complex. On the one hand, many of the benefits that the shortened insolvency process has for the sold business redound to the purchaser, as the ultimate owner. On the other hand, the purchaser also enters into an auction process that is not overseen by a court, and so misses out on all the assurances for fair and equitable treatment that that would otherwise provide. Moreover, because the purchaser is dealing with an insolvent seller, prior to having the sale blessed by court order a buyer has little recourse and cannot rely on break fees or other tools that could normally be used to protect it against a seller who reneges on the deal.
Although the Primus and Nelson examples represent some of the first transactions of their kind under the CCAA, the prearranged “quick” sale does have a long history in the receivership context. And though the courts must submit a pre-arranged sale to the same scrutiny as would be applied to a post-filing sale, the jurisprudence suggests that a transaction will be approved so long as (a) the procedure that led to the sale was fair, reasonable, and conducted with integrity and (b) the transaction that results from such process fairly maximizes value for the debtor’s creditors and other stakeholders.
Thus for instance, courts have approved immediate sales where:
- an immediate sale is the only realistic way to provide maximum recovery for a creditor who stands in a clear priority of economic interest to all others;
- the sale transaction to be approved was the culmination of an exhaustive marketing process that had already occurred (whether conducted by the Monitor, or subject to its subsequent review);
- the debtor had insufficient funds to engage in a further, extended marketing process (and without anyone having come forward to fund it either);
- there was no realistic indication that another such sale process would produce a more favourable realization for the assets;
- the secured creditors whose funds are at risk are unwilling to forego the sale for a possible “faint-hope” alternative in the future;
- a failed sale would likely damage the value of the business, such as by leading to the loss of key customers or suppliers, jeopardizing its accounts receivable or impairing its goodwill; and
- those parties who are objecting to the sale are unable to offer any concrete alternative.
In making such findings, courts will typically defer heavily to the business judgment of the monitor and the debtor. Be advised however, that in a “quick flip” sale transaction, courts have noted that the adequacy of the sales and marketing process is to be scrutinized with particular care to ensure transparency and integrity in the process and that it was performed in good faith.
Whether the approach taken in the Nelson and Primus cases ultimately bears out as a trend remains to be seen, but at the moment it looks like distressed M&A buyers and sellers have a new tool in the toolbox.
 Ontario Superior Court of Justice (Commercial List), Court File CV-15-10961-00CL.
 Ontario Superior Court of Justice (Commercial List), Court File CV16-11257-00CL.
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