Substantive Consolidation: Efficient and Equitable Restructuring of Group Companies
Gray Aqua Group of Companies, Re1 is a case from New Brunswick that dealt with the remedy of substantive consolidation under the Bankruptcy and Insolvency Act (BIA). Historically, courts have shown reluctance in granting consolidation and it was seen as an extraordinary remedy.
The group of eight aquaculture companies (the “Group”) operated as an integrated enterprise with centralized management, sales and accounting all based in New Brunswick. The Group filed separate notices of intention (NOIs) and Ernst & Young was appointed as the Proposal Trustee. The Proposal Trustee sought an Order for a Consolidated Proposal, pursuant to sections 34, 66, 183 and 192 of the BIA.
While the BIA is silent as to when consolidation of proceedings for corporate entities will be granted, limited case law on the point relies on the equitable jurisdiction of the Court under s. 183. Section 183(12) provides:
Where in the opinion of the court the cost of preparing statements, lists of creditors or other material required by this Act to be sent with notices to creditors, or the cost of sending the material or notices, is unjustified in the circumstances, the court may give leave to omit the material or any part thereof or to send the material or notices in such manner as the court may direct.
Register Natalie H. LeBlanc held that the Group was a suitable candidate for an Order for a Consolidated Proposal. There was sufficient evidence to find that the Group was integrated from a financial and practical perspective and that it functioned as a centralized company. Evidence also indicated that neither the shared nor individual creditors of the Group would be deprived of any rights and would not suffer any measurable prejudice if the Order was granted. Furthermore, accommodations were proposed under the Consolidated Proposal for a group of unsecured creditors of one member of the Group.
In granting the Order, Register LeBlanc noted:
The purpose of the BIA is to facilitate financial rehabilitation in a fair and structured atmosphere while protecting the integrity of the process and all of its participants, including creditors.2
Gray Aqua Group of Companies, Re is valuable as it shows the expectations of the Court in granting an Order for a Consolidated Proposal. The right balance of efficiency and equity is essential, with evidence to show that a Consolidated Proposal serves to streamline the proposal process, create savings for all parties, and facilitate a faster restructuring on the whole without unduly prejudicing the legal rights of stakeholders. Interestingly, the Court did not consider whether the same effect could have been achieved through procedural consolidation.
1 2015 NBQB 107
2 Ibid at para 18.