A few years ago, we canvassed the now outdated and antiquated financial assistance (or illicit loan) provisions that remain in the Newfoundland Corporations Act (the “Act”) and the problems they create for financial institutions seeking guarantees in financing transactions. This article seeks to examine in greater detail the solutions and work-arounds.read more
True Lessors, the CCAA and Allocation of Administrative Expenses
In Atlantica Diversified Transportation Systems Inc. (Re), 2018 NSSC 77, the Supreme Court of Nova Scotia considered whether a true lessor is exempt from payment of expenses covered by an administration charge in Companies’ Creditors Arrangement Act (“CCAA”) proceedings. A determining factor on a claim for exemption is whether the lessor received a benefit – actual or potential – from the CCAA proceeding. The court found that while a true lessor may be generally exempt from an allocation of the administration charge, the receipt of such a benefit, however modest, can lead to the lessor being allocated a portion of administration charge for the benefit they received from the CCAA proceeding.
Atlantica Diversified Transportation Systems Inc. (“ADTS”) leased 137 trucks in its operations, the majority from Canadian Western Bank and Canadian Western Bank Leasing Inc. (collectively, “CWB”). In August 2017, after ADTS failed to pay amounts due under the leases, CWB issued a demand letter for the full amount owing under the contract and began to seize the trucks and trailers it had leased to ADTS. In November 2017, ADTS made an application for protection under the CCAA, seeking a stay of proceedings in an attempt to halt these seizures and avoid bankruptcy. The order was granted in December 2017 and BDO Canada Ltd. (“BDO”) was appointed as the monitor. On February 20, 2018, the CCAA stay expired and and the CCAA proceeding would be terminated after certain outstanding issues were addressed. One of these issues was a $75,000 administration charge owed by the creditors to the legal counsel and financial advisors of ADTS, BDO and its legal counsel.
BDO argued that CWB should pay 73% of the administration charge because it held 73% of ADTS’ debt. CWB disagreed, arguing that it should only be allocated a portion reflecting the amount of the non-lease debt (ADTS was indebted to CWB mostly in respect of leases but also had a small amount of loan debt).
The court agreed that “true” lessors are generally exempt from paying a portion of the administrative charge, and that the trucks and trailers CWB leased to ADTS represented “true” leases. In determining whether true lessors should be exempt from allocation of administrative expenses, the court reviewed the general principles applicable to such allocations set out in HSBC Bank of Canada v. Maple Leaf Loading Ltd, 2016 BCSC 361. These principles were namely that the allocation of such costs must be done on a case-by-case basis, and that costs should be allocated in a fair and equitable manner, one which does not re-adjust the priorities between creditors, and one which does not ignore the benefit or detriment to any creditor.
CWB argued that it would not be just and equitable for it to bear 73% of the $75,000 administrative charge, since approximately 91% of the money owed by ADTS to CWB arose from “true leases” and only 9% from non-lease obligations. BDO took the position that true lease or not, true lessors can be allocated some of the relevant costs, provided it is just and equitable in all the circumstances, and suggested that CWB obtained practical benefits such as a central point of contact and source of information, as well as the stabilizing effect of BDO’s actions on ADTS’ finances. CWB disputed that it had obtained any actual benefit or that it would have received any potential benefit from the CCAA proceeding. Instead of benefitting, CWB argued that it suffered prejudice as a result of the process, as it was barred from seizing its vehicles during the CCAA process even though it wasn’t receiving lease payments, and those vehicles continued to depreciate over that period.
Given the non-lease obligations owed by ADTS to CWB, and the modest (at best) benefit CWB received in relation to the lease-based debt, the court found it would be just and equitable for CWB to be allocated a portion of the administration charge. The non-lease obligations amounted to 18.18% of the overall secured debt, and given this percentage, plus the minor benefit realized, CWB’s allocation of the administration charge was set at 20% (or $15,000).