LEXPERT MAGAZINE
|
NOVEMBER/DECEMBER 2016 15
iary of US Steel. Aer the Ontario Superior
Court granted creditor protection in 2014,
the parent company, USS, filed a $2.2-bil-
lion claim against its subsidiary. Several
parties objected to these claims, including
a group of former unionized employees,
represented by Andrew Hatnay and a team
from Koskie Minsky LLP.
Among other things, the employees
based their case on allegations of oppres-
sion and breach of fiduciary duty regarding
USS's conduct in relation to the Canadian
operations and pensioners. ey alleged
that USS caused USSC to underperform,
leading it to incur significant debt and de-
faulting on its pension obligations. e em-
ployees sought an order subordinating the
USS claims to their own.
e CCAA judge refused to apply the
doctrine, reasoning that the CCAA and its
legislative history restricted its application.
e OCA upheld
that ruling, but on
different grounds.
Indeed, the
OCA specifically
disagreed that the
CCAA restricted
the application of
equitable subordi-
nation. Rather, the
court ruled that equitable subordination
(or any other remedy) could only be applied
under the language of the statute, which re-
quired any order to be "appropriate in the
circumstances." e court's powers "are
Equitable subordination clarified
Court rules that equitable subordination can only be applied under the language of the CCCA BY JULIUS MELNITZER
shaped by the purpose and scheme of the
CCAA," the court wrote. "e appellant
has not identified how equitable subordi-
nation would further the remedial purpose
of the CCAA." e
court did, however,
expressly leave open
the application of
equitable subordi-
nation under the
Bankruptcy and In-
solvency Act (BIA).
Unlike the
CCAA, the court
noted, the BIA cre-
ated a scheme of priorities for distribution.
By contrast, the CCAA le these to be
worked out largely by negotiation as part of
a compromise or arrangement.
"ere is no provision in the CCAA
equivalent to s. 183 of the BIA or s. 105(a)
of the U.S. Bankruptcy Code. Section 183
invests the bankruptcy court with 'such
jurisdiction at law and in equity' as will
enable it to exercise its bankruptcy jurisdic-
tion," the court stated. "is is significant,
because if equitable subordination is to
become a part of Canadian law it would
appear that the BIA gives the bankruptcy
court explicit jurisdiction as a court of eq-
uity to ground such a remedy and a legis-
lative purpose that is more relevant to the
potential reordering of priorities."
For the most part, Canadian courts have
taken a liberal approach to debtors' resort
to the CCAA. Whether that continues to
be the case when the proceedings resemble
a liquidation and equitable subordination
is a viable argument remains to be seen.
Regardless, Bish welcomes the OCA's
decision in the case. "Because individual
facts are always so important in CCAA
proceedings, it's rare that we see appellate
courts going as far as they have in this case
in providing parameters for the future."
IN ITS SEPTEMBER decision in Re:
US Steel Canada Inc., the Ontario Court
of Appeal appears to have closed the door
on claims of equitable subordination in
Companies' Creditors Arrangement Act
(CCAA) proceedings.
"What US Steel means is that creditors
won't be able to litigate conduct-based al-
legations among themselves in CCAA pro-
ceedings," says Michael Barrack of Blake,
Cassels & Graydon LLP in Toronto, who
led the firm's team representing United
States Steel Corp. (USS).
e doctrine, accepted in the US, would
allow for the re-ranking of creditors' claims
where higher-priority creditors engage in
inequitable conduct. It's an important de-
cision for secured creditors generally and
for insolvency proceedings for subsidiaries
who are in debt to their parents.
But David Bish of Torys LLP in Toronto
says equitable subordination may still be
available in certain circumstances. He
notes, for example, that the OCA focused
on the fact that equitable subordination
arose here in the context of an inter-credi-
tor dispute.
"e key question for the court was
whether applying the doctrine furthered
the purposes of the CCAA, which are
aimed at assisting debtors in their restruc-
turing," he says. "Here the fight was among
creditors, but what if the debtor had been
asking for the court to apply the doctrine?"
US Steel Canada (USSC), formerly
known as Stelco, was the Canadian subsid-
DAVID BISH
>
TORYS LLP
MICHAEL BARRACK
>
BLAKE, CASSELS
& GRAYDON LLP
ON THE CASE
"THE KEY QUESTION FOR THE COURT WAS WHETHER APPLYING
THE DOCTRINE FURTHERED THE PURPOSES OF THE CCCA, ...
AIMED AT ASSISTING DEBTORS IN RESTRUCTURING. HERE THE
FIGHT WAS AMONG THE CREDITORS, BUT WHAT IF THE DEBTOR
HAD BEEN ASKING FOR THE COURT TO APPLY THE DOCTRINE?"
>
DAVID BISH, TORYS LLP
