Can a court ordered stay of proceedings under the Canadian restructuring statute, the Companies’ Creditors Arrangement Act (the “CCAA”) apply to a contract for the supply of natural gas? This depends in part on whether the contracts fall within the definition of “eligible financial contracts” under the CCAA, and, in part, on the terms of the contracts.
What constitutes an eligible financial contract for the purposes of §11.1 of the CCAA was recently reconsidered in insolvency proceedings in respect of Androscoggin Energy LLC.
Androscoggin Energy LLC filed for protection under Chapter 11 of the U.S. Bankruptcy Code and made an application for ancillary relief in Canada under §18.6 of the CCAA in order, among other things, to have the Chapter 11 stay of proceedings recognized and enforced in Canada.
In Canada, the CCAA operates in similar fashion to Chapter 11 in the United States. An insolvent debtor company may apply to the court for creditor protection pursuant to the CCAA. If the court grants such relief, the initial order issued by the court typically provides for a broad stay of proceedings against the debtor. The debtor then attempts to develop and negotiate a plan of arrangement or compromise, which must be accepted by a majority in number and two thirds in value of each class of creditors voting on the plan, and must also be sanctioned by the court, in order to become effective.
The CCAA contains relief analogous to §304 ancillary relief under Chapter 11 of the U.S. Bankruptcy Code. Pursuant to §18.6(2) of the CCAA, a court may make such orders and grant such relief as it considers appropriate to facilitate, approve or implement arrangements that will result in the co-ordination of proceedings under the CCAA with any foreign proceeding (as defined in the CCAA).
While the court ordered stay of proceedings can be very broad, there are some statutory limits. Pursuant to §11.1(2) of the CCAA, no order under the CCAA may be made staying or restraining the exercise of any right to terminate, amend or claim any accelerated payment under an “eligible financial contract,” if such right exists under the terms of the contract. Section 11.1 of the CCAA specifically states as follows:
11.1(1)—In this section, “eligible financial contract” means
- a currency or interest rate swap agreement;
- a basis swap agreement;
- a spot, future, forward or other foreign exchange agreement;
- a cap, collar or floor transaction;
- a commodity swap;
- a forward rate agreement;
- a repurchase or reverse repurchase agreement,
- a spot, future, forward or other commodity contract,
- agreement to buy, sell, borrow or lend securities, to clear or settle securities transactions or to act as a depository for securities;
- any derivative, combination or option in respect of, or agreements similar to, an agreement or contract referred to in paragraphs (a) to (i);
- any master agreement in respect of any agreement or contract referred to in paragraphs (a) to (j);
- any master agreement in respect of the master agreement referred to in paragraph (k);
- a guarantee of the liabilities under an agreement or contract referred to in paragraphs (a) to (l); or
- any agreement of a kind prescribed;
“net termination value” means the net amount obtained after setting off the mutual obligations between the parties to an eligible financial contract in accordance with its provisions.
(2) No order may be made under this Act staying or restraining the exercise of any right to terminate, amend or claim any accelerated payment under an eligible financial contract or preventing a member of the Canadian Payments Association established by the Canadian Payments Association Act from ceasing to act as a clearing agent or group clearer for a company in accordance with that Act then rules of that Association.
(3) For greater certainty, where an eligible financial contract entered into before an order is made under §11 is terminated on or after the date of the order, the setting off of obligations between the company and the other parties to the eligible financial contract, in accordance with its provisions, is permitted, and if the net termination values determined in accordance with the eligible financial contract are owed by the company to another party to the eligible financial contract, that other party shall be deemed to be a creditor of the company with a claim against the company in respect of the net termination values.
There are very few cases on the scope of the stay as it applies to eligible financial contracts. Prior to the insolvency proceedings in respect of Androscoggin Energy LLC, the latest word on the issue of “eligible financial contracts” was that of the Alberta Court of Appeal in In Re Blue Range Resource Corp. (2000), 20 C.B.R. (4th) 187. In Blue Range, the Alberta Court of Appeal essentially held that a contract for the supply of natural gas at fixed future prices which provided for settlement by physical delivery was a “forward commodity contract” referred to in §11.1(h) of the CCAA (natural gas being a “commodity” as defined by the Alberta Court of Appeal) and, therefore, an “eligible financial contract” under §11.1 of the CCAA. As a result, rights of termination by the non-defaulting party, which were provided for in the gas supply contracts, were not subject to the general stay provided for in CCAA proceedings. This conclusion was reached without attributing much, if any, meaning to the word “financial” and without giving much consideration to the intention and prior conduct of the parties in relation to the supply contract.
Many insolvency practitioners believe that the appellate decision in Blue Range casts too broad a net over what can be caught up in the definition of “eligible financial contract.” There is a general concern that the appellate decision in Blue Range can be used to argue that a debtor requiring CCAA protection cannot stay the termination of any contract that deals with the sale and supply of a “commodity” if the contract provides for a right of termination upon an insolvency filing. Such a result could easily jeopardize the restructuring efforts of many companies. Given that the “carve out” for eligible financial contracts provided for in §11.1 of the CCAA was generally meant to protect derivative market participants from being caught by a stay of proceedings in a restructuring (and on a similar basis to the protection afforded to such parties under U.S. bankruptcy laws), many insolvency practitioners also feel unsettled by the fact that the Alberta Court of Appeal avoided providing a persuasive rationale for not attributing any meaning to the word “financial” in the definition of “eligible financial contract”—the very issue with which the trial level court in Blue Range (1999), 12 C.B.R. (4th) 173 wrestled at great length and in a very considered fashion.
These very concerns were brought to the fore in the January 26, 2005 endorsement of Justice James Farley of the Ontario Superior Court of Justice (Commercial List) in Androscoggin Energy LLC’s §18.6 CCAA proceedings. By way of background, in the initial November 26, 2004 order obtained by Androscoggin LLC in the CCAA proceedings, a stay against terminating contracts had been granted by the Court. Certain suppliers of natural gas to Androscoggin Energy LLC brought a motion for an order that their contracts were “eligible financial contracts” and that the stay of proceedings resulting from the initial CCAA order did not apply to these contracts.
Justice Farley shared the Blue Range trial court’s concern that consideration must be given to the word “financial” in the definition of “eligible financial contracts.” Justice Farley also expressed the view that the Alberta Court of Appeal did not provide due consideration to the context of the legislative process (as little on the record as there is) which gave rise to the amendment to the CCAA which is now §11.1. This record, however, also spoke very strongly to the “financial” nature of the transactions being contemplated at the time.
Given the foregoing, Justice Farley held that the essential relationship of the gas suppliers to Androscoggin Energy LLC over the terms of their respective supply contracts was the actual physical supply of gas. As such, Justice Farley concluded (with “considerable trepidation”) that the gas supply contracts in question were not “eligible financial contracts” and specifically stated that the trial court’s interpretation in Blue Range was to be favoured (noting some of its difficulties) over that of the Alberta Court of Appeal.
Two final points are also worth mentioning. First, Justice Farley also held that, even if the contracts in question were “eligible financial contracts” not subject to the CCAA stay of proceedings, the particular contracts in question could not be terminated in any event because, on their terms, they could only be terminated where Androscoggin Energy LLC failed to arrange for payment (and this had not happened); insolvency was not a default giving rise to a right to terminate under the contracts. Second, Justice Farley concluded his endorsement by observing that it would be of assistance if the amendments arising out of the current insolvency legislation review process would refine the definition of “eligible financial contract” so as to provide more certainty on this point in future matters.
Hopefully, the next phase of revisions to Canada’s insolvency laws which are currently being contemplated will clarify what contracts should be entitled to protection given such legislation’s much broader policy objective of affording corporate entities an opportunity to successfully restructure their operations.
In the meantime, the gas suppliers to Androscoggin Energy LLC have indicated that they will be seeking leave to appeal the decision of Justice Farley.