Winalta Inc. (Re), 2011 ABQB 399

Court of Queen ’ s Bench of Alberta Citation: Winalta Inc. (Re), 2011 ABQB 399 Date: 20110624 Docket: 1003 06865 Registry: Edmonton In the Matter of the Companies ’ Creditors Arrangement Act R. S.

C. 1985, c.C - 36, as amended In the Matter of the Plan of Compromise or Arrangement of Winalta Inc., Winalta Homes Inc., Winalta Carriers Inc., Winalta Oilfield Rentals Inc., Winalta Carlton Homes Inc., Winalta Holdings Inc., Winalta Construction Inc., Baywood Property Management Inc., and 916830 Alberta Ltd. _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.E. Topolniski _______________________________________________________ I.

Introduction Professional fees in a CCAA proceeding hold the potential to be behest with controversy as a result of various factors including lack of transparency, overreaching and conflicts of interest. (Professor Stephanie Ben-Ishai and Virginia Torres, “A Cost-Benefit Analysis: Examining Professional Fees in CCAA Proceedings,” in Janis P. Sarra, ed., Annual Review of Insolvency Law 2009 (Toronto: Thomson Carswell, 2008) 142 at p. 169) [ 1 ] Deloitte & Touche Inc ’ s. application for approval of its fees as a monitor under the Companies Creditors Arrangement Act ,

[ 1 ] Deloitte & Touche Inc ’ s. application for approval of its fees as a monitor under the Companies Creditors Arrangement Act , R.S.C. 1985, c. C-36 ( CCAA ) is opposed by the debtor companies, whose allegations mimic the concerns expressed by Professor Ben- Ishai and Virginia Torres in the preceding quote. [ 2 ] The Winalta companies (Winalta Group) obtained protection from their creditors under the provisions of the CCAA on April 26, 2010. At the time, three of nine of the Winalta Group were active.

The Winalta Group's assets were worth about $9.5 million, while its liabilities exceeded $73 million. [ 3 ] The CCAA proceedings moved swiftly at the behest of the primary secured creditor, HSBC Bank Canada (HSBC). It took just six months from the initiation of the proceedings to implementation of the plan. [ 4 ] Deloitte & Touche Inc. now wants to be discharged and paid. The Winalta Group takes umbrage at its bill for $1,155,206.05 (Fee) and is asking for a $275,000.00 adjustment for alleged overcharging. It complains about the following: (

i) charges for support and professional staff other than partners' services/inadequately particularized services (Non-Partner Services); (ii) duplication; (iii) a six percent administration fee charged in lieu of disbursements ($50,000.00); (iv) mathematical errors ($47,979.39); and (

v) charges for internal quality reviews described as something “ required to be independent from the engagement ” ($10,000.00). [ 5 ] The Winalta Group also seeks a $75,000.00 reduction to the Fee as something “ akin to punitive damages ” for breach of fiduciary duty.

It claims that the breach arose when Deloitte & Touche Inc. prepared and delivered a net realization value report to HSBC on September 2, 2010 (September NVR) that prompted HSBC to refuse funding costs to acquire takeout financing. [ 6 ] Deloitte & Touche Inc. has agreed to deduct its $10,000.00 charge for the internal quality reviews, but rejects the suggestion that the Fee otherwise is unfair or unreasonable. It asserts that it acted within its mandate and in compliance with its fiduciary obligations.

It contends there is no evidence to support the suggestion that HSBC withdrew or reduced its support for the restructuring after receiving the September NVR. II. A Quick Look Back [ 7 ] A brief review of the relationship between the Winalta Group, HSBC and Deloitte & Touche Inc. is useful to better appreciate some of the dynamics at play in this application. [ 8 ] The Winalta Group's operations and assets are located in Alberta, except for a small holding in Saskatchewan.

Its head office is in Edmonton. [ 9 ] In November 2009, HSBC entered into a forbearance agreement with the Winalta Group, which owed it in excess of $47 million (the "Forbearance Agreement"). The Winalta Group agreed to Deloitte & Touche Inc. being retained as HSBC's private monitor,

commonly called a "look see" consultant. The Winalta group also agreed to give HSBC a consent receivership order that could be filed with no strings attached. [ 10 ] The Winalta Group was not a party to the private monitor agreement between HSBC and Deloitte & Touche Inc., although it was responsible for payment of the private monitor's fees pursuant to the security held by HSBC.

It was aware that the private monitor agreement provided for a six percent flat "administration fee" that would be charged by Deloitte & Touche Inc. in lieu of “ customary disbursements such as postage, telephone, faxes, and routine photocopying. ” Charges for “ reasonable out of pocket expenses ” for travel expenses were not included in the “ administration fee. ” [ 11 ] Clearly, HSBC was in the position of power. It agreed to support the Winalta Group's restructuring and to fund its operations throughout the CCAA process on the following conditions: (

i) the monitor would be Deloitte & Touche Inc. (the Monitor) and a Vancouver partner of that firm, Jervis Rodriquez, would be the "partner in charge" of the file; (ii) HSBC would be unaffected by the CCAA proceedings; (iii) the initial order presented to the court for consideration would authorize the Monitor to report to HSBC; and (iv) the Winalta's Group's indebtedness to HSBC would be retired by October 30, 2010. [ 12 ] On April 26, 2010, the initial order was granted as the Winalta Group and HSBC had planned (Initial Order). [ 13 ] HSBC continued to provide operating and overdraft facilities to the Winalta Group during the CCAA process, as outlined in the Initial Order, which also provided that the Monitor could report to HSBC on certain matters, the details of which are discussed in the context of the Winalta Group ’ s allegation that the Monitor breached its fiduciary duties. [ 14 ] The Winalta Group did not seek DIP financing.

Its quest for takeout financing to meet the October 30, 2010 cutoff imposed by HSBC was frustrated when HSBC refused to fund the costs associated with obtaining replacement financing without a three million dollar guarantee. A stakeholder came to the rescue.

The Winalta Group is of the view that HSBC ’ s refusal to pay the costs is directly attributable to the Monitor ’ s actions in connection with the September NVR. [ 15 ] There is nothing in the evidence or the submissions made at the hearing of this application that hints at a strained relationship between the Winalta Group and the Monitor before the Winalta Group learned when it examined a Deloitte & Touche Inc. partner in the context of this application that the Monitor had provided HSBC with the September NVR. [ 16 ] The Monitor's interim accounts were sent at regular intervals.

They described activities typical of a monitor in a CCAA restructuring, including intense activity in the early phases tapering off as the process unfolded, with a spike around the time of the claims bar date and creditors' meeting. There is no suggestion that the Winalta Group voiced concern about the Monitor's interim accounts.

Up until the present application, it seems to have been squarely focused on the goal of obtaining a positive creditor vote and paying its debt to HSBC by the cutoff date. [ 17 ] In its twentieth report to the court, the Monitor stated that its Fee is for services rendered in response to “ the required and necessary duties of the Monitor hereunder, and are reasonable in the circumstances. ”

III. Analysis A. Proper Charges 1. General Principles [18] There is a scarcity of judicial commentary relating specifically to the fees of court-appointed monitors, which likely isattributable to the limited number of opposed applications for passing of their accounts. [19] In their

article “A Cost-Benefit Analysis: Examining Professional Fees in CCAA Proceedings,” the authors discuss their(qualified) survey of insolvency practitioners, stating at p. 168: Several answers noted the court’s tendency has been to “rubber stamp” professional fees in non-contentious cases. This lack of judicialscrutiny was concerning to some participants, who stated that an increased degree of oversight would be helpful to ensure the legitimacyof the work completed and fees charged. [20] At pp. 146-147, they review certain cases addressing CCAA monitors’ fees.

Most of these cases, rather than focussing ongeneral considerations in determining what constitutes a monitor’s “reasonable fee,” deal with specific concerns about professional fees,such as: (

i) approval of Canadian and American counsel fees in a cross-border insolvency (Re Muscletech Research & Development Inc. (2007), (ON SC), 30 C.B.R. (5th) 59 (Ont. S.C.J.)); or (ii) approval of “special” or “premium fees” for an administrator under a CCAA plan of arrangement (Confederation Financial Services (Canada) Ltd. v. Confederation Treasury Services Ltd. (2003), (ON SC), 40 C.B.R. (4th) 10 (Ont. S.C.J.)). [21] In Community Pork Ventures Inc. v.

Canadian Imperial Bank of Commerce, 2005 SKQB 24 at para. 10, 8 C.B.R. (5th) 34,Kyle J. commented in the context of opposed applications to extend a stay under the CCAA on the significant amount of anticipatedprofessional fees, noting that: “... the court must be on guard against any course of action which would render the process futile.” [22] On a different application in the same proceeding (2005 SKQB 252), Kyle J. reiterated a concern about the burgeoningprofessional fees (at para.5), saying that they might “sink the company’s chances of survival.” He also was critical (at paras. 11-12) ofthe monitor’s “excellent though useless” report, its practices of recording minimum half-hour blocks of time and billing for discussionswith junior staff.

The final criticism (para. 15) was that the monitor’s fees were offside the local practice. [23] In Re Triton Tubular Components Corp. (2006), (ON SC), 20 C.B.R. (5th) 278 at para. 83 (Ont.

S.C.J.),additional reasons at 2006 CarswellOnt 1029 (S.C.J.), Madam Justice Mesbur’s criteria in scrutinizing the propriety of a monitor’scounsel’s fee was that which “...one would expect from a resistant client.” [24] Given the paucity of judicial commentary on the fees of CCAA monitors generally, guidance often is sought from analogouscase law dealing with the fees of receivers and trustees in bankruptcy. [25] One of the cases most often cited is Federal Business Development Bank v.

Belyea (1983), (NB CA), 46C.B.R. (N.S.) 244 at paras. 3 and 9, 44 N.B.R. (2d) 248 (C.A.), which set out the following principles and considerations that apply inassessing a receiver's fees:

…The governing principle appears to be that the compensation allowed a receiver should be measured by the fair and reasonable valueof his services and while sufficient fees should be paid to induce competent persons to serve as receivers, receiverships should beadministered as economically as reasonably possible.

Thus, allowances for services performed must be just, but nevertheless moderaterather than generous ... . . .The considerations applicable in determining the reasonable remuneration to be paid to a receiver should, in my opinion, include thenature, extent and value of the assets handled, the complications and difficulties encountered, the degree of assistance provided by thecompany, its officers or its employees, the time spent, the receiver's knowledge, experience and skill, the diligence and thoroughnessdisplayed, the responsibilities assumed, the results of the receiver's efforts, and the cost of comparable services when performed in aprudent and economical manner. [26] In Re Agristar Inc., 2005 ABQB 431, 12 C.B.R. (5th) 1, Hart J. applied the factors articulated in Belyea in determining thefairness of the fees charged by a CCAA monitor which had been replaced part way through the proceedings.

In that case, the court hadthe benefit of the replacement monitor's accounts to use as a direct comparator. [27] Referee Funduk in Northland Bank v. G.I.C. Industries Ltd. (1986), (AB KB), 60 C.B.R. (N.S.) 217, 73A.R. 372 refused (at para. 18) to place a receiver's account under a microscope and to engage in a minute examination of its work. Heopined (at para. 35) that: "... parties should not expect to get the services of a chartered accountant at a cheap rate," citing Prairie PalaceMotel Ltd. v. Carlson (1980), 35 C.B.R. (N.S.) 312 (Sask. Q.B.) and Peat, Marwick Ltd. v.

Farmstart (1983), (SKKB), 51 C.B.R. (N.S.) 127 (Sask. Q.B.) in support. [28] In Re Hess (1977), 23 C.B.R. (N.S.) 215 (Ont. S.C.), Henry J. considered the following factors in taxing a trustee inbankruptcy’s accounts: (

a) allowing the trustee a fair compensation for his services; (

b) preventing unjustifiable payments for fees to the detriment of the estate and the creditors; and (

c) encouraging efficient, conscientious administration of the estate. [29] Similar to the caution given in Northland Bank, Henry J. warned consumers (at para. 11) that: “...it should be borne in mindthat the labourer is worthy of his hire. The creditors and the public are entitled to the best services from professional trustees and mustexpect to pay for them.” [30] In my view, the appropriate focus on an application to approve a CCAA monitor's fees is no different than that in areceivership or bankruptcy. The question is whether the fees are fair and reasonable in all of the circumstances.

The concerns areensuring that the monitor is fairly compensated while safeguarding the efficiency and integrity of the CCAA process. As with anyinquiry, the evidence proffered will be important in making those determinations. [31] The Monitor in the present case takes the position that the Winalta Group has failed to present cogent evidence to show thatthe Fee is neither fair nor reasonable. In essence, it asks that the court apply a presumption of regularity. [32] I am not aware of any reported authority supporting the proposition that there is a presumption of regularity that applies to amonitor’s fees.

This application is no different than any other. The applicant, here the Monitor, bears the onus of making out its case. Abald assertion by the Monitor that the Fee is reasonable does not necessarily make it so. The Monitor must provide the court with cogentevidence on which the court can base its assessment of whether the Fee is fair and reasonable in all of the circumstances.

2. Non-Partner Services [33] The Fee includes charges for eighteen support staff, a number which the Winalta Group wryly notes equals that of its ownstaff complement. The support staff involved included those in clerical, website maintenance, analysis, managerial and seniormanagement positions, with (discounted) hourly billing rates ranging from $65.89 per hour (clerical services) to $460.79 per hour (seniormanagement services). [34] The Winalta Group urges that the (discounted) hourly rate of $588.00 charged by the two partners, Messrs. Jervis andKeeble, should have included any work performed by support staff, as is the typical billing practice for lawyers. (

a) Clerical, administrative, and IT staff [35] In Peat, Marwick Ltd. at para. 9, Vancise J. ruled that the charges for secretarial and clerical staff should properly form partof the firm's overhead and, therefore, should not be included in the account for professional services. [36] Referee Funduk in Northland Bank refused to follow that aspect of the Peat, Marwick Ltd. decision as it rested on what hereferred to as an “erroneous presumption” that chartered accountants necessarily employ the same billing format as lawyers.

RefereeFunduk found that the receiver in that case had used the standard billing format for chartered accountants, in which support staff werecharged separately. He expressed the view (at para. 30) that it is wrong to compare a chartered accountant's hourly charges to those of alawyer and to conclude that there is enough profit in the accountant's charges so that work undertaken by staff should not be chargedseparately.

He said that the two operations are not the same and the inquiry should focus on the standard billing format and practice ofthe profession in question. [37] The Alberta Court of Appeal weighed in on the topic in Columbia Trust Company v. Coopers & Lybrand Ltd. (1986), 1986ABCA 225 , 76 A.R. 303, Stevenson J.A. stating at para. 8: ... the propriety of charges for secretarial and accounting services must be reviewed to determine if they are properly an "overhead"component that should be or was included or absorbed within the hourly fee charged by some of the professionals who renderedservices.

The Court, moreover, must be satisfied that the services were reasonably necessary having regard to the amounts involved. [38] In the result, the court in Columbia Trust Company elected not to make an arbitrary award but rather to return the matter for“the application of proper principles.” [39] In Bank of Montreal v. Nican Trading Co., (1990), (BC CA), 78 C.B.R. (N.S.) 85 at 93, 43 B.C.L.R. (2d)315, the British Columbia Court of Appeal found that, having regard to the evidence in that case, it was appropriate for the receiver tohave charged separately for the secretarial and support staff.

Taggart J.A., for the court, observed that Columbia Trust qualified but didnot overrule Northland Bank as the Alberta Court of Appeal simply referred the matter back for review to ensure there was noduplication. [40] The law is no different as it concerns a CCAA monitor. While the court should avoid microscopic examination of theMonitor’s work, the Columbia Trust requirements nevertheless apply. To a degree, I concur with Referee Funduk’s observation inNorthland Bank that the appropriate comparator of a monitor’s charges is not the legal profession, as the Winalta Group urges.

Whilemindful that insolvency professionals typically have a chartered accountant’s designation, I do not agree with Referee Funduk that thestandard billing format for chartered accountants is necessarily the correct comparator. The billing practices for chartered accountsengaged in non-insolvency work may, for a host of reasons, be based on different considerations.

What matters is the standard billingpractice in the Monitor’s own specialized profession - that of the insolvency practitioner. [41] In the present case, the Initial Order specified that: “[t]he Monitor, counsel to the Monitor and counsel to the Applicants shallbe paid their reasonable fees and disbursements, in each case at their standard rates and charges, by the Applicants as part of the costs ofthese proceedings.” I interpret this to mean the Monitor’s standard rates and charges applied in its insolvency practice.

[42] Concerning the charges for IT staff, the law required the Monitor to maintain a website (Companies' Creditors ArrangementRegulation, SOR/2009-219, s. 7). However, that does not derogate from the Monitor’s burden to establish that the service should be apermissible separate charge. Practically, the evidence in this regard should say whether the partners’ hourly billing rates have beenadjusted specifically to address the legislated requirement to maintain a website. [43] The Monitor has not met the evidentiary burden required of it.

It must adduce sufficient evidence to show that in itsinsolvency practice its industry standard is to charge out secretarial, administrative and IT staff separately rather than to include or absorbthose charges as part of the hourly fee charged by the professional staff. If that is its standard practice, it must show that the ratescharged were its standard (or discounted) rates.

It must also establish that the services were reasonably necessary having regard to theamounts involved. [44] The Monitor is to present affidavit evidence within the next 60 days to address the issues discussed, failing which the chargeswill be disallowed. This material will be prepared at the Monitor's own cost and the costs of any further application will be addressed atthe appropriate time. (

b) Professional staff (non-partner) [45] The Winalta Group contends that there was a duplication of work by non-partner professional staff and that inadequate billinginformation has been provided. It points to certain entries that are terse, non-specific descriptions of services. [46] Like Hall J. in Re Hickman Equipment

(1985) Ltd. (2002), (NL SC), 34 C.B.R. (4th) 203 at para. 20,214 Nfld. & P.E.I.R. 126, I consider many of the descriptions of services in the Monitor's accounts to be "singularly laconic." The partyresponsible for paying a monitor's bill is entitled to more. That said, I find the Winalta Group's suggestion of punishing the Monitor forthis infraction by reducing the Fee to be unduly harsh. [47] Despite the cursory nature of certain entries, the work of the Monitor’s subordinate professional staff appears to have beenappropriate and in furtherance of the ultimate goal of restructuring the Winalta Group's affairs.

There seems to be nothing blatantlyuntoward or unusual about the work undertaken by these individuals. [48] Engaging less senior professionals and other subordinate staff to report to and discuss their findings with more seniorprofessionals is not unusual and does not "constitute any type of double teaming of a nature that would be obviously inappropriate" (ReHickman Equipment

(1985) Ltd. at para. 26). [49] Consideration of the factors articulated in Belyea supports the finding that it was acceptable for the Monitor to engage lesssenior professional staff.

In my view, it is relevant that the CCAA proceedings moved quickly; the restructuring involved multipleentities, including a publically traded parent; liabilities far outweighed asset values; an intensive sales campaign was initiated to shedredundant asset; and there were numerous claims and disallowances (all but one of which was resolved without the need for courtintervention). [50] There is no evidence suggesting that the Monitor's non-partner professional staff was anything but knowledgeable, thoroughand diligent, or that their services were excessive, duplicative or unnecessary.

While there may have been some degree of professionaloverlap with the partners, given typical reporting structures, that is facially neither unusual nor inappropriate. The result achieved waspositive - a 100 percent vote in favour of the plan of arrangement. [51] I am mindful that the Winalta Group was a co-operative debtor. 3. Duplication of work by partners [52] The Winalta Group also contends that there was duplication of work by two of Deloitte & Touche Inc.’s partners, Messrs.

Keeble and Rodriquez. [ 53 ] HSBC held a figurative Sword of Damocles over the Winalta Group's head before and during the CCAA proceedings. Many concessions were made by the Winalta Group, including its agreement to Mr. Rodriguez being the partner "in charge" for the Monitor, despite his residence being in Vancouver while the Winalta Group's assets and operations were located in Alberta and Saskatchewan. Freed from HSBC's control, the Winalta Group belatedly questions Mr. Rodriguez's general involvement. [ 54 ] It is undisputed that Mr. Keeble was the Monitor ’ s "hands on" partner. Mr.

Rodriquez, who was familiar to HSBC's special credits branch located in Vancouver, doubtless performed many useful tasks, but as the known entity and more experienced partner, his main raison d'être was to liaise with and provide comfort to HSBC. [ 55 ] Both Messrs. Rodriquez and Keeble signed (and presumably carefully prepared or, at a minimum, carefully considered) all twenty of the Monitor's reports to the court. Report preparation underwent three stages. The initial drafts were prepared by the Winalta Group (at the Monitor's request). Next, a review was conducted by one or two of the Monitor's managers.

Finally, the reports were delivered to Messrs. Rodriquez and Keeble. [ 56 ] The Monitor's accounts do not specify what portion of the fees charged for Mr. Rodriquez ($127,000.00) and for Mr. Keeble ($209,992.00) relates solely to report preparation. Similarly, the Monitor ’ s accounts do not aid in determining if there was any other duplication of work by the two partners. [ 57 ] The Winalta Group is entitled to know exactly what it is paying for. That said, it thoroughly questioned the Monitor about the respective roles of Messrs. Rodriquez and Keeble.

No evidence was presented to show that there was, in fact, any duplication or that any of the work that they undertook was unreasonable. These charges, therefore, are approved. 4. The administration charge [ 58 ] The Winalta Group contends that the Monitor's $50,000.00 administration charge (calculated as six percent of all accounts) in lieu of “ customary disbursements ” is an unfair "upcharge" with no correlation to reality. In response, The Monitor submits that the Winalta Group implicitly agreed to the administration charge.

It further argues that the Winalta Group bears the onus of showing that this charge is offside current industry practice. [ 59 ] The Monitor did not inform the Winalta Group of its intention to charge on the same basis as it had billed HSBC. It simply picked up as the CCAA monitor where it had left off as HSBC's private monitor.

The Monitor points to the Forbearance Agreement, which referred to the administration fee in the Monitor's retainer letter with HSBC as some evidence of the Winalta Group's knowledge and implicit agreement to pay any administration charge in the CCAA . [ 60 ] Under the terms of HSBC's security, the Winalta Group was liable for the charges of the private monitor. However, it was not a party to the agreement between Deloitte & Touche Inc. and HSBC.

In any event, there is no basis for imputing any agreement on the part of the Winalta Group to pay the administration charge in the context of Deloitte & Touche Inc. ’ s work as CCAA Monitor.

Even if it were otherwise, I am far from satisfied that such charges are fair and reasonable in all of the circumstances. [ 61 ] A “ disbursement ” is defined as “ the payment of money from a fund ” or “ a payment, especially one made by a solicitor to a third party and then claimed back from the client ” ( Oxford Dictionaries Online ). [ 62 ] The administration charge may be more or less than the Monitor ’ s actual disbursements. While it may be convenient for the Monitor to apply a flat percentage charge rather than keep track of disbursements, that does not mean that it is fair and reasonable.

Indeed, even if a CCAA debtor expressly agreed to the administration charge, such agreement and the circumstances in which it was made simply are factors that the court should consider in determining whether the administrative charge is fair and reasonable in all of the circumstances.

[ 63 ] The Monitor has failed to establish that the administration charge is fair and reasonable in all of the circumstances. The Monitor shall issue an account to the Winalta Group for actual disbursements incurred within 60 days. Whether the Winalta Group will be pleasantly surprised or disappointed will then be seen. [ 64 ] The disbursement account will be prepared at the Monitor's own cost. 5. Mathematical errors [ 65 ] The parties have resolved the alleged mathematical errors. 6.

Internal quality reviews [ 66 ] At the hearing of this matter, the Monitor quite properly conceded that the $10,000.00 charged for internal quality reviews should be deducted from its Fees. B. Breach of Fiduciary Duty/Conflict of Interest [ 67 ] A monitor appointed under the CCAA is an officer of the court who is required to perform the obligations mandated by the court and under the common law.

A monitor owes a fiduciary duty to the stakeholders; is required to account to the court; is to act independently; and must treat all parties reasonably and fairly, including creditors, the debtor and its shareholders. [ 68 ] Kevin P. McElcheran describes the monitor's role in the following terms in Commercial Insolvency in Canada (Markham, Ont.: LexisNexis Butterworths, 2005) at p. 236 : The monitor is an officer of the court. It is the court's eyes and ears with a mandate to assist the court in its supervisory role. The monitor is not an advocate for the debtor company or any party in the CCAA process.

It has a duty to evaluate the activities of the debtor company and comment independently on such actions in any report to the court and the creditors. [ 69 ] The Winalta Group contends that the Monitor breached its fiduciary duty (and implicitly placed itself in a conflict of interest position) by providing HSBC with the September NVR without its knowledge or consent. The onus of establishing the allegation of breach of fiduciary duty lies with the Winalta Group. [ 70 ] The September NVR was sent to HSBC via e-mail. It included a

summary of the Monitor ’ s analysis and backup spreadsheets for the following two scenarios: (1) the bank appoints a receiver for all companies on September 7, 2010; (2) the bank supports the company through the CCAA and is paid out on October 31, 2010 through a refinancing of the assets of Oilfield and Carriers. The author of the e-mail asked the recipient to confirm his availability to discuss the scenarios with Messrs. Rodriquez and Keeble the next day.

[ 71 ] Mr. Keeble ’ s responses to questioning, filed March 18, 2011, reference three other reports from the Monitor to HSBC dated June 7, August 12, and August 18, 2010, all of which discussed the estimated value of HSBC ’ s security in various scenarios (Other NVRs). The Winalta Group neither complained of nor referred to the Other NVRs in its evidence or submissions.

In the absence of any complaint and evidence, the sole focus of this inquiry is on the September NVR. [ 72 ] The Winalta Group's complaints concerning the September NVR are that it was prepared and issued without its knowledge and it lead to HSBC ’ s refusal to fund its takeout financing costs.

Articulated in the language used to describe a CCAA monitor's duties, the Winalta Group is saying that the Monitor favoured HSBC (placing it in an advantageous position over other creditors) and failed to avoid an actual or perceived conflict of interest. [ 73 ] Accusations of bias and breach of fiduciary duty can harm the public's confidence in the insolvency system and, if unfounded, the insolvency practitioner's good name. A careful investigation into allegations of misconduct is, therefore, essential. The process should entail the following steps: 1.

A review of the monitor ’ s duties and powers as defined by the CCAA and court orders relevant to the allegation. 2. An assessment of the monitor ’ s actions in the contextual framework of the relevant provisions of the CCAA and court orders. 3. If the monitor failed to discharge its duties or exceeded its powers, the court should then: (

a) determine if damage is attributable to the monitor ’ s conduct, including damage to the integrity of the insolvency system; and (

b) ascertain the appropriate fee reduction (bearing in mind that other bodies are charged with the responsibility of ethical concerns arising from a CCAA monitor ’ s conduct). Step 1: Reviewing the monitor ’ s duties and powers as defined by the CCAA and court orders relevant to the allegation (

a) The monitor ’ s fiduciary and ethical duties [ 74 ]

Section 25 of the CCAA provides that: 25. In exercising any of his or her powers in performing any of his or her duties and functions, the monitor must act honestly and in good faith and comply with the Code of Ethics referred to in

section 13.5 of the Bankruptcy and Insolvency Act . [ 75 ]

Section 13.5 of the Bankruptcy and Insolvency Act , 1985 R.S.C. 1985, c. B-3 ( “ BIA ” ) provides that a trustee shall comply with the prescribed Code of Ethics . The Code of Ethics is found in Rules 34 to 53 of the Bankruptcy and Insolvency General Rules , C.R.C., c. 368 under the BIA . These Rules provide in part that: (

a) Every trustee shall maintain the high standards of ethics that are central to the maintenance of public trust and confidence in administration of the Act (Rule 34). (

b) Trustees shall be honest and impartial and shall provide interested parties with full and accurate information as required by the Act with respect to the professional engagements of the trustees (Rule 39).

(

c) Trustees who are acting with respect to any professional engagement shall avoid any influence, interest or relationship thatimpairs, or appears in the opinion of an informed person to impair, their professional judgment (Rule 44). [76] In addition, CCAA monitors are subject to the ethical standards imposed on them by their governing professional bodies. [77] A recurring theme found in the case law is that the monitor’s duty is to ensure that no creditor has an advantage over another(see Siscoe & Savoie v.

Royal Bank of Canada (1994), (NB CA), 29 C.B.R. (3d) 1 at 8 (N.B.C.A.); Re Laidlaw Inc.(2002), 34 C.B.R. (4th) 72 at para. 2 (Ont. S.C.J.); Re United Used Auto & Truck Parts Ltd. (1999), (BC SC), 12C.B.R. (4th) 144 at para. 20 (B.C.S.C.); and Re 843504 Alberta Ltd., 2003 ABQB 1015 at para. 19, 351 A.R. 223). The followingobservations made by Farley J. in Re Confederation Treasury Services Ltd., (1995), (ON SC), 37 C.B.R. (3d) 237 at247 (Ont. Ct. (Gen.

Div.)) about a bankruptcy trustee's duty of impartiality resonate: The appointment is not a franchise to make money (although a trustee should be rewarded for its efforts on behalf of the estate) nor tofavour one party or one side. The trustee is an impartial officer of the Court; woe be to it if it does not act impartially towards thecreditors of the estate. [78] In his article, Conflicts of Interest and the Insolvency Practitioner: Keeping up Appearances (1996), 40 C.B.R. (3d) 56, EricO. Peterson tackles the issue of conflict of interest in circumstances where an insolvency practitioner wears two hats.

At p. 74, he states: ... The duties of a CCAA monitor are defined by standard terms in the court order, and are typically owed to the court, the creditors andthe debtor company. Therefore, a private monitor or receiver would have a potential conflict of interest in accepting an engagement asCCAA monitor of the same debtor. The engagements are at cross purposes. [79] Mr. Peterson cautions (at p. 75) that even if an experienced business person consents to the insolvency practitioner wearingtwo hats, the insolvency practitioner should bear in mind Mr.

Justice Benjamin Cardozo's statement that a fiduciary must be held tosomething stricter than the morals of the marketplace. [80] Not surprisingly, there may be heightened sensitivity about the work of a CCAA monitor who has chosen to wear two hats.Unfounded accusations may be made due to an honestly held suspicion about where the monitor's loyalties lie rather than out of spite ormalice. [81] Common sense dictates that CCAA monitors should conduct their affairs in an open and transparent fashion in all of theirdealings with the debtor and the creditors alike. The reason is simple.

Transparency promotes public confidence and mitigates againstunfounded allegations of bias. Secrecy breeds suspicion. [82] Public confidence in the insolvency system is dependent on it being fair, just and accessible. Bias, whether perceived oractual, undermines the public's faith in the system. In order to safeguard against that risk, a CCAA monitor must act with professionalneutrality, and scrupulously avoid placing itself in a position of potential or actual conflict of interest. (

b) The Monitor’s legislated and court ordered duties [83] One of a monitor's functions is to serve as a conduit of information for the creditors. This did not, however, give the Monitorhere carte blanche to conduct the analysis in the September NVR and issue it to HSBC. Such authority must be found in the CCAA orthe court orders made in the proceeding.

[ 84 ] Subsections 23 (

h) and (

i) of the CCAA deal with the monitor ’ s duty to report to the court. Subsection 23 (

h) requires the monitor to promptly advise the court if it is of the opinion that it would be more beneficial to the creditors if BIA proceedings were taken.

Section 23 (

i) requires the monitor to advise the court on the reasonableness and fairness of any compromise or arrangement that is proposed between the debtor and its creditors. Typically, this report is shared with the creditors just before or at the creditors ’ meeting to vote on the proposed compromise or arrangement. [ 85 ] The provisions in the Initial Order describing the Monitor's reporting functions are central to this inquiry. They must be read contextually. [ 86 ] HSBC was an unaffected creditor that continued to provide financing to the Winalta Group by an operating line of credit and overdraft facility.

There was no DIP financing as HSBC was, in effect, the interim financier. Clause 22 of the Initial Order speaks to HSBC's role as a financier during the CCAA process. [ 87 ] Clause 28(

d) of the Initial Order reads, in part, as follows: 28. The Monitor, in addition to its prescribed rights and obligations under the CCAA , is hereby directed and empowered to: (

d) advise the Applicants in their preparation of the Applicant's cash flow statements and reporting required by HSBC or any DIP lender, which information shall be reviewed with the Monitor and delivered to HSBC or any DIP lender and its counsel on a periodic basis, but not less than weekly, or as otherwise agreed to by HSBC and any DIP lender. [Emphasis added.] [ 88 ] Clause 30 of the Initial Order states: The Monitor shall provide HSBC and any other creditor of the Applicants' and any DIP Lender with information provided by the Applicants in response to reasonable requests for information made in writing by such creditor addressed to the Monitor.

The Monitor shall not have any responsibility or liability with respect to the information disseminated by it pursuant to this paragraph. In the case of information that the Monitor has been advised by the Applicants is confidential, the Monitor shall not provide such information to creditors unless otherwise directed by the Court or on such terms as the Monitor and the Applicants may agree. [Emphasis added.] [ 89 ] The Monitor ’ s capacity to report to HSBC was limited to the parameters of these provisions. Step 2: Assessing the Monitor ’ s actions (

a) Principles of

interpretation [ 90 ] The

interpretation of clauses 28(

d) and 30 of the Initial Order lies at the heart of this stage of the analysis. Before undertaking that task, it is helpful to review the principles governing

interpretation of the CCAA and CCAA orders. [ 91 ] In Smoky River Coal Ltd. , 2001 ABCA 209 , 299 A.R. 125 , the Alberta Court of Appeal cautioned that as CCAA orders become the roadmap for the proceedings, they must be drafted with clarity and precision, and the purpose of the legislation must be kept at the forefront in both drafting and interpreting CCAA orders (at para. 16). [ 92 ] The issue in Smoky River Coal Ltd. was the scope of a provision in an order that did not define a post-petition trade creditor ’ s charge.

The court stressed (at para. 17) the importance of clearly defining the scope of charges created by the order. Since the parties had failed to do so, the court balanced the parties ’ interests, presuming that creditors would understand the purpose of the CCAA and would expect that the disputed charge would be interpreted to accord with the commercial reality that the debtor would be operating in its ordinary course. In the circumstances, the court interpreted that requirement on “ commercially reasonable terms ” (at para. 19).

[93] The provision at issue in Re Afton Food Group Ltd. (2006), (ON SC), 21 C.B.R. (5th) 102, 18 B.L.R.(4th) 34 (Ont. S.C.J.) was the scope of a director’s and officers’ indemnification. At para. 23, Spies J. ruled that the Smoky River CoalLtd. considerations (a liberal

interpretation, consideration of the purpose of the CCAA, the attempt to balance the parties’ interests, and acommercially reasonable

interpretation) apply only if the provision is ambiguous, or if there is a gap or omission. In all othercircumstances, the court should: (

i) assume that the parties carefully drafted the terms of the order; (ii) assume that the terms of the order reflect the parties’ agreement within the parameters imposed by the court, and that suchagreement was codified in the order and approved by the court; and (iii) interpret a clear and unambiguous provision in accordance with its plain meaning. [94] The different approaches employed by the courts in Smoky River Coal Ltd. and Afton Food Group Ltd. are easily reconciledgiven the degree of ambiguity in and the nature of the provisions being interpreted in each case. [95] In my view, the

interpretation of CCAA orders requires a case-specific and contextual approach. In interpreting CCAA orders,the court should consider the objects of the CCAA, recognizing that the importance of the objects will vary with the circumstances of thecase at bar.

Other considerations include the degree of clarity of the provision, its nature, and its consequences for affected parties. [96] I adopt the reasoning in Afton Food Group Ltd. that the words of the provision should be given their plain and ordinarymeaning, that the court is entitled to assume that the terms of orders [granted as presented] reflect negotiated agreements, and that theterms were crafted carefully.

I add to this that the provision being interpreted should be read in the context of the order as a whole, not inisolation. [97] The modern approach to statutory analysis was summarized as follows by Elmer A. Driedger in his text, The Construction ofStatutes, 2d ed.(Toronto: Butterworths, 1983 ) at p. 87, as cited in many cases, including Bell ExpressVu Limited Partnership v. Rex,2002 SCC 42, [2002] 2 S.C.R. 559 at para. 26: Today there is only one principle or approach, namely, the words of

an Act are to be read in their entire context and in their grammaticaland ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. (

b) Interpreting the relevant provisions of the Initial Order and the CCAA [98] The object of the CCAA is to enable insolvent companies to carry on business in the ordinary course or to otherwise deal withtheir assets so that a plan of arrangement or compromise can be prepared, filed and considered by their creditors and the court. While thisobject does not play as significant a role in interpreting clauses 28(

d) and 30 of the Initial Order as it might in other cases, nevertheless itis relevant. [99]

Section 23 of the CCAA sets out certain reporting requirements for a court- appointed monitor. None of these authorized theMonitor in this case to provide HSBC with the analysis contained in the September NVR, without the knowledge and consent of theWinalta Group or the court. [100] Clause 28(

d) of the Initial Order empowers and obliges the Monitor to give advice to the Winalta Group about its preparationof cash flow statements and reports required of it by HSBC or any DIP lender. It is clear from the plain and ordinary language of the

provision that it applies to instances where the Winalta Group reports to HSBC. It is the Winalta Group ’ s job to do the reporting. The Monitor ’ s job is to assist the Winalta Group and to review the reports before they are delivered to the relevant lender. A contrary finding would render the words “ and reviewed with the Monitor" nonsensical. [ 101 ] If there is any ambiguity in clause 28(d), it is about who is to deliver the reports. The use of the word “ and ” after the words “ shall be reviewed with the Monitor ” is open to the

interpretation that the Monitor is to deliver the reports. As nothing turns on that point, I need not decide it. [ 102 ] I am entitled to and do assume that the parties ’ affected by clause 28(

d) carefully crafted that provision and agreed to its terms. Had they intended the Monitor to undertake the analysis contained in the September NVR and to provide it to HSBC, they would have said so. Whether such a provision would have been granted is another question altogether. [ 103 ] This

interpretation is supported by contrasting clause 28(

d) with the unambiguous language of clause 30, which refers to the Monitor providing information to HSBC (given to the Monitor by the Winalta Group and declared by it to be non-confidential). Unlike clause 28(d), clause 30 absolves the Monitor of responsibility and liability for its acts. Presumably, the parties would have included similar protection in clause 28(

d) if it was intended that the Monitor have the authority it claims. [ 104 ] Interpreting clause 28(

d) as referring to reports by the Winalta Group rather than the Monitor also is supported by reading the Initial Order as a whole. Clause 22 speaks to HSBC continuing to provide operating and overdraft facilities to the Winalta Group. As HSBS, in effect, is an interim lender, it is logical that the Winalta Group is obliged under the Initial Order to provide it (and any DIP lender) with cash flow statements and any other required reports on a weekly basis (after having the information reviewed by the Monitor, presumably for accuracy). [ 105 ] Finally, this

interpretation is supported by reference to the object of the CCAA , which is to have debtors remain in and control their business operations throughout the term of the restructuring. The debtor is the party that reports to its interim lenders. [ 106 ] The Monitor's

interpretation of clause 28(

d) as authorizing it to prepare and deliver the September NVR to HSBC does not withstand scrutiny. That clause neither expressly nor implicitly authorized the Monitor ’ s conduct in that regard. If the Monitor had any hesitation about the scope of its authority under this clause (which I am of the clear view it ought to have had), its obligation was to seek clarification from the court before proceeding as it did. [ 107 ] Clause 30 is unambiguous.

To a degree, it supports the Monitor's action as its plain and ordinary language permits the Monitor to release to HSBC (or any DIP lender) information provided by the Winalta Group which it did not declare to be confidential. The Monitor's notes to the September NVR refer to estimated asset realizations, closing dates for certain transactions, and accounts receivable. Presumably, the Monitor obtained that information from the Winalta Group. [ 108 ] However, the Monitor's estimate of receivership fees, its various calculations, and its analysis stand on a completely different footing.

By definition, that is not “ information provided by the Winalta Group." Clause 30 does not authorize the Monitor to take information legitimately obtained from the Winalta Group and to use it as the basis for preparing and issuing the type of analysis contained in the September NVR report. Presumably, this provision (which was granted as presented) reflects a negotiated agreement and was carefully crafted. [ 109 ] The Monitor says that it would have prepared and given any creditor the type of analysis contained in the September NVR on demand, irrespective of the creditor ’ s stake.

That may be so (or not), but it does not mean that it is authorized or appropriate for it to do so, particularly without the knowledge and consent of the Winalta Group. [ 110 ] The Monitor's

interpretation of clause 30 as authorizing it to prepare and deliver the September NVR to HSBC fails to withstand full scrutiny. Clause 30 did not authorize the Monitor to provide anything over and above the information provided by the Winalta Group. Again, if the Monitor had any hesitation about the scope of its authority under this clause (which I am of the clear view it ought to have had), its obligation was to seek clarification from the court before proceeding as it did.

[ 111 ] Read contextually, neither the express language nor the spirit of clauses 28(

d) and 30 of the Initial Order authorized the Monitor to issue certain of the information contained in the September NVR. Its authority was limited to relaying non-confidential raw data obtained from the Winalta Group.

HSBC could then have interpreted the data (alone or with the assistance of another insolvency practitioner). [ 112 ] The Monitor was not transparent in its dealings with HSBC surrounding the September NVR. [ 113 ] Regrettably, and despite any well intentioned motivation that might be imputed to the Monitor, I find that theMonitor lost sight of the bright line separating its duties as an impartial court officer and a private consultant to HSBC when it provided HSBC with the analysis in the September NVR, thereby creating a perception of bias. [ 114 ] In circumstances where the Monitor ought to have been keenly attuned to heightened sensitivity about perceptions of bias, it should have sought clarification of the reporting provisions in the Initial Order before conducting the analysis in the September NVR and issuing it to HSBC.

The Monitor failed to recognize the need to do so. Instead, it elected to rely on an unsustainable

interpretation of clauses 28(

d) and 30 of the Initial Order. Step 3 (

a) Determining if damage is attributable to the Monitor's conduct, including damage to the integrity of the insolvency system [ 115 ] HSBC's refusal to fund the Winalta Group's costs for procuring takeout financing appears to have fallen on the heels of it receiving the September NVR. Whether that was a mere coincidence or not has not been established by the Winalta Group. [ 116 ] No authority was cited for the proposition that the court is entitled to reduce a court-appointed monitor's fees on a basis "akin to punitive damages." However, Murphy v.

Sally Creek Environs Corp. (Trustee of) , 2010 ONCA 312 , 67 C.B.R. (5th) 161 is informative, although distinguishable on its facts. [ 117 ] Murphy concerned the reduction of a trustee in bankruptcy's fees for misconduct where the relationship between the trustee and largest unsecured creditor had spoiled. The trustee rationalized acting without the approval of two inspectors he considered to be the "handmaidens" of the largest unsecured creditor. At times, the trustee acted contrary to the inspectors' express wishes.

Concluding that the trustee had sided against it, the creditor complained to various regulatory bodies, alleging serious wrongdoing and mismanagement by the trustee. [ 118 ] On taxation, the registrar found the trustee guilty of 15 acts of misconduct ranging from multiple breaches of statutory duties to lying to regulatory bodies about the conduct of the estate. The registrar reduced the trustee's fees from $240,000.00 to $1.00 and disallowed or reduced many disbursements.

The registrar ’ s decision was appealed to Ontario ’ s Superior Court of Justice and, in turn, to the Ontario Court of Appeal, which directed (at para. 125) that in preventing unjustifiable payments, the court should begin by considering discrete deductions for misconduct that cost the estate quantifiable amounts.

The court also directed (at para. 126) that the court should consider the degree and extent of the misconduct, and its effect on the estate, the affected creditors, and the integrity of the bankruptcy process in general. [ 119 ] These directives apply equally to a court-appointed CCAA monitor. [ 120 ] In the present case, there is no quantifiable loss, nor is there evidence of damage to the estate. However, the Monitor ’ s failure to scrupulously avoid a conflict of interest negatively impacts the integrity of the insolvency system. (

b) Ascertaining the appropriate fee reduction

[121] There is very little guidance on how the court is to assess an appropriate fee reduction where there is no quantifiable loss (ReNelson (2006), (ON SC), 24 C.B.R. (5th) 40 at para. 31 (Ont. S.C.J.)). [122] Reducing a court-appointed officer’s fee is not intended to be punitive, but rather is an expression of the court’s refusal toendorse the misconduct (Murphy at para. 112; Re Nelson at para. 31). [123] Placing a value on the erosion of the public’s confidence is an extremely difficult task, particularly given that the object of theexercise is not to punish the offending party.

Arbitrarily choosing a figure as a means of refusing to endorse the misconduct is unfair. Inthe circumstances of this case, I am of the view that the fairer approach is to deprive the Monitor of any charges associated with itsmisconduct. [124] Accordingly, the Monitor is to provide affidavit evidence within 60 days particularizing all charges associated with itsanalysis in the September NVR, following which I will determine the appropriate fee reduction. Should the Monitor fail to provide thisinformation, I will have no alternative but to reduce the Fee otherwise. IV.

Conclusions [125] The onus on this application rested with the Monitor to establish that its Fee was fair and reasonable. It has fallen short ofdoing so in a number of respects. [126] The Monitor exceeded it statutory and court ordered authority by conducting the analysis in the September NVR andproviding it to HSBC. The Monitor failed to act with transparency in its dealings with its former client and blurred the bright linedividing its duties as a court-appointed CCAA monitor and a private monitor. [127] In the result: (

i) The Monitor will be afforded a further opportunity to provide better evidence concerning the separate charges for clerical,administrative and IT staff, as discussed above, failing which the charges are disallowed. (ii) The Monitor is to provide affidavit evidence within 60 days particularizing all charges associated with the analysis in theSeptember NVR, failing which I will otherwise reduce the Fee. (iii) All affidavits will be prepared at the Monitor's own cost, and the costs of any further application will be addressed at theappropriate time. (iv) The administration charge is disallowed, and the Monitor will issue an account for actual disbursements within 60 days. (

v) The $10,000.00 charged for internal quality reviews is to be deducted from the Fee. (vii) Subject to reductions for work connected with the analysis in the September NVR, charges for (non-partner and partner)professional services are approved.

(viii) If the parties cannot agree on costs, they may speak to me at the next application or within 120 days, whichever occurs first. Heard on the 21 st day of March, 2011 Dated at the City of Edmonton, Alberta this 24 th day of June, 2011. J.E. Topolniski J.C.Q.B.A. Appearances: Kentigern Rowan For Deloitte & Touche Inc. Darren Bieganek For the Winalta Group