Pillar Securitisation SARL v Sinha Estate, 2016 ABQB 355

Court of Queen’s Bench of Alberta Citation: Pillar Securitisation SARL v Sinha Estate, 2016 ABQB 355 Date: 20160627 Docket: 1001 17048 Registry: Calgary Between: Pillar Securitisation S.A.R.L. Plaintiff - and - Mathew Chadwick Solely in his Capacity as Trustee of the Estate and Property of Ravi Shankar Sinha, a Bankrupt Defendant _______________________________________________________ Oral Reasons for Judgment of the Honourable Madam Justice K.M.

Eidsvik _______________________________________________________ [ 1 ] The Plaintiff Pillar Securitisation S.A.R.L. (“Pillar”) seeks to foreclose upon its security interest in an Alberta limited partnership, New NIB Investors LP (the Security Interest”). The Defendant Trustee does not oppose the application but other creditors in the Sinha bankruptcy proceedings, J.C. Flowers and the partnership, New NIB GP LP, (“JC Flowers”) oppose the application on the basis that the Security Interest is void and unenforceable. [ 2 ] The Security Interest agreement was entered into between Mr.

Sinha and Kaupthing Bank Luxembourg S.A. (“Kaupthing”) in return of a loan of 5,000,000 Euro (“Loan Agreement”) which allowed Mr. Sinha to finance the purchase of units in New NIB.

[3]

Section 15(

e) of the Security Agreement provides as follows: 15(

e) This Security Agreement is non-assignable, however, shall enure to the benefit and be binding upon the parties hereto and theirrespective heirs, executors, administrators and successors. [4] Kaupthing failed in the economic crisis of 2008 and it was restructured in a Luxembourg court process in 2009. Its assetsand liabilities were transmitted as a result of a division or “demerger” of Kaupthing into two new entities, one of which is the PlaintiffPillar.

Pillar came into possession of the right and title to the Security Interest in this restructuring plan. [5] JC Flowers argues that in the commercial context in question Pillar cannot be considered a “successor” but rather, in thissituation it is more akin to an assignee of the Security Interest. Since the Security Interest cannot be assigned, it is not enforceable.

As aresult, Pillar’s loan is unsecured and should fall in line with the other unsecured creditors of the Defendant Sinha’s estate. [6] JC Flowers did not oppose the amount of the outstanding loan, or that, subject to its enforceability, foreclosure proceedingswould be appropriate. It had raised an objection dealing with a mistaken date reference in the Security Interest but it withdrew thisobjection at the hearing before me. [7] JC Flowers submits that the definition of “successor” as found in the Supreme Court of Canada case National Trust Co vMead et al (SCC), [1990] 2 SCR 410 is authoritative in this matter.

JC Flowers quoted from para 27 of the decision,wherein the Court said: When used in reference to corporations, a “successor” generally denotes another corporation which, through merger, amalgamation orsome other type of legal succession, assumes the burdens and becomes vested with the rights of the first corporation. In terms of s.40(2) of the Act, it is understandable that a new corporation should be bound by the waiver of the old one since the new one isessentially supplanting the old one in all respects.

In my view, the application of the s. 40(2) exception to “successors” was onlyintended to ensure liability on the personal covenant of a corporation which steps into the shoes of the original corporate mortgagor.(emphasis added by JC Flowers in its Brief) [8] JC Flowers argues that since Kaupthing was dissolved and its assets and liabilities were divided into two separate corporateentities, Pillar cannot be said to be supplanting Kaupthing “in all respects”. Instead it was “assigned” the Security Interest.

In this latterregard, it also argues that according to Luxembourg law, as interpreted by two different Luxembourg lawyers, Mr. Phillippe Dupont andMr. Jean-Paul Spang, Pillar is a distinct corporate entity and does not continue the legal personality of Kaupthing, therefore, JC Flowersargues, it cannot be considered a “successor”. Indeed, Mr. Spang opines that Pillar is referred to in civil law as the “ayant-cause a titreuniversel” of the company which is divided, which translated in his view means “assign”.

He relies in this regard on a 1970 BelgiumCour de Cassation decision of April 30, 1970. [9] Pillar on the other hand defends its security. It relies on the legal opinion of Mr. Phillippe Hoss, also a Luxembourg lawyer,which is to the effect that in the insolvency situation that occurred, the transfer, pursuant to the 1915 Companies Law (which accordingto Mr.

Spang could be used in insolvency proceedings after the passage of certain laws in 2007) is governed by the articles 288 and 303which read as follows: Article 288(1) "the operation whereby a company either transfers following its dissolution without liquidation, all of its assets andliabilities to more than one newly incorporated company, or transfers, without dissolution, part or all of its assets and liabilities to one ormore than one newly-incorporated company in exchange for the allocation to its members of shares or corporate units in the recipientcompanies and a cash payment, if any, not exceeding 10% of the nominal value of the shares or corporate units allocated or, in theabsence of a nominal value, of their accounting par value" (only the highlighted

section is relevant in the case at hand).

Article 303 of the 1915 Companies Law provides that: "

(1) The division shall have the following consequences, ispo jure and simultaneously: (

a) the transfer, both as between the company being divided and the recipient companies and vis-à-vis third parties of all of the assetsand liabilities of the company being demerged to the recipient companies; such transfer shall be made with the assets and liabilitiesbeing divided in accordance with the allocation provided for in the draft terms of division or in

Article 289 paragraph (3); (

b) the members of the company being divided become members of one or more of the recipient companies in accordance with theallocation provided for in the draft terms of division; (

c) the company being divided ceases to exist; (

d) the cancellation of the shares or corporate units of the company being divided held by the recipient company or companies or by thecompany being divided or by a person acting in his own name but on behalf of those companies.

(2) By way of exception to paragraph (1)(a), the transfer of industrial and intellectual property rights and of ownership or other rightson assets other than collateral established on movable and immovable property will be valid vis-à-vis third parties under the conditionsprovided for in the specific laws governing such operations. The recipient company or companies may complete such formalities."(emphasis added in the Pillar Brief) [10] As further discussed by Mr. Hoss: “These two articles of the 1915 Companies Law are part of Luxembourg's implementinglegislation of European merger and division rules and are consistent with such rules. In particular,

Article 288 reflects Articles 2 andArticle 303 reflects

Article 17 of Council Directive 82/891/EEC of 17 December 1982 concerning the division of public limited liabilitycompanies (also known as the "Sixth Directive")” (at para 11 of his Affidavit).

[ 11 ] Mr. Hoss relied on a 2007 Luxembourg Court of Appeal decision wherein the Court described the latter company as a “substitute” for the first and that there would be no need to give notice on certain instruments because the transfer would not be considered an “assignment” or a sale. In his view: “With regard to contracts, a division results in the recipient entity being vested in the disappearing entity’s position in every contract entered into by the disappearing entity”. Neither Messrs. Spang or Dupont gave a differing opinion on this point.

Their views differed on the “personality” aspect of the newly formed demerged companies. Decision [ 12 ] The Security Interest, according to its terms, must be interpreted based on Alberta law. I agree that the rules of contract

interpretation have been recently set out by the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp . , 2014 SCC 53 at para. 47 as follows: [T]he

interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine "the intent of the parties and the scope of their understanding" . . . .

To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract (reference to authorities, omitted). [ 13 ] Here, the Security Interest was originally given in return for a substantial loan to invest into a limited partnership.

There are prohibitions within that partnership agreement for the interests to be transferred and the non-assignability of the Security Interest also reflects the concern of having a stranger to the partnership without knowledge and consent of the main parties. [ 14 ] It is notable however, that New NIB GP LLP consented to the Security Interest and contained in the same paragraph of non- assignability is the proviso that the Security Interest would “enure to the benefit and be binding upon the parties hereto and their...successors”.

Accordingly, it would have been reasonably contemplated that a “successor” to Kaupthing could become involved. [ 15 ] The question then is, in this commercial context, can Pillar be considered a “successor”? In my view, based on Alberta law, it can be. [ 16 ] The

interpretation that JC Flowers suggests of the word “successor” as defined in the Mead case is too narrow. As mentioned, JC Flowers submitted that in order to be a successor one had to show that the new corporation was “supplanting the other in all respects”. However, in my view, the important passage in that paragraph is the following: “a “successor” generally denotes another corporation which, through merger, amalgamation or some other type of legal succession , assumes the burdens and becomes vested with the rights of the first corporation.” The rest of the comments refer more specifically to the facts in Mead , and statutory

interpretation that related to the specific security in Mead which is not analogous to our situation. Indeed the start of the paragraph in question, which was left out in the quote in JC Flower’s brief, starts: “Turning to s. 40(2)...” The key in my view is whether a new corporation assumes the rights and obligations of the original corporation through some type of legal succession. [ 17 ] Also interestingly, Justice Wilson goes on in the next paragraph of Mead (para 28 ) to define “assign”. She said: “The word “assign” has, of course, a broader meaning.

An “assign” is anyone to whom an assignment is made...” (bolding mine) [ 18 ] The corporate restructuring in this case becomes crucial to determine whether Pillar is a “successor” or an assign. JC Flowers suggests that it makes a difference that Pillar did not completely step into the shoes of Kaupthing – but was only transferred certain assets and obligations. As such, these limited transfers should be considered “assignments”. [ 19 ] In my view however, Pillar stepped into one of Kaupthing’s theoretical shoes pursuant to the Luxemburg receivership Court Order and that is enough.

In so stepping into that shoe it was transmitted both assets and obligations including the Security Interest. Pillar is not “anyone” but rather one of two new shoes. As such it is a “successor” to Kaupthing, as defined by the Supreme Court of Canada, since through “merger” (here “demerger”) or “some other type of legal succession”, Pillar “assumed the burdens and became vested with the rights of the first corporation”. The fact that Pillar did not assume all of them is not determinative in this situation.

The fact that it assumed part (including the Security Interest) and the other company was vested with other parts in a court controlled process pursuant to the 1915 Companies Law (and the 2007 new laws that make it applicable to insolvency situations), is enough. [ 20 ] I note that the fact that there is somewhat of a difference of opinion between the Luxembourg lawyers about whether Pillar assumed the full “personality” of Kaupthing, is not critical to the issue.

I do not find that it is necessary to have exactly the same “personality” based on our law in order to become a “successor”. [ 21 ] Further the fact that “ayant cause” may be translated as “assign” in European dictionaries, is not determinative. As the Court said in Mead , an assign has a wider meaning than successor so there could be situations where a successor could also be an assign. In the security agreement before me, as long as a party is a “successor” it is then not relevant that they may also be an assign since being a “successor” means that that party can take the benefits of the Security Interest.

Any other

interpretation would render the word “successor” in clause 15 meaningless. [ 22 ] Further, unlike a more general assignee, it is interesting to point out that according to the Luxembourg Court of Appeal, the resultant parties to a demerger, such as Pillar is in this situation, is specifically not considered to have the obligations of an “assignee” such as certain notice requirements in Luxembourg. Although not binding on me since it is Alberta not Luxembourg law which applies to this determination, this legal

interpretation coincides with my view that Pillar’s legal position is akin to a successor, not merely a general assignee. Conclusion [ 23 ] In the result, I dismiss JC Flower’s application and find instead that Pillar has a valid and enforceable Security Interest in Mr. Sinha’s interest in New NIB Investors LP.

(

a) I allow Pillar’s application and so declare that that the sum of $8,666,693.49 is owing as of June 13, 2016 under the Loan Agreement. (

b) that the Security Interest is valid and enforceable as against the units in New NIB; and (

c) that the reference to the July 16, 2008 Loan Agreement in the Security Interest is rectified to refer to the July 28, 2008 Loan Agreement. [ 24 ] I further Order that: (

d) that the Collateral as defined in the Affidavit of Juho Hiltunen, sworn November 15, 2010 vest in the name of the Plaintiff; (

e) that any interest in the Collateral of the Defendant or anyone claiming through the Defendant or any other subordinate encumbrancer be extinguished; and (

f) that the Defendant shall stand absolutely debarred and foreclosed of and from all its estate, right, title, interest and equity in the Collateral. Heard on the 22 nd day of June, 2016. Dated at the City of Calgary, Alberta this 24 th day of June, 2016. K.M. Eidsvik J.C.Q.B.A. Appearances: Ken Lenz, Q.C. for the Plaintiff Pillar Emi Bossio and Matthew Vernon for the JC Flowers