Sanjel Corporation (Re), 2017 ABQB 69

Court of Queen’s Bench of Alberta Citation: Sanjel Corporation (Re), 2017 ABQB 69 Date: 20170131 Docket: 1601 03143 Registry: Calgary Between: In the matter of the Companies' Creditors Arrangement Act , R.S.C. 1985, c.

C-36, as amended And in the matter of the Compromise or Arrangement of Sanjel Corporation, Sanjel Canada Ltd., Terracor Group Ltd., Suretech Group Ltd., Suretech Completions Canada Ltd., Sanjel Energy Services (USA) Inc., Sanjel (USA) Inc., Suretech Completions (USA) Inc., Sanjel Capital (USA) Inc., Terracor (USA) Inc., Terracor Resources (USA) Inc., Terracor Logistics (USA) Inc., Sanjel Middle East Ltd., Sanjel Latin America Limited and Sanjel Energy Services DMCC _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E.

Romaine _______________________________________________________ [ 1 ] In this Companies’ Creditors Arrangement Act proceeding, Wells Fargo Securities Canada Ltd seeks a declaration that an engagement letter entered into with Sanjel Corp is enforceable, and that the transaction fee set out in the letter should be paid by Sanjel in priority to the claim of the secured creditor. [ 2 ] Wells Fargo relies on paragraph 6 of the initial CCAA order granted on April 4, 2016. [ 3 ] The relevant parts of that paragraph are as follows: ... the engagement letter entered into between Wells Fargo Securities Canada, Ltd. (“Wells Fargo Securities”) and Sanjel Corp . dated

September 22, 2015 (collectively, ... hereinafter referred to as the “Financial Advisors”) (the “Financial Advisors’ Engagement Letters”) ... are hereby approved and Sanjel Corp is authorized and directed to continue the engagement of the Financial Advisors as Assistants thereunder and to comply with all of its obligations thereunder. The Financial Advisors are hereby granted a single charge in the maximum aggregate amount of ...

US $500,000 (for the benefit of Wells Fargo Securities ) (collectively, the “Financial Advisors’ Charge”) on the Property to secure all obligations under the Financial Advisors Engagement Letters.

The Financial Advisors’ Charge shall have the priority set out in paragraphs 48 and 50 hereof. (emphasis added) [ 4 ] The Financial Advisors’ Charge did not secure the full amount of fees payable under the engagement letters of any of the Financial Advisors. [ 5 ] Nevertheless, Wells Fargo submits that paragraph 6 should be interpreted as a direction to pay the entirety of its transaction fee of $2.5 million in priority to the debt owed to the secured creditor, the Lending Syndicate. [ 6 ] Unfortunately, the sale of assets in this CCAA proceeding has generated insufficient proceeds to pay the entirety of the indebtedness to the Lending Syndicate.

Sanjel proposed to pay the portion of the transaction fees owed to the Financial Advisors secured by the Financial Advisors’ Charge, but treat the balance as unsecured claims, which in the circumstances will receive nothing. [ 7 ] The Alberta Court of Appeal has commented that the remedial purpose of the CCAA must be kept at the forefront in interpreting a CCAA order: Re Smoky River Coal Ltd ., 2001 ABCA 209 at para 16 . The Court noted at para 17 that: It is particularly important that the terms and scope of any charge created by an order be clearly defined.

Creditors need to know from the outset whether or not they are entitled to benefit in any charge or other priority created by the order. Those extending credit, be it trade credit or otherwise, should not be forced to participate in litigation after the CCAA proceeding to discover whether or not they hold some form of security or are entitled to a super-priority. Similarly, secured creditors of a troubled company need to know from the outset the effect the CCAA process will have on their security.

They should not be forced to wait until the end of the proceedings to discover that their security has been whittled away due to a broad judicial

interpretation of qualification for super-priority status.

A precise CCAA order will ensure commercial practicality by allowing all creditors of the debtor company to properly adjust the terms of their credit. [ 8 ] While the Court was referring to the scope of a charge, it is equally important that any provision in an order that purports to create a priority for a creditor over other creditors be clearly delineated and set out with precision. [ 9 ] With this in mind, the context and purpose of the initial order is relevant. [ 10 ] In support of Sanjel’s application for the initial order, the Monitor prepared a pre-filing report that commented on the financial advisors’ charges sought by Sanjel.

The Monitor noted that transaction fees for financial advisors totalled $10.4 million, and that the success fee payable to Wells Fargo seemed high based on the nature and extent of work performed. [ 11 ] At the hearing of the application, counsel for the Monitor commented that the transaction fees were high, but also noted that the charges were not for the whole amount. Wells Fargo had been engaged to aid in the sale of two Sanjel assets known as Suretech and Terracor, but had been unsuccessful in obtaining any acceptable offers at the time of the initial order.

Counsel for the Monitor noted that the Wells Fargo fee was very high on its face, and that “we will no doubt be reporting back to the Court if there is a transaction on [the Suretech/Terracor side] of the business”. [ 12 ] I noted the following in granting the initial order: The applicants seek a Financial Advisors’ Charge up to a maximum amount of US $6.1 million in respect of the fees and disbursements of Credit Suisse and PJT Partners, and a charge of U.S. $500,000 in respect of Wells Fargo.

I note that undue duplication has been considered, but that the differing experience and mandate of the financial advisors has resulted in the coordination of efforts, rather than a duplication. This will be a large and complex cross-border restructuring and I have been aided in considering the quantum of the charge by the Monitor’s analysis of advisor fees from a number of different restructurings.

I note the Monitor’s advice that, while the proposed charge is higher than average, based on the synergies provided by the financial advisors, their success in bringing credible purchasers to Sanjel leading to the execution of purchase and sale agreements supported by the syndicate, and the consent of the syndicate to the charge, the agreed upon Financial Advisors’ Charge is not unreasonable in the circumstances and I approve it . (emphasis added) [ 13 ] What I was asked to do, and what I did, was to approve, retroactively, Sanjel entering into the engagement letters and to grant the charges granting priority of payment for a portion of the fees payable under the letters. [ 14 ] After the initial order was granted, a Wells Fargo representative contacted the Sanjel CRO expressing concern about the size of the Wells Fargo charge.

The representative referred to previous conversations with a Sanjel representative. He said that the representative had assured him not to be concerned, that the Monitor had approved the engagement letter and that the fees had been set aside.

The Monitor says that it is incorrect that fees had been set aside for the transactions fees, as only funds to cover the charges were set aside. [ 15 ] Sanjel’s CRO responded to Wells Fargo that “we didn’t cut your fees, the banking syndicate only approved the reduced first charge, which we had to fight for even that”. [ 16 ] Attempts to sell the Suretech and Terracor assets continued after the initial order, but without the involvement of Wells Fargo, although it was offered. Eventually these assets were sold. Wells Fargo submits that the sales arose from work it had performed prior to

the initial order. [ 17 ] Although paragraph 6 of the order authorizes and directs Sanjel to continue to engage financial advisors and to comply with its obligations to the financial advisors under the agreements, it does not by this language create a priority for the financial advisory fees that are not protected by the Financial Advisor’s Charge. As noted in Re Smoky River Coal Ltd ., 2000 ABQB 621 at para 34 , the court in a CCAA proceeding is not free to disregard the general statutory scheme of priorities of creditors without good reason. When it does alter priorities, it should do so in clear language. [ 18 ] While

Section 11.52 of the CCAA authorizes the court to grant a priority charge where it considers it appropriate, there are factors set out under

section 11.52 in considering such a charge, which I considered and referred to at the time of the initial order. [ 19 ]

Section 6 must be read in its entirety and in the context of the order as a whole: Re Winalta Inc, 2011 ABQB 399 at para 96 . While the order approves the engagement letters, it only gives a priority charge to a portion of the fees set out in the agreements. [ 20 ] As noted by the Monitor, Wells Fargo’s position would render the creation of the charges in the latter part of paragraph 6 redundant and ineffective. [ 21 ] Other provisions in the initial order support this

interpretation. Paragraph 7 provides that Sanjel is “entitled but not required” to pay the “reasonable fees” of Assistants (which include financial advisors) but only those the payment of whose fees are expressly approved by this order. [ 22 ] Paragraph 48 lists the charges created by the order, with specific limits, and makes it clear that it is only the US $500,000 charge that gives priority to the claim of Wells Fargo. Paragraph 6 and paragraph 48 of the order cannot be read together to give effect to Wells Fargo’s

interpretation of paragraph 6. [ 23 ] Wells Fargo makes a number of additional submissions in support of its

interpretation. [ 24 ] It submits that Sanjel cannot use the CCAA to unilaterally revise or amend contractual terms. [ 25 ] The Monitor does not dispute the amount of the Wells Fargo success fee, nor suggest that Wells Fargo is not entitled to it under the terms of the engagement letter.

However, in the circumstances, the only way that Wells Fargo can recover more than the US $5,00,000 covered by the Financial Analysts’ Charge in its favour is if it can establish a priority to estate funds over that of the Lending Syndicate. [ 26 ] Wells Fargo also submits that Sanjel breached the co-operation provision of the engagement letter by entering into direct discussions with potential purchasers without the involvement of Wells Fargo. At best, Wells Fargo may have an unsecured contingent claim for damages if it establishes a breach on this basis.

The resulting contingent claim would not be given priority over the Lending Syndicate. [ 27 ] Alternatively, Wells Fargo submits that the success fee is a post-filing obligation, and therefore not subject to the stay of proceedings. [ 28 ] The engagement letter is clearly a pre-filing obligation, even if the success fee only became payable if and when Suretech and Terracor were sold.

Even if Wells Fargo supplied services to Sanjel following the date of the initial order, which appears not to be the case, paragraph 7 of the order entitles, but does not require Sanjel to pay reasonable expense incurred in carrying on business in the ordinary course after the order. [ 29 ] Wells Fargo submits that this means that it is the only post-filing creditor not to be paid for its services.

Paragraph 7, with its reference to “expenses incurred ... in carrying on the Business in the ordinary course” is focused on trade creditors that are necessary for the continued day-to-day existence of the debtor’s business. Wells Fargo’s services were not in the ordinary course of business, even if it had rendered services after the order. [ 30 ] At any rate, the paragraph is permissive.

In Allarco Entertainment 2008, Inc, ABQB No. 1603-09338, where a licensor sought to recover payment from Allarco of post-filing service charges incurred in the 30-day period subsequent to Allarco having disclaimed those services, the Court held that, despite the licensor having actually supplied services during that time, and while it may have a claim against Allarco, there was nothing in the CCAA that required Allarco to make immediate payment to the licensor of the post-filing services charges. [ 31 ] The Monitor points out that Wells Fargo’s position would mean that any obligation that crystallized post-filing would have automatic priority over existing security interests.

That would be contrary to the Court of Appeal’s comments in Smoky River Coal , and would render

section 11.52 of the CCAA unnecessary and redundant. [ 32 ] Wells Fargo characterizes paragraph 6 of the order as a “mandatory injunction.” It is not. Such an

interpretation cannot prevail given the order as a whole. There was no application for an injunction or direction to pay before the Court at the time of the initial order. [ 33 ] In fact, the Monitor expressed concern over the size of the transaction fee. Had I intended to direct Sanjel to pay the fee, I would have had to address the Monitor’s comment that the fees appeared too high, and paragraph 6 would not require the charging language. [ 34 ] Wells Fargo relies on Re Afton Group Ltd ., [2006] O.J.

No. 1950 for the proposition that a distinction should be drawn between what it characterizes as a “mandatory injunction” and the charge. The facts in Afton are distinguishable, and in any event do not aid Wells Fargo. [ 35 ] Afton involved a receivership that followed CCAA proceedings. The CCAA Justice made a specific order that the legal

accounts of former directors be paid on an ongoing basis. That order was continued in the receivership proceedings, and the Receiver was directed to pay the fees and expenses of counsel to the directors in the ordinary course out of cash flow under its control, in the same manner as previously. [ 36 ] The CCAA order also included indemnification provisions for the former directors, secured by a third-ranking charge, and this was also continued under the receiver order.

One of the issues before the Court was whether or not the $1 million charge on the directors’ indemnification provision was being reduced as legal fees were being paid to counsel for the directors. [ 37 ] Spies, J. commented that if the directors were compelled to look to the charge for claims asserted against them, including legal fees, then those legal fees would be included in the $1 million charge, and that, on that basis, the legal fees would reduce the amount of security available for the claims: para 52.

However, since what had actually happened was that fees were paid as they were invoiced in the ordinary course, there would be no need for the directors to look to the charge, and thus the payment of the fees did not reduce the $1 million amount of the charge: para 54. [ 38 ] Spies, J. thus found that “the charge ... is exclusive of the legal fees and disbursements paid by the Applicants to counsel ...” para 59 (emphasis added). [ 39 ] It is clear that nothing in this case has been paid to Wells Fargo, nor is there the kind of specific provision obligating payment that existed in the Afton orders found in the initial order.

The only paragraph that expressly directs payment is paragraph 35, which mandates weekly payment of fees for certain professionals involved in the CCAA proceedings, but not the financial advisors. [ 40 ] Wells Fargo also submits that a charge is not a cap on payment. It may or may not be depending on the terms of the relevant order, but it is, and must operate as, a cap on amounts given priority. [ 41 ] Finally, Wells Fargo submits that this is not a priority issue, that it is merely seeking to enforce a direction to pay.

This is disingenuous, as the only basis on which the order could be interpreted to direct payment of the transaction fee in the circumstances of this CCAA proceeding is if paragraph 6 created a priority for Wells Fargo over the claim of the Lending Syndicate. Conclusion [ 42 ] Paragraph 6 of the initial order, in the context of the remainder of the order and the circumstances that gave rise to it, does not constitute a direction to pay that would require Sanjel to pay Wells Fargo a success fee in priority to the claims of the secured creditor, the Lending Syndicate.

The proposition that paragraph 6 creates an direction to pay, either implicit or explicit, is not supported by either the language of the initial order nor the requirement that provisions that create in effect a priority for certain creditors must be supported by clear and unambiguous language. Dated at the City of Calgary, Alberta this 31 st day of January, 2017. B.E. Romaine J.C.Q.B.A. Appearances: Lisa Hiebert and Jessica L. Cameron for the Monitor Brett Harrison and Adam Maerov for Wells Fargo Securities Canada Ltd. Kelly J. Bourassa and Chris Nyberg for the Lending Syndicate

Walker Macleod for Liberty Oilfield Services Holdings, LLC Robin Schwill for Ascribe Capital