2023 ABKB 172, 2023 ABKB 172

Court of King’s Bench of Alberta Citation: Dynamic Technologies Group Inc ( Companies’ Creditors Arrangement Act ) ( Re ), 2023 ABKB 172 Date: 20230323 Docket: 2301 03179 Registry: Calgary In the Matter of Companies' Creditors Arrangement Act , RSC 1985, c C-36 , as amended And in the Matter of a Plan of Compromise or Arrangement of Dynamic Technologies Group Inc., Dynamic Attractions Ltd., Dynamic Entertainment Group Ltd., Dynamic Structures Ltd., and Dynamic Attractions Inc. Applicants _______________________________________________________ Endorsement of the Honourable Justice Douglas R.

Mah _______________________________________________________ A. Background [ 1 ] Should an Initial Order under the Companies’ Creditors Arrangement Act , granting a super-priority in favour of an interim lender, also extinguish the right of action of another secured creditor to sue the interim lender for breach of an intercreditor agreement? [ 2 ] In this case, I said it should, in order to promote efficacy in the insolvency marketplace and thereby advance the rehabilitative objectives of the CCAA .

An extinguishment provision to this effect is part of the Commercial List template language for an Initial Order. [ 3 ] This endorsement arises from my ruling on March 16, 2023 concerning the application of the Dynamic Group for certain amendments to an Initial Order under the CCAA originally granted by Justice Fagnan on March 9, 2023.

The amendments involved: • extending the stay period until May 26, 2023 to enable implementation of a Sales and Investment Solicitation Process (SISP); • approval of the SISP itself and its deadlines; and • increasing the Administration Charge to $750,000 and the Interim Financing Charge to $2.6 million plus interest, costs and fees per the interim financing term sheet. [ 4 ] The Dynamic Group consists of 5 related companies which are, broadly speaking, jointly involved in providing all facets of the supply and support of rides and attractions to theme parks located in various countries around the world.

Due to a confluence of circumstances including the recent global COVID-19 pandemic and unanticipated rising costs, the Dynamic Group, or entities within it, encountered debt repayment and cashflow problems, ultimately leading to the application for the March 9, 2023 Initial Order. [ 5 ] FTI Consulting Canada Inc was appointed monitor under the CCAA on March 9, 2023. Both before and since the granting of the Initial Order, FTI has worked with the Dynamic Group in its reorganization effort, which to date has included considerable

retrenching. Through developing and seeking approval of the SISP, the Dynamic Group assisted by FTI, hopes to attract either a partialbuyer or new investor to enable the Dynamic Group to continue its business in some viable form, for the benefit of all stakeholders. [6] The main secured creditor is Promising Expert Limited (PEL), owed $16 million USD plus interest. Export DevelopmentBank (EDC) is a secondary secured creditor, owed slightly more than $2 million USD and interest. Both PEL and EDC advanced theirrespective loans to a particular Dynamic Group entity, Dynamic Technologies Group Inc (DTG).

PEL and EDC entered into an August5, 2022 intercreditor agreement providing that: • the EDC loan is subordinated PEL’s security interest to the extent of $14 million USD in respect of common collateral; • however, EDC has priority over PEL in respect of its priority collateral, which consists of a specific large receivable; and • any further advances by PEL to DTG (or another named entity) in any form are permitted but would be subordinated to EDC’sinterest (clause 7). [7] Notably, DTG and all of the other entities comprising Dynamic Group, are also signatories to the intercreditor agreementand each expressly “covenants and agrees with PEL and EDC to give effect to all of the provisions thereof.” [8] After what was described as diligent efforts on behalf of the Dynamic Group to identify an interim lender in the market, so asto enable it to execute its restructuring plan, the only lender prepared to step forward with an interim financing term sheet was PEL. [9] When Justice Fagnan granted the March 9, 2023 Initial Order, she also approved super-prioritized interim financing by PELto Dynamic Group to the extent of $250,000.

That approval was subject to EDC’s right to argue before me at the March 16, 2023comeback hearing that if any further super-prioritized interim financing beyond the initial $250,000 is approved, the advance of thatadditional interim financing should be “without prejudice” to any claim EDC might have against PEL for breach of the intercreditoragreement.

EDC’s position is that PEL obtaining a super-priority from the Court for any interim financing breaches clause 7, andtherefore EDC should be able if it so wishes to sue on the breach. [10] As noted, Dynamic Group did seek a super-prioritized interim financing increase to $2.6 million as part of this application andI did hear argument on the issue of whether there should be a rights reservation in favour of EDC to enable it to sue PEL in future forviolation of clause 7.

In the result, I granted the Amended and Restated Initial Order (ARIO) as requested by the Dynamic Group withoutthe reservation of rights sought by EDC. I gave brief reasons on the record and indicated I would issue this endorsement within a week. B. EDC’s Argument [11] EDC claims priority over PEL in respect of the priority collateral (the receivable) as well as in respect of $1.8 million worth ofindebtedness, which is the amount of Dynamic Group’s pre-filing indebtedness to PEL in excess of the $14 million USD that EDCsubordinated to PEL in the intercreditor agreement.

Any priority enjoyed by EDC is overridden by the court-imposed super-priorityrelated to the interim financing. EDC wishes to protect itself by specifically preserving, in the ARIO itself, the right of action againstPEL that EDC says arises from PEL’s court-approved advances of interim financing on a super-prioritized basis.

EDC says theacceptance of the super-priority attached to the interim financing advances constitutes a breach of clause 7, giving EDC a cause of actionagainst PEL for any shortfalls to EDC caused by the super-priority. [12] EDC’s main argument is that the Court under the CCAA cannot or should not extinguish rights that pertain between twocreditors and that arise contractually. In other words, the CCAA governs the relationship between the debtor and its creditors, notbetween creditors inter se.

EDC’s counsel quoted Farley J in Re Stelco Inc, (ONSC) at para 7: The CCAA is styled as “An act to facilitate compromises and arrangements between companies and their creditors” and its

short titleis: Companies’ Creditors Arrangement Act. Ss. 4, 5 and 6 talk of compromises or arrangements between a company and its creditors. There is no mention of this extending by statute to encompass a change of relationship among the creditors vis-à-vis the creditorsthemselves and not directly involving the company. See Pacific Coastal Airlines Ltd v Air Canada, 2001 BCSC 1721 , [2001]B.C.J. No. 2580 (S.C.) at paras. 24-25; Royal Bank of Canada . Gentra Canada Investments Inc, [2000] O.J. No. 315 (S.C.J.) at para.41, appeal dismissed (ONCA), [2001] O.J.

No. 2344 (C.A.); Re 843504 Alberta Ltd, [2003] AJ No 1549 (QB) atpara. 13; Re Royal Oak Mines Inc, [1999] OJ No 709 (Gen Div) at para 24; Re Royal Oak Mines Inc, (ON SC),[1999] O.J.

No. 864 (Gen Div) at para 1. (emphasis added) [13] The Ontario Court of Appeal affirmed this view in Re Stelco Inc, (ON CA) at paras 32 & 33: [32] First, as the supervising judge noted [at para. 7], the CCAA itself is more compendiously styled "An Act to facilitate compromisesand arrangements between companies and their creditors." There is no mention of dealing with issues that would change the nature of therelationships as between the creditors themselves.

As Tysoe J. noted in Pacific Coastal Airlines Ltd v Air Canada, 2001 BCSC 1721, [2001] BCJ No 2580, 19 BLR (3d) 286 (SC), at para 24 [page252] (after referring to the full style of the legislation): The purpose of the CCAA proceeding] is not to deal with disputes between a creditor of a company and a third party, even if thecompany was also involved in the subject matter of the dispute.

While issues between the debtor company and non-creditors aresometimes dealt with in CCAA proceedings, it is not a proper use of a CCAA proceeding to determine disputes between parties other thanthe debtor company. [33] In this particular case, the supervising judge was very careful to say that nothing in his reasons should be taken to determine oraffect the relationship between the Subordinate Debenture Holders and the Senior Debt Holders. [14] In addressing this argument, it is important to examine the nature of the issue before the Court in Re Stelco.

Two groups ofunsecured creditors were embroiled in a dispute. The first group held convertible unsecured subordinated debentures and the second

group consisted of senior debt holders. Their rights were defined by a trust indenture that provided that the senior debt holders would be paid in full first before the subordinated debenture holders were paid at all. When CCAA proceedings were initiated, the subordinated debenture holders sought to have themselves designated as a separate class for voting purposes. Farley J ruled that both groups were unsecured and thus only one class was required. The Court of Appeal agreed.

In effect, the Court found that even though both groups were unsecured and should vote as a single class, the CCAA proceedings did not change the fact that one group was to be paid first. [ 15 ] Re Stelco did not in any way deal with interim financing under an Initial Order. Another important distinction in this case is that the debtor, Dynamic Group, is directly involved both as a party (through all of its constituent entities) to the intercreditor agreement and as recipient of the interim financing under the ARIO.

This is unlike Re Stelco where the dispute between the two factions of unsecured creditors was not the debtor’s concern and completely outside of the CCAA proceedings. C. CCAA Provisions & Court Template Order [ 16 ] Moreover, the CCAA at ss 11.2(1) & (2) specifically provides that the Court may override the interests of any secured creditor in approving the interim financing: Interim financing 11.2

(1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the company’s property is subject to a security or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow statement. The security or charge may not secure an obligation that exists before the order is made. Priority — secured creditors

(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company. [ 17 ] The Court has, as authorized by ss 11.2(1) & (2), granted a super-priority to the interim lender PEL that overrides the priority given to EDC by clause 7 of the intercreditor agreement. The specific provision in the template order addressing this situation is reproduced at para 41(e)(ii) of the ARIO actually granted on March 16, 2023: 41.

The Directors' Charge, the Administration Charge, the Commitment Letter, the Definitive Documents , and the Interim Lender's Charge shall not be rendered invalid or unenforceable and the rights and remedies of the chargees entitled to the benefit of the Charges (collectively, the “ Chargees ”) and/or the Interim Lender thereunder shall not otherwise be limited or impaired in any way by: … (

e) any negative covenants, prohibitions or other similar provisions with respect to borrowings, incurring debt or the creation of Encumbrances, contained in any existing loan documents, lease, sublease, offer to lease or other agreement (collectively, an “ Agreement ”) that binds the Applicants, and notwithstanding any provision to the contrary in any Agreement: … (ii) none of the Chargees shall have any liability to any Person whatsoever as a result of any breach of any Agreement caused by or resulting from the creation of the Charges , the Applicants entering into the Commitment Letter, or the execution, delivery or performance of the Definitive Documents … (emphasis added) [ 18 ] The underlined portion applies.

As noted, the intercreditor agreement is an “Agreement that binds the Applicants” (the Dynamic Group) and furthermore, the liability alleged by EDC against PEL is “caused by or results from the creation of” the super- priority or the Dynamic Group agreeing to receive funds per the interim financing term sheet. [ 19 ] As counsel for PEL pointed out, the template Orders were arrived at through consultations between the Court, the insolvency bar and the insolvency community, resulting in standard language that best attains the objectives of insolvency legislation and that reflects the realities and practicalities of the insolvency marketplace.

The exact scenario for which EDC seeks exemption was specifically contemplated during the creation of the template language. [ 20 ] PEL was the only lender in the marketplace prepared to step forward. Without its’ doing so, the restructuring plan would have been dead in its tracks from the start. It was likely PEL’s familiarity with the Dynamic Group’s business, and its potential, that allowed it to offer interim financing when no-one else would. PEL is assuming new and different risk here.

If a different lender had decided to step in, EDC would have no argument. [ 21 ] Here, EDC in losing its action against PEL is in no different a position than any secured creditor of Dynamic Group whose security is diminished or whose rights are “confiscated” because of the court-ordered super-priority in favour of the interim lender. In this case, the interim lender just happens to be PEL. [ 22 ] The immunity afforded to PEL in para 41(e)(ii) of the ARIO is a corollary of and necessarily incidental to the super-priority conferred through ss 11.2(1) & (2) of the CCAA .

If PEL is at risk of having to pay damages to EDC because it accepted court-ordered super-priority for its extension of interim financing, then the super-priority would be illusory. That is because without immunity PEL may, in effect, be called upon to disgorge to EDC an amount equivalent to EDC’s loss from the exercise of the court-ordered super- priority.

[23] Allowing EDC to preserve its potential right of action thereby defeats the purpose of conferring the super-priority, exposesPEL to a risk that another interim lender would not have and acts as a disincentive to PEL (and similarly situated secured creditors inother CCAA proceedings) from acting as interim lender in the first place. [24] Dynamic Group further says that EDC suffers no loss, at least with respect to the priority collateral because of the impositionof the super-priority in favour of PEL.

As described in the affidavit evidence of Dynamic Group’s officer, the specific receivable thatEDC’s security covers (over which it has priority to PEL), instead of being $1 million USD owed to Dynamic Group, is actually apayable of over $3.2 million USD (according to the customer) due to back charges and penalties. EDC said this is speculative but offeredno contrary evidence. [25] I otherwise offer no views on the merits of EDC’s potential action against PEL. D.

Public Policy [26] As stated, allowing EDC to take legal action against PEL because PEL accepted a super-priority under a Court Order puts PELin an untenable position as interim lender. [27] In Canada v Canada North Group Inc, 2021 SCC 30, the Supreme Court of Canada commented on the necessity for super-priority or “priming” charges for interim lenders in the CCAA restructuring process.

Speaking for the majority, Cote J said at paras 29 &30: [29] This Court has similarly found that financing is critical as “case after case has shown that ‘the priming of the DIP facility is a keyaspect of the debtor’s ability to attempt a workout’” (Indalex, at para. 59, quoting J. P. Sarra, Rescue! The Companies’ CreditorsArrangement Act (2007), at p. 97). As lower courts have affirmed, “Professional services are provided, and DIP funding is advanced, inreliance on super-priorities contained in initial orders.

To ensure the integrity, predictability and fairness of the CCAA process, certaintymust accompany the granting of such super-priority charges” (First Leaside Wealth Management Inc (Re), 2012 ONSC 1299, atpara. 51 ). [30] Super-priority charges in favour of the monitor, financiers and other professionals are required to derive the most value for thestakeholders. They are beneficial to all creditors, including those whose claims are protected by a deemed trust.

The fact that they requiresuper priority is just a part of “[t]he harsh reality . . . that lending is governed by the commercial imperatives of the lenders” (Indalex, atpara. 59). It does not make commercial sense to act when there is a high level of risk involved.

For a monitor and financiers to putthemselves at risk to restructure and develop assets, only to later discover that a deemed trust supersedes all claims, smacks of unfairness… [28] In a concurring judgment, Karakatsanis J said at para 75: When a company seeks to restructure its affairs in order to avoid bankruptcy, the Companies’ Creditors Arrangement Act, R.S.C. 1985,c.

C-36 (CCAA), allows the court to order charges in favour of parties that are necessary to the restructuring process: lenders whoprovide interim financing, the monitor who administers the company’s restructuring, and directors and officers who captain the sinkingship (among others). These charges, often referred to as “priming charges”, are meant to encourage investment in the company as itundergoes reorganization.

A company’s reorganization, as an alternative to the devastating effects of bankruptcy, serves the publicinterest by benefitting creditors, employees, and the health of the economy more generally. [29] And further, at para 142: Interim financing is crucial to the restructuring process. It allows the debtor to continue to operate on a day-to-day basis while a workoutsolution is being arranged. A plan of compromise would be futile if, in the interim six months, the debtor was forced to close its doors.For this reason, Farley J., in Royal Oak Mines Inc., Re (1999), (ON SC), 7 C.B.R. (4th) 293 (Ont. C.J. (Gen.

Div.)),at para. 1, quoting Royal Oak Mines Inc., Re (1999), (ON SC), 6 C.B.R. (4th) 314 (Ont CJ (Gen Div)), at para. 24,observed that interim financing helps “keep the lights . . . on”. Similarly, in Indalex, Deschamps J explained that giving interim lenderssuper-priority “is a key aspect of the debtor’s ability to attempt a workout” (para. 59, quoting J. P. Sarra, Rescue! The Companies’Creditors Arrangement Act (2007), at p 97).

Without interim financing and the ability to prime (i.e., to give it priority) the interimlender’s loan, the remedial purposes of the CCAA can be frustrated (para 58). [30] The changing of the priority scheme (and here, the concurrent immunity from suit by another creditor) granted by Court Orderis integral to the viability of the interim financing from the perspectives of both the lender and the debtor. Unless granted, PEL wouldhave no reason to offer the interim financing, no reorganization would take place and the Dynamic Group would have no alternative butto go bankrupt or go into liquidation.

Thus, for public policy reasons, namely avoidance of the economic and social cost of large businessfailure, the interim lender under CCAA restructuring proceedings is afforded special treatment. That special treatment consists of thesuper-priority or priming charge as well as, in this case, insulation from third party contractual liability, as reflected in the templatelanguage. E. Ruling [31] EDC sought to preserve its right to sue PEL for breach of the intercreditor agreement, which it says has occurred by the Courtapproving PEL’s extension of interim financing to DTG and giving PEL a super-priority.

My decision that the interim lender’s chargerank in priority to that of EDC as conferred in the intercreditor agreement is an exercise of discretion under s 11.2(2) of the CCAA. Theextinguishment of EDC’s putative cause of action is part of giving full effect to the super-priority accorded to PEL as interim lender. Forpublic policy reasons, interim lenders are supposed to be given an advantage in CCAA proceedings. For the above reasons, I exercise mydiscretion to dismiss EDC’s request.

Heard on the 16 th day of March, 2023. Dated at the City of Calgary, Alberta this 23 rd day of March, 2023 . Douglas R. Mah J.C.K.B.A. Appearances: Ryan Zahara MLT Aikins for the Applicants John Regush Dentons for Promising Expert Limited David LeGeyt and Ryan Algar Burnet, Duckworth & Palmer LLP for FTI Consulting Canada Inc Dustin Oliver for Monitor for FTI Consulting Canada Inc Aaron Stephenson Norton Rose Fulbright Canada LLP for Export Development Canada Jessica Markic for Export Development Canada Sam Gabor Gowling WLG for CIBC