2011 QCCA 2442, 2011 QCCA 2442

Unofficial English Translation 4370422 Canada inc. (Davie Yards inc.) (Arrangement relative à) 2011 QCCA 2442 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF QUEBEC No.: 200-09-007571-117 (200-11-019127-102) DATE: December 28, 2011 PRESIDED BY: THE HONOURABLE FRANÇOIS PELLETIER, J.A. In the matter of the plan of arrangement of: 4370422 CANADA INC., carrying on business as DAVIE YARDS INC. IMPLEADED PARTY / Debtor and OCEAN HOTELS I LIMITED OCEAN HOTELS II LIMITED PETITIONERS / Petitioners and SAMSON BÉLAIR / DELOITTE & TOUCHE INC.

RESPONDENT / Monitor and EXPORT DEVELOPMENT CANADA IMPLEADED PARTY / Impleaded party JUDGMENT [ 1 ] Two sister companies, Ocean Hotels I Limited and Ocean Hotel II Limited, which I will collectively refer to as "Ocean", commissioned the building of two ships from Davie Yards inc. ("Davie"), now known as 4370422 Canada inc.

To finance the project, Ocean borrowed from the impleaded party, Export Development Canada ("EDC"), and hypothecated its claims against Davie, among other things. [ 2 ] According to the building contract, Ocean paid instalments totalling approximately $141M, but Davie never built the ships and must now reimburse the amounts unduly received. [ 3 ] In February of 2010, Davie filed for protection under the Companies' Creditors Arrangement Act [1] (the "Act") and that March, Étienne Parent, J. of the Superior Court, District of Quebec, was assigned to the case.

In the course of overseeing the process, he issued many orders, including a recent one on October 26, 2011, which is the subject of the present motion for leave to appeal. [ 4 ] The judgment a quo confirms a decision made by Samson Bélair / Deloitte & Touche Inc., the monitor, rejecting Ocean's proof of claim. The monitor's rejection was based on the fact that there was a movable hypothec held by EDC and that a notice of withdrawal of authorization to collect the hypothecated claims had been sent. Both the monitor and Parent J. deemed this notice of withdrawal to

have transferred the right to vote on the plan of arrangement proposed by Davie from Ocean to EDC. [5] As the judge pointed out, in practice, determining who holds the right to vote settles the outcome of the plan since Ocean andEDC have opposing views on the subject: EDC is in favour, whereas Ocean is fiercely opposed. [6] Following the October 26 judgment, the creditors held an assembly to decide the outcome of the plan in question. Voting as ithad previously indicated it would, EDC joined the numerous creditors who approved the plan.

During the subsequent petition forhomologation, Ocean publicly announced its intention to appeal the October 26 judgment. [7] Aware of the consequences of a decision of this Court setting aside his judgment, Parent J. reserved judgment on the petition tohomologate the plan, pending the outcome of the appellate proceedings.[2] [8] In support of its motion for leave to appeal, Ocean submits the following grounds: (

a) Parent J. erred in giving EDC the right to vote on the plan of arrangement since the plan explicitly sets out the admissibility of aproof of claim for the sole purpose of voting, irrespective of the admissibility of that proof of claim for the purpose of distribution. (

b) Despite a prior notice of the exercise of a hypothecary remedy and a notice of withdrawal, Ocean has retained ownership of theclaim and can thus continue to benefit therefrom without interfering with EDC's rights. (

c) In any event, the judge neglected to use the broad powers conferred upon him under

section 11 of the Act by giving EDC theentire right to vote even though EDC financed only $76M of the $141M claim. Thus, Ocean was seriously prejudiced because it wasdeprived of the right to vote on a debt of some $65M with respect to which it alone holds an interest. ANALYSIS [9] At the outset, I find it useful to note that the onus on the party seeking leave to appeal in such matters is a heavy one.Underlying all the provisions of the Act is Parliament's will to confer broad discretionary powers on the trial judge to enable him or herto act quickly and effectively.

Parliament thus intends to favour, in the right circumstances, the permanence of businesses whose socialsignificance justifies resorting to exceptional measures. Generally speaking, this same intent motivates the limitations on the right toappeal. [10] In this case, there is an additional factor calling for increased deference. I must take into account the fact that Parent J. oversawthe entire process from its inception.

In 9145-7978 Québec Inc. (Arrangement in respect of),[3] Gendreau J.A. reminded us that: [translation] Leave to appeal should be granted only with great caution, especially when the management of an arrangement has been assigned to asingle judge who has had the advantage of presiding every stage of that case: [footnote omitted] An appellate court should exercise its power sparingly, when asked to intervene in issues which arise in CCAA proceedings.

A judgeexercising a supervisory function under the CCAA has an ongoing management process, much like a trial judge making orders in thecourse of a trial: Re Pacific National Lease Holding Corp. (1992), (BC CA), 15 C.B.R. (3d) 265 at 272 (B.C.C.A.). [11] In the case at bar, the parties have agreed to recognize that leave will be granted only if the four tests set out by Wittman, J.A.of the Alberta Court of Appeal are met:[4] (1) whether the point on appeal is of significance to the practice; (2) whether the point raised is of significance to the action itself; (3) whether the appeal is prima facie meritorious or, on the other hand, whether it is frivolous; and (4) whether the appeal will unduly hinder the progress of the action. [12] The monitor adds, quite rightly, that the tests in question are cumulative, so failing to meet a single one is sufficient to dismissthe petitioner's motion for leave.[5] [13] In this case, does Ocean's motion meet each of these tests?

I do not believe that it does. Indeed, I find that the petitioner has notdischarged its onus with respect to the first two tests. [14] I shall begin with a few comments regarding the first requirement, which refers to the significance of the point on appeal to thepractice at large. [15] Ocean argues that there is no precedent on the issue of whether the withdrawal of authorization to collect a hypothecated claimincludes the withdrawal of the right to vote on the plan of arrangement proposed under the Act.

Put simply, the argument submittedinvolves determining which right the right to vote on the plan of arrangement is linked to: the actual property right or the right to collectthe debts due. In the wake of its proposition, Ocean adds that the plan of arrangement itself dissociates the right to vote from the right tocollect the proceeds of the distribution. [16] The argument is cleverly presented, but it is my opinion that the significance of the issue is radically lessened by the fact that, toattain Ocean's solution, it is necessary to refer to the agreement entered into by the parties.

Besides, the judge addressed the issue asfollows: [translation]

[20] As suggested by that author, the Court considers it relevant to analyze the parties' agreement as to its division of the exercise of certain rights that are ancillary to the claim. In the hypothecary agreement, the parties have provided that the creditor has certain powers with respect to exercising its hypothecary rights over the claim: 5.3. The Debtor [Ocean] may collect all debts forming part of the Hypothecated Property until EDC withdraws its authorization to the Debtor to do so in accordance with

section 6.3 herein. Upon such withdrawal, EDC may collect such debts and shall be entitled to a reasonable commission which it may deduct from any amount collected. ... 6.3. Upon the Debtor’s [Ocean’s] default, EDC may use and manage the Hypothecated Property at the Debtor’s expense with full authority to grant new leases or renew existing leases upon such terms and conditions as EDC may deem appropriate. EDC may also compromise or transact with the debtors of the hypothecated debts [Davie] and may grant releases and discharges thereto.

EDC may also complete the manufacture of hypothecated inventories and do all things necessary or useful to their sale. [Emphasis added] [ 17 ] The same reasoning applies to the alternate argument whereby Ocean has in any event retained the right to vote with respect to the part of the claim that exceeds the amount of its debt to EDC. To rule on this, the judge referred to the text of the loan agreement entered into by Ocean and EDC: [translation] [26] Alternatively, Ocean submits that part of its claim against Davie exceeds its debt to EDC.

Indeed, its claim against Davie exceeds the amounts owed to EDC by some $65,000,000. [27] The provisions of the hypothec, however, clearly express that the hypothec is indivisible and covers all EDC's claims against Davie: 2.1 To secure the fulfillment of its obligations to EDC pursuant to the Loan Agreement (the « Indebtedness ») and the fulfillment of its obligations hereunder, the Debtor [Ocean] hypothecates the following property: 2.1.1. The vessel currently under construction at Davie’s shipyard, being referred to as [Hull no 721 and Hull no 722] (the « Vessel[s]”); 2.1.2.

All materials, components, machinery and equipment purchased and/or delivered in Davie’s yard for fitting or affixing to the Vessel[s] or for use in the construction or equipping of the Vessel[s] (or any part thereof) or appropriated for its construction; and 2.1.3.

All rights, title and interest of the Debtor [Ocean] in any monetary claims arising under the construction contract[s] dated May 31, 2007, entered into between the Debtor [Ocean] and Davie, including any modification, amendment, addition or replacement thereof (the “Construction Contract[s]”) . (Emphasis added.) [ 18 ] If the appeal were presented to a panel of this Court, that panel would in all probability be compelled to follow a similar train of thought, which would likely give a very limited scope to the findings of the Court.

Ocean has not convinced me, therefore, that the issue of whether the right to vote is connected to being an owner or a hypothecary creditor is, in the factual context of this case, an issue of significance to the practice at large. [ 19 ] As for the second test – whether the point raised is of significance to the action itself – Ocean argues that this appears from the mere observation that approval or rejection of the plan depends on the identity of the person voting as holder of the claim for reimbursement of the advances made to Davie. [ 20 ] In my view, this approach to the requirement is too narrow.

It is not enough that the issue at bar may be determinative to the plan's approval. It must also address an aspect of the process that is likely to be of benefit to the body. And therein lies the rub. [ 21 ] To its credit, Ocean has been transparent and admitted that it intends to vote against the plan and thus cause the debtor's bankruptcy. Ocean sees the situation as follows: [6] 43.

In this case, Petitioners have been denied the right to vote on claims totalling $141,307,000.00 in a situation where the proposed arrangement would result in a distribution to all creditors of only $1,000,000.00, resulting in a potential recovery for each creditor of approximately 0.005% of it's claim against Davie; 44. Should the proposed arrangement be put into effect, EDC would stand to recover approximately only $710,000.00; 45.

This would result in Petitioners potentially still owing EDC a balance of approximately $75,000,000.00, without the opportunity for either Petitioners or EDC to attempt to obtain a more substantial distribution, which, according to Petitioners, would be the case in the event that bankruptcy procedures were commenced; 46. This situation is clearly inequitable and unjustly prejudices both EDC and the Petitioners in their attempt to recover sums owed to them by Davie; 47. Petitioners respectfully submit that the trial judge erred in law by failing to balance the interests of the stakeholders in this process

and render an equitable order under

section 11 of the CCAA in order to preserve Petitioners' right to vote during the Meeting of Creditor; [ 22 ] The statement that the plan would be inequitable to both EDC and Ocean if accepted [7] and that it would deprive them of the possibility of recovering the amounts due by the debtor is somewhat baffling in the absence of actual evidence to this effect. Obviously, the amount to be distributed ($1M for claims amounting to $200M) appears quite modest at first glance, but this does not mean that bankruptcy would yield greater equity.

One thing is certain: Ocean's vision is not in keeping with that of EDC, who, on the contrary, believes that accepting the plan would be of greater benefit than rejecting it. Moreover, the motion does not address the positions of Davie's other creditors. Yet, according to the monitor's undisputed statement, over 350 out of an approximate 360 have declared themselves to be in favour of the plan.

Although they do not hold the majority in worth, it cannot be ignored that these other creditors nonetheless represent a total of many tens of millions of dollars. [ 23 ] Ocean's position, dare I say its frustration, is quite understandable, however, if we consider some of the arguments presented at the hearing by its counsel. It advanced over $141M for the construction to begin on two ships which, it bears saying, were never built. Of even greater significance is the fact revealed by the record that, a very short time before Davie made its initial filing, Ocean made payments totalling $30M.

Like the others, these large sums were used for purposes other than those for which they were intended, but they are different in that they were cashed at a time when it might be assumed that the directors knew of the precariousness of Davie's financial situation. And now, the plan of arrangement provides that the directors will be released, an element that is unlikely to please Ocean in the context I just described. [ 24 ] From this angle, Ocean's interest in opposing the plan, though understandable, remains nonetheless entirely personal.

In this sense, the case before us is like the one considered by my colleague Bich, J.A., in SIDO . She wrote: [8] [translation] [17] It appears from the preceding that, through its appeal, the petitioner pursues no more than its own interests, which have no general application, and which are unlikely to benefit the creditors (who, according to the trial judge, will lose everything in the event of bankruptcy) or, it goes without saying, the respondent.

Moreover, it appears unlikely that the bankruptcy would benefit even the petitioner, except in that its oppression remedy (whose chances of success are impossible to determine) may continue against those it co- sued with the respondent. In this sense, the appeal does not meet the second test we must consider for the purposes of leave to appeal (the point raised is of significance to the action itself).

Instead, the appeal "will unduly hinder the progress of the action" and will turn the peril facing the respondent and its other creditors into reality. [18] We cannot fault the petitioner, of course, for seeking to protect its interests, but it does not appear opportune to grant leave to appeal in these circumstances, and this alone would be sufficient to dismiss the motion. [ 25 ] For very much the same reasons, I find that the proposed appeal does not meet the second test. [ 26 ] In short, the issue before me does not concern the determination of the rights Ocean might hold against Davie's directors, but its right to vote on the issue of approving the plan of arrangement. [ 27 ] In light of the preceding and considering the lack of apparent weaknesses in the judgment under appeal, I find that it is not necessary to determine whether or not the last two tests to grant leave to appeal have been met.

The tests being cumulative, non- compliance with the first two is sufficient to dismiss the motion. FOR THESE REASONS, THE COURT: [ 28 ] DISMISSES the motion, with costs. FRANÇOIS PELLETIER, J.A. Mtre Jacques S. Darche Borden, Ladner For the petitioners Mtre Alain Tardif McCarthy, Tétrault

For the respondent Mtre Alain Robitaille Langlois, Kronström For the impleaded party Export Development Canada Mtre Martin Desrosiers Osler, Hoskin For the impleaded party 4370422 Canada Inc. Date of hearing: December 2, 2011