LUSCAR LTD. v. CONSOL OF CANADA INC., 1999 ABCA 179

Luscar Ltd. v. Smoky River Coal Limited, 1999 ABCA 179 Date: 1999 06 09 Docket: 99-18164 IN THE COURT OF APPEAL OF ALBERTA ____________________________________________________ THE COURT: THE HONOURABLE MADAM JUSTICE PICARD THE HONOURABLE MADAM JUSTICE HUNT THE HONOURABLE MR. JUSTICE McINTYRE ____________________________________________________ IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c.

C-36 , AS AMENDED AND IN THE MATTER OF SMOKY RIVER COAL LIMITED ALLSTATE INSURANCE COMPANY, ALLSTATE LIFE INSURANCE COMPANY, SECURITY LIFE OF DENVER INSURANCE COMPANY, INDIANA INSURANCE COMPANY, PEERLESS INSURANCE COMPANY, PACIFIC LIFE INSURANCE COMPANY, AH (MICHIGAN) LIFE INSURANCE COMPANY, NORTHERN LIFE INSURANCE COMPANY, RELIASTAR LIFE INSURANCE COMPANY, MODERN WOODMEN OF AMERICA, PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY, AMERICAN INTERNATIONAL LIFE ASSURANCE COMPANY OF NEW YORK, and PHOENIX AMERICAN LIFE INSURANCE COMPANY; Petitioners/(not Parties to the Appeal) BETWEEN: LUSCAR LTD. and CONSOL OF CANADA INC.

Appellants - and - SMOKY RIVER COAL LIMITED Respondent/(Debtor) - and - CANADIAN NATIONAL RAILWAY COMPANY Respondent/(Creditor) APPEAL FROM THE ORDER OF THE HONOURABLE MR. JUSTICE S. J. LOVECCHIO

GRANTED FEBRUARY 1, 1999 ____________________________________________________ REASONS FOR JUDGMENT RESERVED ____________________________________________________ REASONS FOR JUDGMENT OF THE HONOURABLE MADAM JUSTICE HUNT CONCURRED IN BY THE HONOURABLE MADAM JUSTICE PICARD AND CONCURRED IN BY THE HONOURABLE MR. JUSTICE McINTYRE COUNSEL: R. B. Davison, Q.C. J. H. Hockin For the Appellants D. R. Haigh, Q.C. B. T. Beck For the Respondent Smoky River Coal W. E. Cascadden For Neptune Bulk Terminals T. M. Warner For the Respondent Canadian National Railway D. W.

Mann For the Petitioners ____________________________________________________ REASONS FOR JUDGMENT OF THE HONOURABLE MADAM JUSTICE HUNT ____________________________________________________

[ 1 ] This case raises a question about the scope of the powers of a judge pursuant to the Companies’ Creditors Arrangement Act (“ CCAA ”), R.S.C. 1985, c. C-36 . Specifically, does a judge have the discretion to establish a procedure for resolving a dispute between parties who have agreed to arbitrate their disputes under a contract? In my view, the judge is granted that power by the CCAA, in this case his discretion was exercised properly, and the appeal must be dismissed.

FACTS [ 2 ] The Appellants Luscar Ltd. and Consol of Canada Inc. (“the Appellants”) and the Respondent Smoky River Coal Limited (“Smoky”) are owners and operators of coal mines in Western Canada. Neptune Bulk Terminals (Canada) Ltd. (“Neptune”) owns and operates a port facility in Vancouver. Smoky and the Appellants are shareholders of Neptune and ship coal for export through the port facility. [ 3 ] The relationship between Neptune and its shareholders is governed by a Shareholders’ Agreement (“the Agreement”), key provisions of which are reproduced below.

Briefly, the Agreement restricts the manner in which a shareholder may dispose of rights arising from the Agreement. Among the consequences of a breach specified in the Agreement are that shareholders are given a right of refusal to purchase, at book value, the Neptune shares belonging to an offending shareholder. The Agreement also provides that disputes among the parties will be arbitrated in British Columbia. [ 4 ] In April 1998, a dispute arose between the Appellants and Smoky when the Appellants alleged that Smoky had breached its obligations under the Agreement.

Neptune issued a Notice of Default as required by the Agreement. Over the next several months, information was exchanged among the parties concerning the facts giving rise to the alleged breach. The Appellants say it was not until September 1998 that they received information, on a “with prejudice” basis, that confirmed their view that Smoky had breached its contractual obligations.

Because until September they had been unable to use the information obtained earlier, they had taken no further steps in the interim to trigger formally the default provisions of the Agreement. [ 5 ] In the meantime, on July 30, 1998, a syndicate of Smoky’s lenders had filed a petition to place Smoky under the protection of the CCAA . They, along with Canadian National Railway Company (a major unsecured creditor of Smoky) are also Respondents. On August 7, 1998, an order was made retroactive to July 31, 1998, staying all actions against Smoky and its assets.

This order (“the Cairns order”) made specific reference to rights arising under the Agreement, even though Neptune and the Appellants had been unaware of the CCAA filing. The Cairns order, which was of limited duration, has since been extended several times.

A Monitor has been appointed to oversee Smoky’s affairs, although not empowered to take possession of Smoky’s assets or manage Smoky’s business. [ 6 ] Upon learning of the Cairns order, the Appellants became involved in the CCAA proceedings, arguing that the stay should not be extended against them and asserting that their dispute with Smoky should be resolved by arbitration pursuant to the Agreement. The chambers judge suggested that the parties attempt to resolve this issue among themselves. When they were unable to do so, cross- motions resulted.

In its motion, Smoky sought various declarations concerning the status of the “dispute” under the Agreement or, alternatively, an order prohibiting arbitration proceedings under the Agreement and giving directions for the determination of issues arising under the Agreement. The Appellants’ motion sought a stay of Smoky’s motion pursuant to s. 15 of the Commercial Arbitration Act , R.S.B.C. 1996, c. 55 (the “B.C. Arbitration Act ”).

DECISION APPEALED FROM [ 7 ] The learned chambers judge dismissed the Appellants’ motion, concluding that the Court of Queen’s Bench (which is the “court” under s. 2 of the CCAA ) has jurisdiction “to hear and determine ... whether Smoky has been or is in default under the ... Agreement and any and all related issues arising therefrom.” He ordered the parties to appear before him for further directions concerning a trial of the issues arising from the Agreement. [ 8 ] Among his undisputed findings were that:

- the law of British Columbia applies to the dispute under the Agreement - the question of whether or not Smoky was in default under the Agreement was an issue that, pursuant to the Agreement, the parties had agreed would be decided by arbitration - Smoky’s motion was a commencement of “legal proceedings” within the meaning of s. 15 (1) of the B.C.

Arbitration Act - the Appellants had applied to stay Smoky’s motion [ 9 ] He framed the question this way at para. 1: “Should this Court establish a procedure to resolve a dispute between [the Appellants and Smoky] as part of its supervisory role of the reorganization of Smoky under the CCAA , or should this Court stay the pending Notice of Motion of Smoky dated January 6, 1999 while that dispute is resolved by an arbitrator in British Columbia in accordance with the Commercial Arbitration Act ?” [ 10 ] He concluded that s. 15 of the B.C.

Arbitration Act obliged him to stay Smoky’s motion and send the matter to British Columbia for arbitration unless, in the words of that section, the agreement to arbitrate was “void, inoperative or incapable of being performed.” He suggested at para. 31 that the latter condition applied because of Smoky’s insolvency, the appointment of the Monitor, and the role of the Court under the CCAA . He said this incapacity was beyond the parties’ control. [ 11 ] He considered that the CCAA process would be compromised if the contractual dispute was not settled within its ambit.

But he noted that, in so dealing with the matter, the resolution of the dispute would be neither precluded nor postponed. Rather, it had to be addressed expeditiously because of its likely impact on the viability of a plan of arrangement. Were it not resolved under the umbrella of the CCAA , moreover, the efforts of Smoky’s officers could be drained through involvement in the B.C. arbitration, at a time when they should be attending to Smoky’s reorganization. Additionally, other stakeholders (including the Monitor) would be excluded from an arbitration in B.C.

He rejected the Appellants’ argument that their rights as non-creditors could not be affected by CCAA orders. He concluded that the dispute should be resolved as expeditiously as possible in the Court of Queen’s Bench under the CCAA proceedings, “so as to permit Smoky to move forward with certainty as to its status as a shareholder of Neptune” (para. 43). [ 12 ] O’Leary J.A. subsequently granted leave to appeal pursuant to s. 13 of the CCAA . He suggested the following as the issues for the appeal:

(1) Did the chambers judge err in finding that the arbitration agreement was "incapable of performance" because Smoky is subject to proceedings under the CCAA?

(2) If [the chambers judge] erred in finding that the arbitration agreement was incapable of performance, did he nevertheless have jurisdiction under the CCAA to override the NSA arbitration agreement with respect to the forum and procedure for resolving disputes?

(3) If the Order appealed adversely affected the substantive rights of Luscar and Consol under the Commercial Arbitration Act and the arbitration rules of the British Columbia International Commercial Arbitration Centre, did the chambers judge have jurisdiction under the CCAA to make the Order? [ 13 ] Because of the approach I have taken to this case, I do not find it necessary to deal with the first issue in quite the way framed by O’Leary J.A. The second and third issues are considered in the reasons that follow. CONTRACTUAL PROVISIONS [ 14 ] A number of provisions of the Agreement are relevant to the issue under appeal. [ 15 ] Paragraph 8.01 provides:

Except as otherwise expressly permitted by this agreement or a Terminal Contract, no Shareholder or Affiliate shall sell, transfer or otherwise dispose of or offer to sell, transfer or otherwise dispose of, any of its Interest, or any Terminal Contract or any of its rights thereunder. [ 16 ] It is alleged that Smoky breached this provision when it transported six train loads of coal through the terminal.

According to the Appellants, on this occasion Smoky “subcontracted” its capacity at the terminal. [ 17 ] Paragraph 8.04 describes the sole method by which a shareholder may dispose of its contracted shipping capacity. Briefly, it must offer that capacity to the other shareholders and only if they do not take up the right may the capacity be subcontracted to a third party. [ 18 ] Paragraph 10 deals with default: 10.01 It is an event of default, if a Shareholder (the “Defaulting Shareholder”) (the other Shareholders being the “Non-Defaulting Shareholders”): (

a) fails to observe, perform or carry out any of its obligations hereunder and such failure continues for 30 days after Neptune has given notice in writing to the Defaulting Shareholder specifying the nature of the default and requiring that the default be cured within 30 days; or (

b) becomes a bankrupt or commits

an act of bankruptcy, or permits or authorizes the appointment of a receiver or if a receiver-manager of its assets is appointed or if the Defaulting Shareholder makes an assignment for the benefit of creditors or otherwise. Neptune shall give a copy of any notice under this paragraph to the Non-Defaulting Shareholders. 10.02 Upon the expiration of the 30 day period referred to in subparagraph 10.01(

a) hereof or upon Neptune becoming aware of an event described in 10.01(

b) hereof, Neptune shall declare a Default and give notice thereof to the Non-Defaulting Shareholders. [ 19 ] In the event of a continuing default, paragraph 11.01 grants other shareholders the option to purchase the defaulting shareholder’s shares at book value. In this case, the evidence suggests that the book value of Smoky’s shares is about $880,000, while the market value of Smoky’s rights in the Neptune Terminal may exceed $46,000,000.

During the course of argument, the chambers judge observed that, from a practical perspective, a plan of arrangement under the CCAA could not go forward without a resolution of the dispute between Smoky and the Appellants. (AB 83-84) [ 20 ] The relevant paragraph dealing with dispute resolution is 12.02: The parties agree that all disputes or differences between or among the parties hereto, other than a dispute or difference decided by the auditors pursuant to paragraph 12.01, shall be submitted to a single arbitrator under the auspices of and pursuant to the rules of the British Columbia International Commercial Arbitration Centre and pursuant to the Commercial Arbitration Act of British Columbia whose decision shall be final and binding upon the parties to the arbitration.

The arbitrator may determine all questions of procedure and after hearing any evidence and representations of the parties, the arbitrator shall make an award and reduce the same to writing together with the reasons therefor. [ 21 ] Paragraph 15.11 provides that the Agreement will be governed by and construed in accordance with the laws of British Columbia. STATUTORY PROVISIONS

[ 22 ] Section 11(4) of the CCAA is central to this appeal. 11(4) A court may, on an application in respect of a company other than an initial application, make an order on such terms as it may impose , (

a) staying , until otherwise ordered by the court, for such period as the court deems necessary, all proceedings taken or that might be taken in respect of the company under

an Act referred to in subsection (1); (

b) restraining , until otherwise ordered by the court, further proceedings in any action, suit or proceeding against the company; and (

c) prohibiting , until otherwise ordered by the court, the commencement of or proceeding with any other action, suit or proceeding against the company. (Emphasis added) [ 23 ]

Part I of the CCAA (ss. 4 to 8) provides for the making of a compromise or arrangement between the company and its creditors. If accepted by two-thirds of the creditors, the plan may be sanctioned by the court. [ 24 ]

Section 2 of the CCAA contains the following

definitions: “secured creditor” “secured creditor” means a holder of a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, all or any property of a debtor company as security for indebtedness of the debtor company, or a holder of any bond of a debtor company secured by a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, or a trust in respect of, all or any property of the debtor company, whether the holder or beneficiary is resident or domiciled within or outside Canada, and a trustee under any trust deed or other instrument securing any of those bonds shall be deemed to be a secured creditor for all purposes of this Act except for the purpose of voting at a creditors’ meeting in respect of any of those bonds; “unsecured creditor” “unsecured creditor” means any creditor of a company who is not a secured creditor, whether resident or domiciled within or outside Canada, and a trustee for the holders of any unsecured bonds issued under a trust deed or other instrument running in favour of the trustee shall be deemed to be an unsecured creditor for all purposes of this Act except for the purpose of voting at a creditors’ meeting in respect of any of those bonds. [ 25 ]

Section 12 sets out the claims procedure. Section 12(1) states that a “claim” means “any indebtedness, liability or obligation of any kind that, if unsecured, would be a debt provable in bankruptcy within the meaning of the Bankruptcy and Insolvency Act .” Section 12(2) mandates how the “amount” of a “claim” is to be determined. Section 12(2) (

a) states: For the purposes of this Act, the amount represented by a claim of any secured or unsecured creditor shall be determined as follows: (

a) the amount of an unsecured claim shall be the amount . . . (iii) in the case of any other company, proof of which might be made under the Bankruptcy and Insolvency Act , but if the amount so provable is not admitted by the company, the amount shall be determined by the court on

summary application by the company or by the creditor . . .

[ 26 ] For reasons that will become apparent, the following provisions of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 (“ BIA ”) are also relevant.

Definitions - s. 2(1) “claim provable in bankruptcy”, “provable claim” or “claim provable” “claim provable in bankruptcy”, “provable claim” or “claim provable” includes any claim or liability provable in proceedings under this Act by a creditor; “creditor” “creditor” means a person having a claim, unsecured, preferred by virtue of priority under

section 136 or secured, provable as a claim under this Act; . . . Persons claiming property in possession of bankrupt 81(1) Where a person claims any property, or interest therein, in the possession of a bankrupt at the time of the bankruptcy, he shall file with the trustee a proof of claim verified by affidavit giving the grounds on which the claim is based and sufficient particulars to enable the property to be identified.

Claims provable 121(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act. Contingent and unliquidated claims 121(2) The determination of whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with

section 135. Debts payable at a future time 121(3) A creditor may prove a debt not payable at the date of the bankruptcy and may receive dividends equally with the other creditors, deducting only thereout a rebate of interest at the rate of five per cent per annum computed from the declaration of a dividend to the time when the debt would have become payable according to the terms on which it was contracted. [ 27 ] Section 15(2) of the B.C. Arbitration Act , referred to by the chambers judge, provides:

In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed. (Emphasis added) [ 28 ]

Section 23 states: An arbitrator must adjudicate the matter before the arbitrator by reference to law unless the parties , as a term of an agreement referred to in

section 35, agree that the matter in dispute may be decided on equitable grounds, grounds of conscience or some other basis . (Emphasis added) [ 29 ] Under ss. 8 and 9 of the Domestic Commercial Arbitration, Rules of Procedure of the B.C. International Commercial Arbitration Centre (as amended June 1, 1998) (“Rules”), arbitration may be commenced by a notice from one party to another and to the Centre or by the filing of a Joint Submission to Arbitrate to the Centre. The arbitration is deemed to have commenced following this filing and the payment of fees (s. 10). There is no evidence to suggest that arbitration was commenced in this case. [ 30 ]

Section 33 of the Rules provides: An arbitration tribunal shall decide the dispute in accordance with the law unless the parties agree in writing in accordance with

section 23 of the Commercial Arbitration Act that the matter in dispute may be decided on equitable grounds, grounds of conscience or some other basis . (Emphasis added) ANALYSIS 1. Did the Chambers Judge Have the Authority under s. 11 of the CCAA to Order a Stay of the B.C. Arbitration Proceedings? (

A) Does the term “proceedings” in s. 11 of the CCAA include the proposed arbitration in B.C.? [ 31 ] There is little doubt that the term “proceedings” in s. 11 is broad enough to encompass extra-judicial proceedings. Trial and appellate courts have treated the term expansively, relying upon jurisprudence that takes a broad, liberal approach to the

interpretation of the CCAA . Meridian Developments Inc. v. Toronto Dominion Bank; Meridian Developments Inc. v. Nu-West Group Ltd. (1984), 1984 CanLII 1176 (AB KB) , 52 C.B.R. (N.S.) 109, [1984] 5 W.W.R. 215, 32 Alta. L.R. (2d) 150, 11 D.L.R. (4th) 576, 53 A.R. 39 (Q.B.); Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 1990 CanLII 430 (BC CA) , 2 C.B.R. (3d) 303 (B.C. C.A.) (“ Quintette Coal ”).

Such courts have observed that, were it otherwise, non-judicial proceedings could operate against the interests of creditors and render impossible the achievement of effective arrangements. [ 32 ] Thus, in Quintette Coal , the term “proceedings” was held to include extra-judicial conduct such as the withholding of payments to the debtor company. In Meridian , it was said to embrace payment pursuant to a letter of credit.

Without specific discussion of the point, it seems also to have been assumed that “proceedings” includes the exercise of a contractual right to replace an operator of jointly-owned petroleum properties. Norcen Energy Resources Ltd. v. Oakwood Petroleums Ltd. (1988), 1988 CanLII 3560 (AB KB) , 72 C.B.R. (N.S.) 1, 63 Alta. L.R. (2d) 361, 92 A.R. 81 (Q.B.). [ 33 ] The above jurisprudence persuades me that “proceedings” in s. 11 includes the proposed arbitration under the B.C. Arbitration Act . The Appellants assert that arbitration is expeditious. That is often, but not always, the case.

Arbitration awards can be appealed. Indeed, this is contemplated by s. 15(5) of the Rules. Arbitration awards, moreover, can be subject to judicial review, further lengthening and complicating the decision-making process. Thus, the efficacy of CCAA proceedings (many of which are time-sensitive) could be seriously undermined if a debtor company was forced to participate in an extra- CCAA arbitration. For these reasons, having taken into

account the nature and purpose of the CCAA , I conclude that, in appropriate cases, arbitration is a “proceeding” that can be stayed under s. 11 of the CCAA . (

B) Are the Appellants creditors for the purposes of the CCAA ? [ 34 ] If the Appellants can be considered creditors under the CCAA , there is little doubt that the chambers judge had the power to affect their rights in the way he did. It is obvious that the contractual rights of a creditor can be affected permanently under the CCAA .

To take a simple example, a plan of arrangement or compromise that is approved by the requisite number of creditors can alter permanently the contractual rights of even those creditors that have not approved the plan ( CCAA , s.6). [ 35 ] To explain my conclusion that the Appellants can be considered creditors under the CCAA , it is necessary to examine the statutory linkage between the CCAA and the BIA and the courts’ view of that linkage. [ 36 ] The relevant provisions of the CCAA and the BIA have been set out above.

For the purposes of the claims procedure in s. 12 of the CCAA , “claim” is defined as the BIA ’s meaning of “a debt provable in bankruptcy”. Could the Appellants’ claims in this case constitute a “debt provable in bankruptcy”? [ 37 ] The answer is not readily apparent from the BIA , since nowhere does it define “ debt provable in bankruptcy”. The closest definition is “ claim provable in bankruptcy”. A contingent and unliquidated claim recoverable by legal process is a “claim provable in bankruptcy” for the purposes of s. 121(1) of the BIA : Farm Credit Corp. v.

Holowach (Trustee of) , 1988 ABCA 216 (CanLII) , [1988] 5 W.W.R. 87 at 90, 51 D.L.R. (4th) 501 (Alta. C.A.), leave to appeal to the Supreme Court of Canada dismissed at [1989] 4 W.W.R. lxx. Section 81(1) of the BIA contemplates proof of a claim arising from “any property, or interest therein” in the possession of the bankrupt at the time of bankruptcy.

Some of the Respondents argue that the Appellants’ claim against Smoky under the Agreement would fall under one of these sections and is, therefore, a “claim” under the CCAA that would give the Appellants access to the s. 12 claims procedure, making them creditors under that statute. [ 38 ] This legal result is contingent on whether the terms “debt” and “claim” are interchangeable under the BIA . Both terms are used in s. 121, which is entitled “Claims Provable”.

There are cases which, without directly considering the point, appear to have assumed that the two terms are synonymous: Re Central Capital Corp. (1995), 1995 CanLII 7415 (ON SC) , 22 B.L.R. (2d) 210 (Ont. Gen. Div.); affirmed (1996), 1996 CanLII 1521 (ON CA) , 27 O.R. (3d) 494 (C.A.). [ 39 ] There are also cases where the point has been addressed directly. In Algoma Steel Corp. v. Royal Bank (1992), 11 C.B.R. (3d) 1 (Ont. Gen.

Div.) , the issue was whether the holder of a loan guaranteed by the debtor company should be treated as a creditor for the purposes of the plan of arrangement filed by the debtor company, notwithstanding the fact that the loan holder had made no demand of payment under the loan agreement or the guarantee. Farley J. concluded that the loan holder was a creditor. He distinguished Quebec Steel Products (Industries) Ltd. v. James United Steel Ltd. , 1969 CanLII 530 (ON SC) , [1969] 2 O.R. 349, 5 D.L.R. (3d) 374 (H.C.) because of changes that had been made to the wording of s. 12 of the CCAA in the meantime.

Specifically, he noted that the earlier wording had bundled together the concepts of “claim” and “amount”, leading in Quebec Steel to the application of the common law definition of “debt” as a certain sum of money. [ 40 ] At 6-7, Farley J. said: It strikes me that [under the current CCAA ] the double recitation in s. 12(1) and (2) of “[f]or the purposes of this Act” and the segregation of these subsections was intended to allow “claim” to be determined as any “indebtedness, liability or obligation of any kind” by reference to whether it “could be a debt provable in bankruptcy within the meaning of the Bankruptcy Act ”.

The determination of the amount of that claim is to be determined under another provision, also “[f]or the purposes of this Act”. Under the structure and context of the C.C.A.A. could there be a claim (unsecured debt provable as such under the Bankruptcy Act ) without there being a creditor as the holder of that claim. I think not. I therefore conclude that the B. of M. is creditor of Algoma vis-à-vis the guarantee (see Re Film House Ltd. (1974), 19 C.B.R. (N.S.) 231 (Ont. S.C.) , varied (1974), 19 C.B.R. (N.S.) 231 at 234 (Ont.

S.C.) ; Re Froment , 1925 CanLII 313 (AB KB) , 5 C.B.R. 765, [1925] 2 W.W.R. 415, [1925] 3 D.L.R. 377 (Alta. T.D.), which indicate that the contingent liability of a guarantor who has not been called upon to pay or who has not in fact paid should be considered a debt provable in bankruptcy pursuant to the Bankruptcy Act ).

[ 41 ] He held to similar effect in Re Cadillac Fairview Inc. (1995), 1995 CanLII 7362 (ON SC) , 30 C.B.R. (3d) 17 (Ont. Gen. Div.), where the party found to be a “claimant” for the purposes of the CCAA had merely launched a lawsuit against the debtor company, seeking, among other things, declarations concerning the validity of certain agreements and recovery of damages for the breach of the agreements by the debtor company. See also Re Quintette Coal Ltd. (1991), 1991 CanLII 303 (BC SC) , 7 C.B.R. (3d) 165 (B.C.

S.C.) at 174 where it was held that “claim” under the CCAA included “future prospects”. [ 42 ] I find this reasoning persuasive. There is a possible explanation for the fact that the CCAA refers to a “debt”, rather than a “claim”, provable under the BIA . At the time the CCAA was passed, the Bankruptcy Act , R.S.C. 1927, c. 11 , contained s. 104 , entitled “Debts provable”. That

section is the forerunner of s. 121, now entitled “Claims provable”. The language used in the body of s. 104 was “debts provable”; in the current s. 121, it is “claims provable”. The

definitions at that time also referred to “debts” rather than “claims”. It may be that Parliament failed to re-align the language of the CCAA when the relevant language of the Bankruptcy Act was amended in 1949, S.C. 1949, 2nd sess., c. 7. [ 43 ] Nor am I convinced there are compelling reasons why the notion of a “debt” should be treated narrowly under the CCAA , rather than as broadly as a “claim” under the BIA . It is true that, in comparison to CCAA proceedings, bankruptcy proceedings are by nature more final. If it is ever to be dealt with, a claim must be resolved during the bankruptcy proceedings.

In contrast, if a CCAA plan of arrangement is accepted, there is the future possibility of a going concern against which a claim may be asserted. [ 44 ] But there may also be situations (like the present one) where it would be difficult for a plan of arrangement to be prepared and voted upon without some resolution, in the same process, of a claim that is relatively unripe. This appears to have been the reasoning of Blair J. in Campeau v. Olympia & York Developments Ltd. (1992), 14 C.B.R. (3d) 303 (Ont. Gen. Div.) .

There, the plaintiffs had served a statement of claim (seeking damages for breach of contract against the debtor company) before an initial stay under the CCAA was ordered. In refusing to lift the stay and permit the action to proceed, he noted that, unless the claim was dealt with in the context of CCAA proceedings, the creditors would have no way to assess whether to accept or reject the debtor company’s plan (notwithstanding that the plan itself had treated the plaintiffs as parties that were unaffected by it).

His language at 311 suggests a tacit acceptance of the fact that the plaintiffs were not “creditors” in the same sense as other creditors. He held, nevertheless, that their “claim” should be dealt with under the CCAA . [ 45 ] In this case, the essence of the Appellants’ claim is that Smoky has breached the Agreement. Although paragraph 11.01 of the Agreement grants an option to purchase the defaulting shareholder’s shares, it is clear from paragraph 11.02 that other remedies are contemplated.

Viewed this way, the Appellants’ claim is not significantly different than the breach of contract claims in some of the cases just discussed. To the extent that the Appellants might exercise an option to acquire Smoky’s shares, moreover, it could be said that they claim a right to “property” in Smoky’s possession, a right that would be provable under s. 81 of the BIA . [ 46 ] For these reasons, I conclude that the Appellant’s claim against Smoky can be treated under the claims process of s. 12 and that they are creditors for the purposes of the CCAA .

In case I am wrong, I will now consider whether, if the Appellants cannot be considered creditors, the chambers judge nevertheless had the power to make the order. (

C) Even if the Appellants are not creditors for the purposes of the CCAA , does s. 11 authorize the order made in this case? [ 47 ] The Appellants do not dispute that the rights of non-creditor third parties can be affected by the s. 11 power to order a stay. They agree this is the clear implication of cases such as Norcen , supra , a decision that has been followed widely and cited with approval by many Canadian courts. But they say in no case has a court altered permanently the contractual rights of a non-creditor and doing so is beyond the scope of the CCAA .

They assert that, if the order is upheld, they will have lost forever the opportunity to resolve the dispute pursuant to the arbitration procedure accepted by the parties to the Agreement. As discussed later, in my view the nature of the contractual right being affected is an important factor to take into account. [ 48 ] The Respondents disagree with the Appellants’ assessment of the jurisprudence.

They also maintain that the impugned order affects the Appellants’ procedural, not substantive, rights. [ 49 ] In my opinion, the language of s. 11(4), considered in the context of the CCAA’s purpose, authorizes the order made by the chambers judge. To recapitulate, that order declared that the Alberta Court of Queen’s Bench “has jurisdiction to hear and determine the

issue of whether Smoky has been or is in default under the Neptune Shareholders’ Agreement and any and all related issues arising therefrom”, required the parties to appear before him for further directions, and dismissed the Appellants’ motion for a stay pursuant to the B.C. Arbitration Act . Although there are no previous decisions on all fours with the present situation, I read the existing jurisprudence as supportive of my

interpretation of s. 11(4). [ 50 ] The language of s. 11(4) is very broad. It allows the court to make an order “on such terms as it may impose”. Paragraphs (a), (

b) and (

c) empower the court order to stay “ all proceedings taken or that might be taken” against the debtor company; restrain further proceedings “in any action, suit or proceeding” against the debtor company; and prohibit “the commencement of or proceeding with any other action, suit or proceeding” (emphasis added). These words are sufficiently expansive to support the kind of discretion exercised by the chambers judge. [ 51 ] This

interpretation is supported by the legislative objectives underlying the CCAA . The purpose of the CCAA and the proper approach to its

interpretation have been described as follows: The CCAA is intended to facilitate compromises and arrangements between companies and their creditors as an alternative to bankruptcy and, as such, is remedial legislation entitled to a liberal

interpretation. It seems to me that the purpose of the statute is to enable insolvent companies to carry on business in the ordinary course or otherwise deal with their assets so as to enable plan of compromise or arrangement to be prepared, filed and considered by their creditors and the court.

In the interim, a judge has great discretion under the CCAA to make order [sic] so as to effectively maintain the status quo in respect of an insolvent company while it attempts to gain the approval of its creditors for the proposed compromise or arrangement which will be to the benefit of both the company and its creditors. per Farley J. in Re Lehndorff General Partner Ltd. (1993), 17 C.B.R. (3d) 24 at 31 (Ont. Gen. Div.) [ 52 ] As has been noted often, the CCAA was enacted by Parliament in 1933 during the height of the Depression.

At that time, corporate insolvency led almost inevitably to liquidation because that was the only option available under legislation such as the Bankruptcy Act and the Winding-Up Act . In the result, shareholder equity was destroyed, creditors received very little, and the social evil of unemployment was exacerbated. The CCAA was intended to provide a means of enabling the insolvent company to remain in business: Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 1990 CanLII 529 (BC CA) , 4 C.B.R. (3d) 311 (B.C.

C.A.); Quintette Coal , supra . [ 53 ] The courts have underscored that the CCAA requires account to be taken of a number of diverse societal interests. Obviously, the CCAA is designed to “provide a structured environment for the negotiation of compromises between a debtor company and its creditors for the benefit of both”: Re Lehndorff General Partner Ltd. , supra , at 31.

It is intended to “prevent any manoeuvers for positioning among creditors during the interim period which would give the aggressive creditor an advantage to the prejudice of others who were less aggressive and would further undermine the financial position of the company making it less likely that the eventual arrangement would succeed”: Meridian , supra , at 114. But the CCAA also serves the interests of a broad constituency of investors, creditors and employees: Chef Ready , supra, at 320; Quintette Coal , supra , at 314.

These statements about the goals and operation of the CCAA support the view that the discretion under s. 11(4) should be interpreted widely. [ 54 ] There are a number of cases where third party rights have been affected by a stay order. Norcen provides a convenient starting point. [ 55 ] Under the terms of the contract pursuant to which the debtor company (Oakwood) operated jointly owned oil and gas properties, the parties were entitled to replace the operator in the event of insolvency. Norcen was a party to the operating agreement, but not a creditor of Oakwood, nor present at the initial CCAA application.

The stay order specifically enjoined Oakwood’s removal as operator under any operating agreements. Norcen applied to vary the stay order and replace Oakwood pursuant to the terms of its operating agreement. [ 56 ] In denying Norcen’s application, Forsyth J. agreed that, by bringing its CCAA application, Oakwood had declared itself insolvent and that, normally, this would bring into play the replacement of operator provisions.

He acknowledged at 11 (C.B.R.) that Norcen’s rights might be affected permanently under the operating agreement were it not prevented from replacing Oakwood: if Oakwood’s plan of arrangement was approved by its creditors and its insolvency thereby “cured”, Norcen might lose forever its claim to replace Oakwood as operator. While not deciding the issue of whether the insolvency was capable of being “cured”, he approached the case as involving more than a mere suspension of Norcen’s rights.

He concluded at 12, nevertheless, that the s. 11 powers were broad enough to affect the rights of non-creditors, noting that there was much room for discretion within the application of s. 11 “to refuse a stay when third party rights will be seriously prejudiced by its terms.”

[ 57 ] Having determined that the s. 11 powers permitted interference with Norcen’s contractual rights, Forsyth J. addressed the CCAA ’s constitutional validity, observing that it had been upheld by the Supreme Court of Canada in Re Companies’ Creditors Arrangement Act; A.G. Can. v. A.G. Que. , 1934 CanLII 72 (SCC) , [1934] S.C.R. 659, 16 C.B.R.1, [1934] 4 D.L.R. 75. Thus, he said, the continuance of insolvent companies must be considered a constitutionally valid statutory objective. “[I]t follows that a stay which happens to affect some non-creditors in pursuit of that end is valid” (p. 16).

He concluded that continuance of a company involves more than a consideration of creditor claims, adding that s. 11 of the CCAA could be used to interfere with some other contractual relationships in circumstances which threaten a company’s existence. In obiter , he expressed the view that fairness required that such interference “should be effective only for a relatively short period of time” (p. 16). [ 58 ] A related case is Re T. Eaton Co. (1997), 1997 CanLII 12405 (ON SC) , 46 C.B.R. (3d) 293 (Ont. Gen. Div.). Dylex (not a creditor of T. Eaton but an operator of stores in malls where T.

Eaton was the anchor tenant) applied to amend a CCAA stay order so that it could exercise rights pursuant to its leases. Those leases permitted Dylex to alter the lease terms if T. Eaton ceased to operate in the shopping centres. Houlden J.A. denied the motion, noting that, if such rights were accorded to Dylex, there might be other tenants who would make the same claim. This would likely increase the claims of landlords against T. Eaton and seriously impact its re-structuring plan. He took account of T. Eaton’s position as a large employer and purchaser from suppliers.

At 295-96, without extensive analysis, he opined that s. 11 and the inherent jurisdiction of the Court gave him the power to make orders against non-creditor third parties when their actions would potentially prejudice the success of the plan. I acknowledge that it is not clear that his order had the effect of altering contractual rights permanently, since, depending on the outcome of the re-organization proceedings, at a future time the tenants might still be able to exercise their rights under the leases.

In this regard, the situation was akin to that in Norcen . [ 59 ] In Re Dylex Ltd. (1995), 1995 CanLII 7370 (ON SC) , 31 C.B.R. (3d) 106 (Ont. Gen. Div.), the debtor company was permitted to terminate its leases in shopping malls, as part of its restructuring program.

Farley J. viewed s. 11 as giving the court the inherent jurisdiction, in the interim between the filing and the approval of a plan, to “fill in gaps in [the] legislation so as to give effect to the objects of the CCAA, including the survival program of a debtor until it can present a plan” (p. 110). [ 60 ] To summarize, the language of s. 11(4) is very broad. The CCAA must be interpreted in a remedial fashion.

Cases support the view that third-party rights may be affected by a stay order, although there are none where the third-party rights appear to have been affected in quite the same way as those of the Appellants as a result of this order. I am satisfied, nevertheless, that the CCAA gives the chambers judge the discretion to make the impugned order. It remains to consider whether he properly exercised that discretion. 2.

Did the Chambers Judge Properly Exercise his Discretion under s. 11(4) of the CCAA ? [ 61 ] The fact that an appeal lies only with leave of an appellate court (s. 13, CCAA ) suggests that Parliament, mindful that CCAA cases often require quick decision-making, intended that most decisions be made by the supervising judge. This supports the view that those decisions should be interfered with only in clear cases. [ 62 ] A similar opinion was expressed by Macfarlane J.A. in Re Pacific National Lease Holding Corp. (1992), 1992 CanLII 427 (BC CA) , 15 C.B.R. (3d) 265 (B.C. C.A.).

In considering whether to grant leave to appeal, he observed at 272: . . . I am of the view that this court should exercise its powers sparingly when it is asked to intervene with respect to questions which arise under the C.C.A.A. The process of management which the Act has assigned to the trial court is an ongoing one. In this case a number of orders have been made. . . . Orders depend upon a careful and delicate balancing of a variety of interests and of problems.

In that context appellate proceedings may well upset the balance, and delay or frustrate the process under the C.C.A.A. [ 63 ] The Appellants point to cases where a specific issue arising under the CCAA has been sent for resolution to a forum other than the CCAA court. In each of those cases, however, it has been determined that resolution in the other forum would promote the objectives of the CCAA . In each such case, moreover, the CCAA judge has retained control over the impact of the outside determination.

[ 64 ] For example, in Re Philip’s Manufacturing Ltd. (1991), 1991 CanLII 226 (BC SC) , 9 C.B.R. (3d) 1 (B.C. S.C.), the debtor company’s landlord alleged that its leases were about to expire since the company had not given requisite notice. The judge noted that it was essential to the reorganization plan that the company be able to remain in the leased premises. He permitted the landlord to pursue proceedings under the Commercial Tenancy Act , R.S.B.C. 1979, c. 54. But that legislation contained a

summary procedure for determining the issue at hand (whether the landlord was entitled to a writ of possession). The judge, moreover, maintained some control over the process by ordering that, if an order of possession was granted, it would be stayed for as long as the CCAA stay, “to be dealt with in the context of any reorganization plan ultimately brought before the court” (para. 44). Additionally, the

summary procedure was to occur in the B.C. Supreme Court, the same court that supervised the CCAA . [ 65 ] Similarly, in Re Cadillac Fairview Inc. (1995), O.J. No. 138 (Ont. Gen. Div.) , an issue arose about the quantification of a claim affecting the debtor company. Farley J. permitted this issue to be determined by a court in Chicago, because that court undertook to resolve the matter expeditiously and in coordination with the CCAA proceedings. [ 66 ] On the other hand, in Landawn Shopping Centres Ltd. v. Harzena Holdings Ltd. (1997), 44 O.T.C. 288 (Ont. Gen.

Div.) , a plan of arrangement was already in effect when a landlord sought to proceed to arbitration with its claim against the debtor company. Instead, the court ordered that the claim be dealt with by the court under the terms of the plan of arrangement. [ 67 ] These cases compel the conclusion that a judge has the discretion under the CCAA to permit issues to be determined in another forum but is under no obligation to do so.

The proper exercise of the discretion will be very fact-dependent. [ 68 ] As noted by Gibbs J.A. in Quintette Coal , supra , at 312, the judicial exercise of discretion under s. 11 should “produce a result appropriate to the circumstances.” The power under s. 11 should be exercised in a manner to give effect to the purpose of the CCAA , and not to “seriously ... impair the ability of the debtor company to continue in business during the compromise or arrangement negotiating period.” [ 69 ] In this case, the chambers judge considered a number of matters in refusing to permit the arbitration.

Among these were his view that the arbitration would compromise the CCAA process; that the effect of his order would not be to preclude or postpone the resolution of the dispute but to expedite it; that an expedited resolution of the dispute was critical to the CCAA proceedings given its possible impact on a plan of arrangement; and that it was desirable for Smoky’s officers to focus on the re-organization. [ 70 ] These were all legitimate matters to consider. Another factor, not mentioned by the chambers judge, is that arbitration had not been commenced in this case by the time the initial CCAA order was made.

There may be reasons why the Appellants had not moved toward arbitration more rapidly. But the fact remains that several months had elapsed between the origin of the dispute under the Agreement and the CCAA petition, during which time no steps to commence arbitration were taken by the Appellants. [ 71 ] It is also important to consider the nature of and the extent to which the Appellants’ contractual rights may be compromised as a result of the order under appeal. I agree there are some potential advantages to the Appellants under arbitration.

Specifically, they would be able to play a role in selecting the decision-maker. If their

interpretation of s. 33 of the Rules and s. 23 of the B.C. Arbitration Act is correct, arguably the arbitration would limit Smoky’s ability to rely on certain arguments that might be available in a court proceeding (for example, equitable arguments such as relief from forfeiture). [ 72 ] But as the Appellants acknowledged during argument, no decision has yet been made about what rules will apply to the resolution of this dispute under the procedures to be determined by the chambers judge. It remains open to the Appellants to argue that Rule 33 and s. 23 of B.C.

Arbitration Act ought to govern the resolution of their dispute in the CCAA proceedings. The only “rights” of the Appellants that have been affected so far are that they cannot help select the decision-maker and they must participate in proceedings in the Court of Queen’s Bench of Alberta. I do not consider that the order under appeal permanently affects the substantive contractual rights of the parties. It merely affects the forum in which those contractual rights will be assessed. This is a relatively minor incursion compared to the large benefit that may result from the CCAA proceedings.

I assume that, in settling the details of the CCAA procedure, the chambers judge will take account of the Appellants’ arguments and ensure that their substantive contractual rights are protected. 3. What is the Relationship between the Discretion of the Chambers Judge under s. 11 of the CCAA and s. 15 of the B.C. Arbitration Act ?

[ 73 ] It is apparent that I have taken a different approach than the chambers judge, who focussed largely on s. 15 of the B.C. Arbitration Act . He was correct in his opinion that, under that legislation, a stay must be ordered unless one of the three disabling events exists. If a case is governed by that legislation, a court should honour the choice of the parties to go to arbitration and has very limited power to refuse a stay of competing proceedings. Kaverit Steel and Crane Ltd. v. Kone Corp. (1992), 1992 ABCA 7 (CanLII) , 87 D.L.R. (4th) 129 (Alta. C.A.); Prince George (City) v.

McElhanney Engineering Services Ltd. , 1995 CanLII 2487 (BC CA) , [1995] 9 W.W.R. 503 (B.C. C.A.). [ 74 ] He concluded that, as a result of Smoky’s insolvency, the appointment of a Monitor, and the court’s role under the CCAA , the agreement to arbitrate was “incapable of being performed”. The Appellants say this conclusion was wrong. [ 75 ] But even if the chambers judge erred in interpreting s. 15, the outcome of this case would not change. There would then be a conflict between the CCAA and a provincial statute. The Appellants do not contest the constitutional validity of the CCAA .

The authorities are clear that, in the event of a conflict with a provincial law, the CCAA must prevail. Wynden Canada Inc. v. Gaz Métropolitain Inc. (1982), 44 C.B.R. (N.S.) 285 (Que. S.C.) ; Re Pacific National Lease Holding Corp. , supra ; Pacific National Lease Holding Corp. v. Sun Life Trust Co. (1995), 1995 CanLII 2575 (BC CA) , 34 C.B.R. (3d) 4 (B.C. C.A.). Accordingly, it is not necessary to decide whether he misapplied s. 15. [ 76 ] For these reasons, I would dismiss the appeal.

APPEAL HEARD on APRIL 13 , 1999 REASONS FILED at CALGARY , Alberta, this 9th day of JUNE , 1999 ______________________________ HUNT J.A. I concur: ______________________________ PICARD J.A. I concur: ______________________________ McINTYRE J.A.