Firm News Alert

January 2021

Disengaging Assets subject to a CCAA Proceeding

Case Study: Teliphone Corp. v. Ernst & Young Inc.1

Howard Borlack
Howard Borlack,
Partner

Adam Ostermeier
Adam Ostermeier,
Articling Student

by Howard Borlack and Adam Ostermeier

This 2019 decision of the British Columbia Court of Appeal was the third in a trio of appeals regarding the topic of disengaging assets owned by insolvent entities subject to a Companies' Creditors Arrangement Act (“CCAA”) proceeding from assets owned by other affiliated entities that were not insolvent. It serves as a thorough example of detailing standards of review upon appeal, and the relatively high bar the courts have for reasons presented by a court-appointed Monitor to be deemed inadequate upon appellate review.

Facts

Ernst and Young served as the court-appointed Monitor of the petitioners. They pursued two parallel goals; to restructure all related entities and to solicit offers to purchase the assets of the petitioners. Teliphone Corp., along with several other appellants, were a group of solvent affiliated entities to the petitioners that claimed they were not subject to the proceedings and thus could not be subjected to Ernst and Young's monitoring powers. The appellants, along with the insolvent petitioners, shared business operations, senior management and accounting records through operations as a single company, which has been referred to as TNW Group. Under the umbrella of TNW Group is a company called TNW Networks Corp., who owned an array of different assets which the Monitor was entitled to sell.

After an initial effort at restructuring that failed to be successful, the Monitor turned its attention to the sale of assets. Ernst and Young was permitted to sell assets belonging to TNW Networks as the company had assigned to the Monitor “all of the assets of TNW Networks that are used in or necessary for the business of the Petitioners, as determined by the Monitor...” This assignment, dated March 21, 2017, included all customer agreements and material supplier contracts without limitation.

... the order acknowledged the difficulty of segregating these assets completely...

TNW Networks made claims that some of these assets were not subject to sale by the Monitor. Eventually, this became the subject of a court order, on April 6, 2017, which stated that Ernst and Young were to investigate the affairs and assets of TWN Networks and locate the property they were allowed to sell. The order specifically stated that the Monitor was prohibited from selling property that was not derived directly or indirectly from the property of the Petitioners, their subsidiaries, or any other entities subject to the Applicants security. It is noteworthy that the order acknowledged the difficulty of segregating these assets completely and as such created significant hurdles for a party to show that an asset should be excluded from sale. This culminated in July 2017, when the Monitor applied for an order approving the sale of assets of a Canadian numbered company known as Distributel where there were disagreements over the ownership of assets of the business.

What arises from this order of the B.C.S.C. is an extensive case history. Several of the appellant companies first delivered proofs of claim to Ernst and Young that were shortly rejected. This rejection was appealed back to the B.C.S.C. which upheld the Monitor's decision. That decision was then granted leave for appeal to the B.C.C.A. who allowed the appeal on the grounds of an improper standard of review in the lower court matter and remitted the matter back to the B.C.S.C. with directions. The B.C.S.C. again upheld the Monitor's decision following this, resulting in the subsequent appeal that is the basis of this case.

Discussion

On this third appeal, Teliphone, raised three arguments:

  • The judge did not apply the proper standard of review to the Monitor's Decisions

First, Teliphone claimed that the lower court judge was still incorrect to apply the standard of review of palpable and overriding error. This was primarily because Teliphone claimed that there were extricable questions of law intertwined in various matters that were deemed mixed questions of law and fact that should have had the correctness standard of review applied. The court upheld the lower court ruling that the Monitor made no reviewable error of law as on prior appeals the former judge had found no extricable errors of law or any palpable and overriding errors of fact or law.

  • The judge did not decide the questions of law that were raised by Teliphone, correctly or at all. In this regard, Teliphone submits that it identified five questions of mixed fact and law, containing extricable questions of law, in the Monitor's Decisions, and the judge did not properly determine these issues;

...it is not an error for judges to utilize excerpts from party submissions in a judgement.

Next Teliphone complained that the lower court judge failed to provide sufficient reasons, relying too heavily on excerpts of the submissions. The court held in response to this that reasons not being clear enough was not a valid grounds for appeal and that it is not an error for judges to utilize excerpts from party submissions in a judgement. Notably, in the court's decision, the fact that the trial judge's ruling in Chamber Reasons No. 2 was a reconsideration that was meant to be read with his Chamber Reasons No. 1, and the extensive familiarity the judge had with the matter, carrying it for almost two years, was deemed evidence that the trial judge directed his mind to all of the issues independently.

  • The judge's reasons are inadequate for appellate review.

This issue took up the majority of the court's analysis. In the prior trial court ruling, Teliphone pointed to five key alleged appealable errors that they claim the Monitor made in its decisions. These included;

  1. Whether a particular company was a subsidiary of the Petitioners on January 1, 2016, is to be determined by the Boale Wood Chart;
  2.  In January of 2013, Teliphone Corp. transferred all of its assets to the Petitioners;
  3. The purchaser paid for various assets, and for all servicing costs from its bank account, and therefore for purposes of the Derivation Analysis, those assets were derived from the assets of the Petitioners;
  4. The “Legacy Companies” had no assets at all, having, at some time in some fashion, transferred all their assets to the Petitioners; and
  5. Teliphone Corp., and various others, are subject to security in favour of the creditors of the Petitioners,

...the burden of proof was on the appellants...

On all of these matters, Teliphone claimed that the reasons provided were inappropriate for appellate review. However, the court found that the reasons provided were sufficient, stating that none of the five appealable issues was of merit. On all of these issues, it was alleged that there were overriding errors of law or fact and that either the Monitor or the lower court judge did not provide sufficient reasons to support their findings. The court systematically went through the various complaints presented and demonstrated that reasons had been provided in the Monitor's reports that would not amount to the standard of palpable and overriding error in questions of fact. This is primarily because the court found no evidence that the Monitor's failure to explicitly address every piece of evidence provided in their reports exhibited a failure to consider that evidence. The court went on further to state that the burden of proof was on the appellants to establish that specific assets were not included under the umbrella of saleable assets available to the Monitor. They failed to meet that burden in their attempts to suggest specific documentation was not considered in the Monitor's decisions.

It is worth noting as well that the claiming parties also advanced several claims beyond Teliphone's position. These included that the Monitor:

  • relied on new arguments with no notice,
  • asserted that there was no evidence when there was,
  • took contradictory positions that amounted to an abuse of process, and
  • failed to give adequate reasons.

The court addressed each of these arguments and dismissed them.

Conclusion

It was found that the Appellants failed to advance any grounds for appeal with merit and the appeal was dismissed with costs. The matter was then presented to the Supreme Court who denied the appeal. Ultimately, the BC courts have illustrated in this matter that reasons provided need not be exhaustive to be sufficient.

Read the full decision.


  1. Teliphone Corp. v. Ernst & Young Inc. 2019 BCCA 473 (39082)

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