Alberta Courts Confirm Restructuring Transactions With Select Creditors Not Oppressive And Comment On Availability Of The Oppression Remedy In CCAA Proceedings

In Re Lightstream Resources Ltd, 2016 ABQB 665 (Lightstream), the Court of Queen's Bench of Alberta (Court) confirmed that it had jurisdiction to remedy oppressive conduct while a business is restructuring under the Companies' Creditors Arrangement Act (CCAA). The decision also provides insight as to when a court might exercise its equitable jurisdiction to remedy oppressive conduct in a CCAA proceeding.

Background Lightstream arose when the two largest unsecured noteholders of Lightstream Resources Ltd. (Lightstream), Apollo Global Management LP (Apollo) and GSO Capital Partners (GSO), completed a transaction (the Transaction) with Lightstream, exchanging their unsecured notes for secured notes. The Transaction excluded two smaller unsecured noteholders, Mudrick Capital Management (Mudrick) and FrontFour Capital Corp. (FrontFour and with Mudrick, together, the Applicants), who argued that their exclusion from the Transaction was oppressive. The Applicants had previously indicated to Lightstream of a desire to participate in a note exchange if one was undertaken. Lightstream reciprocally expressed interest in the Applicants' participation if a note exchange went ahead. Ultimately, however, The Transaction only included Apollo and GSO.

The Alberta Court of Queen's Bench confirmed that it had jurisdiction to remedy oppression by the debtor in a CCAA proceeding. In this instance, the Court deferred to the business judgment of Lightstream's management and found the requested remedy was not appropriate in the circumstances. In the subsequent leave to appeal application, the Alberta Court of Appeal denied leave (2016 ABCA 401), finding that the Applicants' position was bound to fail. Both decisions illustrate that a Court has wide jurisdiction to award remedies in CCAA proceedings, and that the CCAA exists to permit arrangements with creditors as quickly as possible, which affords debtors flexibility to arrange their affairs.

The Transaction Lightstream is engaged in the upstream energy industry and ran into financial difficulty during the recent commodity price downturn. Apollo and GSO together held $465 million of Lightstream's $800 Million in unsecured notes, while FrontFour and Mudrick held $32.2 million and $31.75 million, respectively.

Through 2014 and early 2015, the Applicants, GSO and Apollo all approached Lightstream about restructuring the unsecured notes. In early 2015, the Applicants discussed the possibility of a note exchange transaction with Lightstream. They were told that Lightstream had capacity to carry additional secured debt, but because it had sufficient liquidity and did not need to restructure its balance sheet, a note exchange was not being considered. Lightstream subsequently considered a number of alternative debt structures, including a note exchange. Lightstream management did consider the possibility that an exchange transaction might need to be tendered to all the unsecured noteholders as a matter of fairness.

In May 2015, Lightstream retained the Royal Bank of Canada (RBC), who advised that Lightstream would need additional liquidity in 2016 to address a liquidity shortfall in 2017. Apollo and GSO provided Lightstream with term sheets for a note exchange, on the condition that the note exchange was for Apollo and GSO only, and not for other noteholders. FrontFour became aware on May 19th that Lightstream was in talks with other creditors. Lightstream subsequently reassured FrontFour and Mudrick that: (i) it had been receiving more reasonable financing offers; (ii) no debt exchange was currently contemplated; and (iii) if an exchange was contemplated, the possibility would be offered to all holders of unsecured notes. Lightstream, Apollo and GSO subsequently exchanged $465 million of unsecured notes for $395 million of secured, second lien notes, and Lightstream issued an additional $200 million of secured notes. The Transaction was completed on July 2.

The Queen's Bench Application The...