Disengaging Assets Subject To A CCAA Proceeding

• Published date: 20 January 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Court Procedure, Trials & Appeals & Compensation
• Law Firm: McCague Borlack LLP
• Author: Mr Howard Borlack and Adam Ostermeier

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

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.

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...