Representing an Unusual and Rare Motion

One of the greatest advantages of corporations as a vehicle for developing capital in society is that they usually transcend the lifetime of any particular founding individual. Corporations do not necessarily live forever though, and the winding up or bankruptcy of a company can give rise to some complexities around the division of assets.

The Companies’ Creditors Arrangement Act (CCAA) was first enacted in 1933 during an economic depression, and found to be constitutionally valid in a 1934 reference. Its purpose was described by the British Columbia Court of Appeal in Chef Ready Foods Ltd. v. Hongkong Bank of Canada as follows,

When a company became insolvent liquidation followed because that was the consequence of the only insolvency legislation which then existed – the Bankruptcy Act and the Winding-Up Act. Almost inevitably liquidation destroyed the shareholders’ investment, yielded little by way of recovery to the creditors, and exacerbated the social evil of devastating levels of unemployment. The government of the day sought, through the C.C.A.A., to create a regime whereby the principals of the company and the creditors could be brought together under the supervision of the court to attempt a reorganization or compromise or arrangement under which the company could continue in business.

Citing a 1947 article in the Canadian Bar Review, the court explained that the purpose of the Act was to keep a company going despite insolvency. Larger companies may have greater difficulty in finding a buyer willing and able to purchase the entire enterprise, and without the possibility for reorganization, the sale of property in a disparate fashion would fail to meet the needs of both creditors and shareholders.

The Supreme Court of Canada, referencing this same 1947 article, revisited the purposes of the CCAA in the 2010 decision, Century Services Inc. v. Canada (Attorney General), the first time the Court had interpreted the provisions of the Act.

The majority reconciled an apparent conflict between the CCAA and other statutes, based on its flexible and remedial purpose of avoiding the social and economic costs of liquidating a debtor’s asset, especially with complex organizations. To achieve these goals, courts require broad discretionary powers,

[58] CCAA decisions are often based on discretionary grants of jurisdiction. The incremental exercise of judicial discretion in commercial courts under conditions one practitioner aptly describes as “the hothouse of real-time litigation” has been the primary method by which the CCAA has been adapted and has evolved to meet contemporary business and social needs (see Jones, at p. 484).

[61] When large companies encounter difficulty, reorganizations become increasingly complex. CCAA courts have been called upon to innovate accordingly in exercising their jurisdiction beyond merely staying proceedings against the debtor to allow breathing room for reorganization. They have been asked to sanction measures for which there is no explicit authority in the CCAA

[71] It is well established that efforts to reorganize under the CCAA can be terminated and the stay of proceedings against the debtor lifted if the reorganization is “doomed to failure” (see Chef Ready, at p. 88; Philip’s Manufacturing Ltd., Re (1992), 1992 CanLII 2174 (BC CA)9 C.B.R. (3d) 25 (B.C.C.A.), at paras. 6-7). However, when an order is sought that does realistically advance the CCAA’s purposes, the ability to make it is within the discretion of a CCAA court.

One of the ways that these discretionary powers are exerted under the CCAA is through representation orders under s. 11. These orders are often sought when vulnerable creditors have little or no means to pursue complex CCAA proceedings, there is a social benefit from such orders, and that an order of this nature introduces some efficiency for all parties.

In Canwest Publishing Inc., the Ontario Superior Court of Justice discussed some of the factors that have been identified in obtaining a representation order:

– the vulnerability and resources of the group sought to be represented;

– any benefit to the companies under CCAA protection;

– any social benefit to be derived from representation of the group;

– the facilitation of the administration of the proceedings and efficiency;

– the avoidance of a multiplicity of legal retainers;

– the balance of convenience and whether it is fair and just including to the creditors of the Estate;

– whether representative counsel has already been appointed for those who have similar interests to the group seeking representation and who is also prepared to act for the group seeking the order; and

– the position of other stakeholders and the Monitor.

In Ontario, Rule 10.01 of the Rules of Civil Procedure allows the court to appoint representative counsel, where persons with an interest in an estate cannot be readily ascertained, found or served.

There are enumerated circumstances in this rule as to when the court may make such an order, but there remains residual discretion where it “appears necessary or desirable” to do so. Occasionally, these orders can arise in some unexpected or unusual circumstances, outside of the Commercial List. 

Internet security and data breaches have become an area of concern for all business sectors these days. In part, it’s because of the impact of the largest discovered data breach in the history of the Internet, involving Yahoo!.

The Internet service company disclosed the existence of two separate data breaches in 2016, involving the account information of 500 million users in 2014, and the account information of over one billion users in August 2013.

An estimated 5 million people in Canada were affected by these privacy breaches. In response to these incidents, a proposed class action for breach of privacy was launched that same year.

In 2017, the successor company to Yahoo, Altaba, sold up to 50 per cent of the liabilities of the company to Verizon Communications Inc., retaining the remainder for exposure related to the privacy breaches. In 2019, this successor company itself started to wind up, while setting aside some money for these liabilities.

The proposed class counsel were able to agree to a holdback in relation to the damages for the privacy breaches. Given a 2015 decision by the Quebec Court of Appeal, denying authorization to institute a class action on similar facts on the basis that the representative plaintiff failed to demonstrate a prima facie case for the existence of tangible injury and recoverable damage, this agreement would appear to be prudent.

In order to enter into this agreement though, they would need a representation order. Although this would be a rare form of relief under the Class Proceedings Act, 1992, the Act allows under s. 12 for the court to make orders it considers appropriate to a fair and expeditious determination. To court provided this explanation on this recent motion, in Karasik v. Yahoo! Inc.,

[13] In the circumstances of the immediate case, a holdback, which would, in effect, provide security for the creditors’ claims, is obviously in the best interests of the putative Class Members. They all share a similar interest in achieving a fair holdback amount…

[14] Without a representation order, each creditor of Altaba resident in Canada would arguably be required to make an individual claim against Altaba in the proceedings in the State of Delaware. Given the large size of the putative Class, it is not practical for each putative class member to file a claim.

[15] If the class action proceeds to trial and a judgment is awarded, there may be no means to enforce the judgment against Altaba, absent a holdback. Therefore, a representation order is required to protect the interest of the proposed class members.

Citing some of the similar factors used under the CCAA, Justice Perell concluded that granting a representative order, despite being “an unusual and rare motion for a proposed class action,” was warranted in the circumstances.

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