Since the seminal decision of the Ontario Court of Appeal in Metcalfe & Mansfield Alternative Investment II Corp. (“Metcalfe”) in 2008, third party releases have been part of the restructuring landscape. Metcalfe involved the asset back commercial paper crisis that resulted from the financial crisis of 2007-2009. A plan of compromise or arrangement under the Companies’ Creditors Arrangement Act (“CCAA”) was put to creditors that involved a release of creditor claims against the debtors and also against certain non-filing third parties. The plan was approved by the requisite number of creditors but opponents challenged the jurisdiction of the courts to approve such a plan at the court sanction stage. The case made its way to the Court of Appeal where the Court sanctioned the plan and confirmed that Canadian courts had the jurisdiction to approve CCAA plans that included third party releases. The basic principle underlying third party releases is that there must be a reasonable connection between the claims against the third parties being released or compromised in the plan and the restructuring to be achieved by the plan in order to warrant a third party release.
Most recently, in the restructuring (an orderly wind-down, actually) of Target Canada Co. (“Target”), a plan was brought forward for sanction by the court after creditor approval that included third party releases. The plan, which was in fact a second plan — the first plan having been rejected by the court a year earlier — included releases in favor of third parties, one of which was Target’s U.S. parent. In considering whether to sanction the plan, the Court took the opportunity to review the criteria to consider when deciding whether to sanction a plan that includes third party releases. Having reviewed the case law since Metcalfe and the particular facts of the case, Regional Senior Justice Morawetz set out the factors to be considered by the court, including:
i) whether the parties to be released from claims were necessary and essential to the restructuring of the debtor;
ii) whether the claims to be released were rationally connected to the purpose of the plan and necessary for it;
iii) whether the plan could succeed with the releases;
iv) whether the parties to be released were contributing to the plan;
v) whether the release benefited the debtors as well as the creditors generally;
vi) whether the creditors voting on the plan had knowledge of the nature and effect of the releases; and
vii) whether the releases were fair and reasonable and not overly broad.
Having found the factors present, Morawetz RSJ approved the plan.
For practitioners, the case represents a timely reminder of the factors that debtor(s) must consider and account for where developing a viable CCAA plan that included releases of claims against third parties.