Will the Court approve the sale of an insolvent business to a related party without a sales process?OEL Projects Ltd (Re), 2020 ABQB 365 (CanLII)
1. The Debtor entered into an Asset and Share Purchase Agreement with the Purchaser and sought approval and a vesting order in respect of that transaction, pursuant to s. 65.13 of the Bankruptcy and Insolvency Act. The Proposal Trustee supported the application and recommended the transaction. The Debtor’s two secured creditors approved of the transaction.
2. The Debtor is an engineering services firm operating in Alberta and surrounding provinces in the energy sector. It has been experiencing declining revenues and operations given the downturn in the Canadian energy sector. The Debtor was projected to have negative cash flow this fiscal year without this transaction.
3. The Purchaser is a newly created subsidiary of the Debtor’s two creditors. Section 65.13 of the BIA precludes a person who is the subject of an NOI from selling or disposing of assets outside the ordinary course of business, without authorization of the Court. Section 65.13(4) sets out a non-exclusive list of factors that the Court must consider. Section 65.13(5) applies where a proposed sale or disposition is to a person who is related to the insolvent person, as is the case here.
4. Pursuant to section 65.13(5), after considering the factors that apply to all transactions under subsection (4), the Court may only grant authorization for the sale if it is satisfied that:
a. good faith efforts were made to sell or otherwise dispose of the assets to persons who are not related to the insolvent person; and
b. the consideration to be received is superior to the consideration that would be received under any other offer made in accordance with the process leading to the proposed sale or disposition.
5. The Court considered three relevant factors. First, because the Notice of Intention was only filed on May 20, 2020, the Debtor’s unsecured creditors did not yet have effective notice of the NOI, let alone the application. The Debtor and the Proposal Trustee argued that in this case, the unsecured creditors had no material interest because with or without this transaction, the accounting showed that the unsecured creditors stood to be paid nothing. Second, the proposed sale is to a related party. Third, there was no sale process, per se.
6. The Debtor argued that its Board considered a sale process and determined that it was not feasible. The Debtor’s circumstances, combined with a highly mobile clientele and workforce—both of whom could simply go elsewhere in the face of a sales process—meant that the Board did not consider a third-party sale process to be realistic. The Debtor also lacked the liquidity to fund a sale process, and would lose an estimated $600,000 during the process. The Board considered that the sale process itself would erode the value that was left in the Debtor, and there would be nothing left to sell at the end.
7. The Court approved the transaction and granted the relief sought by the Debtor. It based its decision on a few factors. First, while not all unsecured creditors had notice of the application, the largest unsecured creditors were notified and were represented by counsel. These creditors were best positioned to critique the analysis of the Debtor or the Proposal Trustee.
8. Second, the number and value of non-served unsecured claims was relatively small, so the unserved unsecured creditors were not prejudiced by the transaction. There was no scenario where the unsecured creditors would be paid, unless their debt was assumed by a purchaser.
9. Third, while the process leading up to the transaction was not as robust as is often expected, this was reasonable in the circumstances. The Board's reasoning as to why a sales process was not feasible in this case made sense, given the financial circumstances of the company, the lack of liquidity to fund the sale process, the portable nature of the employees and clients, and the circumstances in which a process would have to take place, including the very depressed price of oil.
10.Finally, the Purchaser was paying consideration at the highest end of the possible range of value that could be recovered for either the company as a going concern, or on a liquidation basis. The purchase price was significantly more than would be achieved in a liquidation. The Court was satisfied that the consideration was reasonable and fair. Moreover, the transaction was going to proceed quickly, so as to avoid further erosion of value.11. Section 65.13(5) refers to good faith efforts being made to sell, but does not actually mandate a particular sales process or any sales process at all. In most cases, “good faith efforts” would involve approaching other purchasers. However, this is not strictly required in every case. It would be absurd to suggest that making one call to a potential purchaser would bring a party's efforts into consideration under section 65.13(5), whereas coming to a reasoned conclusion that such a call would actually harm the value that could be achieved for stakeholders, would disqualify the insolvent person from even having the transaction considered under section 65.13(5).