No special treatment: Securities class action stayed by CCAA Court
Under the Companies’ Creditors Arrangement Act (CCAA), Canadian courts have broad discretion to order, extend or lift stays of proceedings. In a recent decision, the Superior Court of Québec extended an existing stay despite an attempt by the applicants in a securities class action to limit its scope.
Xebec Adsorption Inc. (Xebec) is a global provider of sustainable gas solutions used in energy, mobility, and industry applications. In March 2021, an application for authorization to institute a securities class action was filed in Québec against Xebec, underwriters and five of Xebec’s directors, on behalf of all persons and entities who purchased or otherwise acquired Xebec securities within a certain timeframe (the Class Action). A notice of action seeking the certification of a class action in Ontario based on the same allegations was also filed, but has not been served on the defendants.
On September 29, 2022, Xebec and certain subsidiaries (the Debtors) were granted protection under the CCAA and Deloitte Restructuring Inc. was appointed as monitor. The resulting Initial Order contained a stay of proceedings, pursuant to which no proceeding could be commenced or continued against the Debtors and their directors and officers (the Stay).
On October 20, 2022, at the come-back hearing in the CCAA proceedings, the Debtors sought the issuance of an Amended Restated Initial Order (the ARIO), including the extension of the Stay until November 28, 2022. The applicants in the Class Action (the Applicants), opposed the extension and sought an order excluding the Class Action from the scope of the Stay for the purposes of proceeding with an authorization hearing on the Class Action. The authorization hearing was scheduled to be heard by the Superior Court of Québec on December 6, 2022.
There is no statutory test under the CCAA to guide the Court in deciding whether to limit the scope or to lift a stay of proceedings. Generally speaking, the Court should consider whether there are sound reasons for lifting a stay consistent with the objectives of the CCAA. In order to do so, the Court will assess the relative prejudice to parties, the balance of convenience and, where relevant, the chances of success of the stayed action. Case law has further identified a number of situations in which courts may be justified to lift stay orders.
Justice Christian Immer found that there was no benefit in allowing the Class Action to move forward at this time.
The Applicants argued that it was necessary for them to attempt to be granted representative status to advance the interests of the proposed class, which could only be achieved if the Stay was partially lifted to allow the authorization hearing to take place. In particular, the Applicants argued that it would allow them to make representations regarding the fairness of an eventual plan of compromise or arrangement in relation to the equity claims that potentially could be asserted by the members of the class.
For Justice Immer, the Applicants’ argument did not constitute a sound reason to lift the Stay or to restrict its scope, nor did it demonstrate that the Applicants would suffer a significant prejudice by not being allowed to pursue the authorization, given that, at the time of the hearing, it was “highly speculative, if not unlikely, that there would be sufficient proceeds for a compromise or arrangement to generate funds to satisfy all the secured and unsecured creditors”. It was therefore also unlikely that equity claims would be paid, as they rank behind all debt claims. Accordingly, the Applicants would not be in a position to make representations on the fairness of an eventual plan of compromise or arrangement even if they had passed the authorization stage of the Class Action. The Court further noted that pursuant to section 6(1) of the CCAA, unless a court orders otherwise, class members holding equity claims may not vote on any plan of proposal or arrangement.
The Applicants also argued that Xebec would suffer no prejudice if the Stay was partially lifted, because the authorization hearing was scheduled for only a day and required no evidence. The Court disagreed, pointing out that even though the authorization hearing would proceed on the face of the record (without testimony), executives would be required to assist defence counsel in the proceedings. Moreover, the Court noted that a significant amount of procedural wrangling was expected to result from the authorization hearing.
In his reasoning, Justice Immer relied on the reasons of Justice Stephen Hamilton in Wabush, that established that a stay should only be lifted in circumstances where to do so would be consistent with the goals of the stay, and the impact of the proceedings on the CCAA process generally. Ultimately, Justice Immer concluded that at the date of the hearing, Xebec’s efforts would be better served by focusing on the restructuring process than on litigating the Class Action. This was also consistent with the objectives of the CCAA. There was no benefit to be gained from allowing the Class Action to move forward for authorization. The Court granted the extension of the Stay, along with the ARIO and dismissed the Applicants’ objection.
Class action proceedings do not differ from other types of litigation when it comes to limiting the scope or lifting stays of proceedings pursuant to the CCAA. The courts will generally consider whether there are sound reasons to do so consistent with the objectives of the CCAA. The outcome will depend in large part on the facts of the case, including any practical impact of the litigation on the ongoing restructuring process.
Osler acted as counsel for the Debtors in this matter.
 Lloyd W Houlden, Geoffrey B Morawetz & Dr Janis P Sarra, Bankruptcy and Insolvency Law of Canada, 4th ed (Toronto: Carswell, 2009) (Electronic Loose-Leaf) at para 22.30.
 There are nine situations in which courts may be justified to lift stay orders. See Wabush, supra note 5, at para 30; Canwest, supra note 5, at para 33.
 Section 2(1) of the CCAA defines an equity claim as a “claim that is in respect of an equity interest, including a claim for, among others, (a) a dividend or similar payment, (b) a return of capital, (c) a redemption or retraction obligation, (d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or (e) contribution or indemnity in respect of a claim referred to in any of paragraphs (a) to (d)”.
 Pursuant to section 6(8) of the CCAA, which provides that “no compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the court unless it provides that all claims that are not equity claims are to be paid in full before the equity claim is to be paid”.
 Wabush, supra note 5, at paras 28, 35.