In the world of CCAA, it’s very unusual for a court-appointed monitor to bring an oppression action against the company’s former owner.
It’s also unusual for the court to rule in favour of the monitor, especially without hearing testimony from the executives themselves.
But that’s the state of play at Algoma Steel, a company based in Ste. Sault Marie and which has been either in restructuring or in CCAA four times over the past 25 years.
In 2007, Essar Global, an Indian-based company, acquired Algoma and renamed it Essar Steel Algoma.
But it lost that ownership when Algoma, after experiencing financial pressures in 2014, filed for protection in November 2015. Two U.S. firms, Golden Tree and Bain Capital, are the largest secured creditors to Algoma. They also provided US$210 million via a DIP term loan.
This week Justice Frank Newbould of the Ontario Superior Court of Justice, ruled in favor of Ernst & Young (the monitor, which was appointed in November 2015 and launched the oppression action last September) and the company’s creditors.
Judge Newbould ruled against Essar Global “in relation to a number of related party transactions including the transactions involving the conveyance of Algoma’s Port facility assets to Portco,” a company controlled by Essar Global — but formed before Essar Algoma filed for CCAA.
The conveyance would provide Essar Global with an income stream under a cargo handling agreement that was to run for 20 years.
Prior to this conveyance the port and the steel mill were all part of Essar Steel Algoma. “Algoma could not function economically without unfettered access to the Port,” wrote Justice Newbould.
But the cargo handling agreement contained a “change of control clause that requires Portco’s consent to a change of control of Algoma.” That clause didn’t sit well with the monitor who argued it gave Essar Global, Portco’s ultimate parent “a veto over any party acquiring Algoma in the CCAA process and that it is negatively affecting the sales process,” writes Justice Newbould, adding the “monitor says that this clause in itself constitutes oppression.”
In his ruling, Justice Newbould determined Essar Global “carried out the recapitalization and port transaction negotiations and made the critical decisions.” As for Essar Steel Algoma management, he argued that it was “handed the economic terms … and implemented them from an operational perspective.”
Because of that determination, the monitor argued — and Justice Newbould agreed — the “sale” of the port’s assets didn’t meet the “reasonable expectations” test held by Algoma’s creditors.
The reasonable expectations of trade creditors, employees, pensioners and retirees, “were that Algoma would not deal its core assets … in such a way as it would lose long-term control and value over those assets to a related party, on terms that permitted the related party to veto or thwart Algoma’s ability to do significant transactions or restructure, as was done in this case.”
Justice Newbould has some strong language against Essar. “I find this an astonishing argument,” he said in one section in response to an argument by the defendants that Algoma’s creditors “ought” to have taken steps to protect themselves from related-party transactions or the disposition of assets.
He also argued that had Essar Global not breached its equity commitment to invest $250 million to $300 million into Algoma, the Port transaction would not have been necessary.