Executive Summary: Key Legal and Evidentiary Issues

• HCorp’s constructive trust claim was treated as a transferred liability and thus extinguished under the approved CCAA transaction.

• The court found HCorp failed to establish its fraud-based claim on a balance of probabilities, as required to alter the transaction structure.

• The stalking horse bid and Reverse Vesting Order (RVO) were approved as the only viable option to preserve Long Run’s operations and maximize value for stakeholders.

• HCorp objected not to the transaction itself, but to the categorization of its claim, seeking designation as a retained liability.

• The CCAA justice concluded that the equities favored the transaction in its current form and that unproven fraud claims should not disrupt CCAA proceedings.

• The Alberta Court of Appeal dismissed the application for leave to appeal, finding no legal error or merit in the issues raised.

Facts of the case

Henenghaixin Corp. (HCorp) sought leave to appeal a decision made in a Companies’ Creditors Arrangement Act (CCAA) proceeding involving Long Run Exploration Ltd. (Long Run). The restructuring involved the approval of a stalking horse bid, a subscription agreement, and a Reverse Vesting Order (RVO), enabling Long Run to operate under new ownership with only select liabilities retained. All other liabilities would be transferred and have recourse only against a creditor trust, which was not expected to yield any recovery.

HCorp’s claim, categorized as a transferred liability, arose from a lawsuit it commenced in 2020. The lawsuit alleged that certain individuals induced the improper transfer of HCorp’s funds to Long Run or its parent company, Calgary Sinoenergy Investment Corp., through fraud or misrepresentation. HCorp asserted a claim to a proprietary constructive trust and requested the transaction be amended to classify its claim as a retained liability to preserve its adjudication.

The CCAA justice denied this request, approving the transaction as proposed. The Monitor, FTI Consulting Canada Inc., supported the transaction, asserting it provided better outcomes than bankruptcy and was necessary due to the regulated nature of Long Run’s business. The stalking horse bid was the only qualified offer and the only means of preserving Long Run as a going concern.

Policy terms and legal standards applied

The court, relying on Century Services Inc v Canada (Attorney General) and Harte Gold Corp (Re), emphasized the need for decisions to further the purposes of the CCAA and be guided by considerations of appropriateness, good faith, and due diligence. HCorp’s objection focused on the treatment of its claim, not the transaction itself. The court held that a mere assertion of a constructive trust was insufficient to alter a CCAA process and that a threshold assessment on the merits was required.

Relying on Montreal (City) v Deloitte Restructuring Inc and Laurentian University of Sudbury, the CCAA justice determined that the appropriate standard was the balance of probabilities. He found that HCorp’s evidence did not meet this standard and thus concluded that the claim did not warrant different treatment in the transaction. The justice further noted that the purchaser would not proceed with a modified deal and that the equities favored approval without amendment.

Outcome of the appellate decision

HCorp sought leave to appeal under section 13 of the CCAA, arguing that the justice improperly ruled on the merits of its claim, applied the wrong legal test, and misapprehended the evidence. Justice Jo'Anne Strekaf of the Alberta Court of Appeal rejected these arguments, stating that the CCAA justice was entitled to assess the merits with the parties' consent and that the standard applied was in accordance with precedent.

The Court of Appeal held that no novel legal issue was raised, and that the proposed appeal lacked merit. It also found no error in the CCAA justice’s evidentiary assessment or legal reasoning. Furthermore, the court emphasized the potential harm of delay, noting that the purchaser would not proceed with a different transaction and that HCorp had not sought a stay of the CCAA order.

Conclusion

The application for leave to appeal was dismissed. The Alberta Court of Appeal upheld the lower court's findings, affirming that the restructuring transaction was lawfully approved and that HCorp’s claim did not justify altering its terms. The decision reinforced that in CCAA proceedings, creditors asserting equitable claims must meet a high evidentiary threshold to influence the outcome.