On May 8, 2020, the Supreme Court of Canada released its reasons in 9354-9186 Quebec Inc. v. Callidus Capital Corporation . The Supreme Court unanimously overturned the Quebec Court of Appeal and reinstated the Superior Court’s decision confirming that a debtor under the Companies’ Creditors Arrangement Act (“CCAA”) does not require creditor approval for a third-party financing agreement. This decision marks the first time the Supreme Court has addressed litigation funding.
Bluberi, a company which developed video games, became insolvent and tried to fund a $200-million lawsuit against its secured creditor, Callidus Capital Corporation (“Callidus”). Bluberi had been under CCAA protection since 2015. As part of its restructuring efforts, Bluberi sought to assert a claim against Callidus alleging that Callidus’ wrongful conduct caused its liquidity issues and eventual insolvency. The claim was Bluberi’s only potential source of recovery for its creditors.
Because Bluberi lacked the funds to advance the claim, it entered into a litigation funding agreement with Bentham IMF in January 2018. In response, Callidus filed a motion to call a creditors’ meeting to approve its own plan of arrangement.
In March 2018, the Quebec Superior Court judge accepted Bluberi’s funding agreement. The Superior Court noted that the agreement allowed Bluberi to gain access to justice and that Callidus’ plan could result in substantial injustice for the debtor. The Superior Court also found that Callidus’ motion had an improper purpose since it was seeking to shield itself from litigation.
In February 2019, the Quebec Court of Appeal unanimously disagreed with the Superior Court by holding that the funding agreement required a vote by Bluberi’s creditors. The appeal court reasoned that equity should not be used to exclude CCAA voting rights and that reliance on improper purpose was not based in statutory discretion.
In January 2020, the Supreme Court of Canada decided from the bench that the Superior Court’s ruling should stand, with reasons to follow. Those reasons were released on May 8, 2020.
The Supreme Court found that the Court of Appeal did not afford the appropriate deference to the Superior Court’s factual findings. Based on section 11 of the CCAA, the Superior Court can also exercise broad statutory discretion to make orders furthering remedial objectives.
The Supreme Court additionally held that litigation funding qualifies as interim financing under section 11 of the CCAA. Litigation funding serves the two main purposes of the CCAA, which are to keep companies in business and to maximize creditor recovery. Since the litigation claim was the sole asset that could be monetized for the benefit of creditors, the Supreme Court held that the funding agreement should be permitted.
In light of this decision, debtors and creditors may more frequently turn to litigation funding. Third-party financing may be pursued out of necessity or to accelerate recoveries and reduce risk. Supervising judges ultimately have considerable discretion to determine whether litigation funding should be approved to advance the CCAA’s objectives in particular cases. The decision is also timely given the likely wave of insolvency filings by companies affected by the COVID-19 crisis.