SCHEDULE "A" Applicants

Court File No. CV-09-7966-00CL

ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENTACT, R.S.C. 1985, C.C-36, AS AMENDED

AND IN THE MATTER OF THE BANKRUPTCYAND ZNSOLVENCYACT, R.S.C. 1985, C.B-3, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF SMURFIT-STONE CONTAINER CANADA INC. AND THE OTHER APPLICANTS LISTED ON SCHEDULE "A" Applicants

BRIEF OF AUTHORITIES OF THE MOVING PARTIES (returnable October 7,2009)

McCarthy Tktrault LLP Suite 5300, Toronto Dominion Bank Tower Toronto ON M5K 1E6

Kevin McElcheran LSUC# 221 19H Tel: (416) 601-7730 Fax: (416) 868-0673

Malcolm M. Mercer LSUC# 23812W Tel: (416) 601-7659 Fax: (416) 868-0673

Heather L. Meredith LSUC# 48354R Tel: (416) 601-8342 Fax: (416) 868-0673

Lawyers for the Moving Parties, Aurelius Capital Management, LP and Columbus Hill Capital Management, L.P. -2-

TO: THE ATTACHED SERVICE LIST

INDEX -3-

INDEX

TAB

Peoples Department Stores Inc. (Trustee of) v. Wise

Re United Used Auto & Truck Parts Ltd. (1999)

Re Fraser Papers Inc. and Affidavit of J. Peter Gordon, sworn June 17,2009 in support of the Fraser Papers Inc. CCAA Application

R. v. Neil

Strother v. 3464920 Canada Inc.

MacDonaId Estate v. Martin

Rule 2.04(2)

File No. LCN20109

File No. LCN21109

Canadian Aero Service Ltd v. 07Malleyet al.

Gardner v. Parker

Charterbridge Corporation

Scottish Co-Operative Wholesale Society Ltd. v. Meyer et al.

Cranewood v. Norisawa

Siscoe & Savoie v. Royal Bank (1995)

Jackpine Forest Products (Ruling No. 1)

Re. Pine Valley Mining Corp. Re. Laidlaw Inc. (2002)

Re. Stokes Building Supplies Ltd (1992)

Re. Keddy Motor Inns Ltd. (1992)

Re. T. Eaton Co. (1999)

Re. Cadillac Fairview Inc.

ATB Financial v. Metcalfe & Mansfeld Alternative Investments 11 Corp. (2008)

Re Irma Co-Operative Company

Re. Inducon Development Corp. (1991)

Re. Stelco Inc.

Bargain Harold's Discount Ltd. v. Paribas Bank of Canada (1992)

TAB 1 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [2004] 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

2004 CarswellQue 2862

People's Department Stores Ltd. (1992) Inc., Re In the Matter of the Bankruptcy of Peoples Department Stores Inc./Magasins a rayons Peoples inc. Caron Bdanger Ernst & Young Inc., in its capacity as Trustee to the bankruptcy of Peoples Department Stores 1nc.lMagasins a rayons Peoples inc. (Appellant) v. Lionel Wise, Ralph Wise and Harold Wise (Respondents) and Chubb Insurance Company of CanadalCompagnie d'assurance Chubh du Canada (Respondent) Supreme Court of Canada Iacobucci,[FN*] Major, Bastarache, Binnie, LeBel, Deschamps, Fish JJ. Heard: May 11,2004 Judgment: October 29,2004 Docket: 29682

Proceedings: affirming People's Department Stores Ltd. (1992) Inc., Re (2003), 2003 CarswellQue 145, (sub nom. Peoples Department Stores Znc. (Trustees 08 v. Wise) 224 D.L.R. (4th) 509, [2003] R.J.Q. 796, 41 C.B.R. (4th) 225 (Que. C.A.); reversing People's Department Stores Ltd. (1992) Inc., Re (1998), (sub nom. Peoples De- partment Stores Inc./Magasin 6 rayons Peoples inc. (Syndic de)) [I9991 R.R.A. 178, 1998 Car!;wellQue 3442, 23 C.B.R. (4th) 200 (Que. S.C.)

Counsel: Gerald F. Kandestin, Gordon Kugler, Gordon Levine for Appellant

~ricLalanne, Martin TCtreanlt for Respondents, Lionel Wise, Ralph Wise, Harold Wise

Ian Rose, Odette Jobin-Laberge for Respondent, Chubb Insurance Company of Canada

Subject: Corporate and Commercial; Insolvency; Income Tax (Federal)

Business associations --- Specific corporate organization matters -- Directors and officers -- Fiduciary duties -- General principles

Even though directors implemented new inventory procurement policy that played part in corporation's hank- ruptcy, directors did not breach fiduciary duty under s. 122(l)(a) of Canada Business Corporations Act, which duty is not owed to creditors, in view of lack of personal interest or illegal purpose of new policy and directors' desire to make corporation better business -- Duty of care under s. 122(l)(h) of Act can be owed to creditors by way of art. 1457 of Civil Code of QuChec, but in case at bar evidence established directors had not breached duty of care towards corporation's creditors because implementation of new policy was reasonable business decision made in order to remedy serious and pressing commercial problem -- Several other factors contributed in more direct manner to corporation's bankruptcy.

Bankruptcy and insolvency --- Avoidance of transactions prior to bankruptcy -- Fraudulent and illegal transactions -- Reviewable transactions under Act

Test for detennining whether difference in consideration is "conspicuously greater or less" is whether difference is conspicuous to court having regard to all relevant factors, such as percentage difference -- Disparity slightly over 6 per cent between fair market value and consideration received by bankrupt corporation did not constitute conspicuous difference within meaning of s. 100(2) of Bankruptcy and Insolvency Act.

Associations d'affaires --- Questions specifiques relatives B I'organisation de la sociitt -- Administrateurs et dirigeants -- Obligations fiduciaires -- Principes gtntraux

En instaurant une nouvelle politique d'approvisionnement ayant joue un r81e dans la faillite d'une socitti, les administrateurs de celle-ci n'ont pas manque B leur obligation fidnciaire en vertu de l'art. 122(l)a) de la Loi canadienne sur les sociktts par actions, obligation qui ne vise pas les crtanciers, vu I'absence d'un intitst personnel ou d'une fin illkgitime dans cette nouvelle politique et vu leur volonte de faire de la sociktt une ~neilleureentre- prise -- Obligation de diligence de l'art. 122(l)b) de la Loi peut viser les crtanciers par le hiais de I'art. 1457 du Code civil du Quibec, mais, en I'espice, la preuve dkmontrait que les administrateurs n'avaienc pas manque a leur obligation de diligence envers les crtanciers de la sociCtC puisque I'instauration de la nouvelle politique constituait une dCcision d'affaires raisonnable prise dans le but de remtdier B un prohlkme commercial grave et urgent -- Plusieurs autres facteurs avaient contribut de faron plus directe B la faillite de la societe.

Faillite et insolvabilitC --- Annulation de transactions antCrieures B la faillite -- Transactions frauduleuses et illegales -- Transactions revisables en vertu de la Loi

Critkre applicable pour dCterminer si la difffrence entre la contrepartie et sa juste valeur marchande est

(( mauifestement suphieure ou inferieure )) est celui de savoir si la difftrence est manifeste pour le tribunal eu egard a tous 1es facteurs pertinents, le pourcentage de diffirence Ctant un tel facteur -- Ecart d'un peu plus de 6 pour cent entre la juste valeur du marchi et la contrepartie rerue par la socittk en faillite ne constituait pas une difference manifeste au sens de I'art. 100(2) de la Loi sur la faillite et I'insolvabilitt.

Three brothers were directors of W Inc., a chain of stores. W Inc. purchased from M & S Inc. its chain of stores, P. Prior to the purchase, P had annual losses of about $10 million. W Inc. guaranteed solldarily the purchase in favour of M & S Inc. and paid about a sixth of the purchase price. To guarantee the balance, M & S Inc. included security measures and restrictive clauses in the contract of sale: W Inc. bad to maintain strict financial ratios and P could not provide any financial assistance to W Inc. P became P Inc. after being merged with the W Inc. subsidiary that had bought it.

To solve the logistic and administrative problems that had followed the extension of W Inc.'s accounting sys- tems to P Inc., the brothers implemented a domestic inventory procurement policy for both corporations, which became effective on February 1, 1994. Both corporations' warehouses were merged. P Inc. made the continental purchases for both corporations and transferred and charged out to W Inc. all the domestic merchandise shipped to its stores. W Inc. made the overseas purchases and transferred and charged the merchandise out to P Inc. and entered the merchandise immediately into P Inc.'s warehouse records as if they had been received. P Inc. charged W Inc. for the transfers of imported merchandise to W Inc!s stores. In autumn 1994, W Inc. had not paid P Inc. for the merchandise, which increased the inter-company charge owed by W Inc. to over $18 million. W Inc. lost its financing and both corporations filed notices of intent to file a proposal. P Iuc. alnd W Inc. were retroactively declared bankrupt following a petition filed by M & S Inc. The brothers all had directors' liability

insurance.

P Inc.'s bankruptcy trustee brought a motion based on s. 122 of the Canada Business Corporations Act (CBCA) and s. 100 of the Bankruptcy and Insolvency Act (BIA). The trial judge found the three brothers to be liable and that the procurement policy was a reviewable transaction and ordered the brothers to personally pay about $4.5 million to the trustee. The brothers, their insurer and the trustee appealed. The Court of Appeal found the brothers were not liable. The trustee appealed.

Held: The appeal was dismissed.

Per Major, Deschamps JJ.: The trial judge neither applied nor examined separately the two duties imposed by s. 122(1) to directors, the fiduciary duty and the duty of care. As for the fiduciary duty, the directors and officers must act with integrity and good faith in the best interest of the corporation. They must serve the corporation in a disinterested manner, with loyalty and integrity. Since the trial judge in this case found lack of fraud and dishonesty on the part of the brothers, one could not conclude that the brothers had breached their fiduciary duty. The brothers implemented a policy to deal with the serious inventory management problem they were facing. Absent any proof of personal interest or an illegitimate purpose of the new policy, and considering the desire to make the corporations better businesses, one could only conclude the brothers had not breached their fiduciary duty stated in s. 122(l)(a) of the CBCA. The expression "best interests of the corporation" should be read as meaning the maximization of the corporation's value. The interest of the corporation should not be confused with that of the shareholders, the creditors or any other stakeholder. The directors' fiduciary duty remains the same, even if the corporation is in the "vicinity of insolvency". In assessing the actions of the directors, any honest and good faith attempt to redress the corporation's problem situation will, if successful; retain value for the shareholders while improving the creditors' position. Should the attempt fail, it would not qualify as a breach of the statutory fiduciary duty. There was no need to read the interests of creditors into the fiduciaq duty. Credit- ors are stakeholders and their interest are protected in several ways. Stakeholders have viable remedies at their disposal, such as the oppression remedy provided by s. 241 of the CBCA and an action based on the duty of care.

Since the CBCA did not provide a specific remedy for creditors, art. 1457 of the Civil Code of Quebec could be used as suppletive so as to include creditors in the expression "every person" found in s. 122(l)(b) of the CBCA. But the standard of conduct to apply was the one stated in s. 122(l)(h). It is an objective standard, since it is not the subjective reasons of the directors and officers that are important, but rather the factual elements of the context in which they operate. Directors and officers are not considered to have not done their fiduciary duty under s. 122(l)(b) of the CBCA if they acted with caution and based on the information they had. Burliness decisions must be reasonable given what directors knew or should have known. Directors are not required to act perfectly. Courts should not substitute their opinion for that of the directors who used their business expertise to assess factors that are considered by corporations in making decisions. Courts must determine, with the facts of each case, whether the directors used the necessary degree of caution and diligence in making what is alleged to be a reasonable decision at the time it was made. In this case, a review of the evidence as a whole led to the conclusion that the implementation of the new procurement policy was a reasonable business decision made for the purpose of remedying a serious and pressing co~nmercialproblem in a situation where there might be no solution whatsoever. By concluding the new policy had inexorably led to P Inc.'s decline and bankruptcy, the trial judge misinterpreted the facts and made a palpable and overriding error. Many other factors contributed more directly to P Inc.'s bankruptcy. Consequently, the brothers did not breach the duty of care they owed to P Inc.'s creditors by implementing the procurement policy.

Copr. 0 West 2008 No Claim to Orig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REJFI 2004-72160, J.E. 2004-2016

The Court of Appeal wrongly concluded s. 44(2) of the CBCA could serve to generally legitimize financial aid provided by a wholly-owned subsidiary to its parent corporation. Even if s. 44(2) did authorize some financial aid formulas between corporations, that section did not remove directors and officers from possible liability under s. 122(1) for any financial aid provided by a subsidiary to a parent corporation. Moreover, the brothers could not invoke the defence provided by s. 123(4)(b) of the CBCA. They could not claim to have relied on the judgment of a professional when they accepted the procurement policy proposed as solution by the vice-president of finance. That vice-president was an employee of W Inc., not a professional. He was not an accountant, his actions were not regulated by a professional corporation and he had no professional liability insurance.

As for s. 100(1) of the BIA, the test for determining whether the difference in consideration is "conspicuously greater or less" is whether the difference is conspicuous to the court having regard to all the relevant factors, and the percentage difference is such a factor. The transactions made during the whole time the policy was applied had to he examined. The trial judge concluded P Inc. had not received anything in exchange for the transferred inventory since the accounts receivable had not been collected and could not be collected, but he then reduced the difference to 6 per cent after taking into consideration, among other things, the transfers from W Inc. to P Inc. His findings were contradictory and the Court of Appeal properly found the judge had co~nmitteda palpable and overriding error in that respect. A disparity of slightly more than 6 per cent between fair market value and consideration received did not constitute a conspicuous difference within the meaning of s. 100(2) of the BIA. In that respect, the trustee's claim had to fail.

The disagreement between the trial judge and the Court of Appeal on the interpretation of "privy" in s. 100(2) of the BIA warranted some observations. Section 100 of the BIA mainly seeks to cancel the effects of a transaction, which reduced the value of the bankrupt's assets. The word "privy" should be given a broad meaning so as to include those who benefit directly or indirectly from and have knowledge of a transaction occurring for less than fair market value, and mostly when the persons who benefit are the controlling minds behind the transaction. Concluding that a person is privy to a reviewable transaction does not mean that the court will necessarily exercise its discretion to order a remedy against that person, since some conditions must be complied with.

Trois frkres ttaient les administrateurs de W inc., une chaine de magasins. 11s ont achett la chaine de magasins P de M & S inc. Avant l'acquisition, P subissait des pertes d'i peu prBs 10 millions de dollars par nnnte. W inc. a garanti solidaireinent l'achat en favenr de M & S inc. et n'a pay6 qu'environ le sixieme du prix de vente. Afin de garantir le solde du prix de vente, M & S inc. a inclus dans le contrat de vente des mesures de stcuriti et des clauses restrictives: W inc. devait inaintenir des ratios financiers stricts et P ne devait fournir aucune assitance financikre i W inc. P est devenue P inc. aprBs avoir ttt fusionnte avec la filiale de W inc. qui I'avait achette.

Afin de risoudre les problkmes de logistique et d'administration dtcoulant de I'extension des systkines inform- atiques de W inc. ;l P inc, les frkres ont instau16 nn systhme d'approvisionnement commun pour les deux sociitb qui a pris effet le ler fivrier 1994. Les entrep6ts des deux socittts ont Cti fusionnis. P inc. fairbait les achats B sur le continent pour les deux sociitts, puis transfirait et facturait i W inc. tous les hiens exptdi6.s aux inagasins de W inc. Quant B elle, W inc. faisait les achats outre-mer, puis transftrait et facturait i P inc. la marchandise, qui ttait im~nCdiatementinscrite dans les livres d'entrep8t de P inc. comme si elle avait tti regue. P inc. facturait B W inc. les transferts de marchandises importtes aux magasins de W inc. A I'automne 1994, W inc. n'avait pas encore paye i P inc. la marchandise, faisant ainsi que les sommes qu'elle devait i P inc. dtpassaient 18 millions de dollars. W inc. a perdu son financement et les deux sociCtCs ont dfi diposer un avis d'intention. W inc. et P inc. ont Ctt diclaries faillies ritroactivement i la suite d'une requ&te prisentie par M & S inc. Les frhes ditenaient une assurance-responsabiliti ;l titre d'administratenrs.

Copr. O West 2008 No Claim to Orig. Go*. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

Le syndic de faillite de P inc. a prCsentC, contre les frhes et leur assureur, une requ&tefondie sur l'art. 122 de la Loi canadienne sur les sociitCs par action et sur l'art. 100 de la Loi sur la faillite et I'insolvabiliti.

Le premier juge a conclu B la responsabilitC des fikres, que le systhme d'approvisionnement commun constituait une transaction revisable et les a condamnes &payerau syndic environ 4,5 millions de dollars. Les frhres, leur assureur et le syndic ont interjet6 appel. La Cour d'appel a conclu i la non-responsabilite des frkres. Le syndic a interjete appel.

Arrirt: Le pourvoi a CtC rejet6.

Major, Deschamps, JJ.: Le premier juge n'a pas appliqu6 ni examini separCment les deux obligations imposies par I'art. 122(1) aux administrateurs, soit l'obligation fiduciaire et l'obligation de diligence. En ce qui concerne I'obligation fiduciaire, les administrateurs et les dirigeants sont tenus d'agir avec intigrit6 et bonm: foi aux mieux des inter& de la sociCtC. Ils doivent servir la sociCt.6 de inanikre disintCressCe, avec IoyautC et intigrite. Dans ce cas-ci, on ne pouvait conclure que les frkres avaieut manqui i leur obligation fiduciaire, puisque le premier juge a conclu a l'absence de fraude et de malhonnsteti de leur part. Au prise avec un grave probkme de gestion des stocks, les frkres ont mis en application une politique visant & le rCgler. En I'absence de preuva: de l'existence d'un intir&tpersonnel ou d'une fin illigitime de la nouvelle politique, et vu la volonti de faire des sociitis de meilleures entreprise, il fallait conclure que les administrateurs n'avaient pas manque leur obligation fiduciaire inoncie i I'art. 122(l)a) LCSA. L'expression (( au mienx des intCr&tsde la sociCtC )) doit &treinterprCtCe comine signifiant la inaximisation de la valeur de l'entreprise. Les intCr&tsde la sociiti ne doivent pas se confondre avec ceux des actionnaires, des crianciers on ceux de toute autre partie intiresste. L'nbligation fiduciaire des administrateurs reste la m&me, meme si la sociiti est (( au bord de I'insolvabiliti 8. Dans I'ivaluation des mesures prises par les administrateurs, toute tentative faite avec intigrit6 et bonne foi pour redresser la situation financisre de la societi aura, si elle riussit, conservi une valeur pour les actionnaires tout en amiliorant la situation des crianciers. En cas d'ichec, on ne pourrait y voir un manquement i l'obligation fiduciaire privue par la loi. I1 n'Ctait pas nicessaire d'interpriter les inttr&tsdes crianciers coinme Ctant visis par I'obligation fiduciaire. Les creanciers sont une partie interessCe et leurs intirhs sont protigis de plusieurs manikres. Les parties inttressies ont la possibiliti d'exercer des recours efficaces, soit le recours en cas d'abus de droit privu par I'art. 241 LCSA ainsi que ['action fondie sur l'obligation de diligence.

Puisque la LCSA ne privoyait aucun recours exprhs pour les crkanciers, I'art. 1457 du Code civil du Quibec pouvait servir & titre supplitif afin d'intigrer les crianciers dans l'expression (( toute personne )) de l'art. 122(l)b) LCSA. Par ailleurs, la norme de conduite & respecter itait celle Cnoncie & l'art. 122(l)b). I1 s'agit d'une norme objective, puisque ce sont les iliments factuels du contexte dans lequel agissent l'administrateur ou le dirigeant qui sont importants plut8t que lenrs motifs subjectifs. Les ad~ninistrateurset les dirigeants ne sont pas considiris comme ayant manquC leur obligation de diligence en vertu de I'art. 122(l)b) LCSA s'ils ont agi avec prudence et en s'appuyant sur les renseignements dont ils disposaient. Les d6cisions d'affaires doivent &tre raisonnables compte tenu de ce que les administrateurs savaient ou auraient dil savoir. La perfection n'est pas exigee des ad- ininistrateurs. Les tribunaux ne doivent pas substifiler leur opinion i celle des administrateurs qui ont utilisi leur expertise co~nrnercialepour ivaluer des considirations qui entrent dans la prise de dicisions des sociCtCs. Ils doivent diterminer, partir des faits de chaque cas, si les administrateurs ont exerc6 le degri de prudence et de diligence nicessaire pour en arriver i ce qu'on prCtend &treune decision d'affaires raisonnable au moment oh elle a Cti prise. Dans ce cas-ci, l'examen de I'ensemble de la preuve menait B la conclusion que I'instauration de la nouvelle politique d'approvisionnement Mait une dCcision d'affaires raisonnable prise en we de corriger un problkine d'ordre commercial grave et urgent dans un cas ou il n'y avait peut-&treaucune solution. En concluant

Copr. O West 2008 No Claim to Orig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016 que la nouvelle politique avait inexorablement entrain6 le dCclin et la faillite de P inc., le premier juge a ma1 interpret6 les faits et a commis une erreur manifeste et dominante. Plusieurs autres facteurs avaient contribui de faqon plus directe B la faillite de P inc. Ainsi, en adoptant la politique d'approvisionnement, les frkres n'ont pas manqui B leur obligation de diligence B I'igard des creanciers de P inc.

Par ailleurs, la Cow d'appel a conclu a tort que I'art. 44(2) LCSA servait a ligitimer de faqon g6nCrale I'aide financiire fournie par une filiale 8 part eutiire i sa sociCtC mhe. M&me si I'art. 44(2) autorisait certaines for- milles d'aide fiuanciire entre sociCtCs, il ne soustrayait cependant pas les administrateurs et les dirigeants a leur responsabiliti eventuelle en vertu de I'art. 122(1) pour toute aide financikre fournie par une filiale B sa soc~iti- mkre. De plus, les frkres ne pouvaient se servir du moyen de defense prevu i I'art. 123(4)b). 11s ne pouvaient faire valoir qu'ils s'Ctaient fits au jugement d'un professionnel en retenant la solution proposie par le vice- prisident aux finances, soit la politique d'approvisionnement. Ce vice-president itait un employ6 de W iuc. et non un professionnel. I1 n'Ctait pas comptable, ses activitb n'etaient pas 16glementies par un ordre professionnel et il n'avait pas souscrit a une assurance-responsabilit6 professionnelle.

En ce qui concerne I'art. 100(1) LFI, le critkre applicable pour diterminer si la difference entre la contrepartie et sa juste valeur marchande est (( manifestemeut supCrieure ou inferieure u est celui de savoir si la difference est manifeste pour le tribunal eu igard tons les facteurs pertinents, le pourcentage de difference en etant im. Dans ce cas-ci, il fallait analyser les transactions effectuies au cours de toute la piriode d'application de la nouvelle politique. Le premier juge a conclu que P inc. n'avait requ aucune contrepartie pour les transferts de stock puisque les comptes recevables n'avaient pas it6 recouvrCs et n'etaient pas recouvrables, mais il a ramen6 la difference B environ 6 pour cent apris avoir notammeut tenu compte des transferts de W inc. i P inc. Ses couclu- sions se contredisaient et la Cour d'appel a en raison de conclure que Je juge avait commis A cet igard une erreur manifeste et dominante. Un kart d'un peu plus de 6 pour cent entre la juste valeur du marchi et la contrepartie reque ne constituait pas une diffirence (< manifeste )) au sens de I'art. 100(2) LFI. La riclamation du syndic ti cet Cgard devait Ccbouer.

Le dksaccord entre le premier juge et la Cour d'appel sur l'interpretation des mots a ayant int8r6t u B l'art. 100(3) LFI ji~stifiait de faire certaines observations. L'article 100 LFI vise priucipalement annuler les effets d'une transaction ayant diminui la valeur des actifs d'un failli. Les termes (( ayant interkt )) doivent recevoir un sens large afin de s'appliquer aux personnes qui tirent un avantage direct on indirect d'un transaction tout en sachant que la contrepartie est inf6rieure B la juste valeur du marchi, surtout lorsque les personnes touchant I'avantage sont les instigatrices de la transaction. Par ailleurs, le fait de conclure qu'une personne a un (( intCr6t )) dans une transaction rivisable ne veut pas dire que le tribunal va nkcessairement exercer son pouvoir discritionnaire pour rendre uue ordonnance reparatrice contre cette personne, Ctant donne que certaines conditions doivent 6tre respectees.

Cases considered by Major, Deschainps JJ.:

Automatic SelfC1eansin.q Filler Syndicate Co. v. Cunninghame (1906), [I9061 2 Ch. 34 (Eng. Ch.) -- referred to

B. (K.L.) v. Brilish Columbia (2003), 18 B.C.L.R. (4th) 1, 19 C.C.L.T. (3d) 66, 230 D.L.R. (4th) 513, [ZOO31 11 W.W.R. 203, 309 N.R. 306, [ZOO31 2 S.C.R. 403, [ZOO31 R.R.A. 1065,44 R.F.L. (5th) 245, 187 B.C.A.C. 42, 307 W.A.C. 42, 38 C.P.C. (5th) 199, 2003 SCC 51, 2003 CarswellBC 2405, 2003 CarswellBC 2406,2004 C.L.L.C. 210-014 (S.C.C.) -- considered

Brasserie Labatt /tie c. Lanoue (1999), 1999 CarswellQue 1121 (Que. C.A.) -- referred tmo

Brazilian Rubber Plantation & Eslates Ltd., Re (191 l), [I91 11 1 Ch. 425 (Eng. Ch. Div.) -- referred to

Canadian Aero Service Ltd. v. O'Malley (1973), [I9741 S.C.R. 592,40 D.L.R. (3d) 371, 11 C.P.R. (2d) 206, 1973 CarswellOnt 236, 1973 CarswellOnt 236F (S.C.C.) -- considered

City Equitable Fire Insurance Co., Re (1924), 40 T.L.R. 664, [I9251 1 Ch. 407 (Eng. C:.A.) -- referred to

Dovey v. Cory (1901), [1901] A.C. 477 (Eng. H.L.) --referred to

H6pital Notre-Dame de I'Espirance c. Lauren1 (1977), (sub nom. Laurent v. Theoret) [I9781 1 S.C.R. 605, 17 N.R. 593,3 C.C.L.T. 109, 1977 CarswellQue 35, 1977 CarswellQue 33 (S.C.C.) -- referred to

Lister v. McAnulty (1944), [I9441 S.C.R. 317, [I9441 R.L. 425, [I9441 3 D.L.R. 673, 1944 CarswellQue 30 (S.C.C.) -- referred to . Olympia & York Enterprises Ltd. v. Hiram Walker Resources Lfd, (1986), 59 O.R. (2d) 254, 37 D.L.R. (4th) 193, 1986 CarswellOnt 1050 (Ont. Div. Ct.) -- followed

Pente Investment Management Ltd. v. Schneider Corp. (1998), 1998 CarswellOnt 4035, 113 O.A.C. 253, (sub nom. Maple LeafFoods Inc. v. Schneider Corp.) 42 O.R. (3d) 177, 44 B.L.R. (2d) 115 (Ont. C.A.) -- considered

Regent Taxi & Transport Co. v. Congrigation des petits fr2res de Marie (1929), [I9291 S.C.R. 650, [I9301 2 D.L.R. 353, 1929 CarswellQue 42 (S.C.C.) -- considered

Regent Taxi & Transport Co. v. Congrigation despetits fr6res de Marie (1932), [I9321 A.C. 295, 38 R.L.N.S. 261, [I9321 2D.L.R. 70,53 Que. K.B. 157 (Que. K.B.) -- referred to

Skalbania (Trustee ofl v. Wedgewood Village Estates Ltd, (1989), 37 B.C.L.R. (2d) 88, 74 C.B.R. (N.S.) 97, [I9891 5 W.W.R. 254, 60 D.L.R. (4th) 43, 44 C.R.R. 341, 1989 CarswellBC 344 (B.C. C.A.) -- followed

Soper v. R. (1997), [I9971 3 C.T.C. 242, 1997 CarswellNat 853, (sub nom. Soper v. Canada) 149 D.L.R. (4th) 297,97 D.T.C. 5407, (sub nom. Soper v. Minister of National Revenue) 215 N.R. 372, (sub nom. Soper v. Canada) [I9981 1 F.C. 124,1997 CarswellNat 2675 (Fed. C.A.) -- considered

Standard Trustco Ltd. (Trustee ofl v. Standard Trust Co. (1995), 36 C.B.R. (3h) 1, 129 I1.L.R. (4th) 18, 26 O.R. (3d) 1, (sub nom. Standard Trustco Ltd. (Bankrupt) v. Standard Trust Co.) 86 O.A.C. 1, 1995 CarswellOnt 932 (Ont. C.A.) -- followed

Teck Corp. v. MiNar (1972), [I9731 2 W.W.R. 385, 33 D.L.R. (3d) 288, 1972 CarswellBC 284 (B.C. S.C.) -- considered

373409 Alberta Ltd. (Receiver ofl v. Bank ofMontreal (2002), [2002] 4 S.C.R. 312,2002 SCC 81, 2002 CarswellAlta 1573, 2002 CarswellAlta 1574, [2003] 2 W.W.R. 1, 29 B.L.R. (3d) 1, (sub nom. Bank of Montreal v. Ernst & Young Inc.) 220 D.L.R. (4th) 193, (sub nom. 373409 Alberta Ltd v. Bank of

Montreal) 296 N.R. 244, 8 Alta. L.R. (4th) 199, 317 A.R. 349, 284 W.A.C. 349, [ZOO31 R.R.A. 1 (S.C.C.) -- distinguished

820099 Ontario Inc, v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 123, 1991 CarswellOnt 142 (Ont. Gen. Div.) -- considered.

820099 Ontario Inc. v. IYarold E. Ballard Ltd (1991), 3 B.L.R. (2d) 113, 1991 CarswellOnt 141 (Ont. Div. Ct.) --referred to

Statutes considered:

Bankruptcy andInsolvency Act, R.S.C. 1985, c. B-3

Generally -- referred to

s. 100 -- considered

s. 100(1) -- considered

s. 100(2) -- referred to

Canada Business Corporations Act, R.S.C. 1985, c. C-44

Generally -- referred to

s. 44 -- referred to

s. 44(1) -- considered

s. 44(2) -- considered

s. 44(2)(c) -- considered

s. 102 -- considered

s. 102(1) -- considered

s. 121 -- considered

s. 122(1) -- considered

s. 122(l)(a) -- considered

s. 122(l)(b) -- considered

s. 123(4) -- considered

s. 123(4)(b) -- referred to

s. 185 --referred to

s. 238 "complainant" -- considered

s. 238 "complainant" (a) -- considered

s. 238 "complainant" (d) -- considered

s. 241 -- referred to

s. 241(2)(c) -- considered

Code civil du Quebec, L.Q. 1991, c. 64

en ginera1 -- referred to

art. 300 --referred to

art. 3 11 -- referred to

art. 1457 -- considered

art. 2501 -- referred to

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)

Generally -- referred to

Interpretation Act, R.S.C. 1985, c. 1-21

s. 8.1 [en. 2001, c. 4, s. 81 -- referred to

Words and phrases considered best interests of the corporation

From an economic perspective, the "best interests of the corporation" [in s. 122(l)(a) of the Canada Business Corporations Act, R.S.C. 1985, c. C-441 means the maximization of the value of the corporation: see E.M. Iac- ohucci, "Directors' Duties in Insolvency: Clarifying What Is at Stake" (2003), 39(3) Can. Bus. .L.J 398, at pp. 400-1. vicinity of insolvency

That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is a deterioration in the corporation's financial stability.

Termes et locutions cites

an mieux des intircts de la soci6t6

D'un point de vue iconomique, I'expression (< au mieux des intkrgts de la sociCt6 )) [dans I'art. 12:2(1)a) de la Loi canadienne sur ies socidtis par actions, L.R.C. 1985, c. C-441 s'entend de la maximisation de la valeur de

Copr. O West 2008 No Claim to Orig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [2004] 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

l'entreprise : voir E.M. Iacobucci, a Directors' Duties in Insolvency: Clarifying What Is at Stake )) (2003), 39(3) Rev. can. D. comm. 398, p. 400-401 au bord de I'insolvabilit6

Cette expression n'a pas CtC dCfinie; elle ne peut 6tre dtfinie et n'a aucune signification en droit. Elle vise mani- festement B illustrer une dCtCrioration de la stabilitC financikre de la sociCt8.

APPEAL by bankruptcy hustee from judgment reported at People's Department Stores Lld. (1992) Inc., Re (2003), 2003 CarswellQue 145, (sub nom. Peoples Department Stores Inc (7hstees of) v. Wise) 224 D.L.R. (4th) 509, [2003] R.J.Q. 796,41 C.B.R. (4th) 225 (Que. C.A.), allowing appeal by directors ofbankrupt corporation from judgment allowing trustee's motion to recover funds of corporation and finding directol.~personally liable.

POURVOI du syndic de faillite B I'encontre de Iqarr&tpubliC B People's Deparlment Stores Ltd. (1992) Inc., Re (2003), 2003 CarswellQue 145, (sub nom. Peoples Department Stores Inc. (Trustees of) v. Wise) 224 D.L.R. (4th) 509, [ZOO31 R.J.Q. 796, 41 C.B.R. (4th) 225 (C.A. Qut), qui a accueilli le pourvoi des adminishateurs d'une soci6tC en faillite B l'encontre du jugement qui avait accueilli la requ&te en recouvrement des fonds de la sociCtC pr8sentCe par le syndic et condamn6 personnellement les ad~ninistrateurs.

Major, Deschamps JJ.:

I. Introduction

1 The principal question raised by this appeal is whether directors of a corporation owe a fiduciary duty to the corporation's creditors comparable to the statutory duty owed to the corporation. For the reasons that follow, we conclude that directors owe a duty of care to creditors, but that duty does not rise to a fiduciary duty. We agree with the disposition of the Quebec Court of Appeal. The appeal is therefore dismissed.

2 As a result of the demise in the mid-1990s of two major retail chains in eastern Canada, Wise Stores Inc. ("Wise") and its wholly-owned subsidiary, Peoples Department Stores Inc. ("Peoples"), the indebtedness of a number of Peoples' creditors went unsatisfied. In the wake of the failure of the two chains, Caron Btlanger Ernst & Young Inc., Peoples' trustee in bankruptcy (the "trustee"), brought an action against the directors of Peoples. To address the trustee's claims, the extent of the duties imposed by s. 122(1) of the Canada Business Corpora- tions Acl, R.S.C. 1985, c. C-44 ("CBCA"), upon directors with respect to creditors must he detennined; we must also identify the purpose and reach of s. 100 of the Bankruptcy and Insolvency Act, R.S.C. 1985, I:. B-3 ("BIA").

3 In our view, it has not been established that the directors of Peoples violated either the fiduciary duty or the duty of care imposed by s. 122(1) of the CBCA. As for the trustee's submission regarding s. 100 of the BIA, we agree with the Court of Appeal that the consideration received in the impugned transactions was not "conspicuously" less than fair market value. The BIA claim fails on that basis.

11. Background

4 Wise was founded by Alex Wise in 1930 as a small clothing store on St-Hubert Street in Montreal. By 1992, through expansion effected by a mix of internal growth and acquisitions, it had become an enterprise operating at 50 locations with annual sales of approximately $100 million, and it had been listed on the Montreal Stock Exchange in 1986. The stores were, for the most part, located in urban areas in Quebec. The founder's three

sons, Lionel, Ralph and Harold Wise (the "Wise brothers"), were majority shareholders, officer:;, and directors of Wise. Together, they controlled 75 percent of the tinu's equity.

5 In 1992, Peoples had been in business continuously in one form or another for 78 years. It had operated as an unincorporated division of Marks & Spencer Canada Inc. ("M & S") until 1991, when it was incorporated as a separate company. M & S itself was wholly owned by the large British firm, Marks & Spencer plc. ("M & S plc."). Peoples' 81 stores were generally located in rural areas, from Ontario to Newfoundland. I'eoples had annual sales of about $160 million, but was struggling financially. Its annual losses were in the neighbourhood of $10 million.

6 Wise and Peoples competed with other chains such as Canadian Tire, Greenberg, Hart, K-Mart, M-Stores, Metropolitan Stores, Rossy, Woolco and Zellers. Retail competition in eastern Canada was intense in the early 1990s. In 1992, M-Stores went bankrupt. In 1994, Greenherg and Metropolitan Stores followed M-Stores into bankruptcy. The 1994 entry of Wal-Mart into the Canadian market, with its acquisition of ov8:r 100 Woolco stores from Woolworth Canada Inc., exerted significant additional competitive pressure on retail stores.

7 Lionel Wise, the eldest of the three brothers and Wise's executive vice-president, had expre,rsed an interest in acquiring the ailing Peoples chain from M & S as early as 1988. Initially, M & S did not share Wise's interest for the sale, but by late 1991, M & S plc., the British parent company of M & S, had decided to divest itself of all its Canadian operations. At this point, M & S incorporated each of its three Canadian divisions to facilitate the anticipated divestiture thereof.

8 The new-found desire to sell coincided with Wise's previously expressed interest in acquiring its larger rival. Although M & S had initially hoped to sell Peoples for cash to a Large firm in a solid financial condition, it was unable to do so. Consequently, negotiations got underway with representatives of Wise. A formal share pnr- chase agreement was drawn up in early 1992 and executed in June 1992, with July 16, 1992 as its closing date.

9 Wise incorporated a company, 2798832 Canada Inc., for the purpose of acquiring all of the issued and ont- standing shares of Peoples from M & S. The $27- inillion share acquisition proceeded as a fully leveraged huy- out. The portion of the purchase price attributable to inventory was discounted by 30 percent. The discount was designed to inject equity into Peoples in the fiscal year following the sale and to make use of some of the tax losses that had accumulated in prior years.

10 The amount of the down payment due to M & S at closing, $5 million, was borrowed from the Toronto Dominion Bank (the "TD Bank"). According to the terms of the share purchase agreement, the $22-million balance of the purchase price would he carried by M & S and would be repaid over a period of eight years. Wise guaranteed all of 2798832 Canada Inc.'s obligations pursuant to the terms of the share purchase agreement.

11 To protect its interests, M & S took the assets of Peoples as security (subject to a priority in favour of the TD Bank) and negotiated strict covenants concerning the financial management and operation of the company. Among other requirements, 2798832 Canada Inc. and Wise were obligated to maintain specific financial ratios, and Peoples was not permitted to provide financial assistance to Wise. In addition, the agreemetit provided that Peoples could not be amalgamated with Wise until the purchase price had been paid. This prohibition was pre- sumably intended to induce Wise to refinance and pay the remainder of the purchase price as early as possible in order to overcome the strict conditions imposed upon it under the share purchase agreement.

12 On January 31, 1993, 2798832 Canada Inc. was a~nalgainatedwith Peoples. The new entity retained

Peoples' corporate name. Since 2798832 Canada Inc. had been a wholly-owned subsidiary of Wise, upon amalgamation the new Peoples became a subsidiary directly owned and controlled by Wise. The three Wise brothers were Peoples' only directors.

13 Following the acquisition, Wise had attempted to rationalize its operations by consolidating the overlap- ping corporate functions of Wise and Peoples, and operating as a group. The consolidation of the administration, accounting, advertising and purchasing departments of the two corporations was completed by the fall of 1993. As a consequence of the changes, many of Wise's employees worked for both firms but were paid solely by Wise. The evidence at trial was that because of the tax losses carried-forward by Peoples, it was advantageous for the group to have more expenses incurred by Wise, which, if the group was profitable as a whole, would increase its after-tax profits. Almost from the outset, the joint operation of Wise and Peoples did not filnction smoothly. Instead of the expected synergies, the consolidation resulted in dissonance.

14 After the acquisition, the total number of buyers for the two companies was nearly halved. The procurement policy at that point required buyers to deal simnultaneonsly with suppliers on behalf of both Peoples and Wise. For the buyers, this nearly doubled their administrative work. Separate invoices were required for purchases made on behalf of Wise and Peoples. These invoices had to be separately entered into the system, tracked and paid.

15 Inventory, too, was separately recorded and tracked in the system. However, the inventory of each company was handled and stored, often unsegregated, in shared warehouse facilities. The main warehouse for Peoples, on Cousens Street in Ville St-Laurent, was maintained for and used by both firms. The Cousens warehouse saw considerable activity, as it was the central distribution hub for both chains. The facility was open 18 hours a day and employed 150 people on two shifts who handled a total of approximately 30,000 cartons daily through 20 loading docks. It was abuzz with activity.

16 Before long, the parallel bookkeeping combined with the shared warehousing arrangements caused serious problems for both Wise and Peoples. The actual situation in the warehouse often did not mirror the reported state of the inventory in the system. The goods of one company were often inextricably co~nmingledand confused with the goods of the other. As a result, the inventory records of both companies were increasingly incorrect. A physical inventory count was conducted to try to rectify the situation, to little avail. Both Wise and Peoples stores experienced numerous shipping disruptions and delays. The situation, already nnsustainable, was worsening.

17 In October 1993, Lionel Wise consulted David ClBlnent, Wise's (and, after the acquisition, Peoples') vice- president of administration and finance, in an attempt to find a solution. In January 1994, ClCment recommended and the three Wise brothers agreed that they would implement a joint inventory procurement policy (the "new policy") whereby the two firms would divide responsibility for purchasing. Peoples would make all purchases from North American suppliers and Wise would, in turn, make all purchases from overseas suppliers. Peoples would then transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice versa. The new policy was implemented on February 1, 1994. It was this arrangement that was later criticized by certain creditors and by the trial judge.

18 Approximately 82 percent of the total inventory of Wise and Peoples was purchased from North American suppliers, which inevitably meant that Peoples would be extending a significant trade credit to Wise. The new policy was known to the directors, but was neither formally implemented in writing nor approved by a board

19 On April 27, 1994, Lionel Wise outlined the details of the new policy at a meeting of Wise's audit committee. A partner of Coopers & Lybrand was M & S's representative on Wise's board of directors and a member of the audit committee. He attended the April 27th meeting and raised no objection to the new policy when it was introduced.

20 By June 1994, financial statements prepared to reflect the financial position of Peoples as of April 30, 1994 revealed that Wise owed more than $18 million to Peoples. Approximately $14 million of this amount resulted from a notional transfer of inventory that was cancelled following the period's end. M & S was concerned about the situation and started an investigation, as a result of which M & S insisted that the new procurement policy he rescinded. Wise agreed to M & S's demand but took the position that the former procurement policy could not be reinstated immediately. An agreement was executed on September 27, 1994, effective July 21, 1994, and it provided that the new policy would be abandoned as of January 31, 1995. The agreement also specified that the inventory and records of the two companies would he kept separate, and that the amount owed to Peoples by Wise would not exceed $3 million.

21 Another result of the negotiations was that M & S accepted an increase in the amount of the TD Bank's priority to $15 million and a new repayment schedule for the balance of the purchase price owed to M & S. The parties agreed to revise the schedule to provide for 37 monthly payments beginning in July 1995. Each of the Wise brothers also provided a personal guarantee of $500,000 in favour of M & S.

22 In September 1994, in light of the fragile financial condition of the companies and the conipetitiveness of the retail market, the TD Bank announced its intention to cease doing business with Wise and Peoples as of the end of December 1994. Following negotiations, however, the bank extended its financial support until the end of July 1995. The Wise brothers promised to extend personal guarantees in favour of the TD Bank, but this did not occur.

23 In December 1994, three days after the Wise brothers presented financial statements showing disappoint- ing results for Peoples in its third fiscal quarter, M & S initiated bankruptcy proceedings against hoth Wise and Peoples. A notice of intention to make a proposal was filed on behalf of Peoples the same day. Nonetheless, Peoples later consented to the petition by M & S, and hoth Wise and Peoples were declared bankmpt on January 13, 1995, effective December 9, 1994. The same day, M & S released each of the Wise brothers from their personal guarantees. M & S apparently preferred to proceed with an uncontested petition in hankmptcy rather than attempting to collect on the personal guarantees.

24 The assets of Wise and Peoples were sufficient to cover in full the outstanding debt owed to the TD Bank, satisfy the entire balance of the purchase price owed to M & S, and discharge almost all the llandlords' lease claims. The hulk of the unsatisfied claims were those of trade creditors.

25 Following the bankruptcy, Peoples' tmstee filed a petition against the Wise brothers. In the petition, the trustee claimed that they had favoured the interests of Wise over Peoples to the detriment of Peoples' creditors, in breach of their duties as directors under s. 122(1) of the CBCA. The trustee also claimed that the Wise brothers had, in the year preceding the bankruptcy, been privy to transactions in which property had been transferred for conspicuously less than fair market value within the meaning of s. 100 of the BIA.

26 Pursuant to art. 2501 of the Civil Code of QuQbec, S.Q. 1991, c. 64 ("C.C.Q."), the trustee named Chnhh

Insurance Company of Canada ("Chubb"), which had provided directors' insurance to Wise and its subsidiaries, as a defendant in addition to the Wise brothers.

27 The trial judge, Greenherg I., relying on decisions from the United Kingdom, Australia and New Zealaud, held that the fiduciary duty and the duty of care under s. 122 (I) of the CBCA extend to a company's creditors when a company is insolvent or in the vicinity of insolvency. Greenberg J. found that the implem~:ntation, by the Wise brothers qua directors of Peoples, of a corporate policy that affected both companies, had occurred while the corporation was in the vicinity of insolvency and was detrimental to the interests of the creditors of Peoples. The Wise brothers were therefore found liable and the trustee was awarded $4.44 million in damages. As Chubb had provided insurance coverage for directors, it was also held liable. Greenberg J. also considered the altemat- ive grounds under the BIA advanced by the trustee and found the Wise brothers liable for the same $4.44 million amount on that ground as well. All the parties appealed.

28 The Quebec Court of Appeal, per Pelletier J.A., with Robert C.J.Q. and Nuss J.A. concurring, allowed the appeals by Chi~bband the Wise brothers. The Court of Appeal expressed reluctance to follow Greenberg 1. in equating the interests of creditors with the best interests of the corporation when the corporation was insolvent or in the vicinity of insolvency, stating that an innovation in the law such as this is a policy matter more appro- priately dealt with by Parliament than the courts. In considering the trustee's claim under s. 100 of the BIA, Pel- letier J.A. held that the trial judge had committed a palpable and overriding error in concluding that the amounts owed by Wise to Peoples in respect of inventory "were neither collected nor collectible". He four~dthat the consideration received for the transactions had been approximately 94 percent of fair market value, and he was not convinced that this disparity could he characterized as being "conspicuously" less than fair market value. Moreover, he did not accept the broad meaning the trial judge gave to the word "privy". Pelletier J.A. declined to exercise his discretion under s. lOO(2) of the BIA to make an order in favour of the trustee. In view of his conclusion that the Wise brothers were not liable, Pelletier J.A. allowed the appeal with respect to Chubb.

111. Analysis

29 At the outset, it should be acknowledged that according to art. 300 of the C.C.Q. and s. 8.1 of the Inter- pretation Act, R.S.C. 1985, c. 1-21, the civil law serves as a supplementary source of law to federal legislation such as the CBCA. Since the CBCA does not entitle creditors to sue directors directly for breach of their duties, it is appropriate to have recourse to the Civil Code of QuQbecto determine how rights grounded in a federal statute should he addressed in Quebec, and more specifically how s. 122(1) of the CBCA can be harmonized with the principles of civil liability: see R. Crete and S. Rousseau, Droit des sociQtQspar actions: principes fonda- mentaux (2002), at p. 58.

30 This case came before our Court on the issue of whether directors owe a duty to creditor:;. The creditors did not bring a derivative action or an oppression remedy application under the CBCA. Instead, ibe trustee, representing the interests of the creditors, sued the directors for an alleged breach of the duties imposed by s. 122(1) of the CBCA. The standing of the trustee to sue was not questioned.

31 The primary role of directors is described ins. 102(1) of the CBCA:

102. (I) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.

As for officers, s. 121 of the CBCA provides that their powers are delegated to them by the directors:

121. Subject to the articles, the by-laws or any unanimous shareholder agreement,

(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation, except powers to do anything referred to in subsection 115(3);

(b) a director may he appointed to any office of the corporation; and

Although the shareholders are commonly said to own the corporation, in the absence of a unanimous shareholder agreement to the contrary, s. 102 of the CBCA provides that it is not the shareholders, but the directors elected by the shareholders, who are responsible for managing it. This clear demarcation between the respective roles of shareholders and directors long predates the 1975 enactment of the CBCA: see Automatic Self Cleansing Filter Syndicate Co. v. Cunninghame, [I9061 2 Ch. 34 (Eng. Ch.); see also art. 31 1, C.C.Q.

32 Subsection 122(1) of the CBCA establishes two distinct duties to he discharged by directors and officers in managing, or supervising the management of, the corporation:

122. (1) Every director and officer of a corporation in exercising their powers and discharging their dnties shall

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The first duty has been referred to in this case as the "fiduciary duty". It is better described as the "duty of loyalty". We will use the expression "statutory fiduciary duty" for purposes of clarity when referring to the duty under the CBCA. This duty requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation. The second duty is com~nonlyreferred to as the "duty of care". Generally speaking, it imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation's affairs.

33 The trial judge did not apply or consider separately the two duties imposed on directors by s. 122(1). As the Court of Appeal observed, the trial judge appears to have confused the two duties. They are, in fact, distinct and are designed to secure different ends. For that reason, they will he addressed separately in these reasons.

A. The Statrrtory Fiduciary Duty: Section IZZ(I)(a) of the CBCA

34 Considerable power over the deployment and management of financial, human, and material resources is vested in the directors and officers of corporations. For the directors of CBCA corporations, this power origin- ates in s. 102 of the Act. For officers, this power comes from the powers delegated to them by the directors. In deciding to invest in, lend to or otherwise deal with a corporation, shareholders and creditors transfer control over their assets to the corporation, and hence to the directors and officers, in the expectation that the directors and officers will use the corporation's resources to make reasonable business decisions that are to the eorpora- tion's advantage.

35 The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-a-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally: see K.P. McGuinness, The Law and Practice of Canadian Business Corporations (1999), at p. 715.

36 The common law concept of fiduciary duty was considered in B. (K.L.) v. British Columbia, [2003] 2 S.C.R. 403, 2003 SCC 51 (S.C.C.). In that case, which involved the relationship between the government and foster children, a majority of this Court agreed with McLachlin C.J. who stated, at paras. 40-41 and 49:

...Fiduciary duties arise in a number of different contexts, including express trusts, relationships marked by discretionary power and trust, and the special responsibilities of the Crown in dealing with aboriginal interests ....

What ... might the content of the fiduciary duty be if it is understood ... as a private law duty arising simply from the relationship of discretionary power and trust between the Superintendent and the foster children? In Lac Minerals Ltd v. International Corona Resources Ltd., [I9891 2 S.C.R. 574, at pp. 646-47, La Forest I. noted that there are certain common threads running through fiduciary duties that arise from relationships marked by discretionary power and trust, such as loyalty and "the avoidance of a conflict of duty and interest and a duty not to profit at the expense of the beneficiary". However. he also noted that "ltlhe oblieation imoosed mav varv in its suecific substance deuendine on the relation- shin" lo. 646>...

...concern for the best interests of the child informs the parental fiduciary relationship, as La Forest I. noted in M (K,) v. M. (H.), supra, at p. 65. But the duty imposed is to act loyally, and not to put one's own or others' interests ahead of the child's in a manner that abuses the child's trust .... The parent who exercises undue influence over the child in economic matters for his own gain has put his own interests ahead of the child's, in a manner that abuses the child's trust in him. The same may be said of the parent who uses a child for his sexual gratification or a parent who, wanting to avoid trouble for herself and her household, turns a blind eye to the abuse of a child by her spouse. The parent need not, as the Court of Appeal suggested in the case at bar, be consciously motivated by a desire for profit or personal advantage; nor does it have to be her own interests, rather than those of a third party, that she puts ahead of the child's. It is rather a question of disloyalty -- of putting someone's interests ahead of the child's in a manner that abuses the child's trust. Neelieence. even aeeravated neelieence. will not ?round aarental fiduciaw liabilitv unless it is associated with breach of trust in this sense. [Emphasis added.]

37 The issue to he considered here is the "specific substance" of the fiduciary duty based on the relationship of directors to corporations under the CBCA.

38 It is settled law that the fiduciary duty owed by directors and officers imposes strict obligations: see Cana- dian Aero Service Ltd. v. O'Malley (1973), [I9741 S.C.R. 592 (S.C.C.), at pp. 609-10,per Laskin J. (as he then was), where it was decided that directors and officers inay even have to account to the corporation for profits they make that do not come at the corporation's expense:

The reaping of a profit by a person at a company's expense while a director thereof is, of course, an ad-

Copr. O West 2008 No Claim to Orig. Govt. Works Page 17 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th)215,49B.L.R. (3d) 165, [ZOO41 3 S.C.R.461,REJB 2004-72160, J.E. 2004-2016

equate ground upon which to hold the director accountable. Yet there mav be situations where a orofit nus st be diseoreed. although not eained at the exnense of the comoanv. on the eround that a director must not he allowed to use his oosition as such to make a orofit even if it was not ooen to the comnanv, as for examule. bv reason ofleeal disabilitv. to particinate in the transaction. An analogous situation, albeit not involving a director, existed for all practical purposes in the case of Phipp~v. Boardman [[I9671 2 A.C. 461, which also supports the view that liability to account does not depend on proof of an actual conflict of duty and self-interest. Another, quite recent, illustration of a liabtlity to account where the company itself had failed to obtain a business contract and hence could not be regarded as having been deprived of a business opportunity is Indusbial Development Consultanls Ltd. v. Cooley [[I9721 2 All E.R. 1621, a judgment of a Court of first instance. There, the managing director, who was allowed to resign his position on a false assertion of ill health, subsequently got the contract for himself. That case is thus also illustrative of the situation where a director's resignation is prompted by a decision to obtain for himself the business contract denied to his company and where ha does obtain it without disclosing his intention. [Emphasis added.]

A compelling argument for making directors accountable for profits made as a result of their position, though not at the corporation's expense, is presented by J. Brock, "The Propriety of Profitmaking: Fiduciary Duty and Unjust Enrichment" (2000), 58 U.T. Fac. L. Rev. 185, at pp. 204-5.

39 However, it is not required that directors and officers in all cases avoid personal gain as a direct or indirect result of their honest and good faith supervision or management of the corporation. In many cases the interests of directors and officers will innocently and genuinely coincide with those of the corporation. :If directors and officers are also shareholders, as is often the case, their lot will automatically improve as the corporation's financial condition improves. Another example is the compensation that directors and officers usually draw from the corporations they serve. This benefit, though paid by the corporation, does not, if reasonable, ordinarily place them in breach of their fiduciary duty. Therefore, all the circumstances may be scrutinized to determine whether the directors and officers have acted honestly and in good faith with a view to the best interests of the corporation.

40 In our opinion, the trial judge's determination that there was no fraud or dishonesty in the Wise brothers' attempts to solve the mounting inventory problems of Peoples and Wise stands in the way of a finding that they breached their fiduciary duty. Greenberg J. stated, at para. 180:

We hasten to add that in the present case, the Wise Brothers derived no direct personal benefit from the new domestic inventory procurement policy, albeit that, as the controlling shareholders of Wise Stores, there was an indirect benefit to them. Moreover, as was conceded by the other parties herein, in deciding to implement the new domestic inventory procurement policy, there was no dishonesty or fraud on their part.

The Court of Appeal relied heavily on this finding by the trial judge, as do we. At para. 84, Pelletier J.A. stated that:

[TRANSLATION] In regard to fiduciary duty, I would like to point out that the brothers were driven solely by the wish to resolve the problem of inventory procurement affecting both the operations of Peoples Inc. and those of Wise. [This is a] motivation that is in line with the pursuit of the interests of the corporation within the meaning of paragraph 122(l)(a) C.B.C.A. and that does not expose them to

any justified criticism

41 As explained above, there is no doubt that both Peoples and Wise were struggling with a serious inventory management problem. The Wise brothers considered the problem and implemented a policy they hoped would solve it. In the absence of evidence of a personal interest or improper purpose in the new policy, and in light of the evidence of a desire to make both Wise and Peoples "better" corporations, we find that the directors did not breach their fiduciary duty under s. 122(l)(a) of the CBCA. See 820099 Ontario Inc. v. HaroldE. Ballard Lid. (1991), 3 B.L.R. (2d) 123 (Ont. Gen. Div.) (affd (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.)), in which Farley I., at p. 171, correctly observes that in resolving a conflict between majority and minority shareholders, it is safe for directors and officers to act to make the corporation a "better corporation".

42 This appeal does not relate to the non-statutory duty directors owe to shareholders. It is concerned only with the statutory duties owed under the CBCA. Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the "best interests of the corporation" should he read not simply as the "best interests of the shareholders". From an economic perspective, the "best interests of the corporation" means the maximization of the value of the corporation: see E.M. lacohucci, "Directors' Duties in Insolvency: Clarifying What Is at Stake" (2003), 39(3) Can. Bus. L.J. 398, at pp. 400-1. However, the courts have long recognized that various other factors may be relevant in determining what directors should consider in soundly managing with a view to the best interests of the corporation. For example, in Teck Carp. v. Millar (1972), 33 D.L.R. (3d) 288 (B.C. S.C.), Berger I. stated, at p. 314:

A classical theory that once was unchallengeable must yield to the facts of modern life. In fact, of course, it has. If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bonaJide in the interests of the company itself. Simil- arly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders.

I appreciate that it would be a breach of their duty for directors to disregard entirely the interests of a co~iipany'sshareholders in order to confer a benefit on its employees: Parke v. Daily News Ltd., [I9621 Ch. 927. But if they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.

The case of Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd. (1986), 59 O.K. (2d) 254 (Ont. Div. Ct.), approved, at p. 271, the decision in Teck, supra. We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment.

43 The various shifts in interests that naturally occur as a corporation's fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(l)(a) of the CBCA. At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders.

44 The interests of shareholders, those of the creditors and those of the corporation may and will be consistent with each other if the corporation is profitable and well capitalized and has strong prospects. Ilowever, this can

Copr. O West 2008 No Claim to Orig. Govt. Works Page 19 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th)215,49B.L.R. (3d) 165, [2004] 3 S.C.R. 461,REJB2004-72160, J.E. 2004-2016

change if the corporation starts to struggle financially. The residual rights of the shareholders will generally he- come worthless if a corporation is declared bankrupt. Upon bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation's assets for the benefit of creditors.

45 Short of bankruptcy, as the corporation approaches what has been described as the "vicinity of insolvency", the residual claims of shareholders will be nearly exhausted. While shareholders might well prefer that the directors pursue high-risk alternatives with a high potential payoff to maximize the shareholders' expected residual claim, creditors in the same circumstances might prefer that the directors steer a safer course so as to maximize the value of their claims against the assets of the corporation.

46 The directors' fiduciary duty does not change when a corporation is in the nebulous "vicinity of insolvency". That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is a deterioration in the corporation's financial stability. In assessing the actions of directors it is evident that any honest and good faith attempt to redress the corporation's financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty.

47 For a discussion of the shifting interests and incentives of shareholders and creditors, :see W.D. Gray, "Peoples v. Wise and Dylex: Identifying Stakeholder Interests upon or near Corporate Insolvency -- Stasis or Pragmatism?" (2003), 39 Can. Bus. L.J. 242, at p. 257; E. M. Iacobucci & K.E. Davis, "Reconciling Derivative Claims and the Oppression Remedy" (2000), 12 S.C.L.R. (2d) 87, at p. 114. In resolving these competing interests, it is incumbent upon the directors to act honestly and in good faith with a view to the best interests of the corporation. In using their skills for the benefit of the corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its best interests by creating a "better" corporation,, and not to favour the interests of any one group of stakeholders. If the stakeholders cannot avail themselves of the statutory fiduciary duty (the duty of loyalty, supra) to sue the directors for failing to take care of their interests, they have other means at their disposal.

48 The Canadian legal landscape with respect to stakeholders is unique. Creditors are only one set of stakeholders, but their interests are protected in a number of ways. Some are specific, as in the case of'amalgamation: s. 185 of the CBCA. Others cover a broad range of situations. The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the br,oadest rights to creditors of any common law jurisdiction: see D. Thomson, "Directors, Creditors and Insolven,;y: A Fiduciary Duty or a Duty Not to Oppress?" (2000), 58(1) U.T. Fac. L. Rev. 31, at p. 48. One commentator describes the oppression remedy as "the broadest, most comprehensive and most open-ended shareholder rem,:dy in the common law world": S.M. Beck, "Minority Shareholders' Rights in the 1980s" in Corporate Law in the 80s (1982), 31 1, at p. 3 12. While Beck was concerned with shareholder remedies, his observation applies equally to those of creditors

49 The fact that creditors' interests increase in relevancy as a corporation's finances deteriorate is apt to be relevant to, inler alia, the exercise of discretion by a court in granting standing to a party as a "complainant" under s. 238(d) of the CBCA as a "proper person" to bring a derivative action in the name of the corporation under ss. 239 and 240 of the CBCA, or to bring an oppression remedy claim under s. 241 of the CBCA.

50 Section 241(2)(c) authorizes a court to grant a remedy

if the powers of the directors of the corporation or any of its affiliates are or have been exercised in a

Copr. 0West 2008 No Claim to Orig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [2004] 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

manner

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer ...

A person applying for the oppression remedy must, in the court's opinion, fall within the definition of "complainant" found in s. 238of the CBCA:

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,

(h) a director or an officer or a former director or officer of a corporation or any of its affiliates,

(d) any other person who, in the discretion of a court, is a proper person to make an application under this Part.

Creditors, who are not security holders within the meaning of para. (a), may therefore apply for the oppression remedy under para. (d) by asking a court to exercise its discretion and grant them status as a "complainant".

51 Section 241 of the CBCA provides a possible mechanism for creditors to protect their interests froin the prejudicial conduct of directors. In our view, the availability of such a broad oppression remedy undermines any perceived need to extend the fiduciary duty imposed on directors by s. 122(l)(a) of the CBCA to include creditors.

52 The Court of Appeal, at paras. 99-100, referred to 373409 Alberta Ltd. (Receiver ofl v. Bank of Montreal, [2002] 4 S.C.R. 312, 2002 SCC 81 (S.C.C.), as an indication by this Court that the interests of creditors do not have any hearing on the assessment of the conduct of directors. However, the receiver in that case was representing the corporation's rights and not the creditors' rights; therefore, the case has no application in this appeal. 373409 Alberta Ltd involved an action taken by the receiver on behalf of the corporation against a bank for the tort of conversion. The sole shareholder, director and officer of 373409 Alberta Ltd., who was also the sole shareholder, director and officer of another corporation, Legacy Holdings Ltd., had deposited a cheque payable to 373409 Alberta Ltd. into the account of Legacy. While it was recognized, at para. 22, that the diversion of money froin 373409 Alberta Ltd. to Legacy "may very well have been wrongful vis-8-vis [373409 Alberta Ltd.1'~creditors" (none of whom were involved in the action), no fraud had been committed against the corporation itself and the hank, acting on proper authority, had not wrongfully interfered with the cheque by carrying out the deposit instructions. The statutory duties of the directors were not at issue, nor were they (considered, and no assessment of the creditors' rights was made. With respect, Pelletier J.A.'s broad reading of 373409 Alberta Ltd. was misplaced.

53 In light of the availability both of the oppression remedy and of an action based on the duty of care, which will he discussed below, stakeholders have viable remedies at their disposal. There is no need to read the interests of creditors into the duty set out in s. 122(l)(a) of the CBCA. Moreover, in thc circunlstances of this case, the Wise brothers did not breach the statutory fiduciary duty owed to the corporation.

B. The Stat~toryDuty of Care: Section ZZZ(Z)(b) of the CBCA

Copr. O West 2008 No Claiin to Orig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

54 As mentioned above, the CBCA does not provide for a direct remedy for creditors against directors for breach of their duties and the C.C.Q. is used as suppletive law.

55 In Quebec, directors have been held liable to creditors in respect of either contractual or extra-contractual obligations. Contractual liability arises where the director personally guarantees a contractual obligation of the company. Liability also arises where the director personally acts in a manner that triggers his or her extra- contractual liability. See P. Martel, "Le 'voile corporatif -- l'attitude des tribunaux face a I'articlle 317 du Code civil du Quihec" (1998), 58 R. du B. 95, at pp. 135-36; Brasserie Labatt /fiec. Lanoue, [I9991 J.Q. No. 1108 (Que. C.A.), per Forget J.A., at para. 29. It is clear that the Wise brothers cannot he held contraotually liahle as they did not guarantee the debts at issue here. Extra-contractual liability is the remaining possibility.

56 To determine the applicability of extra-contractual liability in this appeal, it is necessary to refer to art. 1457 of the C.C.Q.:

EV~Nnerson has a dnty to abide by the rules of conduct which lie upon him, according to the circumstances, usage or law, so as not to cause injury to another.

Where he is endowed with reason and fails in this dnty, he is responsible for any injury he causes to another person by such fault and is liable to reparation for the injury, whether it he bodily, moral or material in nature.

He is also liable, in certain cases, to reparation for injury caused to another by the act or fault of another person or by the act of things in his custody. [Emphasis added]

Three elements of art. 1457 of the C.C.Q. are relevant to the integration of the director's duty of care into the principles of extra-contractual liability: who has the duty ("every person"), to whom is (.he duty owed ("another") and what breach will trigger liability ("rules of conduct"). It is clear that directors ant3. officers come within the expression "every person". It is equally clear that tbe word "another" can include the creditors. The reach of art. 1457 of the C.C.Q. is broad and it has been given an open and inclusive meaning. See Regent Taxi & Transport Co. v. Congrigation des petits frires de Marie , [I9291 S.C.R. 650 (S.C.C.), per Anglin C.J., at p. 655 (rev'd on other grounds, [I9321 2 D.L.R. 70 (Que. K.B.)):

...to narrow the prima facie scope of art. 1053 C.C. [now art. 14571 is highly dangerous and would necessarily result in most meritorious claims being rejected; many a wrong would he without a remedy.

This liberal interpretation was also affirmed and treated as settled by this Court in Lister v. McAnu/ry, 119441 S.C.R. 317 (S.C.C.), and H6pital Notre-Dame de I'Espirance c. Laurent (1977), [I9781 1 S.C.R. 605 (S.C.C.).

57 This interpretation can be harmoniously integrated with the wording of the CBCA. Indeed, unlike the statement of the fiduciary dnty in s. 122(l)(a) of the CBCA, which specifies that directors and officers must act with a view to the best interests of the corporation, the statement of the duty of care in s. 122(1)(6) of the CBCA does not specifically refer to an identifiable party as the beneficiary of the duty. Instead, it provides that "[elvery director and officer of a corporation in exercising his powers and discharging his duties shall ... exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." Thus, the identity of the beneficiary of the duty of care is much more open-ended, and it appears obvious that it must include creditors. This result is clearly consistent with the civil law interpretation of the word "another". There- fore, if breach of the standard of care, causation and damages are established, creditors can resort to art. 1457 to

Copr. O West 2008 No Claim to Orig. Govt. Works Page 22 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REB 2004-72160, J.E. 2004-2016

have their rights vindicated. The only issue thus remaining is the determination of the "rules of conduct" likely to trigger extracontractual liability. On this issue, art. 1457 is explicit.

58 The first paragraph of art. 1457 does not set the standard of conduct. Instead, it incorporates by reference s. 122(l)(b) of the CBCA. The statutory duty of care is a "duty to abide by [a rule] of conduct which lie[s] upon [them], according to the ... law, so as not to cause injury to another". Thus, for the purpose of determining whether the Wise brothers can be held liable, only the CBCA is relevant. It is therefore necessary to outline the requirements of the duty of care embodied in s. 122(1)(b) of the CBCA.

59 That directors must satisfy a duty of care is a long-standing principle of the common law, although the duty of care has been reinforced by statute to become more demanding. Among the earliest English cases establishing the duty of care were Dovey v. Cory, [I9011 A.C. 477 (Eng. H.L.); Brazilian Rubber PIbntalion & Es- tates Ltd., Re, [I91 I] 1 Ch. 425 (Eng. Ch. Div.); and City Equitable Fire Insurance Co., Re (1924), [I9251 1 Ch. 407 (Eng. C.A.). In substance, these cases held that the standard of care was a reasonably relaxed, subjective standard. The common law required directors to avoid being grossly negligent with respect to the affairs of the corporation and judged them according to their own personal skills, knowledge, abilities and capacities. See McGuinness, supra, at p. 776: "Given the history of case law in this area, and the prevailing standards of competence displayed in commerce generally, it is quite clear that directors were not expected at oommon law to have any particular business skill or judgment".

60 The 1971 report entitled Proposals for a New Business Corporations Law for Canada (1971) ("Dickerson Report") culminated the work of a committee headed by R.W. V. Dickerson which had been appointed by the federal government to study the need for new federal business corporations legislation. This report preceded the enactment of the CBCA by four years and influenced the eventual structure of the CBCA.

61 The standard recommended by the Dickerson Report was objective, requiring directors and officers to meet the standard of a "reasonably prudent person" (vol. 11, at. p. 74):

(1) Every director and officer of a corporation in exercising his powers and discharging his duties shall ..... (h) exercise the care, diligence and skill of a reasonably prudent person.

The report described how this proposed duty of care differed from the prevailing common law duty of care (vol. I, at p. 83):

242. The formulation of the duty of care, diligence and skill owed by directors represents an attempt to upgrade the standard presently required of them. The principal change here is that whereas at present the law seems to be that a director is only required to demonstrate the degree of care, skill and diligence that could reasonably he expected from him, having regard to his knowledge and experience -- Re City Equitable Fire Insurance Co., [I9251 Ch. 425 -- under s. 9.19(l)(b) he is required to conform to the standard of a reasonably prudent man. Recent exnerience has demonstrated how low the nrevailine leeal standard of care for directors is. and we have soueht to raise it si~nificantlv.We are aware of the argument that raising the standard of conduct for directors may

deter people from accepting directorships. The truth of that argument has not been demonstrated and we think it is specious. The duty of care imposed by s. 9.19(l)(h) is exactly the same as that which the common law imposes on every professional person, for example, and there is no evidence that this has dried up the supply of lawyers, accountants, architects, surgeons or anyone else. It is in any event cold comfort to a shareholder to know that there is a steady supply of marginally competent people available under present law to manage his investment. [Emphasis added.]

62 The statutory duty of care in s. 122(l)(b) of the CBCA emulates but does not replicate the language proposed by the Dickerson Report. The main difference is that the enacted version includes the words "in comparable circumstances", which modifies the statutory standard by requiring the context in which a given decision was made to be taken into account. This is not the introduction of a subjective element relating to the competence of the director, but rather the introduction of a contextual element into the statutory standard of care. It is clear that s. 122(l)(b) requires more of directors and officers than the traditional common law duty of care outlined in, for example, City Equitable Fire Insurance Co., Re, supra.

63 The standard of care embodied in s. 122(l)(b) of the CBCA was described by Robertson J.A. of the Feder- al Court of Appeal in Soper v. R. (1997), [I9981 I F.C. 124 (Fed. C.A.), at para. 41, as being "objective subjective". Although that case concerned the interpretation of a provision of the Income Tax Act, it is relevant here because the language of the provision establishing the standard of care was identical to that of s. 122(l)(b) of the CBCA. With respect, we feel that Robertson J.A.'s characterization of the standard as an "objec1:ive subjective" one could lead to confusion. We prefer to describe it as an objective standard. To say that the standard is ohject- ive makes it clear that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(l)(b) duty of care, as opposed to the subjective motivation. of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(l)(a)of the CBCA.

64 The contextual approach dictated by s.I22(l)(b) of the CBCA not only emphasizes the primaly facts but also permits prevailing socio-economic conditions to be taken into consideration. The emergence of stricter standards puts pressure on corporations to improve the quality of hoard decisions. The establishment of good corporate governance rules should be a shield that protects directors from allegations that they have breached their duty of care. However, even with good corporate governance rules, directors' decisions can still be open to criticism from outsiders. Canadian courts, like their counterparts in the United States, the United Kingdom, Aus- tralia and New Zealand, have tended to take an approach with respect to the enforcement of the duty of care that respects the fact that directors and officers often have business expertise that courts do not. Many decisions made in the course of business, although ultimately unsuccessful, are reasonable and defensible ;at the time they are made. Business decisions must sometimes be made, with high stakes and under considerable time pressure, in circumstances in which detailed information is not available. It might be tempting for some to see unsuccessful business decisions as unreasonable or imprudent in light of information that becomes available expostfacfo. Because of this risk of hindsight bias, Canadian courts have developed a rule of deference to business decisions called the "business judgment rule", adopting the American name for the rule.

65 In Pente Investment Management Ltd. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (Ont. C.A.), Weiler J.A. stated, at p. 192:

The law as it has evolved in Ontario and Delaware has the coinmon requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a oerfect decision. Provided the decision taken is within a ranee of

reasonableness the court on ht n t t sequent events mav have cast doubt on the board's determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board's decision [references omitted]. This formulation of deference to the decision of the Board is known as the "business judgment rule". The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction

[reference omitted]. [Emphasis added; italics in original.]

66 In order for a plaintiff to succeed in challenging a business decision he or she has to establish that the directors acted (i) in breach of the duty of care and (ii) in a way that caused injury to the plaintiff: W.T. Allen, J.B. Jacobs, and L.E. Strine, Jr., "Function Over Fom: A Reassessment of Standards of Review in Delaware Corpor- ation Law" (2001), 26 Del. .ICorp. L. 859, at p. 892.

67 Directors and officers will not be held to he in breach of the duty of care under s. 122(l)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should he reluctant to second-guess the application of husiness expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to he a reasonable business decision at the time it was made.

68 The trustee alleges that the Wise brothers breached their duty of care under s. 122(1)(b) of the CBCA by implementing the new procurement policy to the detriment of Peoples' creditors. After considering all the evidence, we agree with the Court of Appeal that the implementation of the new policy was a reasonable business decision that was made with a view to rectifying a serious and urgent business problem in circumstances in which no solution may have been possible. The trial judge's conclusion that the new policy led inexorably to Peoples' failure and bankruptcy was factually incorrect and constituted a palpable and overriding error.

69 In fact, as noted by Pelletier J.A., there were many factors other than the new policy that contributed more directly to Peoples' bankruptcy. Peoples had lost $10 million annually while being operated by M & S. Wise, which was only marginally profitable and solvent with annual sales of $100 million (versus $160 million for Peoples), had hoped to improve the performance of its new acquisition. Given that the transaction was a fully leveraged buyout, for Wise and Peoples to succeed, Peoples' performance needed to improve dramatically. Un- fortunately for both Wise and Peoples, the retail market in eastern Canada had become very competitive in the early 1990s, and this trend continued with the arrival of Wal-Mart in 1994. At paras. 153 and 15.5, Pelletier J.A. stated:

[TRANSLATION] In reality, it was that particularly unfavourahle financial situation in which the two corporations found themselves that caused their downfall, and it was M. & S. that, to protect its own interests, sounded the charge in December, rightly or wrongly judging that Peoples Inc.'s situation would only worsen over time. It is crystal-clear that the bankruptcy occurred at the most propitious time for M. & S.'s interests, when inventories were high and suppliers were unpaid. In fact, M. & S,. recovered the entire balance due on the selling price and almost all of the other debts it was owed.

Copr. O West 2008 No Claim to brig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

...... the trial judge did not take into account the fact that the brothers derived no direct benefit froin the transaction impugned, that they acted in good faith and that their true intention was to find a solution to the serious inventory management problem that each of the two corporations was facing. Because of an assessment error, he also ignored the fact that Peoples Inc. received a sizable [sic]consideration for the ~goods it delivered to Wise. Lastly, I note that the act for which the brothers were fount1 liable, i.e. he and that. in opposition to his view. the act was also not the true cause of the hankrnotcv of Peonies Inc. [Emphasis added.]

70 The Wise brothers treated the implementation of the new policy as a decision made in the ordinary course of business and, while no formal agreement evidenced the arrangement, a monthly record was inade of the inventory transfers. Although this may appear to be a loose business practice, by the autumn of 1.993, Wise had already consolidated several aspects of the operations of the two companies. Legally they were two separate entities. However, the financial fate of the two companies had become intertwined. In these circumstances, there was little or no economic incentive for the Wise brothers to jeopardize the interests of Peoples in favour of the interests of Wise. In fact, given the tax losses that Peoples had carried forward, the companies had every incentive to keep Peoples profitable in order to reduce their combined tax liabilities.

71 Arguably, the Wise brothers could have been more precise in pursuing a resolution to the intractable inventory management problems, having regard to all the troublesome circumstances involved at the time the new policy was implemented. But we, like the Court of Appeal, are not satisfied that the adoption of the new policy breached the duty of care under s. 122(l)(b) of the CBCA. The directors cannot he held liable for a breach of their duty of care in respect of the creditors of Peoples.

72 The Court of Appeal relied on two additional provisions of the CBCA that in its view could rescue the Wise brothers from a finding that they breached the duty of care: ss. 44(2) and 123(4).

73 Section 44 of the CBCA, which was in force at the time of the impugned transactions but has since been repealed, permitted a wholly-owned subsidiary to give financial assistance to its holding body corporate:

44.(1) Subject to subsection (2), a corporation or any corporation with which it is affiliated shall not, directly or indirectly, give financial assistance by means of a loan, guarantee or otherwise . . . . . (2) A corporation may give financial assistance by means of a loan, guarantee or otherwise . . . . . (c) to a holding body corporate if the corporation is a wholly-owned subsidiary of the holding body corporate;

74 While s. 44(2) as it then read qualified the prohibition under s. 44(1), it did not serve to supplant the duties of the directors under s. 122(1) of the CBCA. The Court of Appeal erred in concluding that s. 44(2) served as a blanket legitiinization of financial assistance given by wholly-owned subsidiaries to parent corporations. In our opinion, it is incumbent upon directors and officers to exercise their powers in conformity with the duties of s. 122(1).

75 Although s. 44(2) authorized certain fonns of financial assistance between corporations, this cannot exempt directors and officers from potential liability under s. 12741) for any financial assistance given by subsidiaries to the parent corporation.

76 When faced with the serious inventory management problem, the Wise brothers sought thte advice of the vice-president of finance, David CICment. The Wise brothers claimed as an additional argument ithat in adopting the solution proposed by CICment, they were relying in good faith on the judgment of a person whose profession lent credibility to his statement, in accordance with the defence provided for in s. 123(4)(b) (now s. 123(5)) of the CBCA. The Court of Appeal accepted the argument. We disagree.

77 The reality that directors cannot he experts in all aspects of the corporations they manage or supervise shows the relevancy of a provision such as s. 123(4)(b). At the relevant time, the text of s. 123(4) read:

. . . . . (4) A director is not liable under section 118, 119 or 122 if he relies in good faith on

(a) financial statements of the corporation represented to him by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

(h) a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by him.

78 Although Clement did have a bachelor's degree in commerce and 15 years of experience in administration and finance with Wise, this experience does not correspond to the level of professionalisin required to allow the directors to rely on his advice as a bar to a suit under the duty of care. The named professior~algroups in s. 123(4)(b) were lawyers, accountants, engineers, and appraisers. ClCment was not an accountant, was not subject to the regulatory overview of any professioual organization and did not carry independent insurance coverage for professional negligence. The title of vice-president of finance should not auto~naticallylead to a couclusion that ClCment was a person "whose profession lends credibility to a statement made by him." It is noteworthy that the word "profession" is used, not "position". ClCment was simply a non-professional employee of Wise. His judgment on the appropriateness of the solution to the inventory management problem must be regarded in that light. Although we might accept for the sake of argument that Clement was better equipped and positioned than the Wise hrothers to devise a plan to solve the inventory management problems, this is not enough. Therefore, in our opinion, the Wise hrothers cannot successfully invoke the defence provided by s. 123(4)(b) of the CBCA but must rely on the other defences raised.

C. The Claim under Section 100 of the BIA

79 The trustee also claimed against the Wise brothers under s. 100 of the BIA. That section reads:

100.(1) Where a bankrupt sold, purchased, leased, hired, supplied or received property or services in a reviewable transaction within the period beginning on the day that is one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, the court may, on the application of the trustee, inquire into whether the bankrupt gave or received, as

the case may be, fair market value in consideration for the property or services concerned in the transaction.

(2) Where the court in proceedings under this section finds that the consideration given or received by the bankrupt in the reviewable transaction was conspicuously greater or less than the fair market value of the property or services concerned in the transaction, the court may give judgment to the trustee against the other party to the transaction, against any other person being privy to the transaction with the bankrupt or against all those persons for the difference between the actual consideration given or received by the bankrupt and the fair market value, as determined by the court, of the property or services concerned in the transaction.

80 The provision has two principal elements. First, subs. (1) requires the transaction to have been conducted within the year preceding the date of banknlptcy. Second, subs. (2) requires that the consideration given or received by the bankrupt be "conspicuously greater or less" than the fair market value of the property concerned.

81 The word "may" is found in both ss. 100(1) and 100(2) of the BIA with respect to the jurisdiction of the court. In Standard Trustco Ltd. (Trustee ofl v. Standard Trust Co. (1995), 26 O.R. (3d) 1 (Ont. C.A.), a majority of the Ontario Court of Appeal held that, even if the necessary preconditions are present, the exercise of jurisdiction under s. 100(1) to inquire into the transaction, and under s. 100(2) to grant judgment, is discretionary. Equitable principles guide the exercise of discretion. We agree.

82 Referring to s. 100(2) of the BIA, in Standard Trustco, supra, at p. 23, Weiler J.A. explained that:

When a contextual approach is adopted it is apparent that although the conditions of the section have been satisfied the court is not obliged to grant judgment. The court has a residual discretion to exercise. The contextual approach indicates that the good faith of the parties, the intention with which the transaction took place, and whether fair value was given and received in the transaction are important considerations as to whether that discretion should be exercised.

We agree with Weiler J.A. and adopt her position; however, this appeal does not turn on the discretion to ultimately impose liability. In our view, the Court of Appeal did not interfere with the trial judge's exercise of dis- creti011 in reviewing the facts and finding a palpable and overriding error.

83 Within the year preceding the date of bankruptcy, Peoples had transferred inventory to Wise for which the trustee claimed Peoples had not received fair market value in consideration. The relevant transaotions involved, for the most part, transfers completed in anticipation of the busy holiday season. Given the non-arm's length relationship between Wise and its wholly-owned subsidiary Peoples, there is no question that rhese inventory transfers could have constituted reviewable transactions.

84 We share the view of the Court of Appeal that it is not only the final transfers that should be considered. In fairness, the inventory transactions should be considered over the entire period from Febmary to December 1994, which was the period when the new policy was in effect.

85 In Skalbania (Trustee ofl v. Wedgewood VillageEslates Lld. (1989), 37 B.C.L.R. (2d) 88 (B.C. C.A.), the test for determining whether the difference in consideration is "conspicuously greater or less" was held to he not whether it is conspicuous to the parties at the time of the transaction, hut whether it is conspicuous to the court having regard to all the relevant factors. This is a sound approach. In that case, a difference of $1.18 million

Copr. 0West 2008 No Claim to Orig. Govt. Works 2004 SCC 68,244 D.L.R. (4th) 564,326 N.R. 267 (Eng.), 326 N.R. 267 (Fr.), 4 C.B.R. (5th) 215,49 B.L.R. (3d) 165, [ZOO41 3 S.C.R. 461, REJB 2004-72160, J.E. 2004-2016

between fair market value and the consideration received by the bankrupt was seen as conspicuous, where the fair market value was $6.6 million, leaving a discrepancy of more than 17 percent. While there is no particular percentage that definitively sets the threshold for a conspicuous difference, the percentage difference is a factor.

86 As for the factors that would be relevant to this determination, the court might consider, inter alia: evidence of the margin of error in valuing the types of assets in question; any appraisals made of the assets in question and evidence of the parties' honestly held beliefs regarding the value of the assets in question; and other circumstances adduced in evidence by the parties to explain the difference between the consideration received and fair market value: see L.W. Houlden and G.B. Morawetz, Bankruptcy and Insolvency Law of Canada (3rd ed. (loose-leaf)), vol. 2, at p. 4-1 14.1.

87 Over the lifespan of the new policy, Peoples transferred to Wise inventory valued at $71.54 million. As of the date of bankruptcy, it had received $59.50 million in property or money from Wise. As explained earlier, the trial judge adjusted the outstanding difference down to a balance of $4.44 million after taking into account, inter alia, the reallocation of general and administrative expenses, and adjustments necessitated by imported inventory transferred from Wise to Peoples. Neither party disputed these figures before this Court. We agree with the Court of Appeal's observation that these findings directly conflict with the trial judge's assertion that Peoples had received no consideration for the inventory transfers on the basis that the outstanding accounts were "neither collected nor collectible" from Wise. Like Pelletier J.A., we conclude that the trial judge's finding in this regard was a palpable and overriding error, and we adopt the view of the Court of Appeal.

88 We are not satisfied that, with regard to all the circumstances of this case, a disparity of slightly more than six percent between fair market value and the consideration received constitutes a "conspicuous" difference within the meaning of s. 100(2) of the BIA. Accordingly, we hold that the trustee's claim under the BIA also fails.

89 In addition to permitting the court to give judgment against the other party to the transaction, s. 100(2) of the BIA also permits it to give judgment against someone who was not a party but was "privy" to the transaction. Given our finding that the consideration for. the impugned transactions was not "conspicuously less" than fair market value, there is no need to consider whether the Wise brothers would have been "privy" to the transaction for the purpose of holding them liable under s. lOO(2). Nonetheless, the disagreement between the trial judge and the Court of Appeal on the interpretation of "privy" in s. 100(2) of the BIA warrants the following observations.

90 The trial judge in this appeal had little difficulty finding that the Wise brothers were privy to the transaction within the meaning of s. 100(2). Pelletier J.A., however, preferred a narrow construction in finding that the Wise brothers were not privy to the transactions. He held, at para. 136, that:

[TRANSLATION] ... the legislator wanted to provide for the case in which a person other than the co- contracting party of the bankrupt actually received all or part, of the benefit resulting from the lack of equality between the respective considerations.

To support this direct benefit requirement, Pelletier J.A. also referred to the French version which uses the term ayanl intdrit. While he conceded that the respondent brothers received an indirect benefit from the inventory transfers as shareholders of Wise, Pelletier J.A. found this too remote to be considered "privy" to the transactions (paras. 140-41).

91 The primary purpose of s. 100 of the BIA is to reverse the effects of a transaction that stripped value from the estate of a bankrupt person. It makes sense to adopt a more inclusive understanding of the word "privy" to prevent someone who might receive indirect benefits to the debiment of a bankrupt's unsatisfied creditors from frustrating the provision's remedial purpose. The word "privy" should he given a broad reading to include those who benefit directly or indirectly from and have knowledge of a transaction occurring for less than fair market value. In our opinion, this rationale is particularly apt when those who benefit are the controlling minds behind the transaction.

92 A finding that a person was "privy" to a reviewable transaction does not of course necessarily mean that the court will exercise its discretion to make a remedial order against that person. For liability to be imposed, it must be established that the transaction occurred: (a) within the past year; (b) for consideration conspicuously greater or less than fair market value; (c) with the person's knowledge; and (d) in a way that directly or iudir- ectly benefited the person. In addition, after having considered the context and all the above factors, the judge must conclude that the case is a proper one for holding the person liable. In light of these conditions and of the discretion exercised by the judge, we find that a broad reading of "privy" is appropriate.

IV. Disposition

93 For the foregoing reasons, we would dismiss the appeal with costs to the respondents

Appeal dismissed.

Pourvoi rejeti.

FN*. Iacobucci J. took no part in the judgment

END OF DOCUMENT

Copr. O West 2008 No Claim to Orig. Govt. Works

TAB 2 12 C.B.R. (4th) 144

1999 CarswellBC 2673

United Used Auto & Truck Parts Ltd., Re In the Matter of the Companies' Creditors Arrangement Act R.S.C. 1985, c. C-36 In the Matter of the Company Act R.S.C. 1996, c. 62 In the Matter of United Used Auto & Truck Parts Ltd., VECW Industries Ltd., Seiler Holdings Ltd., United Used Auto Parts (Storage Div.) Ltd., Petitioners British Columbia Supreme Court [In Chambers] Tysoe J. Judgment: November 19, 1999 Docket: Vancouver A992950

Counsel: William E.J. Skelly, for Petitioners, United Group of Companies.

Douglas I. Knowles, for Ernst & Young LLP

Martin L. Palleson, for Canadian Western Bank.

Shelley C. Fitzpatrick, for Century Services Inc

E. Jane Milton, for Royal Bank of Canada

John I. McLean, for Aziz Group.

Bonita Lewis-Hand, for Clarica Life Insurance Company

R.G. Hildebrand, for City of Surrey.

Donnaree G. Nygard, for Her Majesty the Queen in Right of Canada as represented by the Attorney General of Canada (Revenue Canada).

Michael W. Watt, for International Union of Operating Engineers, Local 115

Subject: Corporate and Commercial; Insolvency

Corporations --- Arrangements and compromises -- Under Companies' Creditors Arrangement Act -- Miscel- laneous issues

Petitioners owned large amounts of land and operated auto-wrecking business -- Petitioners were granted ex parte stay order under Companies' Creditors Arrangement Act -- Stay order allowed conduct of sale by bank and C to continue and granted charge, up to $500,000, for professional fees of monitor and its legal counsel and petitioners' legal counsel -- Petitioners brought application for authorization of debtor-in-possession financing and priority charge against lands -- Secured creditors brought application to set aside stay order -- Petitioners' applic-

Copr. 0 West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

ation dismissed and secured creditors' application granted in part -- It was not demonstrated that financing was critical for business to continue to operate or for petitioners to successfully restructure affairs -- It was not clear that benefit of financing clearly outweighed potential prejudice to secured lenders -- Stay order was not to be set aside in its entirety -- Petitioners met realistic standard of disclosure and stay order was not to be set aside on basis of non-disclosure -- Petitioners acted in good faith -- Stay order was to be amended to stay conduct of sale by bank and C and to direct monitor to list lands and to receive and negotiate all offers for lands while considering input and interests of petitioners and security holders -- It was appropriate for monitor to be given priority charge for its fees and disbursements, including legal fees -- It was also appropriate to create priority charge in respect of petitioners' legal fees, to extent that expenses were reasonably incurred in connection with restructuring -- Amount of administrative charge to be reduced to $200,000.

The petitioners owned or had agreements for sale of 32 contiguous parcels of land totalling 150 acres. The petitioners operated an auto-wrecking business on part of the lands and employed 75 people. The petitioners experienced financial difficulties, and the petitioners entered into a series of forbearance agreements with the principal secured creditors. The agreements expired and a number of foreclosure actions were commenced. The bank and C obtained an order for conduct of sale with the consent of the petitioners. The parcels were listed for sale at a price in excess of the amount of the debt secured against the land. The petitioners made arrangements for debtor- in-possession financing and proposed that the financing be charged against the lands in priority ahead of all secured creditors except the Federal Crown and the holders of agreements for sale. The financing was alleged to be necessary to allow the petitioners to acquire new inventory for the auto-wrecking business and to retain professionals required for restructuring and bringing the operating business back to life. The court granted an ex parte stay order in favour of the petitioners under the Companies' Creditors Arrangement Act. The court allowed the conduct of sale to continue but directed the listing agents to deal with the petitioners or the monitor appointed under the stay order. The stay order also granted a charge, up to $500,000, for the professional fees and disbursements of the monitor and its legal counsel and the petitioners' legal counsel. The court declined to deal on an ex parte basis with the petitioners' application for authorization of the debtor-in-possession financing and the charge on the financing. Notice was given to the affected creditors and the petitioners requested that the court proceed with the application. A group of secured creditors brought an application to set aside the ex parte order.

Held: The petitioners' application was dismissed and the secured creditors' application was granted in part.

The inherent jurisdiction of the court to subordinate existing security should be exercised only in extraordinary circumstances. It must be shown that the benefit of the debtor-in-possession financing clearly outweighs the potential prejudice to the lenders whose security is being subordinated. While the financing in the circu~nstancesat the time would have a beneficial effect on the operating business, it was not demonstrated that it was critical for the business to continue to operate or for the petitioners to successfully restructure their affairs. It was not clear that the benefit of the financing clearly outweighed the potential prejudice to the secured lenders.

The provisions in the forbearance agreements by which the petitioners purportedly contracted out of the provisions of the Act were ineffective in view of s. 8 of the Act. The petitioners' failure to disclose the true status of refinancing efforts or restructurirlg advice that they had received, was not a material omission. The petitioners met a realistic standard of disclosure and the stay order was not to be set aside on the basis of non-disclosure. The petitioners acted in good faith. The petitioners' failure to abide by the terms of the forbearance agreements and the fact that they obtained restructuring advice did not demonstrate a lack of good faith in bringing the proceedings. The petitioners had substantial land holdings and an operating business. The petitioners had a legitimate concern that an en bloc sale of the lands in the foreclosure proceedings could bring an end to the operating

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

business. It was not an act of bad faith for the petitioners to seek the protection of the Act in order to attempt to save the operating business. The stay order was not to be set aside in its entirety.

The secured creditors did raise legitimate concerns that the petitioners might thwart any sale of the lands unless the price met with their approval and that the petitioners might not act reasonably in that regard. The evidence suggested that the petitioners had not acted reasonably in the attempts to sell the lands over the preceding two years. The stay order was to be amended so that the conduct of sale was also stayed and the listing agreement could not be acted upon by the bank and C. The amendment was to direct the monitor to list the lands on the same basis as the existing listing agreements, and the monitor was to receive and negotiate all offers for the lands or any part of the lands. The monitor was to consider the input of the petitioners and the security holders and to take into account the interests of the parties, but the petitioners and holders were not to interfere with any negotiations undertaken by the monitor. The offers were to be subject to court approval. The monitor was an officer of the court and had an obligation to act independently and to consider the interests of all parties. The potential continuation of the operating business was one of the considerations to be taken into account by the monitor in assessing offers on the land.

It was appropriate for the monitor to be given a priority charge for its fees and disbursements, including legal fees. The monitor acted on behalf of the court to provide information and monitoring for the benefit of all parties. It was also appropriate for the court to create a priority charge in respect of the petitioners' legal fees. The cash-flow projections of the petitioners did not provide for the payment of any legal expenses if there was no injection of working capital by way of the debtor-in-possession financing. The petitioners required legal advice in order to successfully restructure their affairs. A priority charge was to be given in respect of the petitioners' legal expenses, but only to the extent that the expenses were reasonably incurred in connection with the restructuring. The $500,000 maximum amount of the administrative charge in the stay order was too high and was to be reduced to $200,000.

Cases considered by Tysoe J.:

Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 51 B.C.L.R. (2d) 84,4 C.B.R. (3d) 31 1, (sub nom. Chef Ready Foods Ltd. v. Hongkong Bank of Canada) [1991] 2 W.W.R. 136 (B.C. C.A.) -- applied

Lochson Holdings Ltd. v. Eaton Mechanical Inc. (1984), 55 B.C.L.R. 54, 33 R.P.R. 100, 52 C.B.R (N.S.) 271, 10 D.L.R. (4th) 630 (B.C. C.A.) --referred to

Mooney v. Orr (1994), 33 C.P.C. (3d) 31, [I9951 3 W.W.R. 116, 100B.C.L.R. (2d) 335 (B.C. S.C.) -- considered

Ontario (Securities Commission) v. Consortium Construction Inc. (1992), 14 C.B.R. (39 6, 9 O.R. (3d) 385,93 D.L.R. (4th) 321, 11 C.P.C. (3d) 352, 57 O.A.C. 241 (Ont. C.A.) -- referred to

Royal Oak Mines Inc., Re (1999), 6 C.B.R. (4th) 314 (Ont. Gen. Div. [Commercial List]) -- applied

Royal Oak Mines Inc., Re (1999), 7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial List]) -- considered

Starcoin International Optics Corp., Re (1998), 3 C.B.R. (4th) 177 (B.C. S.C. [In Chambers]) -- applied

Westar Mining Ltd., Re, 70 B.C.L.R. (2d) 6, 14 C.B.R. (3d) 88, [I9921 6 W.W.R. 331 (B.C. S.C.) --

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

considered

Statutes considered:

Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36

Generally -- referred to

s. 8 -- referred to

APPLICATION by petitioners for authorization for debtor-in-possession financing and priority charge against lands; APPLICATION by secured creditors to set aside stay order.

Tysoc J. :

1 THE COURT: On November 8, I granted an ex parte stay Order under the Companies' Creditors Arrange- ment Act (the "CCAA") in favour of the Petitioners. In granting the Order, I indicated that I was not creating any burden on creditors who wished to apply to set aside the Order. I declined to deal on an ex parte basis with the request of the Petitioners that I authorize debtor-in-possession ("DIP") financing in the amount of $1.1 million and create a charge for such financing in priority to all existing security except the charge in favour of the Fed- eral Crown and the holders of agreements for sale.

2 After giving notice to the affected creditors, the Petitioners are now asking me to deal with the request for the DIP financing. One of the groups of the secured creditors has concurrently applied to set aside the November 8 Order, in whole or in part, and all of the other secured creditors support the application.

3 The Petitioner, VECW Industries Ltd., commenced business in 1958 in Victoria as the seller of English car parts. The business grew and VECW established an auto wrecking business in Surrey in 1963. The Victoria operation was closed in 1990. Over the years the Petitioners acquired additional land in Surrey and they now own or have agreements for sale on 32 contiguous parcels aggregating approximately 150 acres. At the present time, the auto wrecking business operates on approximately 40 acres of land and employs approximately 75 people.

4 The Petitioners first ran into financial difficulty in 1989 when they suffered significant losses. The Petition- ers have only been profitable in two or three years since that time, the most recent profitable year being 1996. The accumulated losses have essentially been financed by mortgaging of the real estate. The gross revenues of the auto wrecking business have decreased from $14 million in 1996 to $6.5 million in 1998, and the projected revenue figure for 1999 is $3 million.

5 The Petitioners entered into a series of forbearance agreements with the principal secure:d creditors, but when they expired a number of foreclosure actions were commenced in late 1998 or early 1999. Orders Nisi were granted and redemption periods ran their course. On July 28, 1999, an order for Conduct of Sale was granted to Royal Bank of Canada and Century Services Inc. The Order was granted with the consent of the Petition- ers. The 32 parcels were listed for sale with Colliers Macaulay Nicholls Inc. and J.J. Bamicke Vancouver Ltd. by a listing agreement dated October 12, 1999. The parcels are individually listed at an aggregate price of $49.6 million and an en bloc price of $32 million.

6 The aggregate amount of the debt secured against the real estate is approximately $24 million

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

7 There is disagreement as to the appraised value of the real estate. There have been two rrscent appraisals conducted by Burgess Austin, which was commissioned by the Royal Bank and Century S(srvices, and by Grover Elliot, which was commissioned by the Petitioners. The range of the two appraisals for the sale of the land on a lot-by-lot basis, before making any allowance for carrying costs, selling expenses and developer profit, is $44.4 million to $48.5 million. The selling period for the land on a lot-by-lot basis has been estimated from 3 to 4 years to 7 to 8 years. Grover Elliot did not provide an en bloc valuation for the land. The final en bloc valuation of Austin Burgess was $23 to $25 million hut an earlier draft of its appraisal valued the land on an en bloc basis at $30 million.

8 The Petitioners have made arrangements for DIP financing in the amount of $1.1 million, with $200,000 he- ing withheld for fees and an interest reserve. It is proposed that the financing he charged against the real estate in priority ahead of all of the secured creditors except the Federal Crown which is owed monies for unremitted source deductions and GST and except for the holders of agreements for sale. The President of the Petitioners had deposed that the DIP financing is essential for the purpose of allowing the Petitioners to acquire new inventory for the auto wrecking business, retain the professionals required for the restructuring and to generally bring the operating business back to life. The Petitioners have provided cash flow statements showing the effect of this injection of working capital.

9 In granting the stay Order, I allowed the conduct of sale to continue but I directed that the listing agents were to deal with the Petitioners or the Monitor appointed under the stay Order, rather than dealing with the Royal Bank and Century Services. The stay Order also granted a charge, up to $500,000, for the professional fees and disbursements of the Monitor and its legal counsel and the Petitioners' legal counsel.

10 The secured creditors attack the stay Order on two main grounds. First, they say that the Petitioners did not make full and frank disclosure when obtaining the ex parte order. Second, they say that the Petitioners are not acting in good faith and are abusing the CCAA by using this proceeding to delay a sale of the real estate.

11 Numerous non-disclosures were alleged hut I need only address the three main complaints. First, it was as- serted that the Petitioners did not disclose the existence of provisions in the forbearance agreements by which the Petitioners purportedly contracted out of the provisions of the CCAA. As I advised during the course of suh- missions, these provisions were disclosed to me on November 8 and I was of the view that they were ineffective in view of s. 8 of the CCAA.

12 Second, it is said that the Petitioners failed to disclose the true status of the refinancing efforts of ~eming- ton Financial Group, Inc. If there was any non-disclosure in this regard, I do not consider it to be material. In granting the stay Order, I did not rely on any imminent prospect of refinancing.

13 Third, the secured creditors point to the non-disclosure of the fact that the Petitioners sought advice from Deloitte & Touche Inc. in February 1998 and were provided with a report advising them to consider a restructnring. I do not consider this omission to be material. Knowledge of this report would not have affected my decision to grant the stay Order.

14 As was pointed out in Mooney v. Orr (1994), 100 B.C.L.R. (2d) 335 (B.C. S.C.), the standard of disclosure must be realistic. In my view, the Petitioners met a realistic standard of disclosure and I decline to set aside the stay Order on the basis of non-disclosure.

15 I am also not persuaded by the submissions of the secured lenders that the Petitioners are not acting in

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

good faith. The facts that the Petitioners failed to abide by the terms of the forbearance agreements and that they obtained restructuring advice from Deloitte & Touche Inc. in February 1998 does not, in my view, demonstrate a lack of good faith in bringing these proceedings.

16 The Courts have consistently recognized the broad public policy objectives of the CCAA. The purpose of the legislation was described in the following passage from Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990),4C.B.R. (3d)311 (B.C.C.A.):

The purpose of the C.C.A.A. is to facilitate the making of a comproinise or arrangement between an insolvent debtor company and its creditors to the end that the company is able to continue in business. It is available to any company incorporated in Canada with assets or business activities in Canada that is not a bank, a railway company, a telegraph company, an insurance company, a trust company, or a loan company. When a company has recourse to the C.C.A.A., the Court is called upon to play a kind of supervisory role to preserve the status quo and to move the process along to the point where a compromise or arrangement is approved or it is evident that the attempt is doomed to failure. Obviously time is critical. Equally obviously, if the attempt at compromise or arrangement is to have any prospect of suc- cess, there must be a means of holding the creditors at hay, hence the powers vested in the Court under s. 11.

17 In the present case, the Petitioners have substantial land holdings and an operating business. It is their intention to reorganize their affairs in order to save the auto wrecking business. They have a legitimate concern that an en bloc sale of the lands in the foreclosure proceedings could bring an end to the operating husiness. In my view, it is not an act of bad faith to seek the protection of the CCAA in order to attempt to save the operating business. The arguments of the secured lenders in this regard would have been more persuasive if the only business of the Petitioners was land holdings, but the Petitioners do have an active business which must be considered.

18 Accordingly, I decline to set aside the stay Order in its entirety

19 As I indicated during the course of submissions, I appreciate the concerns of the secured creditors that the Petitioners may thwart any sale of the lands unless the price meets with their approval and that the Petitioners may not act reasonably in this regard. There is evidence to suggest that the Petitioners have not acted reasonably in the attempts to sell the lands over the past two years. I also agree with Mr. McLean's commerlt that the Court probably does not have the jurisdiction to amend the current listing agreement. Therefore, I set aside paragraph 33 of the stay Order and I order the following in its place:

(a) the stay of proceedings contained in paragraph 2 of the stay Order applies to the foreclosure proceedings, with the result that the Order for Conduct of Sale dated July 28, 1999 is also stayed and the listing agreement cannot he acted upon by the Royal Bank and Century Services;

(h) the Monitor is directed to list the lands with Colliers Macauly Nicholls Inc. and J.J. Barnicke Van- couver Ltd. on the same basis as the current listing agreement, provided that the Monitor may apply for further directions if it believes that there should he any changes in the listing arrangements;

(d) the Monitor is to provide copies of all offers to the Petitioners and the holders of the mortgages and

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

agreements for sale and is to consider their input with respect to any offers, provided that the Monitor may accept an offer or make a counter-offer one full business day after providing a copy of the offer to these stakeholders;

(e) the Petitioners and the secured creditors are not to interfere with any negotiations undertaken by the Monitor and while they may answer any unsolicited inquiries from prospective purchasers, they are not to initiate contact with them;

(0 all offers are subject to court approval in this proceeding;

(g) in dealing with offers, the Monitor is directed to take into account the interests of the Petitioners and the interests of the secured creditors, as well as the unsecured creditors, and the Monitor is to give consideration to en bloc offers while weighing the viability of the continued operation of the auto wrecking business;

(h) in the event that any of the secured creditors believe that the Monitor is acting unrea;ronably in dealing with offers, there is liberty to apply to replace the Monitor with another party with respect to the sale of the lands or to seek directions with respect to any offer not accepted by the Monitor.

20 When I suggested during submissions that the Monitor be given conduct of the sale of the lauds, counsel for the secured creditors argued that another chartered accounting firm be appointed as the parly designated to have conduct of the sale. They submitted that the Monitor is seen to he in the camp of the Petitioners and that the party having conduct of the sale should give no consideration to the continuation of the operating business. I do not accept these submissions. The Monitor is an officer of the Court and has an obligation to act independently and to consider the interests of the Petitioners and its creditors. If the secured lenders can satisfy the Court that the Monitor is not performing its functions independently, there is liberty to apply for a replacement. With 1 respect to the second point, it is my view that the potential continuation of the operating business is one of the considerations to be taken into account when assessing offers on the lands.

21 I now turn to the Petitioners' request for a priority charge in respect of the proposed DIP financing.

22 The first case in which a court in Canada created a charge against the assets of a company in CCAA proceedings was Re Westar Mining Ltd. (1992), 14 C.B.R. (3d) 88 (B.C. S.C.), where the Court created a charge to secure credit extended by suppliers of Westar Mining Ltd. during the period of the stay. The Court created the charge against unencumbered assets and it was not necessary to postpone any existing security.

23 In the Weslar Mining Lld. case, Macdonald J. distinguished the CCAA situation from the situation where a receiver-manager requests the Court to exercise its inherent jurisdiction to create a charge, such as occurred in Lochson Holdings Lfd. v. Eaton MechanicalInc. (1984), 52 C.B.R. (N.S.) 271 (B.C. C.A.)

24 While I agree with Macdonald J. that there are considerations in a CCAA situation which do not exist in relation to a receivership, it is my view that the inherent jurisdiction of the Court to subordinate existing security should only be exercised in extraordinary circumstances.

25 A somewhat similar situation arises when a request is made for a charge against trust assers. The jurisprudence suggests that the Court's jurisdiction to create such a charge should be sparingly exercised: for example, see Ontario (Securities Commission) v. Consortium Construction Inc. (1992), 14 C.B.R. (3d) 6 (Ont. C.A.).

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

26 The extraordinary nature of superpriority for DIP financing in the context of CCAA procl:edings was acknowledged hy Blair J. in Re Royal Oak Mines Inc. (1999), 6 C.B.R. (4th) 314 (Ont. Gen. Div. [Commercial List]) at paragraph 24:

It follows from what I have said that, in my opinion, extraordinary relief such as DIP financing with sn- per priority status should be kept, in Initial Orders, to what is reasonably necessary to meet the debtor company's urgent needs over the sorting-out period. Such measures involve what may be a significant re-ordering of priorities from those in place before the application is made, not in the sense of altering the existing priorities as between the various secured creditors but in the sense of placing encumbrances ahead of those presently in existence. Such changes should not be imported lightly, if' at all, into the creditors mix; and affected parties are entitled to a reasonable opportunity to think about their potential impact, and to consider such things as whether or not the CCAA approach to the insolvency is the appropriate one in the circumstances - as opposed, for instance, to a receivership or bankruptcy - and whether or not, or to what extent, they are prepared to have their positions affected by DIP or super priority financing. As Mr. Dnnphy noted, in the context of this case, the object should be to "keep the lights [of the company] on" and enable it to keep up with appropriate preventative maintenance measures, but the Initial Order itself should approach that objective in a judicious and cautious matter.

Those comments continue to have force on an application for priority financing after the initial Order.

27 Farley J. expressed his views in the subsequent application in the same proceedings at item 22 of paragraph 6 of Re Royal OakMines Inc. (1999), 7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial Lisl:]):

Aside froin the question of the lienholders who have registered liens which hut for the Initial Order granted by Blair .I.(hut subject to the comeback clause) would have priority over the DIP financing, I see no reason to interfere with this superpriority granted. It would seem to me that Blair J. engaged properly in a balancing act as to the $8.4 million of superpriority DIP financing as authorized. I am in accord with his views as expressed in Re Skydome Corporation released Nov. 27, 1998 where Blair J. stated at p. 7:

This is not a situation where someone is being compelled to advance further credit. What is bap- pening is that the creditor's security is being weakened to the extent of its reduction in value. It is not the first time in restructuring proceedings where secured creditors - in the exercise of balancing the prejudices between the parties which is inherent in these situations - have been asked to make such a sacrifice. Cases such as Re Westar Mining Ltd. (1992), 14 C.B.R. 88 (B.C.S.C.) are ex- amples of the flexibility which courts bring to situations such as this. See also Re Lehndorff Gen Partner (1992), 17 C.B.R. (3d) 24 (Ont. Gen. Div.); Olympia & Yorlr Developments Limited v. Royal Trust Co. (1993), 17 C.B.R. (3d) 1 (Ont. Gen. Div.).

Implicit in his analysis and part of the equation is the reasonably anticipated benefits for all concerned which derive from these sacrifices. It would seem to me that Holden J.A. in his endorsement in Re Dylex Limited released January 23, 1995 implicitly engaged in this balancing of prejudices act where he observed:

I do not believe that the Bank of Montreal will he adversely affected by the making of this order. As a result of the bridge financing, new receivables will be generated which will assist in re-paying or securing the bridge financing.

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

Better and more timely information will be of assistance in minimizing the momentum effect in the future. My conclusion as to the appropriateness of the superpriority granted the DIP financing is of course limited to the Initial Order $8.4 million amount and is based upon the conditions now determined to be prevailing as of the authorization date. Each subsequent DIP financing authorization and the priority to be attributed to it will have to he determined on the merits and circumstances then existing.

28 While I do not disagree that it is an exercise of balancing interests, it is my view that them should he cogent evidence that the benefit of DIP financing clearly outweighs the potential prejudice to the lenders whose security is being subordinated. For example, in Weslar Mining Lfd.,the charge was necessary to keep the business in operation and there was no prejudice to any secured lenders.

29 In the present situation, while the ~~P'financingwould obviously have a beneficial effect on the operating business, I am not satisfied that it is critical for the business to continue to operate or for the Petitioners to successfully restructure their affairs. Nor do I have sufficient confidence in the cash flow projections and the appraised values of the realty that I can conclude that the benefit of the DIP financing clearly outweighs the potential prejudice to the secured lenders.

30 In the result, I dismiss the Petitioners' application for a priority charge to secure DIP financing.

31 The secured lenders also object to the priority charge for the professional fees and disbursements of the Monitor, its legal counsel and the legal counsel for the Petitioners. The jurisdiction of the Court in this regard was considered in the case of Re Sfarcom Inlernafional Optics Corp. (1998), 3 C.B.R. (4th) 177 (B.C. S.C. [In Chambers]), where Saunders J. said the following at paragraphs 48 and 49:

This court, in previous cases which postdate Fairview Industries Ltd., Re, has acted to give priority for payment of accounts. For example, in Westar Mining Ltd., Re (1992), 70 B.C.L.R. (2d) 6 (B.C.S.C.) Mr. Justice Macdonald exercised his discretion to create a "first charge" to secure monies advanced to permit operations to continue. Considering this authority, and the genesis of the office of monitor, I conclude that this court does have jurisdiction to create a priority for fees charged by the monitor.

Further, in my view the order sought is appropriate. The monitor acts on behalf of the court to provide information and monitoring for the benefit of all parties. An order protecting the fees, as first granted in the exparte order, shall continue.

32 1 agree with these comments and I believe that it is appropriate for the Monitor to he given a priority charge for its fees and disbursements, including disbursements incurred for legal counsel. I will return shortly to the appropriate amount of the charge.

33 In Sfarcom Infernafional Opfics Corp., Saunders J. concluded that the Court had the jurisdiction to create a priority charge in respect of other professional fees but she declined to do so because the evidence was that they could be paid from cash flow. In this case, the cash flow projections prepared by the Petitioners do not provide for the payment of any legal expenses if there is no injection of working capital by way of the DIP financing.

34 I am satisfied that some priority should he given at this stage for the Petitioners' legal expenses because they will require legal advice in order to successt%lly restructure their affairs. However, in the event that the restructuring is not successful and there is a shortfall in the recovery for the secured lenders, it would not be fair to require those lenders to bear all of the burden of the expense of the lawyers for the Petitioners in acting against

Copr. O West 2008 No Claim to Orig. Govt. Works 12 C.B.R. (4th) 144

them. The secured lenders should not be expected to underwrite the expenses of lawyers who act unreasonably or who act on unreasonable instructions to frustrate them in the recovery of the monies owed to them.

35 Hence, I am only prepared to give a priority charge in respect of the Petitioners' legal expenses to the extent that they are reasonably incurred in connection with the restructuring. As an example, if the Court were to conclude that the position of the Petitioners' on an application was unreasonable, the Petitioners' counsel would not have the benefit of the priority charge and would have to look to other sources for payment.

36 After hearing full submissions on this matter, I have also concluded that the $500,000 maximum amount of the administrative charge in paragraph 30 of the November 8 stay Order is too high without a requirement for further justification. I reduce the amount to $200,000, subject to further order of the Court.

37 Two creditors asked to be excluded from these proceedings because of their unique situation. Both R.I.C. Lands Ltd. and Western Canadian Bank submitted that their security relates to isolated parcels and there is no reason why they should he part of the CCAA proceeding. I do not agree because the parcels of land against which they hold security form part of the collective land holdings of the Petitioners. There is no principled reason to exempt them from the stay Order.

38 Subject to the variations which I have ordered, the stay Order is to continue in force pending further Court application. When these applications initially came before me on November 15, I directed that the Monitor was not to take any steps under the stay Order except answering inquiries from creditors until further order. I now direct the Monitor to act under the stay Order.

Order accordingly

END OF DOCUMENT

Copr. O West 2008 No Claim to Orig. Govt. Works 2000BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559, 16 C.B.R. (4th) 141, 135 B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No.409

United Used Auto & Tmck Parts Ltd., Re In the Matter of the Companies' Creditors Arrangement Act R.S.C. 1985, C. c-36 In the Matter of the Company Act, R.S.B.C. 1979, c. 59 In the Matter of United Used Auto & Truck Parts Ltd. VECW Industries Ltd., Seiler Holdings Ltd. and United Used Auto Parts (Storage Div.) Ltd. United Used Auto & Tmck Parts Ltd. VECW Industries Ltd. Seiler Holdings Ltd and United Used Auto Parts (Storage Div.) Ltd., Petitioners (Respondents) and Rashid Aziz, Respondent (Appellant) British Columbia Court of Appeal Rowles, Prowse, Mackenzie JJ.A. Heard: January 25,2000 Judgment: February 28,2000 Docket: Vancouver CA026591

Proceedings: affirming (1999), 12 C.B.R. (4th) 144 (B.C. S.C. [In Chambers])

Counsel: B.J. Brown, for Appellant

S.C. Fitzpatrick, for Respondent Century Services.

C.W, Caverly, for Respondent Emst & Young.

W.E.J. Skelly, for Respondent United Group of Co

R.G. Hildebrand, for Respondent City of Surrey

B. Lewis-Hand, for Respondent Clarica Life Insurance Co.

D.G. Nygard, for Respondent Attorney General of Canada

Subject: Corporate and Commercial; Insolvency

Corporations --- Arrangements and compromises -- Under Companies' Creditors Arrangement Act -- Miscel- laneous issues

Petitioners owned large amounts of land and operated auto-wrecking business -- Petitioners were granted stay order under Companies' Creditors Arrangement Act -- Stay order allowed conduct of sale by bank and C to continue and granted charge for professional fees of monitor and its legal counsel and petitioners' legal counsel -- Petitioners' application for authorization of debtor-in-possession financing was dismissed -- Secured creditors' application to set aside stay order was granted in part -- Stay order was ordered amended by motions judge to

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559,16 C.B.R. (4th) 141,135B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No. 409

stay conduct of sale by bank and C and to direct monitor to list lands and to receive and negotiate all offers for lands -- Appeal by secured creditors dismissed -- Equity permitted orders granting super-priority for monitor's fees and expenses in appropriate circumstances as well as for debtor's legal expenses related to restmcturing plan --Nothing precluded exercise of equitable jurisdiction to supplement statute and effect object of Act -- Jur- isdiction under Act could not be restricted to circumstances where secured creditors approved appointment of monitor, monitor is appointed to preserve and realize assets for benefit of all interested parties, or monitor has expended money for necessary preservation or improvement of properly -- Super-priority for petitioners' legal fees was substitute for debtor in possession financing -- Jurisdiction to grant super-priority for petitioners' legal expenses rested on same equitable foundation as monitor's fees and disbursements -- Adequate security for monitor's reasonable costs of administration was necessary -- Cash flow from operations was insufficient to assure payment of monitor's fees and expenses, and asset values exceeding secured charges were in doubt -- Granting of super-priority was only practical means of securing payment of monitor's fees and expenses -- Priority for reasonable restructuring fees and disbursements could have been allowed as part of debtor in possession financing -- Immaterial that fees and disbursements were allowed as part of administration charge -- Companies' Creditors Arrangement Act, R.S.C. 1985, c. (2-36.

Cases considered by Mackenzie LA.:

Bank of America Canada v. Willann Investments Ltd. (February 6, 1991), Doc. B22191 (Ont. Gen. Div.) -- referred to

Baxter Student Housing Ltd. v. College Housing Co-operative Ltd (1975), [I9761 2 S.C.R. 475, [I9761 1 W.W.R. 1,20 C.B.R. (N.S.) 240, 57 D.L.R. (3d) 1, 5 N.R. 515 (S.C.C.) --considered

Braid Builders Supply & Fuel Ltd. v. Genevieve Mortgage Carp. (1972), 17 C.B.R. (N.S.) 305, 29 D.L.R. (3d) 373 (Man. C.A.) -- considered

Canadian Asbestos Services Ltd. v. Bank of Montreal, 16 C.B.R. (3d) 114, [I9921 G.S.T.C. 15, 11 O.R. (3d) 353, 93 D.T.C. 5001, 5 C.L.R. (2d) 54, [I9931 1 C.T.C. 48, 5 T.C.T. 4328 (Ont. Gen. Div.) -- considered

Dylex Lld., Re (January 23, 1995), Doc. B-4/95 (Ont. Gen. Div.) -- considered

Fairview Industries Ltd., Re (1991), 11 C.B.R. (3d) 71, (sub nom. Fairview Industries Ltd., Re (No. 3)) 109 N.S.R. (2d) 32, (sub nom. Fairview Industries Ltd.. Re (No. 3)) 297 A.P.R. 32 (N.S. T.D.) -- not followed

Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 51 B.C.L.R. (2d) 84,4 C.B.R. (3d) 31 I, (sub nom. Chef Ready Foods Ltd, v. Hongkong Bank of Canada) [I9911 2 W.W.R. 136 (B.C. C.A.) -- applied

Lochson Holdings Ltd. v. Eaton Mechanical Inc. (1984), 55 B.C.L.R. 54, 33 R.P.R. 100, 52 C.B.R. (N.S.) 271, 10 D.L.R. (4th) 630 (B.C. C.A.) -- considered

Northland Properties Ltd., Re (1988), 69 C.B.R. (N.S.) 266, 29 B.C.L.R. (2d) 257, 7:s C.B.R. (N.S.) 146 (B.C. S.C.) -- considered

I Reference re Companies' Creditors Arrangement Act (Canada), 16 C.B.R. 1, [I9341 S.C.R. 659, [I9341

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559,16 C.B.R. (4th) 141,135B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No.409

4 D.L.R. 75 (S.C.C.) -- applied

Robert F. Kowal Investments Ltd. v. Deeder Electric Ltd (1975), 9 O.R. (2d) 84,21 C.B,.R. (N.S.) 201, 59 D.L.R. (3d) 492 (Ont. C.A.) -- considered

Royal Oak Mines Inc., Re (1999), 7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial List]) --referred to

Skydome Corp.,Re (1998), 16 C.B.R. (4th) 118 (Ont. Gen. Div. [Commercial List]) -- referred to

Starcom International Optics Corp., Re (1998), 3 C.B.R. (4th) 177 (B.C. S.C. [In Chambers]) -- considered

Westar Mining Ltd., Re, 70 B.C.L.R. (2d) 6, 14 C.B.R. (3d) 88, [I9921 6 W.W.R. 331 (B.C. S.C.) -- considered

Statutes considered:

Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36

Generally -- referred to

s. 11 [rep. &sub. 1997, c. 12, s. 1241 --considered

s. 11.7 [en. 1997, c. 12, s. 1241 -- considered

s. 11.8 [en. 1997,~.12, s. 1241 --referredto

s. 11.8(1) [en. 1997, c. 12, s. 1241 --considered

s. 11.8(2) [en. 1997, c. 12, s. 1241 --considered

APPEAL by secured creditors from judgment reported at(1999), 12 C.B.R. (4th) 144 (B.C. S.C. [In Chambers]), granting super-priority to fees and expenses of monitor and petitioners' legal fees related to restructuring plan.

The judgment of the court was delivered by MackenzieJA.:

1 This appeal raises the issue of "super-priorities" under the Companies' Creditor Arrangement Act, R.S.C. 1985, c. C-36 (the "CCAA").Can a court grant a priority for the fees and expenses of a court appointed monitor ahead of secured creditors without the consent of those creditors? A subsidiary issue is whether legal fees of the debtor in possession related to a proposed restructuring can be granted a similar priority. For the reasons that follow, I have concluded that equity underpins the court's CCAA jurisdiction and permits orders granting super- priority for the monitor's fees and expenses in appropriate circumstances as well as for the debtor's legal expenses related to a restructuring plan.

2 Following the hearing of the appeal we advised counsel through the Registry that the appeal. was dismissed and that reasons would follow. We have been advised by counsel that this is the first time the issues have come before an appellate court. We are indebted to counsel for their thorough and comprehensive submissions.

Background

Copr. O West 2008 No Claim to Orig. Govt. Works 2000BCCA 146,73 B.C.L.R. (3d)236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559,16 C.B.R. (4th) 141, 135B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No. 409

3 In brief, Mr. Justice Tysoe granted an exparte order under the CCAA on 8 November 1999 staying all exe- cution and enforcement proceedings against the debtorlpetitioners. Emst & Young Inc. was appointed monitor and its reasonable fees and disbursements were ordered to be paid in priority to secured charges. The court also ordered that the reasonable fees and disbursements of counsel for the debtors related to the plan of restructuring should be included with the monitor's fees and disbursements in the defined "administrative charge" and be granted the super-priority over the charges of the secured and other creditors. On 19 November 1999, Tysoe J. dismissed an application by the secured creditors to set aside the stay order and the priority granted for the administrative charge. Tysoe J. reduced the maximum amount of the administration charge from $500,000 to $200,000. The secured creditors have appealed the super-priority granted to the adminishation charge. They did not appeal the stay of proceedings.

The facts

4 The debtorlpetitioners have carried on an auto wrecking business in Surrey, British Columbia since 1963. They gradually acquired 32 parcels of land aggregating some 150 acres. The business operates on 40 acres em- ploying about 75 people.

5 The petitioners' financial difficulties started in 1989. Over the years since they have financed losses by mortgaging the real estate.

6 Foreclosure actions were commenced in late 1998. The mortgagees obtained orders nisi and the redemption periods expired. On 28 July 1999 two of the mortgagees were granted conduct of sale. The 32 parcels have been listed at individi~alprices aggregating $49.6 million or an en bloc price of $32 million. Appraisals of the property range from $23 million to $48.5 million. The higher estimates are for lot-by-lot sales with no allowance for carrying costs, selling expenses, or developers' profit.

7 The aggregate debt is $24 million.

8 The stay order granted by Tysoe J. allowed the conduct of sale to continue but directed that the listing agents were to deal with the petitioners and the monitor rather than with the two mortgagees earher granted conduct of sale. Tysoe J. summarized the reasons for granting a stay under the CCAA in these terms at para. 17:

In the present case, the Petitioners have substantial land holdings and an operating business. It is their intention to reorganize their affairs in order to save the auto wrecking business. They have a legitimate concern that an en bloc sale of the lands in the foreclosure proceedings could bring an end to the operating business. In my view, it is not an act of bad faith to seek the protection of the CCAA in order to attempt to save the operating business. The arguments of the secured lenders in this regard would have been more persuasive if the only business of the Petitioners was land holdings, but the Petitioners do have an active business which must be considered.

9 The petitioners asked for Debtor in Possession ("DIP") financing in the amount of $1.1 million. Tysoe J. refused that request but he did allow a super-priority for legal expenses reasonably incurred in connection with the effort to successfully restmcture the petitioners' affairs. He concluded that the cash flow from the business would be insufficient to pay those expenses in the absence of DIP financing. In the result, the allowance for the petitioners' restructuring legal expenses was a limited substitute for DIP financing. The petitioners' counsel's reasonable restructuring legal fees and disbursements for the restructuring were included within the administration charge as defined in the order and subject to the cap on the amount of the administratio11charge.

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559, 16 C.B.R. (4th) 141, 135 B.C.A.C. 96,221 W.A.C. 96, [2000]B.C.J.No.409

The Companies' Creditor Arrangement Act

10 The CCAA has been controversial since it was first enacted in 1933, in the depths of the Gr'eat Depression. It was upheld as constitutional in Reference re Companies' Creditors Arrangement Act (Canada), [I9341 S.C.R. 659, 16 C.B.R. 1, [I9341 4 D.L.R. 75 (S.C.C.), at 2 [C.B.R.] . In an often quoted passage Duff l3.J.C. summarized the purpose of the statute:

... the aim of the Act is to deal with the existing condition of insolvency in itself to enable arrangements to be made in view of the insolvent condition of the company under judicial authority which, otherwise, might not be valid prior to the initiation of proceedings in bankruptcy. Ex facie it would appear that such a scheme in principle does not radically depart from the normal character of bankruptcy legislation."

The legislation is intended to have wide scope and allow a judge to make orders which will effectively maintain the status quo for a period while the insolvent company attempts to gain the approval of its creditors for a proposed arrangement which will enable the company to remain in operation for what is, hopefully, the future benefit of both the company and its creditors.

11 Those observations were reinforced by Gibbs J.A. in Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990), 4 C.B.R. (3d) 311 (B.C. C.A.) at 315-16:

The purpose of the C.C.A.A.is to facilitate the making of a compromise or arrangement between an insolvent debtor company and its creditors to the end that the company is able to continue in business. It is available to any company incorporated in Canada with assets or business activities in Canada that is not a bank, a railway company, a telegraph company, an insurance company, a trust company, or a loan company. When a company has recourse to the C.C.A.A.,the Court is called upon to play a kind of supervisory role to preserve the status quo and to move the process along to the point where a compromise or arrangement is approved or it is evident that the attempt is doomed to failure. Obviously time is critical. Equally obviously, if the attempt at compromise or arrangement is to have any prospect of suc- cess, there must be a means of holding the creditors at hay, hence the powers vested in l.he Court under s. 11.

There is nothing in the C.C.A.A.which exempts any creditors of a debtor company from its provisions. The all-encompassing scope of the Act qua creditors is even underscored by s. 8 which negates any contracting out provisions in a security instrument.

Gibbs J.A. concluded (at 320):

In the exercise of their functions under the C.C.A.A. Canadian courts have shown themselves partial to a standard of liberal construction which will further the policy objectives. See such cases as Meridian Developments Inc. v. Nu-West Ltd., 52 C.B.R. (N.S.) 109, [I9841 5 W.W.R. 215, 32 Alta. L.R. (2d) 150, 53 A.R. 39 (Q.B.); Northland Properties Ltd. v. Excelsior Life Insurance Co. of Canada, 73 C.B.R. (N.S.) 195, 34 B.C.L.R. (2d) 122, [I9891 3 W.W.R. 363 (C.A.); Re Feifer andFrame Manufacturing Carp., [I9471 Que. K.B. 348, 28 C.B.R. 124 (C.A.); Wynden Canada Inc. v. Gaz Mitropolitain Inc. (1982), 44 C.B.R. (N.S.) 285 (Que. S.C.); and Norcen Energy Resources Lld v. OakwoodPetroleums Ltd., 72 C.B.R. (N.S.) 20, [I9891 2 W.W.R. 566, 64 Alta. L.R. (2d) 149 (Q.B.). The trend demonstrated by these cases is entirely consistent with the object and purpose of the C.C.A.A.

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559,16 C.B.R. (4th) 141, 135 B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J. No. 409

12 These comments emphasize that the CCAA's effectiveness in achieving its objectives is (dependent on a broad and flexible exercise of jurisdiction to facilitate a restructuring and continue the debtor as a. going concern in the interim.

The Monitor

13 The CCAA originally contained no reference to a monitor. The term "monitor" appears to have originated in a passage from the judgment of Trainor J. in Re NorthlandProperties Ltd. (1988), 69 C.B.R. (N.S.) 266 (B.C. S.C.), as follows (at 277):

I am satisfied that I have jurisdiction to appoint an interim receiver and spell out the responsibilities of that office such that his true role would he that of a monitor or watchdog during the interim period. The cost would be significant, but is not a factor of great weight considering the lotal indebtedness of the companies.

The jurisdiction relating to interim receivers is a jurisdiction in equity and Trainor J. implicitly relied upon that equitable jurisdiction to support the order.

14 The term "monitor" was picked up by Parliament in a 1997 amendment to the CCAA [S.C. 1997, c. 12, s. 1241 and for the first time given statutory recognition. The amendment made appointment of a monitor mandatory. The material portion of the 1997 amendment is as follows:

Court td appoint monitor

11.7(1) When an order is made in respect of a company by the court under section 11, the court shall at the same time appoint a person, in this section and in section 11.8 referred to as "the monitor", to monitor the business and financial affairs of the company while the order remains in effect.

Auditor may be monitor

(2) Except as may he otherwise directed by the court, the auditor of the company may he appointed as the monitor.

Functions of monitor

(3) The monitor shall

(a) for the purposes of monitoring the company's business and financial affairs, have access to and examine the company's property, including the premises, books, records, data, including data in electronic form, and other financial documents of the company to the extent necessary to adequately assess the company's business and financial affairs;

(b) file a report with the court on the state of the company's business and financial affairs, containing prescribed information,

(i) forthwith after ascertaining any material adverse change in the company's :projected cash- flow or financial circumstances,

(ii) at least seven days before any meeting of creditors under section 4 or 5, or

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559, 16 C.B.R. (4th) 141, 135 B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No. 409

(iii) at such other times as the court may order;

(c) advise the creditors of the filing of the report referred to in paragraph (b) in any notice of a meeting of creditors referred to in section 4 or 5; and

(d) carry out such other functions in relation to the company as the court may direct.

Monitor not liable

(4) Where the monitor acts in good faith and takes reasonable care in preparing the report referred to in paragraph (3)(b), the monitor is not liable for loss or damage to any person resulting from that person's reliance on the report.

Assistance to be provided

(5) The debtor company shall

(a) provide such assistance to the monitor as is necessary to enable the monitor to adequately carry out the monitor's functions; and

(h) perform such duties set out in section 158 of the Bankruptcy and Insolvency Act as are appropriate and applicable in the circumstances.

Non-liability in respect of certain matters

11.8(1) Notwithstanding anything in any federal or provincial law, where a inonitor carries on in that position the business of a debtor company or continues the employment of the company's employees, the monitor is not by reason of that fact personally liable in respect of any claim against the company or related to a requirement imposed on the company to pay an amount where the claim arose before or upon the monitor's appointment.

Status of claim ranking

(2) A claim referred to in subsection (1) shall not rank as costs of administration. ...

The balance of s. 11.8 deals with liability for environmental matters that are not pertinent to this appeal.

15 The function of the monitor is set out in some detail but the only reference to the cost of carrying out the monitor's function is the oblique reference in s. 11.8(2) that costs of statutory claims on the debtor arising before the monitor's appointn~entwill not rank as a cost of administration. I do not think that it can be inferred that the monitor's costs of administration were otherwise overlooked by Parliament or that Parliament intended that the court have no authority to provide for those costs. The only reasonable conclusion in my opinio~nis that Parlia- ment was aware of the court's general jurisdiction in equity and assumed that jurisdiction remained available except as inconsistent with the Act. Indeed, by requiring the appointment of a monitor Parliament made a jurisdiction to provide for the monitor's costs of administration even more necessary.

Cases

Copr. O West 2008 No Claiin to Orig. Govt. Works 2000BCCA 146,73 B.C.L.R. (3d)236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559, 16 C.B.R. (4th) 141, 135B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No. 409

16 The first attack on the jmisdiction of the court to grant a super-priority to the monitor's cost!; of administration came in Re Fairview Industries Ltd. (1991), 11 C.B.R. (3d) 71 (N.S. T.D.). There Glube C.J. concluded with some reluctance that the court had no authority under the CCAA to grant the monitor a super-priority in payment without the secured creditors' consent. While Glube C.J. referred to NorthlandProperties Ltd, supra, in another context in the judgment, there is no reference to Trainor J.'s analogy of that between a monitor and an interim receiver and the common authority to assign a priority flowing from the court's equitable jurisdiction over interim receivers. Glube C.J. appears to have treated the issue solely as one of statutory construction without reference to any broader equitable jurisdiction.

17 Later decisions in Ontario and British Columbia have declined to follow Fairview Industries Ltd.. They have held consistently that the court does have jurisdiction to grant a super-priority for the fees and expenses of the monitor; see Canadian Asbestos Services Ltd. v. Bank of Montreal (1992), 16 C.B.R. (3d) 114 (Ont. Gen. Div.) Re Starcom International Optics Corp. (1998), 3 C.B.R. (4th) 177 (B.C. S.C. [In Chambers]). In Canadian Asbestos Chadwick J. stated (at 123):

The fruits of the monitors' efforts is for the benefit of all creditors and therefore the monitor and their legal counsel should be paid in advance and before distribution to the creditors.

18 In Starcom, supra, Saunders J. advanced a similar rationale at 189:

[I]n my view the order sought is appropriate. The monitor acts on behalf of the court to provide information and monitoring for the benefit of all parties.

Neither Canadian Asbestos nor Starcanr specifically referred to the source of the jurisdiction. Macdonald J. in Re Westar Mining Ltd. (1992), 14 C.B.R. (3d) 88 (B.C. S.C.) , relied on in Starcom, referred to the jurisdiction simply as inherent jurisdiction (at 93). Macdonald J. noted that Dickson J., speaking for the Supreme Court of Canada in Baxter Student Housing Ltd. v. College Housing Co-operative Ltd. (1975), [1976:1 2 S.C.R. 475 (S.C.C.), held that inherent jurisdiction with respect to receiver-managers could not be exercised in conflict with a statute. The origins of the receivers' jurisdiction are located in the equitable jurisdiction of the Court of Chan- cery and while that jurisdiction cannot be exercised contrary to a statute nothing precludes its exercise to supplement a statute and effect a statutory object.

The receivers' jurisdiction

19 The Canadian jurisprudence on priorities for receivers' fees and expenses begins with Braid Builders Sup- ply & FuelLtd. v. Genevieve Mortgage Corp. (1972), 17 C.B.R. (N.S.) 305 (Man. C.A.). There Dickson J.A. for the court rejected an argument that a receiver could only be paid from the debtor's remaining equity in the property. He concluded that such a restriction would frustrate the receiver's function (at 307-8):

... The argument is that a receiver can only receive his remuneration and costs from property in which an equity remains. No authority was quoted in support of this proposition. There are cases to the contrary: Strapp v. Bull, So~s& Co.; Shaw v. London School Board, [I8951 2 ch. 1: Re ~GlasdirCopper Mines Ltd.; English Electro-Metallurgical Co. v. Glassier Copper Mines Ltd., [1906:] 1 Ch. 365. It would seem to us that if appellant's argument is sound, one would be hard put to find anyone willing to be a receiver; he would be denied recovery of his fees and disbursements out of properly under his administration if the mortgage load borne by that property exceeded the value of the property. The true worth of property under administration can rarely be determined at the time of appointment. The Court

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559,16C.B.R. (4th) 141,135 B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No.409

itself has no funds from which to pay a receiver. If his fees cannot be paid from assets under adininis- tration of the Court the receiver would be in the untenable position of having to seek recovery from the creditor who, on behalf of all creditors, asked for the appointment. This could work a grave injustice on the receiver and on the petitioning creditor. Why should the latter bear all of the costs in respect of an appointment made for the benefit of all creditors, including secured creditors, for the purpose of preserving the property? The argument also appears to proceed on the assumption that when property subject to a mortgage becomes of a value less than the mortgage debt against it, it ceases to belong to the debtor. Property of a dehtor, whatever the amount of the mortgage debt against it, remains the property of the dehtor until all steps have been taken in law to foreclose the interest of the debtor. All of the debtor's property under administration of the court, and not merely the equity of the debtor in that property is available by order of the court to meet the fees and disbursements of a receiver.

20 The issue of the receiver's priority was next visited by the Ontario Court of Appeal in Robe.~fF. Kowal In- veslrnenls Lld v. Deeder Electric Lld (1975), 21 C.B.R. (N.S.) 201 (Ont. C.A.). ~ouldenJ.A. fi>r the court relied on Clark on Receivers, 3rd ed., for the proposition that the receiver of a partnership has no power to subject the security of secured creditors of the partnership to liability for the receiver's disbursements. There were, however, exceptions:

1) if a receiver has been appointed with the approval of the holders of security;

2) if a receiver has been appointed to preserve and realize assets for the benefit omf all interested parties, including secured creditors; or

3) if a receiver has expended money for the necessary preservation or improvement of the property.

21 Houlden J.A. stated that these three exceptions were not exhaustive. Nonetheless the Kowal statement of exceptions has been influential in subsequent cases and they were applied by this Court in Lochson Holdings Ltd. v. Eaton Mechanical Inc. (1984), 55 B.C.L.R. 54 (B.C. C.A.). But as Macdonald J. observed in Weslar Min- ing, supra at 93-94, different considerations apply under the CCAA. The court is concerned with the survival of the debtor company long enough to present a plan of reorganization. That is a broader interest than that of creditors alone. The jurisdiction must expand from the Kowal exceptions to serve that broader interest.

22 Thus the receivers' jurisdiction and the monitors' jurisdiction are analogous to the extent that they are both rooted in equity but they diverge to the extent that the monitors' jurisdiction serves a broader statutory objective under the CCAA. In my opinion the jurisdiction under the CCAA cannot be restricted to the Kowal exceptions.

Priority for reasonable restructuring legal fees and disbursements of the debtors' counsel

23 The legal expenses of the debtor in connection with the restructuring were wrapped up with the n~onitor's fees and expenses in the administration charge for the purposes of the stay order. However, I think they should be examined separately for questions of jurisdiction. As indicated above, Tysoe J. ordered the priority for the debtors' legal expenses as part of the administration charge only after he had refused to order more dehtor in possession priority financing. The super-priority for the debtors' legal fees was a substitute for DIP financing and in my opinion, the jurisdictional issue turns on the power of the court to allow a super-priority for DIP financing.

24 The subject of DIP financing bas recently been examined in a trenchant paper by H.A. Zimmerman, Finan-

Copr. 0 West 2008 No Claim to Orig. Govt. Works 2000BCCA 146,73 B.C.L.R. (3d)236, [2000] 5 W.W.R. 178, [2000]B.C.W.L.D. 559,16C.B.R. (4th) 141,135 B.C.A.C. 96,221 W.A.C. 96, [2000] B.C.J.No.409

cing the Debtor in Possession, (Insolvency Institute of Canada, 19 November 1999). According to Mr. Zimmer- man, the first case authorizing super-priority DIP financing under the CCAA was Bank ofAmerica Canada v. Willann Investmenls Ltd (February 6, 1991), Doc. B22/91 (Ont. Gen. Div.) . In Re Dylex L*L (January 23, 1995), Doc. B-4/95 (Ont. Gen. Div.) super-priority DIP financing was granted for the first time over the objection of a secured creditor. According to Mr. Zimmerman the scope of super-priority DIP financing has been extended in recent, as yet unreported, cases including Re Skydome Corp. (November 27, 1998), Doc. 98-CL-3179 (Ont. Gen. Div. [Commercial List]) [reported at 16 C.B.R. (4th) 1181 and Re Royal Oak Mines Inc. (March 14, 1999), Doc. 99-CL-3278 [reported at(1999), 7 C.B.R. (4th) 293 (Ont. Gen. Div. [Commercial List]).

25 In Canadian Asbestos Selvices Ltd. v. Bank of Montreal, supra, Chadwick J. granted super-priority for the advancement of additional funds to complete certain specific construction projects, holding that it was for the benefit of all creditors, both secure and non-secure. In Dylex, supra, Houlden J.A. recognized a broader interest, including that of 12,000 employees, as justification for super-priority bridge financing over a secured creditor's objections. The jurisdiction to grant a super-priority for the debtors' restructuring legal expenses, whether separately or as a part of DIP financing rests on the same equitable foundation as the monitor's fees and disbursements and stands or falls on the same considerations.

Conclusions

26 The petitioners left it very late in the day to apply for CCAA relief. The secured creditors opposed a stay of proceedings and failed. No appeal was taken from that part of the order which involved discretion of the chambers judge. Once the decision to grant relief was made, the monitor is required and I conclude that adequate security for the monitor's reasonable costs of administration necessarily follows. The question then becomes simply whether a super-priority ahead of secured creditors is necessary to provide that security in the circumstances of any particular case.

27 The secured creditors contend that the super-priority for the monitor can only be supported if the case falls within the second Kowal exception, circumstances where the appointment is "to preserve and realize assets for the benefit of all interested parties, including secured creditors". Here it is contended that the ob,jective is to effect a partial sale of the real estate assets for a price sufficient to pay the creditors and still leave sufficient land to permit the active business to continue. That would benefit other parties but not the secured creditors who could be paid out from an en bloc sale. The secured creditors have no interest in preserving the active business.

28 The object of the CCAA is more than the preservation and realization of assets for the benefit of creditors, as several courts have underlined. In Chef Ready, supra, Gibbs J.A. said that the primary purpose is to facilitate an arrangement to permit the debtor company to continue in business and to hold off the creditors long enough for a restructuring plan to be prepared and submitted for approval. The court has a supervisory role and the monitor is appointed "to monitor the business and financial affairs of the company" for the court. The appointment of a monitor is mandatory when the court grants CCAA relief.

29 Dickson J.A. pointed out in Braid Builders, supra, that receivers will not accept an appointment without reasonable assurance that they will be paid. That is equally true for monitors. When, as here, the cash flow from operations is insufficient to assure payment and asset values exceeding secured charges are in doubt, granting a super-priority is the only practical means of securing payment. In such circumstances, if a super.-priority cannot be granted without the consent of secured creditors, then those creditors would have an effective veto over CCAA relief. I do not think that Parliament intended that the objects of the Act could be indirectly frustrated by

Copr. O West 2008 No Claim to Orig. Govt. Works 2000 BCCA 146,73 B.C.L.R. (3d) 236, [2000] 5 W.W.R. 178, [2000] B.C.W.L.D. 559, 16 C.B.R. (4th) 141, 135B.C.A.C. 96,221 W.A.C. 96, [ZOO01 B.C.J.No. 409

secured creditors

30 In my opinion, an equitable jurisdiction is available to support the monitor which is sufficiently flexible to be adapted to the monitor's role under the CCAA. It is a time honoured function of equity to adapt to new exi- gencies. At the same time it should not be overlooked that costs of administration and DIP financing can erode the security of creditors and CCAA orders should only he made if there is a reasonable prospect of a successful restructuring. That determination is largely a matter of judgment for the judge at first instance and appellate courts normally will be slow to interfere with an exercise of discretion.

3 1 In my opinion, super-priority for DIP financing rests on the same jurisdictional foundation in equity. Prior- ity for the reasonable restructuring fees and disbursements could have been allowed as part of DIIP financing. It is immaterial that they have been allowed here as part of the administration charge.

32 I would dismiss the appeal for these reasons.

Appeal dismissed.

END OF DOCUMENT

Copr. O West 2008 No Claim to Orig. Govt. Works

TAB 3 Page 1

Case Name: Fraser Papers Inc. (Re)

IN THE MATTER OF The Companies' Creditors Arrangement Act, R.S.C., c. C-36, as amended AND IN THE MATTER OF a plan of compromise or arrangement of with respect to Fraser Papers Inc. FPS Canada Inc., Fraser Papers Holdings Inc., Fraser Timber Ltd., Fraser Papers Limited, Fraser N.H. LLC, Applicants

[2009] O.J. No. 2648

Court File No. CV-09-8241-00CL

Ontario Superior Court of Justice Commercial List

G.B. Morawetz J.

Heard: June 18,2009. Judgment: June 22,2009.

(45 paras.)

Bankruptcy and insolvency law -- Companies' Creditors Arrangement Act (CCAA) matters -- Application ofAct -- Afiliated debtor companies --Application under the Companies' Creditors Arrangement Act allowed -- The applicants were a group of companies specialized in paper, pulp and lumber operations -- They soughtprotection under the CCAA to facilitate the re-organization of their afiirs due to insolvency, declines in the price ofpulp, pension funding deficiencies, and a continuedpoor economic outlook for the lumber andpulp markets -- The court accepted that debtor-in-possession financing was urgently required and that the applicants were clearly debtor corporations --An initial order grantingprotection was appropriate.

Statutes, Regulations and Rules Cited:

Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, s. 11, s. 1 l(2)

Counsel: Michael Barrack, Robert Thomton and D.J. Miller, for the Applicants.

David Chernos, for the Brookfield Asset Management Inc.

Susan Grundy, for CIT Business Canada Inc.

Peter Griffin, for Board of Directors of the Applicants.

Robert J. Chadwick and Cathy Costa for PricewaterhouseCoopers Inc., Proposed Monitor.

ENDORSEMENT

1 G.B. MORAWETZ J.:-- On June 18,2009, I granted an Initial Order in the proceedings with reasons to follow. These are those reasons.

2 Fraser Papers Inc. ("FPI"), FPS Canada Inc. ("FPSC"), Fraser Papers Holdings Inc. ("Fraser Holdings"), Fraser Timber Ltd., Fraser Papers Limited and Fraser N.H. LLC (collectively, the "Fraser Group" or the "Applicants") make this application under the Companies' Creditors Arrangemen! Act.

3 FPI is a CBCA company with a registered head office in Toronto, Ontario. It is a publicly-traded company listed on the Toronto Stock Exchange. As of June 1,2009, the issued and outstanding capital of FPI coasisted of 50,166,789 common shares. There are no other classes of shares outstanding at this time. As at December 31,2008, Brookfield Asset Management Inc. ("Brookfield") owned, directly or indirectly, approximately 70.5% of the outstanding common shares of FPI.

4 The other Applicants are either a direct or indirect wholly-owned subsidiaries of IFPI. A simplified corporate chart is attached to the affidavit of J. Peter Gordon (the "Gordon ~ffidavit") which was filed in support of the application.

5 FPI owns all of the issued and outstanding shares of FPSC and Fraser Holdings.

6 Detailed information concerning the background of the Applicants, their creditors and their financial status forms part of the Gordon Affidavit and is also summarized in the First Report submitted by PricewaterhouseCoopers Inc. ("PwC") in its capacity as proposed Monitor (the "PwC Report"). Page 3

7 The PwC Report notes that a key to the Fraser Group's ability to cany on its business operations as usual, is the ongoing multi-dimensional support provided by Brookfield Asset Management Inc. ("BAM").

8 The Fraser Group is a speciality paper company with integrated paper, pulp and lumber operations. The operations of the Applicants comprise two paper mills, one market pulp mill, two internal pulp mills, a biomass cogeneration power plant, and four lumber mills in New Brunswick, Quebec, Maine and New Hampshire.

9 The Fraser Group operates largely as an integrated business. PwC reports that while the Applicants' operations include the above-noted locations in both Canada and the United States, each location provides to or receives product from another location creating an integrated nature to the business.

10 For fiscal 2008, the Applicants had consolidated net sales of approximately $688.6 million (unless otherwise stated, all monetav amounts are expressed in United States dollars, the Applicants' reporting currency) and suffered a net loss of $71.9 million. For the four months ended May 2,2009, the Applicants reported a net loss of $22.1 million on consolidated net sales of $202.8 million.

11 PwC further reports that the Fraser Group's debt structure and approximate current amounts outstanding is as follows (excluding any amounts in respect of pensions, post-employment benefits, guarantees, potential exposure under foreign exchange hedging contracts and potential environmental liabilities):

LenderIType of debt Outstanding Amount

US$ millions

CIT - secured 56

NB Loan - secured

CIBC - unsecured Page 4

3rd party trade creditors - Canadian entities*

3rd party trade creditors - US entities*

ll~tercompanypayable to FPI - US entities* 32

* Balances as at May 2,2009

12 FPI is the borrower under the CIT Business Canada Inc. ("CIT") Facility (the "CIT Facility"). The CIT Facility is guaranteed by all of the other Applicants. CIT has a first charge over inventory and accounts receivable of each of the Applicants. BAM has also guaranteed $25 mil'lion of the outstanding amount under the CIT Facility.

13 The Province of New Brunswick has a first charge over the fixed assets in New Brunswick and a second charge on inventory and accounts receivable in New Brunswick in connection with FPI's indebtedness to it (the "NB Loan"). Counsel to the Applicants advised that the Province of New Brunswick is aware of these CCAA proceedings.

14 FPI is the borrower under the unsecured CIBC Facility. BAM has guaranteed $25 million of the outstanding amount under this facility.

15 The two BAM guarantees noted above are secured by guarantees of each of the Applicants and a general security agreement over all of the Applicants' assets, which security is subordinate to the CIT and NB Loan security.

16 The Applicants seeks protection under the CCAA to facilitate the re-organization of their affairs.

17 PwC reports that based on discussions with management, the principal causes of the need for the CCAA filing include:

(i) the poor economic conditions of the past few years, resulting in significant operating losses and a severe working capital shortfall; (ii) the impact of the U.S. "Black Liquor Tax Credit", which the Applicants are not entitled to receive, which has further lowered the price of pulp; (iii) the uncertainty associated with negotiating new collective bargaining Page 5

agreements and obtaining concessions under the existing collective bargaining agreements with certain of its unions; (iv) the recent stock market crash which has resulted in material funding deficiencies in the Applicants' defined pension benefit plans; and (v) the continued poor outlook for the housing, lumber and pulp markets.

18 In addition, PwC has been advised by the Applicants that it does not have the liquidity required to meet the following near term obligations;

(i) the ongoing losses associated with the pulp and lumber operations; (ii) the repayment of the $25 million CIBC term loan which matures in September 2009; (iii) $7.8 million of severance payments related to the temporaiy shutdown of the Thurso pulp mill, due for payment in two equal amounts in November 2009 and December 2009. (iv) the approximate amount of $10 million required to bring their overdue supplier balances back to normal credit terms; and (v) the approximate amount of $7.7 million owing to various municipalities for property taxes.

19 The Applicants contemplate a comprehensive operational and balance sheet restructuring, and PwC reports that the Applicants- - have already commenced dealing- with the numerous issues that are currently negatively impacting the profitability of its various business units.

20 The Applicants have indicated that significant additional time is required in order to be able to meet with all of the relevant parties, to attempt to negotiate revisions to contract term:;, to determine which parts of the business are viable based on these contract revisions, to update business plans, to arrange exit financing and to develop a plan of arrangement and compromise for consideration by the Applicants' creditors.

21 PwC understands that negotiations will take place with these various parties throughout the summer of 2009.

22 Copies of FPI's audited consolidated financial statements as at ~ecember3 1,2008 as well as consolidating statements as at May 2,2009 are filed in the record.

23 The Applicants have acknowledged that they are insolvent.

24 PwC has consented to act as the Monitor (the "Monitor") of the Applicants in the CCAA proceedings.

25 The record filed in support of the application also contains the required cash flow forecast Page 6

which forecast estimates that the Applicants have an urgent need for DIP Financing. The Applicants have received two term sheets in respect of DIP Financing - one from BAM and one from CIT, the Applicants existing revolving credit lender.

26 The PwC Report comments at length with respect to the DIP Financing proposals. The PwC Report indicates that the two proposals have super priority charges and would be in priority to existing charges granted to the Province of New Brunswick in respect of its advances to fund capital expenditures in New Brunswick.

27 Counsel to the Applicants advised that the Province of New Brunswick is aware of the priming provisions, subject to a maximum of $20 million. The Applicants have acknowledged that this $20 million cap is acceptable at this time.

28 PwC also reports that it has inquired into the marketing process for the DIP Financing arrangements and has been advised by management that the financing requirement was not marketed externally to other potential lenders given the nature of the industry and the willingness of the existing lenders to fund ongoing operations. Management has advised PwC that the two DIP term sheets represent the only alternative available to the Applicants to ensure the conltinuation of the Applicants' operations at this time.

29 PwC reports that it has compared the principal financial terms of the two DIP Financing arrangements to a number of other recent debtor-in-possession financing packages in the forestry, pulp and paper sector with respect to pricing, loan availability and certain security considerations and based on this comparison, PWC is of the view that the financial terms of the DIP Facilities term sheets appear to be commercially reasonable and consistent with current market transactions.

30 I accept that DIP Financing is urgently required and that financing on the basis of the term sheets should be approved.

31 The proposed form of Order provides for a number of charges which are described in both the Gordon Affidavit and the PwC Report. These charges include an administrative charge, a CIT DIP I charge, a DIP Lenders' charge, a directors' charge and an intercompany charge. 32 Counsel to the Applicants advised that the directors' charge is in the amount of $30 million; however, counsel also advised that there is a directors' and officers' insurance policy in place which should have the practical impact of reducing any exposure under the directors' charge

33 In its Report, PWC has recommended that the Applicants be granted the benefit of protection under the CCAA and, as well, PwC is supportive of the charges and financial thresholds proposed in the Draft Order. The priority of the various charges is specified in the Draft Order.

34 Having reviewed the record and have heard submissions, I am satisfied that the Applicants qualify as debtor corporations within the meaning of the CCAA. The Applicants clearly have Page 7

obligations in excess of the qualifying limit and have acknowledged that they are insolvent. The jurisdiction of this court to receive the CCAA application has been established.

35 The Applicants seeks an Initial Order under Section 11 of the CCAA. The required Statement of Projected Cash Flow and the other financial documents required under Section 1l(2) have been filed. The application was not opposed by any party appearing.

36 I am satisfied that it is appropriate that the Applicants be granted protection under the CCAA and an order shall issue to that effect. The Draft Order is based on the Model Order and the I modifications as proposed are acceptable. 37 As previously noted, the Fraser Group is fully integrated including between the Canadian and the United States operations. The integration of the Applicants' business is described nn detail in the Gordon Affidavit. The Applicants are of the view that the restructuring to be undertaken under the CCAA will require a review of the operations of the Fraser Group as a whole and may involve a restructuring of certain business and the sale of the remaining businesses and related assets. The Applicants anticipate that this process will require a judicial proceeding and approval in the United States in view of the assets and operations located in the United States.

38 The Applicants are of the view that the restructuring of the Fraser Group will he administered most efficiently through a single, centralized restructuring process. Such a process would likely minimize the cost of the restructuring, minimize the time necessary to effect the restructuring and thereby maximize the overall value of the assets and operations for all stakeholders.

39 The Applicants contemplate that the CCAA proceeding in Canada will he the primary court-supervised process for the restructuring of the Fraser Group. The Applicants have also indicated that they will he seeking an Order pursuant to Chapter 15 of the United StaOes Bankruptcy Code to have the CCAA proceedings recognized as "foreign main proceedings". The (effect of the Chapter 15 proceedings would he to give effect to this Initial Order in the United Stat~es.

40 The Applicants are of the view that FPI's centre of main interest ("COMI") is Ontario. Its . registered head office is in Ontario and all corporate, management, banking and strategic functions are undertaken from its head office in Ontario.

41 In considering whether these CCAA proceedings should he recognized as "foreign main proceedings", paragraphs 24-28 of the Gordon Affidavit provides comprehensive reasons for the basis for his conclusion that the Applicants' COMI is also Ontario.

42 PwC has also commented on this issue in the PwC Report at paragraphs 26-29. I'wC has indicated that based on their understanding of the integrated nature of the Applicants' management, operations and financing as between the Canadian and U.S. Applicants, the poor liquidity situation of the U.S. Applicants which have no separate borrowing facilities, and PWC's view that the Applicants' COMI is Ontario, they concur with the Applicants commencing proceedings under Page 8

Chapter 15.

43 I do note that it is more usual in Chapter 15 proceedings to have the Monitor make the application as foreign representative. In this case, the Applicants have indicated that, in their view, it would be both more time effective and cost effective for the Applicants to make the application. The Applicants have indicated that the Monitor will be taking a very active role in the proceedings both in the CCAA and in any proceedings under the U.S. Bankruptcy Code. I am satisfied that the involvement of the Monitor will ensure that a satisfactory process is in place in order to keep the stakeholders informed of developments both in this proceeding and in the proceeding.3 under the U.S. Code.

44 An order shall issue to give effect to the foregoing.

45 I would like to express my appreciation to the parties involved in this process. The detail contained in the Gordon Affidavit as well as the PwC Report was of great assistance to the court.

G.B. MORAWETZ J. .... End of Request ---- Print Request: Current Document: 6 Time Of Request: Wednesday, September 23, 2009 13:33:01 Court File No.: ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCJAL LIST)

IN THE MATTER OF THE COWA,%E5" CREDITORS ,&RAMGEMENTACT, RS.C. 1985, c.G36 AS AMENDED

AM) IN TIE MATTER OF A PROPOSED PLAN OP COMPROMISE OR ~GEMENTwrr~ RESPECT TO FRASER PAPERS mc., PPS CANADA INC., PRASER PAPERS HOLDINGS INC., FRASER TIMBER LTD., PMSER PAPERS MTED and FRASER N.H. LLC Applicants

AFJ7lDAW OF J. PETER GORDON (Sworn June 17,2009) (CCAA InitiaI Order)

I, J. Peter Gordon, of the City of Toronto, in the Province of Ontario, MAKE OATH AND

SAY AS FOLLOWS:

1. I am the Chief Executive Officer and a Director of Fraser Papers Inc. (Traser Papers" or the "Company"), and hold the office of Chairman of each of the other Applicants (collectively, with Fraser

Papers, the "Fraser Group") and as such I have personal knowledge of the mMters to which I herein depose. Where the source of my information or belief is other than my own personal knowledge, I have identified the source and the basis for my information and verily believe it to betrue.

2. All reference to currency in this Affidavit is $USD unless otherwise noted. la.

I. OVERVIEW. NEED FOR PROTECTION

3. Fraser Papers is a specialty paper company with integrated paper, pulp and lumber operations. The Fraser Group is a conso!.idated~bnsinesscomprising various facilities in Canada and the United States of America (the 'W.S."), operating under a combiied cash management and accounting system and senior management decision making, including extensive intercompany transactions such as the sale and use of products and services among various business operations and Iegal entities. As such, the business is operationally and functionally integrated and not easily divisible based on legal entity or g+phic boundaries.

4. The Fraser Group's ope~ationsand financial results are influenced by a number of factors, many of which are beyond the Applicants' control. The five most signifcant factors, in no particular order of importance, are: (i) the cyclical nahm of the business; (ii) the competitive environment of the industry;

(iii) product demand; (iv) cost contro&and (v) foreign cunrency risk.

5. The Applicants have experienced many of the challenges faced by other companies in the North American forest products industry. The challenges faced by the Applicants include market issues and financial issues, the most pressing of which are as follows:

(a) negative cash flow from its'operations (prior to changes in non-cash working capital) of $65.4 million and $55.5 million in 2007 and 2008 respectively, combined with a fuxther shodall of $9.7 million in the first quarter of 2009. The Company no longer has the ability to finance cash flow shortfalIs of this mapaitllde;

fb) the aforementioned cash flow shortfalls are being driven by a sharp deterioration at the Company's pulp operations, continuing losses from its lumber operations and are only paaialIy offset by the turnaround in its specialty papers business;

(c) under the current collective agreement, aggregate severance payments to unionized employees at the Company's Thurso facility of CDN$7.8 Wonare due in two equal payments on November 9 and December 21, 2009, followkg the miWs temporary closure on June 1,2009. The Applicants have no ability to pay these amounts at this time;

(a) the Applicants are required to repay or re&nat~ce a $25 million term loan with Canadian Imperial Bank of Commerce ("CIBC") in September 2009 and they have no ability to do so at this time;

(e) the Applicants have a substantial deficit, as determined in accordance with @nerdy Accepted Accounting PrincipIes in Canada ("GAAP"), of approximately $171.5 million at December 31, 2008 in five defined benefit pension plans and three Supplemental Executive Retirement Plans ~SERPs'') and are required to make payments of $3.5 million by September 30,2009 and an additional $10.1 million by December 31,2009. Average annual payments of approximately $34.7 million per year from2010 to 2013 are expected to be required to fund the Pension Plans. Unless the Applicants are able to obtain a temporary funding holiday or an alternative fundig formuIa is achieved, the Applicants have no ability to meet these funding obligations; and

(fJ the AppEcants owe trade suppliers in excess of $10 million beyond normal credit terms and owe an additional $7.7 million in property taxes to six municipalities.

6. The Cash Row Forecast (as hereafter defined) indicates that, in tbe absence of any DII! Financing

(as hereafter defined), the Applicants will have insuffcient cash with which to operate after June 30,

2009. Existing liquidity under the Applicants' revolving working capital facility is not expected to meet the Applicants' operating requirements beyond the next few weeks. The Applicants are insolvent, and their need for protection is immediate and urgent.

A. Fraser Papers hc and its US. Subsidiaries 7. Fraser Papers was incorporated pursuant to the provisions of the Canada Business Co:orporatiolls

Act, and its registered head oftice is in Toronto, Ontario. On July 1, 2004 Fraser Papers, fomerIy a wholly-owned subsidiaj of Nexfor hc., became a separate pubIicly trsded company. Its stock is listed on the Toronto Stock Bxchange under the symbol "FPS". 8. As at June I: 2009, the issued and outstanding capital of Fraser Papers consisted of 50,166,789 comkon shares. There are no other classes of shares outstanding at this time. As at December 31,2008

Brookfield Asset Management Inc. ("Brookfield") owned, directly or indirectly, approximately 70.5% of the outstanding common shares of Fraser Papers.

9. Each of the other Applicants are direct or indirect whollyowned subsidies of Eraser Papers. hexedhereto and marked as Exhibit "A" is a simplified corporate chart showing the relationship of the

Applicants to one another.

10. Fmser Papers owns all of the issued and outstanding shares of FPS Canada Inc. ('WS Canada") and Fraser Papers Holdings Inc. ("Holdings"). Holdings owns all of the issued and outstanding shares of

Praser Timber Ltd. ('Timber") and Fraser Papers Limited ("Praser Madawask"). Fraser Madawaska is the sole member and manager of Fraser N.W. LLC ('Fraser Gorham").

11. EF'S Canada acts as agent for Fraser Papers and manages the Company's .pulp, paper and lumbermill assets in Canada These assets owned by Fraser Papers include:

(a) a sulphite pulp mill, a groundwood pulp mill and a biomass cogeneration power plant (the "CoGen FaciLity") in Edmundston, New Bmnswick;

(b) ' a hardwood pulp miU in Thurso, Quebec;

(4 two lumbermills in Juniper and Plaster Rock, New Bmswick; and

(dl a corporate office in Toronto, Ontario

12. Holdings is iacorpomted under the laws of the State of DeIaware and holds the Company's investments in Fraser Madawaska and Timber, which are the Fraser Group's operating entities h the State of Maine, in the U.S.

13. Fraser Madawaska: (a) owns and manages the cornpimy's paper operations in Madawah, Maine;

@) is the sole member of Fraser Gorham, a limited liabiity corporation incorporated under the laws of Delaware:

(c) is the sole member of Katahdiu Services Company LLC ("JQitahdii Services") which, on behalf of the Fraser Gmup, manages (but does not fund) the operations of Katahdin Paper Company LLC ('?Catahdin Paper") an indiuect, wholly owned subsidiary of Brookfield that owns a paper mill in Maine; and

(a) owns 10,000 convertible, term, preferred units of -din Paper and also holds an option to purchase all common units of Katabdjn Paper.

14. Fraser GorharO owns and operates a paper miiI in Gorham, New Hampshire.

15. Timber owns and manages the Company's two lumbermills in Masardis and Ashland, Maine.

B. Management of the Applicants 16. The Board of Directors of Fraser Papers is currently comprised of five directors, including myself. Three of the directors are non-independent, as defined by the Ontario Securities Act, National

Policy 58-201, given their relationship to the Company or the Company's major shareholder, Brooktield.

The other two directors are independent

17. There are common officers and directors for each of the other Applicants and those persons hold such role by virtue of their position on the senior management team of Fraser Papers.

18. It is expected that all existing management wiU remain in pbduring this restmcturing and there is no intention to hire a chief restructuring officer or similar officer at tbis time.

C. Integration of Applicants and Center of Main Interest 19. The Applicants are of the view that the reslinchkg to be undertaken under the Companies'

Creditors Arrangement Act (the "CCAA") )I require a review of the operations of the Fraser Group as a whole and may involve a restructuring of certain businesses and the sale of the remaining businesses and related assets. It is anticipated that this process will reqk a judicial proceeding and approval in the

US.,in view of the assets and operations locatedthere.

20. The business of the Fraser Group is fully integrated including between the Canadian and the U.S. operations. The four lumbermills supply wood chips and biomass @ark and othei wood fibre residuals), byproducts of the lumber manufacturing process, to the sulphite pulp mill in Edmdston, New

Brunswick. The hardwood pulp mill in Thurso, Quebec supplies pulp to the Company's two paper milIs in Madawaska, Maine and Ciorham, New Hampshire. The pulp and energy operations in Edmundston,

New Brunswick and the paper mill in Madawaska, Maine (collectiveIy referred to as the '%Papers

Operations") are physically connected, wit. pipelines joining the two plants across the international border between New Brunswick and Maine. Pulp and steam are produced at the Edmundston facilities and delivexed by pipehe to the Madawaska paper miU, where specialty papers are manufactured. A diagram outlining the physical location and proximity of each of the Fmser Group's facilities is annexed hereto and marked as Exhibit "B".

21. The Applicants are of the view that the restmcWturingof the Fraser Group wiU be administered most efficiently through a single, centralized restruchnirtg process. Such a process would likely minimize the cost of the restructuring, minimize the time necessary to effect the restructuring and thereby maximize the overall value of the asses and operations for all stakeholders.

22. It is contemplated that the CCAA proceeding in Canada will be the primary court supervised process for the restructuring of the Fraser Group. WhiIe the resttuching will beundertaken in Canada, the Applicants will seek an Order pusuaut to Chapter 15 of the U.S. Bmkruptcy Code to have this proceedjng recognized as a foreign main proceeding ia order to facilitate the implementation of matters in the U.S. that have been approved in the CCAA proceeding. 23. The Applicants are of the view that Fraser Papers' mtre of main interest ("COW') is Ontario. Its registered head oEm is in Toronto and all corporate, management, banking, and strategic functions are undertaken from its head office in Ontario.

24. In support of the Applicants' position that the COMI for the other Applicants is also Ontario:

(a) all corporate strategic decision-making for the Frascr Gronp occws at the l?raser Papers' head office, and the Chief Bxecutive Officerand Chief Fil~an~ialOfficer have their

primG business office in Ontario;

(b) as CEO of Fmser Papers and Chairman of each of the other Applicants 1 am involved, along with other members of the senior management team, in all material decisions

regarding the operations of all Applicants includjng the terms and conditions for any

material contsacfs and all such decisions are dkected from, made or monitored from

our offices in Ontario;

(d) h~man~resourcepolicy and administration, including certain human resource functions, pension plan administration and certain compensation aad benefits functions are performed and located io Ontario;

(e) all treasury management functions including a centralized cash management system and centralized banking arrangements for the Fraser Group are conducted &om Fraser Papers'

head office in Toronto:

(0 financial reporting of the Applicants is done on a consolidated basis and the audited financjal statements are prepared in Ontario;

(g) investor communications functions areundeaalcen at the head office;

(h) all corporate minute books for the ~~~1icant.sare located and.maintaidedin Ontario; (i) each Applicant has a bank account in Ontario with at least a small credit balance;

(j) with the exception of a tenn loan made available to F~aserPapers by the Province of New Brunswick (the 'W.B. Loan"), all credit facilities of the Applicants are with lenders who

manage such facilities in Toronto, Ontario, and all loans are advanced to Fraser Papers as

borrower;

(k) the Board of Directors' meetings are held in Ontario; and

(1) the location of the Company's major shareholder is in Ontario.

25. As the business operations of the Applicants are functionally integrated, there are a number of suppliers, creditors and other stakeholders of the herGroup that are common to several of the

Applicants.

26. All credit facilities and loans advanced to the Eraser Group are advanced to Eraser Papers as borrower. However, with the exception of the N.B. Loan, all of the Applicants have directly or indirectly guaranteed those credit facilities.

27. In addition, as described in more detd below, there is a significant degree of integration in the cash management arrangements among the Applicants, with the companies borrowing and advancing funds within the Fraser Group as needed, further demonstrating the integrated operations of the Fraser Group and the necessity for deding with the restructuring in a pmcedmally-consolidated manaer. As the operations of the EraSer Group are managed centrally at the Fraser Papers level, the Applicants are of the view that Ontario is the most appropriate forum for overseeing the restructuring of the entire Fraser

Group.

28. The specialty papers business of the Applicants comprises hvo paper mills, one market pulp mill, two internal pulp mills, the CoGen FaciIity and four lurnbedsin New Bmswick, Quebec, Maine and New Hampshire. Fmser Papers has been in opexation since the late 1800's and employed approximately

2,400 people in the U.S. and Canada as at December 31,2008.

A. Principal Pr0dnct.s

29. The principal products manufactured by the Fraser Group are paper, pulp and lumber. '

(a) Pqer 30. The Applicants' paper products can be grouped into six categories: specialty packaging, specialty printing, speciality high-bright groundwood, commodity free sheet, commodity groundwood and towel.

31. Specialty packaging papers are made to customer specifications, primarily for flexible packaging required for food products, and require a high degree of technical expertise. Specialty packagmg papers are generally sold to manufacturing intermediaries (converters) who will manufacture a value added flexible package or bag through various processes based on end customer specifications. Certaiu specialty packaging papers require chemical treatment for moisture and grease resistance.

32. Specialty printing papers include a broad array of both coated and uncoated gcades and include products that are used in thermal printing applications, label papers and for commercial printing purposw.

These grades are characterized by narrow technical specifications and require unique mariufacturing capabiities. Specialty printing gcades are sold directly to customers or through paper merchants who have a well established distribution network The& based papers are used for point:of-sale receipts, and lottery and gaming tickets. Label papers are used in a variety of packaging applications Eom bottling and cans and for labelling boxes, containers and luggage. Commercial printing papers are used for manuals, direct mail inserts and brochures. The Company's lightweight opaque papers ahe used for bibles, financial printing, pharmaceutical inserts and reference applications.

33. Specialty high-bright groundwood papers are used in commmid printing and publishing applications. These product< have a blend of both groundwood and chemical pulp fibre that provide comparable performance to traditional free sheet applications, but at a lower cost Specialty high-bright groundwood papers are sold through merchants or directly to printers and publishers.

34. Commodity fiee sheet papers typically include book papers, off-set papers, tablet and envelope grades. These commodity papers m subject to signXcant competition from much larger paper producers due to their more generic specifications and lower technical requirements. In addition, prices for these grades tend to be more volatile than for specialty grades. Book papers are used iu novels and trade books.

Off-set papers,tablet and envelope papers are used in office applications.

35. Commodity groundwood papers are generally used in mass circulation publications such as directories, magazines, catalogues and advertising inserts. Commodity groundwood papers are generally sold through paper merchants and to printers and publishers.

36. Towel is primarily bleached and unbleached paper towel for the "away-from-home" market segment, typically restrooms in restawants, airports, and other locations accessible by the public. This product is sold to converters though an agent.

(b) pulp 37. The pulp mills are integmted with other parts of the Fraser Group's operations, as the wood fibre in pulp is a fundamental component in the manufactore of paper. Production of sulphite and gmundwood pulp from the Hdmundston, New Bmnswick facility are used excIusively at the Company's Madawaska, Maine paper mill. The hardwood pulp, called northern bleached hardwood kraft pulp ("NBHK") produced at the Thurso, Quebec pulp mill, in excess of the requirements at the Company's paper milIs in

Madawaska, Maine and Gorham, New Hampshire is sold to customers in North America, Ewope and

Middle Eastern countries in Asia either directly or though agents.

38. NBH'K pulp produced at Thurso, Quebec that i$sold to extemdi customers competes with similar product that is manufactured by suppliers in Noah America, Scandinavia. South America, Asia and other regions. NBHK pulp is a commodity with competition essenWy based on price with lesser emphasis on certain technical qualities of the product and service. Market demand is largely a function of global paper production rates in the principal markets of Western Europe, United States and Asia.

39. The Fraser Group produces softwood dimension lumber used in home building constructiou, renovation and repair. Lumber is a commodity and competition is based on price. The .Applicants compete in a large, fragmented North American market that includes approximately one thousand domestic mills. Historically, demand has been cyclical and has been strongly correlated with new home building activity. Lumber is sold primariIy to wholesale distlibutors, with some sales directly to home builders and lumber yards.

40. Wood chips and biomass are imporhut byproducts of the lumber production process. The softwood chips *om the Company's four lumbermills are a significant and secure source of wood fibre fo* the Edmundston pulp mill. The bark is used as a source of fuel for the CoGen Facility. In 2008, approximately 30% of the sohood chips required by the Edmundston sulphite pulp mill were supplied

*om the Applicants' four lumbermills, 55% were supplied from independent mills and 15% were produced at the internal chipping facilities at the Edmundston mill, albeit at a significantly higher cost.

41. Whole logs used in the production of groundwood pulp at Edmundston are (i) obtained under long term fibre supply agreements, (ii) harvested fiwm the Applicants' crown licenced lands in New

Bxunswick and (iii) purchased from private land owners.

42. A chart providing an overview of the wood fibre flow in the production processes of the Eraser Group is annexed hereto and marked as Exhibit'%". B. Facilities

(a) PaperMii

~~xx~dstonand Madawaska (East Pavers O~eratiom)

43. The Applicants' Fast Papers Operations is its largest paper manufacturing facility. This is an integrated complex that is located on either side of the St. Iohn River, representing the international border between Edmundston, New 'Brunswick and Madawaska, Maine. The Edmundston facility produces bleached softwood sulphite pulp and groundwood pulp which are delivered via pipeline to the

Madawaska paper miU in sluny form. The Coaen Facility at the Edmundston plant produces electrical power that is sold under a long term supply agreement to the New B~nswickPower Corporation ("NB

Power") and byproduct stemthat is delivered via pipeline to the Madawaska paper mill.

44. The Madawaska paper mill currently has five paper machines in operation with broad capabilities

to produce light weight, coated and Uncoated specialty papers. Since 2007, three paper machines (out of a

total of eight) have been permanently shut down at theMadawaska mill. The Madawaska mill has taken

market related downtime in 2009 as a mult of weak demand and low prices for its products.

45. In 2009, the Madawaskapaper mill has received approximately 75% of its pulp rewment from

Edmundston with the remainder purchased from Thurso and third parties.

46. Following the temporary shutdown of the Pdmundston and Madawash operations on June 8, 2009, as described below, most of the East Papers Operations are expected to resume and continue

throughout this restructuring, with the exception of the Edmunston sulphite mill where further efforts are

required to lower costs, as discussed below. The other operations may be required to operate at reduced

capacity or subject to periodic downtime based on market demand for specialty paper,

Oorbam

47. The Goxham paper mill currently has two paper machines that produce specialty printing and commodity free sheet papers and a thud machine that produces towel products for the "away from home" 'market segment. The Gorham mill c~entlypurchases its hardwood haft pulp requirements from Thurso

and the balance of its pulp requirements from third parties. During 2008, the Company announced the

shutdown of two paper rnaches at the Gorham mill, representing approximately 40% of its

manufacturing capacity.

48. The NBIDR mill in Thurso, Quebec produces pulp for sale to the Applicants' two paper mills and

on the open market. Approximately 25% of the miU production in 2008 was specialty pulp far use in the

manufacture of high quality printing and writing and decorative laminated papers. Approximately 40% of $,$ ~WSD'S pulp production was shipped to either Madawaska or Clorham in 2008; the balance is sold to third parties.

49. Wood is supplied to the Thmo mill in both whole log form and chip fom with approximately

60% of requirements from whole logs and 40% from chips. Of the total fibre suppIy, approximately 35%

is provided from timberland under Crown licence, with the remainder purchased from third party

lumbermills, in the case of chips, or logs from private wood lots.

50. The Thurso pulp miU was cIosed indefinitely in early June, 2009. as described below.

Plaster Rock and Jrmioer. New Bruoswick

51. The Applicaots' lumbermills in New Bmswick produce dimension lumber for sale into the

noaheastem U.S. market and byproduct wood chips and biomass for use at the pnlp miZI in Edmundston.

In 2008, 100% of the chips produced at the New Brunswick lumbermills were sold to the Edmundston

pulp miU and represented about 10%of all chips used by the Edmundston pulp mill. Appraiximately 30% of the sawlogs for the two New Bmswick lumbermills was harvested under Crown licence or purchased under Iong term fibre supply contracts, with the remainder purchased from private land owners.

52. Eraser Papers is completing a capital improvement project at the Plaster Rock Iumbed in order to mode- certain areas of the manufactuxing process including the boiler, kiXn and saw line. These.

improvements are expected to reduce costs and increase productive capacity. The budget for this project

is CDN$17.6 million, with funding pmvided to Eraser Papers though the N.B.Loan. The modernization project is on budget and is scheduled for completion by the end of June, 2009.

53. The lumbermills at Plaster Rock and Juniper are currently closed, due to Iack of demand for

lumber and low prices. The market factors reflect the depressed conditions in the U.S. housing

construction market.

Pshland and Masardis. Maine

54. The lumbermills in Maine also produce dimension lumber for sale into markets in the

northeastem U.S. The majority of the byproduct chips and biomass from the mills are sold to the

Edmundston pulp mill, representing 20% of all chips consumed by Edmundston, while the remainder is

sold to third parties. The mills obtain a portion of their Iog requirements under long-term fibre supply

agreements with the remainder purchased on the open market.

55. The Applicants' lumbermill in Ashland is currently closed, due to the lack of derhand and poor

prices for lumber. The Masardis mill re-started on May 26,2009 to process an existing inventory of saw

logs, which is expected to take approximately eight weeks, at which time it is expected to be shut down

on an indefinite basis. On June 8,2009 the Company provided employees at the Masardis mill with sixty days' notice that the mill would be closing for market reasons effective August 7 (the 'sawmill) and

August 14 (the planer mill). C. Forest Resources and Crown Licenses

56. Access to an adequate source of timber is a critical requicement for an integratedlumber, pulp and paper business. IumfEcient timber resources result in an inability to obtain a s&cient volume of wood chips to make pulp, thereby requiring a pulp p~oducerto purchase its fibre from a third party.

57. Fraser Papers previously owned timberIands in New Brunswick and Maine that were sold in 2005 and 2006. h May, 2005, Fraser Papers sold its timberland in Maine to the Heartland Forest Group for net cash proceeds of $78 million. In January 2006 the Company sold its freehold timberlands in New Brunswick to Acadii Timber Income Fund ("Acadian") for total proceeds of $93.5 million in cash plus

3,613,780 securities that were convertible into units of Acadian, representing approximately 22% of the equity of Acadian on a fully diluted basis. In 2007 the Company sold its remaining interest in Acadian for net proceeds of $38.4 milion. Proceeds from these transactions were used to repay indebtedness and fund operating losses.

58. At the time of the sale of the timberlands, the Company entered into twenty-year fibre supply agreements whereby the right to purchase fibre (in an amount substantially equal to the volume previously obtained from these lands when they were owned) was retained. These fibre supply

agreements provide approximately 36% of the round wood fibre used in the Applicants' operations in

New Bmswick and Maine.

59. In addition to the fibre supply agreements, the Applicants have licences in New B~xnswickon Crown forest lands equivalent in area to approximateIy 1.3 million acres, subject to certain allowances fox

annual cutting on these Crown lands. Qown licences held by the Applicants provide approximately 30%

of the round wood fibre used in the Applicants' 1umbermd.l operations.

60. When Fraser Papers sold the New Bnmswick timberlands it entaed into an agreement with

Acadian, whereby Acadian provided management services reIating to the Crown lands for a fee. This

management agreement has a term equal to the term of the Crown licences, including renewal terms. 61. AU forest operators on Crown lands keaccountable for their activities on these lands under the

Crown licences. The Provincial licences generally include provisions for royalty fees (or stumpage

charges}, levy fees for reforestation and the development and care of the forests and sub-licencing

requirements for certain amounts of the annual allowable cut to tbird parties. The Provinces have various

IegisIative programs governing utilization of their forest resources which change from timk to time,

resulting in changes m land tenure and cutting rights. The major tenure agreements with the Provinces

are for terms of 20 to 25 years, with provisions for renewal thereafter.

62. The Applicants' access to timber on Crown lands is subject to an aUocation received from the provincial governmeat In New Bmswick, Fmser Papers consumes approximately 28% of the Province's fibre market (sawlogs, pulpwood, chips from sadlsor forest biomass) but receives only 9%

of the total Crown wood allocations, The Applicants have been in negotiations with the Province of New

Bmwick for an increased allocation of the Province's fibre supply to alIow the Applicants to have

access to a secure wood fibre supply that can be harvested at economies of scale. On June 5,2009 the

Province agreed to provide the Applicants with an increased fibre allocation, subject to cextab terms and

conditions as described in further detail below.

D. Energy . 63. The Applicants require significant quantities of power to operate the various manufacturing processes at each of the mills. Eraser Papers purchases all of its power for the Canadian miUs from the

provincial power utilities in Quebec and New Bmswick. With the objective of ,fablishing a

competitive advantage in energy costs at the East Papers Operations, Eraser Papers' predecessor Fraser

Inc. built a 38 megawatt CoCjen Facility on the Fidmmdston site in 1995 at a cost of approximately CDN $120 million.

64. The CoGen Facility bunts approximately 800,000 tons of biomass annually to produce steam for

the East Paper Operations and eIectricity which is sold to NB Power. 65. When the CoGen Facility was built, Fraser Papers entered into a thkty-yeear power purchase agreement with NB Power dated May 16, 1995 (the "CoGen Agreement') whereby Fraser Papers supplies all of the electricity produced at the CoGen Facility to NB Power. The CoGen Agreement was structured such that Fraser Papers receives two monthly payments over the tenn of the agreement: (i) a fixed capacity payment, and (Z) a variable payment for each unit of electricity produced. Fraser Papers negotiated a higher capacity payment in the early years of the contract, under an amortizing schedule of payments. These higher capacity payments represented, in effect, an advance on future capacity payments and Fraser Papers was required to post a Ietter of credit with NIB Power to secure performance under the long term contract. At this time, the letter of credit is approximately CAD $23 million and utiIizes a significant portion of Fraser Papers' bornwing capacity under its revolving credit facility with

CE. A copy of the CoGen Agreement is annexed hereto and marked as Exhiiit "D".

66. Under the CoGen Agreement, the purchase price for the units of electricity generated and sold to

NB Power was to increase each year based on changes to the Consumer Price Index ("CPI"). Since 1997, this adjustment has resulted in a 13% increase in the price paid to Praser Papers for the electricity produced. However, over that same time period the cost of biomass fuel used to generate. the electricity has increased by approximately 300%. By 2009, this had reducad the anticipated operating margins of the CoGen Facility by appmximately CDN$IS million per year.

67. The combined effect of the reduced operating matgin for power soId under the CoGen

Agreement, coupled with the high price paid by the Applicants for power in the Province of New

Brunswick (relative to the price paid for power in other Provinces, including Quebec and British

Columbia) has resulted in a significant competitive disadvantage for the Applicants. The Applicants'

East Papers Operations purchase approximately CDN$30 milIion of power for its operations mually from NB Power. 68. The Applicants have requested amendments to the CoGen Agreement and to date have received relief in one area that wiU provide the opportunity to reduce costs and improve operating efficiency, as discussed below. In my opinion, more relief is necessary and this has been the subject of ongoing discussions with NB Power.

E. Employees

69. As at December 31, 2008 Fraser Papers employed approximately 2,400 people at its eight manufacturing locations in Canada and the U.S. Approximately 70% of these employees are represented by labour unions. One of the collective agreements has already expired and three other collective agreements are due to expire this year.

70. The Communication, Energy and Paper Workers Union C'CEP") represents approximately 660 bargaining empIoyees at the Edmundston and Thmo mills. The United Steel Workers ("USW) represents employees at Madawaska and Gorham. Approximately 150 1umbetmiU bargaining employees at Plaster Rock are represented by the New Bms~ickRegional Council of Carpenters, Mhllwrights and

AUied Workers (''CM4W'').

71. A five year Collective Agreement with the CEP in Edmundston was ratified in May 2005 and expires June 30, 2009. A six year agreement was reached with the USW in 2003 for employees in

Madawaska, and expires October 31,2009.

72. In 2006 a four year agreement covering approximately 300 employees at the Thui-so pulp mill was ratified with the CBP and expired April 30, 2009. Discussions to establish a new agreement have started. In a meeting held on May 27,2009, the employees voted favonrably to amend the terms of the severance payments from six weeks after closure to twenty-two weeks, to provide for additional time to fmd a solution for the situation at the d. 73. In 2008 a two year extension was negotiated to the Gorham labour agreement with the USW,

which was otherwise set ta expire on May 31,2008. The cmntCollective Agreement with the USW for

tbe Gorham facility expires May 31,2010 and provides for a one time profit sharing of 10% of eamings

befo~interest, taxes, and depreciation ("WJTDA") in excess of $8 million in the twelve monChs prior to

May 31,2010.

74. The existing four yea^ Collective Agreement with the CMAW at the Plaster Rock lumbermill expired January 31,2009. A negotiated settlement was teached on a new five year agreement with the

bargaining team representing the unionized employees but was rejected in a vote held early in 2009. The Company's offer was subsequently withdmwn and no further negotiations have taken place.

75. The Applicants' lumbermills at Juniper, New Brunswick and hhIand and Masardis, Maine are

not subject to any collective agreements.

76. The Applicants bave been involved in discussions with each of the unions regatding the terms

and concessions required to achieve a successful resknctudng of the Applicants' business. To date those discussions have not resulted in any agreements.

P. Pension Plans, Benefits and finding Issues

77. The Applicants sponsor five defined benefit pension plans in three jurisdictions: two registered in

the Province of New Brunswick (the "NB EIo&ly PI~II"md the "NB Salaried Plan'?, two registered in the

Province of Quebec and one in the U.S. (individually, the 'Tension Plan" and coUectively, the "Pension

Plans"). Fraser Papers Inc. is the plan sponsor and CIBC MeIIon is the trustee for each of the fow

Pension Plans in Canada Holdings is the plan sponsor and BNY Mellon is the trustee for the Pension

Plan in the U.S. The two Pension Plans registered in Quebec ate administered by pension comminees comprised of representatives from Fraser Papers and representatives from the union or the salaried _ employees, as the case may be. In total, there are 2,997 retirees and 1,412 activk employees who are members of the Pension Plans. 78. In addition, the Applicants have one non-registered, unfunded SERP in Canada and two unfunded

SERPs in the U.S. The obligations under these SERP's are "pay-as-you-go". The Applicants also sponsor a registered defmed wniribution pension plan in Canada and one in the U.S.

79. Based on information received by the Company from its actuaries for the purpose of preparing the annual audited financial statements, and in accordance with GAAP, the Applicants' accrued pension benefit obligations in its five defined benefit Pension Plans and SERP's exceed the value of the Pension

Plan assets by approximately $171.5 million as at December 31,2008.

80. In 2008, actuarial valuations as at December 31,2007 were filed for the two registered Pension

Plans inNew Brunswick and one registered PensionPl~in the U.S. Actnarial valuations as at December

31, 2008 are required to be filed for the M3 Hourly Plan and the one US plan during 2009. Actmid valuations as at December 31,2009 are required for the two registered Pension Plans in the Province of

Quebec. The NB Salaried Plan requires an actuarial valuation report to be prepared as at December 31,

2010. 73ese actuarial reports set out the annuaI cash conhibution rtquirements for each of the Pension

Plans.

81. Recent changes in gIobal capital markets and borrowing rates has affected the funded status,

Wigrequirements and pension expense associated with the Applicants' Pension Plans. Based on current market couditions, regulatory filing requirements and preliminary estimates in r~~lationto the

actuarial valuation reports as at December 31,2008, the Applicants expect that they will be required to make special payments in respect of unfunded going concern and soIvency deficiencies (the 'Tension

Deficits") with respect to the Pension Plans in the amount of $13.5 millon in2009. This is in addition to

$3.3 milIion required to be paid in 2009 on account of normal cost contributions to the Pension Plans. The Applicants have no ab'rlity to pay the combined amount at this time.

82. Based on curtent market conditions, regulatory filing requirements, preliminary estimates in relation to the actuarial valuation reports as at December 31,2008 and the last filed actuarial valuations, the Applicants expect that contributions required to be paid to the defined benefit wmponents of the

Pension Plans in 2009 will almost double in 2010. The Applicants estimate that they will be requjred to pay an average of $34.7 million per year for the years 2010 to 2013 to fund the Pension Deficits and a further $5.1 Doillion for normal cost contributions (for current service of members) to the Pension Plans in

2010. The Applicants expect that they will be unable to satisfy these comhiiedfundiig obligations.

83. The Applicants fund post-retirement health care benefits costs on an AS0 (administrative services only) and insured basis. As at December 31, 2008, the present value of the accrued benefit obligations of these post-retirement health care benefits was $46.8 million In 2008, the Company paid

$3.4 million to provide these post-retirement health care benefits.

84. Many of the health and related benefits payable by the Applicants to active and retired employees in Canada are funded through a Health and Welfare Trust, established by Agreement and Declaration of

Trust dated January 1, 1988. A Health and WeIfare Trust is a means by which trustees can receive contributions from employers and employees, where applicable, and provide, either through diiect payment of benefits or through the payment of insurance premiums, the health and weIfare benefits that the employer has agreed to provide.

85. The Health and Welfare Trust is a tme trust arrangement with four individuals (Jean Paul

Fournier, Linda Pellizzati, Wdliam Peterson and Carole Savage) cunently acting as Trustees. Eraser

Papers has no interest in the monies in the tnrst unless and until all benefits payable at any time to beneficiaries have been paid in full. At this time there is a balance of approldmately $1 million in the trust, which amount, in the ordinary course of business of the Applicants, would fund benefits payable to active and retired employees for a period of approximately four to five months. In view of the existing balance in the trust, the Applicants intend to make no further paymants mto this trust after the date of filing until such time as the funds are fully depleted through the payment of benefik to employees. Once these funds are depleted, the company will contribute sufficient funds to the trust in order to meet its obligations under its retiree and employee benefit plans as they may exist at that time, subject to the provisions of the Initial Order and the DIP Financing (as hereafter defined).

86. Praser Madawaska is party to a Deferred Compensation Plan and Deferred Compensation Plan

Trust Agreement in the US., with McUon Bank N.A. acting as Tmtee. Participation in the program was curtailed some time ago, aIthough two current employees and seven reWemployees are Participants (as that term is defined in the agreements). The program was a means of defening the tax payable on compensation, with Participants receiving payments either as a lump sum or over a number of years following their retirement.

87. Pursuant to the agreements referred to in the immediately preceding pantgraph, the Participants have no beneficial interest in the monies in the trust, the Trustee is required to cease making payment of benefits to the Participants if Fraser Madawaska becomes insolvent, and upon the insolvency of Fraser

Madawaska any money in the trust must be held by the Trustee for the benefit of Fmser Madawaska's general creditors. The Applicants intend to immediately notify the Tntstee of Fraser Madawaska's insoIvency and the commencement of this proceeding. There is approximately $100,000 currently held by the Trustee.

G. Hedging Activities

88. Almost all of the Applicants' sales are denominated in U.S. dollaxs while a significant portion of the operating costs are incurred in Canadian dollars. Accordingly, financial results for the Applicants are highly sensitive to changes in the exchange rate for Canadian and U.S. dollars.

89. From time to time the Applicants hedge a portion of their net foreign currency-denominated cash flows using foreign exchange forward contracts or other derivatives. The Applicants enter into foreign exchange forward contracts, or other hedging contracts, to fix or 'lock-in" the future foreign exchange for a portion of its Canadian doIlar denominated costs thus reducing the risk of foreign exchange fluctuations negatively affecting the operations and cash flows of the Company, -23 -

90. The Applicants also hedge the net Canadian dollar denominated monetary LiabiEties on their balance sheet, as the reporting cmency for the Company is in U.S. dollars and the Company has net liabilities on the balance sheet that are denominated in Canadian dollars.

91. Brookfield has provided the Fraser Group with afacility that enables the Applicants lo enter into forward fomign exchange contracts as part of the Company's hedping activities, with the maximum

"notional" value of derivatives outstanding at any given time being no more than $350 million. As at

May 2,2009 the Company had $32.7 million in foreign exchange conhcts outstanding as a hedge against ceaain Canadian dollar-denominated net monetary liabiities. h addition, as at May 2, 2009 the

Company notiondy had $160.7 million in net forward foreign exchange contracts outstanding under this facility as a hedge against fnhm net Canadian dollar cash flows.

92. From time to time, the Fraser Group also enters into lumber forward contracts to fix the price for a portion of its future lumber sales. At this time, the Applicants have no outstanding future contracts for lumber.

EI. Financing Activities in 2008

93. During 2008, the Applicants required $73.0 million to fund cash operating losses, meet pension funding obligations and'capital expenditures necessary to,sustain the business. The Applicants (i) raised

CDN$60 million of equity capital from a rights offering to shareholders that was fully underwritten by

BrooMield, (ii) expanded availability under the existing revoLving term facility with CIT Business Credit

Canada Inc. ("CIT") by $25 milZion which was guaranteed by Brookfield, and (iii) secured an additional

$25 million loan under anew one year term facility with CIBC that was also guaranteed by Brookfield.

94. In addition, the Province of New Bmnswick agreed to provide a WN$40 million six year term loan (previously defined as the N.B. Loan) with proceeds that were restricted to the financing of capital upgrades at the Edmundston puIp miU and the Plaster Rock lumbemdll. At June 16,2009, borrowings under the N.B. Loan were $25.9 &ion (or CDN$29.3 miIlion). 95. The cash realized horn these debt facilities and the rights offering provided the Applicants with immediate liquidity in 2008 but this was not sufficient to avert the financial crisis that the Applicants now face.

I. Key Factors Affecting the Business 96. The Fraser Group's operations and financial results are influenced by a number of factors, many of which are beyond the Applicants' control. The five most signiricant factors, in no pdcular order of importance, are: (i) the cyclical nature of the business; (ii)the competitive environment of the industty;

(ii) product demand; (iv) cost contro); and (v) foreign currency risk

97. Other risks to the Fraser Group's business include those of general application to all capital intensive manufacturing and distribution businesses in the forest product sector. They include:

(a) market issues such as the dramatic decline in lumber sales due to a collapse in the U.S. housing industty and a drop in global economic activity, which has reduced demand for market pulp;

@) the availability of, and prices for, wood fibre in its various forms including saw logs, pulp logs, softwood chips, and biomass;

(c) the effect of U.S. pulp industry tax subsidies (often referred to as "black liquor tax credits"), as described below;

(d) the general decline in demand for paper grades manufactured by the Applicants reflecting the lower economic activity in North America;

(e) the effect of environmental litigation, regulatory deveIopments and aboriginal land claims on timber supply and operations;

(0 the effect of environmental and other government regulations on the cost of doing business:

(g) an increase iq the cost of purchased energy including oil and other raw makrials, leading to higher manufacturing costs, thereby reducing operating marpins; (h) trade re&ictions regarding trade in softwood lumber products between the U.S. and Canada;

(i) operational risks for which adequate insurance may not be available;

(j) mill shutdowns for unscheduled maintenance or lack of demmd;

&) Iabour disruptions;

(l) insufficient capital to maintain the operating facilities; and

(m) financial obligations includimg long term debt, guarantees, indemnities and pension obligations.

98. The manufacture of pulp and paper is a capital intensive business requiting a significant investment in large machinery and equipment. The geographical breakdown of property, plant and

equipment at the end of 2008 was 47% in the United States and 53% in Canada. A sigoifcant portion of

the AppIioants' operating costs are incunsd in Canadian dollars, while almost all of the Applicants' sales

are transacted in U.S. dollars. Therefore, an increase in the Canadian dollar relative to.the U.S. dollar

increases the Applicants' operating costs relative to sales, which reduces the operating mahgins and the

cash flow available to fund the Applicants' operations. As a result, the significant fluctuaiions in rehtive

currency values over the past twelve to eighteen months has negatively affected the cost competitiveness

. of some of the operating facilities, the value of the Applicants' foreign investments and ultimately the

financial position of the Fraser Group.

99. In addition, certain U.S. pulp and paper companies are currently benefiting from a significant tax

credit availabIe to those who operate haft pulp mills. The original legislation, entitled the S@e,

Accountable, Flexible, Eficient Transportation Equity Act, enacted in 2005, was designed to encourage

the use of alternative fuels, like ethanol, to reduce the consumption of diesel fuel in highway vehicles. In

late 2008 certain U.S. pulp mills identified aloophole in this legislation that would enable them to receive a tax credit by adding diesel fuel to '"alack liquor", which has been bmed as a fuel in recovery boilers in pulp mills for many years. Black liquor is a residue byproduct ofthe tmditonal kraft pulpingprocess.

100. QeApplicants believe that this tax credit has produced the opposite effect to the intended rksult, as pulp operators have begun to add dieseI fuel that was not previously required or used in their pulping process. Industry analysts have estimated that this tax credit is now widespread in the U.S. puIp industry, and is subsidising the oversupply of kraft pulp and the paper manufacmed fmm it during a time when the market is already weak. The Applicants' estimate that the black liquor tax credit is worth between $150 to $200 per ton of pulp produced, which franslates to a savings of 30 to 40 % of the cost of production.

The Applicants are not able to taka advantage of the tax credit, which creates a significant competitive disadvantage for the Applicants relative to U.S. pulp producers who can claimthe tax credit.

101. The Applicants were abIe to address the combiied negative impact of these factors through the financing activities described above and by reducing working capital levels to cover losses and fund

required pension and other obligations. The Fraser Group is now experiencing a severe liquidity crisis

idhas immediate and pending financial obligations that it is unable'to pay.

J. Bank Accounts and Cash Management .

102. The Applicants operate a centralkd cash management system Daily financial requirements of the Applicants are funded by a revolving operating facility with CIT that is provided to Fraser Paper as

borrower, with an unlimited guarantee from each of the other Applicants.

Funding of Canadian Operations ,

103. Fraser Papers mainfains Canadian dollar and U.S. dollar corporate bank accounts in Toronto to

facilitate the funding requirements for the entire Fraser Group. Canadian dolIar and U.S. dollar accounts

are also maintained by Fraser Papers for each of the Canadian facilities (Edmundston, Thurso, Plaster

Rock and Juniper) to fund mill operations and receive tax refunds. The mill accounts are funded from Fraser Papers' Canadian do& or U.S. dollar corporate account, depending on whether the required disbursements from the mill account are denominated in Candm or U.S. dollars. Eraser Papers bas a

Canadian lockbox account in Toronto to receive all deposits for Canadian dollar denominated sales made by the Canadian mills. Fraser Papers also maintains a lockbox account in the U.S. to receive deposits for

U.S. dollar denominated sales. h addition to these primary cash management accouuts, Fraser Papers maintains three accounts which axe used as impressed accounts for payroll disbursements'to employees and other miscellaneous activity.

104. The primary bank accounts for each miU are swept daily to Fraser Papers' corporate account, which provides the necessary funds for daily disbursements. This activity leads to interdivisional account balances between the various divisions. These balances are not paid but allowed to accumulate, and are then cleared infrequently. These balances eliminate at the legal entity level for divisions within Praser

Papers.

Fundiiag of US. Operations

105, Similar banking arrangements exist with respect to the plants owned and operated by the U.S.

subsidiaries of Fraser Papers. HoIdings maintains a Canadian and U.S. dollar corporate account in the

U.S. Separate U.S. dollar bank accounts are maintained for each of the mills in that jurisdiction (Fraser

Madawaska, Fraser Gorham, and Timber) to fund disbursements relating to that mill. The Applicants'

U.S. operations are funded in part from the receipts generated from daily operations and these receipts are used to fund their disbursements, both to thhd parties aud,to Fraser Papers. These cash receipts are deposited to three lockbox accounts that are controlled by Fraser Madaawaska and Timber, to receive deposits for all U.S. sales of the U.S. Applicants. Any shortfall or excess cash in each of the US.

Applicant's accounts is swept to the Holdings' corporate account Holdings will generally use any excess funds to repay amounts owing to Fraser Papers. Any shortfall in the Holdings corporate account wiU be funded by Fraser Papers as described below. 106. Holdings, Fraser Madawaska and Timber also have bank accounts in Canadian dollars to fund disbursements in this currency. Similar to the U.S. dollar accounts, any shortfall or excess in the Fraser

Madawaska or Timber acwnnts is swept to the Canadian dollar Holdings' account which, in tum, is funded by the U.S. dollar account

107. Each of Timber, PraSer Madawaska, and Fraser Gorham also have bank accounts in Canada to facilitate any c,ash flows that myoccur directly between Fraser Papers and its indirect, wholly-owned subsidiaries. These accounts are rarely used, as all funding of the U.S. operations ocms through intercompany loans between Fraser Papers and Holdings.

108. Funding between Eraser Papers and Holdings is effected through an inter-company levolving working capital line note agreement dated July 20, 2005 and amended in August, 2007 (the

"Intercompany Note Agreement'), a copy of which is attached hereto and marked as Exhibit "E".

Holdings owed Frser Papers approximateIy $71.8 donas at May 2, 2009 nnder the htercompany

Note Agreement.

109. The amount outstanding under the Intercompany Note Agreement decreases as any excess cash in

Holdings is paid to Eraser Papers. The amount outstanding under the Intercompany Note Agreement increases if Praser Papers is required to fund any cash shortfalIs in Holdings.

110. Each of the Applicants has their own accounts payable function. Fraser Madawaska perfoms the accounts payable function for the Madawaska, Maine, Edmundston, New Brnnswick and Portland, Maine locations.

11 I. k is anticipated that the Eraser Crroup will continue to use the existing cash management syscem and wilI continue to maintain the bank acconnts and funding arrangements already in place. This approach will minimize any disruption to the business operations of the Fraser Group as it seeks to restructure its affairs. CIT and Brooktie1d, who have each indicated that they will make DIP Financing (as hereafter defined) available to the Applicants if the Initial Order is granted, have confirmed that they support the continued operation of the existing cash management system during the CCAA pror~edings.

IV. CURRENT STATUS OF TJ3E COMPANY

A. Hnancial Status

112. Praser Papers' annual audited financial statements are prepared on a consolidated basis and

include each of the other Applicauts. The most recent audited statements are for the fiscal year ending

December 3 1,2008, a copy of which is annexed hereto and marked as Exhibit "F".

113. The Applicants have also prepared consolidating financial statements for the Fraser Group as at

May 2,2009, acopy of which is annexed hereto and marked as Exbibit "G".

114. On a consolidated basis the Fraser Group has experienced negative BBITDA for three consecutive years. includingnegative EBlTDA of $33.6 million in 2008 and $41.9 milIion in 2007. The

Fraser Group had negative EBlTDA of $1 1.8 million in the first quarter of 2009.

a) Indebtedness to Lenders

115. Loans have been pmvided to Fraser Papers by each of CIT, CI6C and the Province of New

Bmswick BrooEleld has guaranteed certain of these loans. In addition, B~oo~eldhas provided Fraser

Papers with a facility in the notionaI amount of $350 million to facilitate the AppEcants' foreign cmency

hedging activities, as discussed above. The amounts owing as at May 2,2009, the date ofthe most recent

internal financial statements, and the secnrity or guarantees held by each lender are as follows: Authorized Prlncipel Amount Guarantees or Securitv Held (Outstandine Amonntl

Unlimited gomutee from each of the other Applicant%first charge over inventory and awomts receivable of each Applicant $25M of the outstanding amount is gua~antedby Broolrfidd.

CIBC None from the Applicanrs. $25M of the amount owing to CIBC is guaranteed by Brookfield

Province. of New CDN$40M (CDN$29.3M) Fit charge over Gxed assets in New Brunswick Bmswick and second charge. on inventory , and accounts receivableinNew Brunswick

Brookfield $SOM in guarantees above, plus Guarantees and seourity over all assets any exposme under hedging granted by each Applicant in favour of facility. Brookfeld. Security is subordinate to CIT and Province of New Bnmswick

116. Other than in respect of equipment leases, purchase money security interests or similar arrangements, and specijic agreements involving (i) Export Development Corporation for the refund of softwood lumber deposits; and (ii) Royal Bank of Canada in respect of a cash collateral agreement relating to a former employee's pension proceeds, no other parties have a registered secuity interest against any of the Applicai~tsin Ontadc, Quebec or New Bmswick. Summaries of searches conducted under the Personal Property Security Act against each of the Applicants in the PIO~~.~WSof Ontario and

New Brunswick and equivalent semhes conducted in Quebec are annexed hereto and marked as Exhibit

117. Similarly, other than in respect of equipment leases, purchase money security interests or similar arrangements, no other parties have a registered security interest against my of the fipplicants in

Delawam, Maine or New Hampshire. Summaries of searches conducted pursuant to the Uniform

Commercial Code in respect of each of the Applicants in Delawm, Maine and New Hampshire are annexed hereto and marked as Exhibit 'T'. 118. The amount outstanding under the revolving facility provided by ClT includes approxiniately $40

, million in letters of credit issued by ClT at the request of the Applicants. These include LCs totag approximately $1.7 donin favour of certain trade supplers, an LC for approximately CDN$23 million in favour of NB Power for any potential htue liquidated damages under the CoGen Agreement, three

LCs totallhg approximately $3.7 donto secure environmental obligatioas in respect of a U.S. landfill

site in the State of Wisconsin that the Fraser Group no longer owns (the 'Wisconsin Landfill'') and $144

dionto secure potentid workers' compensation obligations in the U.S.

119. As detailed below, Brookfield is prepared to provide DIP Fiancing (as later defined) to the Applicants during this restructuring process and CIT bas also mdidated that it is prcpared to continue to

extend credit to the Applicants to support the Applicants' efforts to restructure through a CCAA

pmceedimg, in each case in accordance with the fomof Initial Order sought by the Applicants.

(6) 0thLiabilities ' 120. As at May 2,2009, the most significant liabiities of the Applicants, other tban their indebtedness to the lenders described above, are as follows:

Trade Creditors $74 Environmental Costs (net present value of $112 projectedfutureIandfiU expenses) Other Liabilitim $0.2 $85.4

121. In addition, the net obligations associated with the Applicants' Pension Plans, SEWS, and retiree benefit plans as at December 31,2008 (as determined in accordance with GAAP) total $218.3 million.

122. The Applicants are unable to pay these liabiLities generally as they become due and they are

insolvent. In addition, the above schedule does not include amounts relating to termination or severance

obligations payable under any statute, ~Uectiveagreement or otherwise. As certain mills are currently shutdown and may be for an extended period of time, those liabilities may be substantial and the

Applicants have no ab'ity to pay such amounts at this time.

123. Cedof the Applicants are also parties to litigation or arbitration that is pendimg or has been threatened in Canada and the U.S. The Applicants are not able to estimate the likely outcome or

quantum of any potential liability at this time, but will review these matters with the Monitor as part of this proceeding.

B. Inter-Company Acconnts 124. Due to the manner in which the Fxaser Group operates as an integrated business and the existence

of a centralized cash management system, there are significant inter-company amounts owing among the various members of the Fraser Group at any given the. The Applicants propose to have the Monitor

report on the intercompany amounts as part of tbis proceeding.

.I25 TheFraser Group uses intercompany accounts to manage activities between its various locations,

and these activities are recorded on a location {rather than a legal entity) basis. For example, the

Canadian operations of Fraser Papers consist of five locations (Toronto, Thnrso, Edmundston, Plaster

Rock and Juniper). General ledgers ace maintained for each to record all activity relating to that group.

The intercompany activities among the various operations can be broadly grouped as: (i) the purchase of

goods (pulp, power, steam, chips and biomass) manufactured by one mill and sold to another; (ii)

allocation of services paid by one operation but charged to an0the.r; (3)other miscellaneous'activity

between locations, and (iv) daily movement of cash between individual miU and corporate bank accounts, as described below.

Purclfase of Goods

126. The largest intercompany transactions relate to the sale of puIp manufactured by the, Edmundston

and Thnrso pulp mills to the Applicants' U.S. paper mills in Madawaska and Gorham. In addition, the

Edmundst'on mill sells power and steam to the Madawaka paper mill to support its operational requirements. The Madawaska mill is heavily reliant upon the Edmmdston mill for its steam, power and certain kinds of pulp, maIcing the Edmundston facility a hitical supplier to the Madawaska mu.

127. The Fraser Group's'lumbermills in New Brunswick and Maine generate byproduct chips and biomass in the manufacture of dimension lumber. These byproducts are sold to theEdmundston pulp mill as raw materials to support the production of pulp (chips) and power or steam @lomass).

128. Each month the resulting intercompany receivab1e.s and payables an hamfad from the local mill ledgers to the corporate ledger maintained for the Canadian and U.S. operations (FPS Canada a. agent for Fraser Papers in respect of the Canadian operations and Fraser Madawaska for the U.S. operations). For example, on a monthly basis Edmundston's receivable from Madawaska for the sale of pulp, power and steam is transferred to PPS Canada, which maintains the corporate general Iedger for the

Canad'lan operations. Siarly, the Madawaska payable to Edmundston is transfed to the corporate Fraser Madawaska general ledger. The resulting balances between the ~anirdianand. U.S. corporate accounts are cIeared mouthIy, as described below.

Ahcafion of Services

129. There are a number of services or costs that are managed centrally by the Fraser Group's head

office, which are then allocated to the individual mills to reflect their appropriate share of benefits received. These items are summarized beIow and are allocated to the mills by way of intercompany charges on amonthly, quarterly or annual basis:

(i) Insurance - insurance premiums are centrally negotiated and paid and each operation is allocated their share of various insurance policies based on insured values or sales, depending on the nature of the policy

(ii) Letter of Credit ('LC"')- letter of credit standby fees are paid centrally and allocated to each operation based on the issuance of mill specific ILCs

(iii) Pension and OPEB expenses - are calculated centrally and allocated to each operation based on based on plan members and retirees attributable to each operation (iv) Workers' compensation - benefits are paid centrally and allocated to tbe operations based on actual claim payments

(v) Procurement and research - the costs associated with centralized functions are allocated to mills based on estimated (procurement) and actual (research) time spent on specific mill needs

(vi) Hedging gainsflosses - realized gains or losses on hedging programs (foreip exchange and commodity) are received or paid cenkdy and are allocated to mills based on their actual Canadiau dollar denominated cash flows or lumber shipments as the case may be. 130. In addition, there are services managed at the mill level that benefit one or more other locations. These actual costs are charged or allocated to other mills by way of intercompany accounts and can be summarized as follows:

(i) services provided by Edmundston to Thurso, Plaster Rock and Juniper certain employee benefits (Blue Cross, workers' health and safety) • information technology services a medical services

(ii) services provided by Madawaska to Edmundston and Gorham

4 information technology services medical services (Edmundston only)

MkceRaneous Charges 131. There are a number of onetixe and recurring charges that are allocated between the various

operations to rdect an appropriate allocation of costs. Some of thelarger or recuning transactions are as

follows:

(i) Payroll Generally payroll at each location is aligned with staff at tbat location, but when staff are seconded or &erred to another location, payroll adjustments are corrected by intercompany charges.

• Edmundston's w&y payroll is funded from the corporate FPS Canada account instead of its local bank account The cost is allocated to Edrnundston through an intercompany charge. (3) Payments A number of significant Canadian suppliers request that payment be made by wire transfer. As wire transfers can only be processed centrally, payments are made £corn the corporate FPS Canada bank account and charged to the respective mill through an intercompany entry.

(iii) Canadian Sales

To ease administration, paper sales to Canadian customers are transacted as an initial sale by the U.S. paper mill (Madawaska or Gorham) to the Edmundston mill. The Edmundston mill then sells the paper to the customer, but is charged for the purchase of goods through intercompany accounts.

(iv) Temporary transfers of goods and services On occasion a mill may provide additional services such as storage or training, or lend equipment to another location on a one-time or temporary basis. To reflect the use of these goods or services, charges are posted to the intercompany accounts of thesemills. Banking, Clearing and Accounting

132. Local bank accounts for each mill are "zero balanced" daily and cleared to the corporate head office bank accounts. Under this process, daily mill disbursements are funded by the corporate accounts.

Canadian bank accounts are cleared to a Eraser Papers' account and U.S. accounts are cleared to a Fraser

Holdings account. The offsets to these transfers are intercompany liabilities between the respective entities. These intercompany balances are not cleared regularly and are allowed to accumulate as described below.

133. Cash requirements of the U.S. operations are funded by the Intercompany Note Agreement between Fraser Papers and Fraser Holdings, as described above. As such, if net cash is required by cue of the U.S. subsidiaries to pay third party suppliers or pay Canadian purchases fromthe previous mouth, it is borrowed by Fraser Holdings from Fraser Papers through the Intercompany Note Ageenlent. Fraser

Papers, as needed, will borrow the necessary fonds from its revolving facility with CE.

34 Monthly mill balances are wansferred to the corporate ledgers maintained by PPS Canada (for the Canadian operations) andPraser Madawaska (for the U.S.operations). Balances due and from operations within each respective country are not paid but allowed to accumulate, subject to infrequent clearing. The balances among the Canadian operations am effectively offset, as they are all owned by the same legal entity. As the U.S. operations are owned by separate legal entities, they are not offset but effectively eliminated when consolidated fmancial reporting is prepared for the Fraser Group.

135. Balances due between Canadian and U.S. operations as a result of the purchases of goods or services are paid in cash monthly in the month following the date of the transaction.

136. Intercompany balances are presented in the Applicants' internal financial reporting as balances due between related parties, which eliminate upon consolidation.

C. Causes ofInsolvency

137. The Applicants have not generated positive casMow from operations for three consecutive years.

Negative cash flow from operations (prior to changes in non-cash working capital) equalled $65.4 million and $555 million in 2007 and 2008 respectively, combined with a further shortfall of $9.7 million in the

'first quarter of 2009.

138. During the first quarter of 2009, the Company funded its cash flow shortfall through the reduction' in working capital of $34.2 million, principally through the sale of finished goods inventory. The

Company no longer has the ability to fiuance its cash flow shortfall.

139. The aforementioned cash flow shoafalls are being driven by a sharp deterioration the

Company's pulp operation at Thurso, Quebec, continuing Losses from its lumber operations and are only partially offset by the turnaround in its specialty papers business. In particular:

(a) a collapse in demand and the market price for hardwood pulp led to EBX'IDA losses of $10.7 milZion in 2Kl8 from a break-even situation in 2007. In the fht quarter of 2009, the Company lost a further $8.7 milIon in EBITDA at its pulp mill in Thurso, Quebec. On June 1,2009, the Company indefinitely closed the Tburso pulp milI. The outlook for hardwood pulp remains poor and the situation has been exacerbated by the impact of the bIack liquor tax credit, referred to above; @) continuing operating losses in t.Company's four lumbermills of $22.0 million and $13.2 milIion in 2007 and 2008 respectively, reflect market conditions for dimension lumber used in housing construction and renovation. Xn the first quarter of 2009 these lumbemjlls had a further operating loss of $4.1 million. As the outlook for the U.S. home building industry remains poor, the Company does not expect an improvement in the demand or price for its lumber. The Company's four lumbermills produced at only 16% of capacity during the first quarter of 2009; and

(c) improvements in the financial resuks at the Company's specialty papers business have not been able to offset losses in its pulp or lumber operations. In the first quarter of 2009, the Company reported EBITDA of $1.7 million from its specialty paper operations, following losses of $9.7 million and $19.7 mjllion in 2008 and 2007, respective1y. These improvements reflect achievements in product development and sales inix, operacing efficiency and productivity, and energy efficiency.

140. Under the current collective agreement, two severance payments of $3.9 million each to unionized employees at the Thurso pulp mill are due on November 9, 2009 and December 21, 2009 following the mill's closure on June 1,2009. The Applicants have no abity to pay these amounts at this time.

141. As at June 16, 2009 the Applicants have a total of $66.7 million of loans outstanding: $15.8 million drawn and utilized under a revolving working capital facility with C1T (not including $40.8 million in LC's issued at the request of the Applicants), $25.9 million borrowedunder the N.B. Loan and

$25 million under a term loan with CIBC. The Applicants are required to repay or refinance the $25 milZion term loan in September 2009 and they have no ability to do so at this time.

142. As described above, the Applicants' accrued pension benefit obligations in its five Pension Plans and SERF'S exceed the vaIue of the Pension Plan assets by approximately $171.5 million as at December

31,2008, as determined in accordance with GAAP. The Applicants are required to make payments of

$3.5 million by September 30, 2009 and an additional $10.1 by December 31, 2009. Average annual payments of approximately $34.7 million per year for the years 2010 to 2013 are expected to be required to fund the Pension Plans. The Applicants' efforts to obtain a oneyear fanding holiday to address the deficit have not been rmccessfuI. W~thouta funding holiday or another fundimg formula, the Applicants have no ability to meet these funding obligations.

143. Collective bargaining agreements at Plaster Rock New Brunswick and Thurso, Quebec to which

Fraser Papers is a pa~Qhave expired. 'milap agreements at Edmundston, New B&ck and

Madawaska, Maine expire on June 30, 2009 and October 31, 2009 respectively, and negotiations concerning Fraser Papers' request for terms and conditions required to achieve a successful restructnring of the Applicants' business have not led to any resolution to date.

144. The Applicants currently owe trade suppliers in excess of $10 million beyond normal credit terms and owe an additional $7.7 million in outstanding property taxes to six municipalities.

D. Efforfs to Rktructure 145. Over the past three years the Applicants have taken steps to address the challenges facing them and the industry generdy, by implementing a number of initiatives to grow their specialty papers business, reduce their exposure to hardwood pulp and 1Gber markets and lower operating costs through reductions in highest cost capacity, process efficiencies, higher productivity and energy conservation, as described in further detail below.

146. In 2006, the Applicants permanently shut their 250,000 ton per year hardwood pulp mill in Berlin, New Hampshire that was integrated with the Gorham paper mill; increased shipments of specialty papers by 9%; and sold timberlaads in New Bmswick while retaining a long term supply agreement.

Proceeds of the sale of the timberlands were used to reduce debt by $57 million and fand pension obligations of $37 milIion.

147. In 2007, the resbructudng initiatives included a major rebuild of tbe recovery boiler at the

~dmundstonsulphite mill to expand its productive capacity and lower costs; the closure of the two -39- smallest and highest cost paper machines at the hkdawaska mill, representing 15% of the rnanufacmrhg capacity; the closure of an oil iired boiler and turbine at Ednmndston and the closure of one paper machine representing 20% of the capacity at Gorham. Jh response to a deterioration in the lumber markets, mill operations at the four locations we~ecuttailed by 50% over levels in 2006 once a suppIy of softwood chips was secured from alternative sources.

148. During 2008 the Applcaats grew the value added paper business by increasing shipments of specialty packaging papers by 11% and high-bright gromdwood papers by 35%. Higher'paper prices were secured and the Fraser Group achieved a 7% increase in the average realized price of its paper products. This generated an additional $34 million in revenue. In addition, the Applicants' pipeline of new products under development was expanded in 2008 to blude approximately 50 new projects at various stages of development from concept to commercial launch. The Applicants estimate that the combined benefit from the product mix improvements added $13 million to the Eraser Group's bottom line for 2008. In 2008 the Fraser Group also increased productivity and throughput by 6% at the paper mills, and capital projects at the Edmundston pulp mill provided a similar 6% improvement in throughput.

149. Despite these significant initiatives undertaken by the Fcaser Group, the Applicants experienced significant unconhoIIable cost pressures fiom fibre, energy and chemical pricing and Canadiau/U.S. foreign exchange, which totalled $52.4 million in 2008 compared to the prior year, and led to negative

EBmlA of $34 million in 2008.

Recent Mill Shutdowns

150. On June 1, 2009 the pulp miU at Thurso, Quebec was indefinitely closed due to the market conditions that have led to unsustainable cash losses. TheThurso facility will remain closed until market conditions improve or a solution can be found to mitigate the cash drain on the Applicants.

151. On June 8,2009, a complete facility shutdown was undertaken at Edmundston involving the (i) groundwood paper mill; (ii) sulphite puIp milI; and (iii) CoQen Facility. The CoGen Facility and groundwood mill are scheduled to undergo annual maintenance. The CoGen Facility restarted operations on June 12,2009 and the groundwood mill is expected to restart on or about June 18,2009. The re-start of the sulphite pulp mill is dependent upon whether the Applicants are able to lower operating costs at the sulphite pulp mill, including reaching new terms and conditions under a collective agreement with the unions representing the employees at that mill, as discussed below.

152. At this time the Applicants' paper mills in Madawaska, Maine and Gorham, New Hampshire will continue to operate, although at capacity rates that will be dependent on customer orders and the

Applicants' ability to source an adequate fibre supply.

Negotiations with Siakehoiders

153. The Applicants have approached the Miuistry of Economic Development, Innovation and Export of the Quebec Government with a proposal requesting $45 million of equity and debt financing for a new subsidiary company that would own and operate the Thurso pulp mill. The financing requested would be sufficient to fund future operating losses, capital expenditure requirements and pension funding obligations and allow the mill to re-start. At the same time, the Applicants have begun negotiations with their unionized employees at Thurso toward a new collective agreewnt with terms and conditious that would involve wage and benefit concessions necessary to attract the necessary financing. Discussions with the Quebec Government and the unionized employees are continuing.

154. The Applicants have requested the Ministry of Natural Resources in New Brnnswick ("MNR") to agree to an additional allocation of Crown fiber in proportion to their size and share in the provincial forest products industry. The Company currently has approximately 400,000 cubic meters of cmwn sawlogs, pulplogs and chips and has requested additional crown fibre in various fonns. The Applicants believe that the right to access crown fibre that allows it to utilize economies of scale is a critical piece to its long term competitive position, and is fair and reasonable in the circumstances. On June 5,2009, the

MNR provided the Applicants with an increase from 9% to approximately 20% of the crown allocation in the Province. This increase in allocation is conditional upon the Company achieving cost reductions at its operations in New Brunswick.

155. The Applicants have approached NB Power with respect to an amendment to the terms and conditions 1111der the CoGen Agreement that would pxovide a more appropriate index for changes in the price paid for biomass fuel, a more favourable price for the renewable power produced by the CoGen

Facility and a number of other material changes that would either lower the cost of operation of the

CoGen Facility or increase the price of electricity sold from it. While no final agreement has been reached, the parties have agreed that the Company can include power produced from in additional, more efficient turbine generator under the CoGen Agreement, providing the opportunity for Fmer Papers to

generate electricity more efficientlyusing less biomass. This change should also reduce the requirement

to operate one additional boiler during the winter months in Edmundston.

156. h February 2009, the Applicants received an extension in the amortization schedule of its

pension funding obligations in New Bmswick from five years to ten years. This relief was retroactive to

2008 and reduced the pension funding required for 2009 by approxhately $5.0 milIion.

157. In April, 2009 the Applicants requested a one year pension funding holiday from the pension

reguIators in New Bmnswick and Quebec. These requests were denied. Discussions bave continued with the New Brunswick Government on a pension funding solution and the Applicants understand that the

New Bmswick Government is studyingthe situation on a broader level.

V. FILING FOR PROrnCTION

A. Overview of' Restructuring Plan 158. The Applicants intend to immediately prepare the framework of a remcturiug plan that wiU

form the basis of a formal plan to be presented to creditors as soon as possible. Key criteria will be new

mgements for crown allocation of timber in New Bmswick, re-establishing a competitive energy position with respect to electricity and steam, and achieving lower opemting costs at both Bmundston and Madawaska. In addition, the economic relationship with unionized employees will have to be brought to a level that allows Fraser Papers' products to be produced at a cost that is competitive. It is anticipated that certain operations or mills that are considered non-core to this business may be sold or othelwise discontinued as part of a restructuring of the Fraser Group as a whole.

B. Cash Flows

159. The Applicants' have prepared estimated cash flow forecasts for the period June 18,2009 to July

17,2009 on a consolidated basis (the "Cash Flow Forecast"). As described above, the factors influencing the Cash Flow Forecast are both volatile and variable. A copy of the Cash Flow Forecast is attacl~edas

Exhibit "J" to this Aflidavit.

160. The proposed Monitor in this proceeding, PricewaterhouseCoopers Inc. ("PwC"), has reviewed the Cash Flow Forecast. The Cash Plow Forecast indicates that, in the absence of any DIP Fiu~ancing,the

Applicants will have insufficient cash with which to operate after June 30,2009. The ~pplichts'need for protection is immediate and urgent.

161. The Cash Flow Forecast contemplates payment of current pension funding obligations only, as the terms of the DIP Financing pmhibit the payment of any special payments including as it relates to the solvency deficit or gojng-concern deficit.

C. DIP Financing

162. Due to the insolvency of the Applicants, the Fraser Group will require additional Tunding in order to implement this restructuring. Brookfield and CIT have both agreed to provide debtor in possession financing ('?)IP Financing") to the Applicants up to fl~eaggegate amount up to $46 million, subject to the Applicauts obtaining an Initial Order in this proceeding 011 the terms requested granting BrookfreId and CIT a charge over all property, assets and undertaking of the Applicants in priority to all creditors except C1T in respect to its existing security, to secure the DIP Financing. Term sheets describing the amount, priority, terms and conditions of the DIP Financing to be provided by Brookfield and CIT are

annexed hereto and marked as Exhibits "R' and "I,", respectively.

163. 1 understand that Section 5.7(d) of Multilateral Insttument 61-101 'Trotection of Minority

Sem& Holders in Special Transactions" under the Securities Act (Ontario) requires that Fraser Papers

seek minority approval of its security holders before completing the DIP Financing transaction, by vhe

of Brookfield's majority interest in Fraser Papers. I also understand that Multilateral Instnunent 61-101 provides an exemption from the minority approval requirement where the transaction is subject to court

approval under applicable bankruptcy or insolvency law and the comt is advised of the minority approval requirement.

164. The Applicants seek a provision in the Initial Order confirming the disclosure by the Applicants

of this requirement and dispensing with the need for compliance.

165. BrooMeld provides existing financial support to the Applicants in various forms. In addition to -. the guarantees it has provided to the Applicants' lenders, as described above, BrooSeld and Fraser

Papers are party to a paper supply agreement dated January 29,2009 (the "Paper Supply Agreement")

whereby Brookfield purchases paper inventory from Fraser Papers that it then sells to Ulird party

customers. A copy of the Paper Supply Agreement is annexed hereto and marked as Exhibit "M".

166. Under the terns of the Paper SuppIy Agreement, Fraser Papers receives payment for the sale of paper to BrooHeld within approximately two business days, whereas Brookfield receives payment from its customers approximateIy 15 to 60 days thereafter. Fraser Papers acts as collection agent for

Brookfield and all receivables dating to Brookfield's sale of paper ate collected by Fraser Papers and

remitted to Brookfield. The Paper Supply Agreement also includes terms with respect to the payment and reimbursement of freight and warehousing costs as between Brookfield and Fraser Papers. 167. In view of the availability of DIP Financing to be extended by Brookfield and in accordance with the terms and conditions precedent to such funding, by agreement of the parties Brookfield's obli@on to purchase paper inventory from Fraser Papers from and affer the date of the Initial Order will teminate,

with all other tenns and conditions continuing to apply. Praser Papwill continue to collect on

BrooEield's behalf the outstanding receivables in respect of paper sold under the terms of the Paper

Supply Agreement (for which Fraser Papers will have already received payment from Brookfield) and

will remit the proceeds to Brookfield. Fraser Papers will also continue to make payments for freight and

warehousing costs incnrred while inventory was being purchased by Brooki5eId, for which it wilt be

reimbursed by Brookfield The Jnitial Order sought by the Applicants includes a provision authorizing

these arrangements in accordance with the terms of the DIP Financing and the Paper Supply Agreement

168. The Monitor will proiride oversight and will report to the Court with respect to the Applicants'

actual results relative to the estimated Cash Flow Forecast during this proceeding. The Applicants'

existing accounting procedules will provide the Monitor with the abiity to track the flow of funds among

the various Applicants, and the non-priming intercompany charges to be created among the Applicants, as

described below, will ensure that no creditor of an Applicant is prejudiced by any inter-company activity

during the continuation of this proceeding.

D. Chapter 15 Proceeding in the U.S. 169. As the U.S. subsidiaries are incorporated under the laws of Delaware and Maine, and because the

Fraser CTroup has operations in the U.S., the Applicants wiU be seeking recognition of these proceedings

as the foreign main proceeding by the U.S. Bankruptcy Court. Accordingly, if an initial CCAA order and

a stay of proceedings are granted, the Applicants intend to immediately commence auxiliary proceedings

under Chapter 15 of the U.S. Brmkrupfcy Code pursuant to which they wiR seek to have the CCAA

proceedings and this Court's order recognized and enforced in the U.S. as a foreign main proceeding.

This will include an immediate request for a temporary restraining order granting provisional relief under the U.S. Bankruptcy Code and preventing any steps from being taken that wouId imp& the AppIicants' ability to carry on its business operations in the U.S., pending further order of the Court.

170. The Chapter 15 Petitions td be filed will name Fraser Papers as the Foreign Representative in respect of each Applicant.

$. The Initial Order

171. Fraser Papers' Board of Directors is comprised of five directors, representing a diverse base of business skills and experiences. These directors have considerabIe knowledge and experience in dealing with the business of the Fraser Group, and have provided direction to management on several key initiatives undertaken over the past several years. The Applicants are of the view that the continued pareicipation of the existing directors and officers will be a key element to a successful reshucturing.

172. I am concerned that certain of the directors and officers may receive advice to resign if they are not granted the protection of a Directors' Charge as provided for in the draft Initial Order. I also believe that, given their experience in the affairs of the Applicants, the services of the directors and officers are essential to a successful proceeding and that the Ilirectors' Charge over a11 the assets of the AppIicmts should therefore be granted.

73. Management estimates that the priority payables in respect of which the directors have personal liability at any point in time during the CCAA process is approximately $20 million, taking into account approximately 2,400 employees. This amount does not include any termination or severance payments that may at any time be owing. The Applicwts therefore request a Directors' Charge in the amount of

$30 milIion to secure such obligations. The Applicants have sought guidance from the Monitor in respect

' of comparable CCAA filings in suggestingthis number.

174. The Directors' Charge requested in the Initial Order will be in addition to the existing directors' and officers' insurance policies (collectively, the 'D&O Policies"). The priqary policy has a liinit of $25 million and there is an excess policy for $25 million. In addition, Endorsement 10 of the D&O Policy is a reinstatement endorsement wheretry if the $50 million in coverage is exhausted, the primary insurer will reinstate for an additional $25 million in coverage.

175. The Applicants also request that the Court grant a charge in favour of the Applicants' counsel and in favour of the Monitor and its counsel, to secure the payment of fees and expenses incured in connection with this proceeding. The Applicants seek an Administration Charge in the amount of

$750,Q00,to secure payment of the fees and expenses of the Applicants' counsel, the Monitor and its counsel.

176. A6 described above, due to the integrated manner in which the Fraser Group operates, on occasion cash is advanced to or charges are incmed by one Applicant on behalf of another Applicant.

The Applicants propose to maintain their existing cash management and accounting system during tJis proceeding under the oversight of the Monitor, which is acceptable to their operating lender CIT. The

Applicants also want to ensure that no creditor of any individual Applicant is prejudiced by the intercompany flow of funds or incurring of liabrlities ftom and after the date of filing. It is proposed that to the extent one Applicant advances money to or incurs a cost on behalf of another Applicant, they will obtain a non-priming secured charge fiom the recipient Applicant for that amount The intercompany charge will attempt to maintain the relative priority and value of each Applicant's estate and ensure that one Applicant does not fund, at the expense of its stakeholders, the operations of another Applicant. As inter-company amounts are setfled on a monthly basis and this proceeding is being commenced mid- month, it is proposed that the inter-company charge sought as part of the Initial Order cover the current . . month of intercompany transactions.

177. 1 have reviewed the model form of Initial Order that is used for proceeings before the

Commercial Court in Toronto under the CCAA (the "Model Order''). Certain amendments to the model - 47 -

form of Initial Ordar are requested to be made, all of which an necessary to the Applicantstsability to

continue business operations in order to effect a successful restructuring.

178. The Applicants cutrentIy owe realty tax anears to various municipalities for the faciIities located in those jurisdictions. Some of these facilities (or indikdual mills located on the facilities) are expected

to form part of the restructured business operations of the Applicants upon successful emergence from

this proceeding, while other facilities or individual mills may not. In consultation with the Monitor, the

Applicants will be reviewing each of the mills and facmties in developing a restnrcturing plan. In view of

their limited cash resources, the Applicants do not believe it is prudent to utilize proceeds of the DIP

Fmancing to pay realty tax arrears on facilities that will not form part of their future operations, or that

may be sold or abandoned. The Applicants therefore seek a term in the Mtial Order providing discretion

as to payment of realty tax arrears on a case by case basis. Current realty taxes on all facilities that are

being utilized by the Applicants will continue to be paid from and after the commencement of this

proceeding.

179. The Applicants also seek a clarification to the Model Order to confirm that their renewal rights

as it relates to certain existing insurance policies are unaffected by the commencement of this proceeding.

The Applicants have two insurance policies that are due to expire June 30,2009 covering: (i) property;

and (ii) Canadian fleet insurance on vehicles owned by Fraser Papers. The Applicants have included an

amount in the Cash Flow Forecast representing the annual premium payment plus a four percent increase, based on prior years' expenses for insurance. Xf the Applicants were unable to obtain a renewaI of

coverage under the property insurance policy from their present iasurer on the same or simiIar terms, it is ' unlikely that they would be able to secure alternate coverage from a new insurer on terms that would be

financialIy feasible, resulting in a potential shutdown of the facilities.

180. The Applicants provide certain volume rebates to customers that will be important to maintain

notwithstanding the commencement of this proceeding. The forest products indusay is rapidIy contracting and is highly competitive. If the Applicants do not have the ability to honoar rebates earned by customers seamlessly throughout the period prior to and after the date of filing, those customers may

quickly move their business to a competitor who can continue to offer vohuneerelated incentives. The

Applicants intend to review all such programs with the Monitor.

181. Due to the natu~eof the business of the Fmser Group, the Applicants have goods in transit at any point in time. The Applicants have requested a provision in the Initial Order to ensure that there is no

disruption to the business relating to non-payment of amounts owing to freight forwarders, customs

brokers or similar agents who are critical to the Applicants' operations, whether in respect of the period prior to or after the date an Order is issued. In addition, with the Monitor's consent and subject to the

terms of the ~@Financing,the Applicants request that they be permitted to make payments to partida

suppliers up to a certain capped amount, if it is determined that such suppliers m critical to the

AppIicants' ongoing business operations, and the inability to pay such amounts may jeopardize their

ability to achieve a successful resauctoring.

182. As outlined above, certain LC's are outstanding in connection with a landfill located in the State

of Wisconsin. The Wisconsin Landfill was originally owned by a predecessor to Fraser Papers, was

subsequently owned by Fraser Madawaska and was then sold to Smart Papers UCin 2005. Fraser

Papers agreed to leave LC's in place totalling approxjmately $3.5 million to facilitate the sale of the mill

to Smaa Papers LLC, to support closure and post-closure care obligations assumed by the purchaser on

closing. Smart Papers LLC paid certain costs associated with the Wisconsin Land£ill following the

closure of the mill, but subsequently filed for protection under Chapter II. of theU.S. Bmtknptcy Code in

2007. As part of that proceeding Smart Papers LLC paid a small amount to the W~sconsinDepartment of

Natural Resources CPNR") and obtained a release from any fder liability in connection with the

Wisconsin Landfill. Smart Papers ultimately became banlrpt. 183. Smart Papers LIX: sold the paper mill, but not the Wisconsin Landfill, and accordingly the

Wisconsin Landfill continues to be owned by a banhnpt entity in respect of which LC's issued at the request of Fraser Papers remain outstanding. In 2007, the DMadvised Fraser Papers that it intended to drawn down the LC's, spend as much as was necessary in their view to close and cmfor the Wisconsin

Landfill, and then sue all prior owners including the Company. The Compauy believed that it could close and care for the Wisconsin Landfill for an amount that was less than the aggregate amount of the outstanding LC's, and periuaded the DNR to allow the Company to proceed in this manner.

184. Since that time, Fraser Papers has completed the closure obligations and has continued to pay post-closure care amounts. It is in the process of applyingfor the release of a portion of the LC's totalling approximately $700,000 to $800,000. The Company believes that it is in the best intetests of their stakeholders that it be ~ennittedto complete the necessary post-closure work on the Wiswnain Landfill, to facilitate the rehun of the outstanding LC's. The Cash Flow Forecast prepared by the Applicants include these payments.

185. An amendment to the Model Order as it relates to payment of pension and benefits is aIso requested, as outlined above in respect of the Cash How Forecast. The requested amendments make it clear through the use of mandatory language that all employees who are continuing to provide a service to the Applicants from and after the date of the Initial Order will continue to receive all health, dental insurance and related benefits to which they were entitled immediately pxior to filing. The Applicants wiII also continue to pay all cmntpension funding obligations.

186. The Applicants also request to not make any special payments in respect of their pension

obligations (including obligations under its SERP plans) after the date of filing, in particular as it relates to funding the solvency deficit or the going-concern deficit, and they ate prohibited from doing so under the terms of the DIP Financing. 187. As outlined in the dmft Initial Order sought by the Applicants, the Applicants seek a provision in

the Tnitial Order providing them with the discretion to pay health, dental, insurance and related benefits on behalf of retirees or any other non-active employees up to a certain amount per month in accordance with the terms of the DIP Financing, without obligating them to do so. It is intended that these payments will

continue to be made following die issuauce of the Initial Order, with the Applicants having the discretion

to stop making such payments at any time thereafter on notice to the affected parties if it is determined

thatit is not feasible to continue doing so.

F. TheMonitor

188. The Applicants propose that PwC be appointed Monitor for this proceeding. PwC is not the

auditor for the Applicants. PwC has consented to act as Monitor and its written consent is being f11ed

with this Honourable Court

189. I swear this afiidavit in suppok of the Applicants' request that an Initial Order be granted under'

the CCAA in the form annexed to the Notice of Application herein, and for no other or improper purpose.

SWORN before me at the City of Toronto, in the Province of Ontario, this day of

TAB 4 Page 1

Indexed as: R. v. Neil

David Lloyd Neil, appellant; v. Her Majesty The Queen, respondent.

[2002] 3 S.C.R. 631

[2002] S.C.J. No. 72

2002 SCC 70

File No.: 28282.

Supreme Court of Canada

Heard: January 25, 2002; Judgment: November 1,2002.

Present: Major, Bastarache, Binnie, Arbour and LeBel JJ.

(48 paras.)

Appeal From:

ON APPEAL FROM THE COURT OF APPEAL FOR ALBERTA

Catchwords:

Criminal law -- Remedies -- Stay ofproceedings -- Accused seeking stay of criminal prosecutions on basis that his lawyers were in a conjlict of interest -- Whether stay ofjury's guilty verdict warranted.

Barristers and solicitors --Duty of loyalty -- Conjlict of interest -- Accusedseeking stay of criminal prosecutions on basis that his lawyers were in a conflict of interest -- Proper limits ?fa lawyer's "duty of loyalty" to a current client in a case where the lawyer did not receive any confidential information relevant to the matter in which he proposes to act against the current client's interest. Page 2

Following complaints that the accused paralegal was providing legal advice contrafy to the Alberta Legal Profession Act, apolice investigation led to a 92-count indictment. The trialjudge severed the counts into five separate indictments. One charged that the accused hadjbbricated court documents in a divorce action. Another contained charges regarding an allegedscheme to defraud Canada Trust. The accused argued that the Vlawfirm, with which he had a solicitor-client relationship, was in a conflict of interest. Spec$cally, L, a member of the Vfirm, had brought a court applicatibn to regularize a divorce which had been obtained on the basis of documents allegedly forged by the accused. At the suggestion of the trialjudge in the divorce, L suggested to the husband that he report the forgery to the police. L in fact steered him to the same police oficer who was responsible for the Canada Trustfile and other casespending against the accused.

With respect to the Canada Trust indictment which was factually unrelated to the divorce proceedings, the accused consulted the V firm (including L) at a time when L, unbelu~ownstto him, was acting for his business associate whom L knew, or ought to have known, would also be charged in the same proceedings. The trial judge found that L had met with the accused on the Canada Trust matters while in fact looking to run a "cut-throat" defence against the accused for the benefit of his ' former associate.

Both indictments proceeded to trial by jury. On the indictment arising out of the divorce file, the accused was convicted. In the subsequent trial on the Canada Trust charges, the conflict of interest involving the V firm was brought to the attention of the trial judge, who declared a mistrial. He also stayed further action on the jury's verdict in the divorce matter. The stay was vacated and the verdict restored by the Court of Appeal, which sent the divorce matter back to the trial judge for sentencing. The Court of Appeal also rejected the accused's argument for a stay of further proceedings in the Canada Trust indictment on the basis that he was denied his right to effective representation contrary to s. 7 and s. 1l(d) of the Canadian Charter ofRights andlireedoms, and that further proceedings would be an abuse of process.

Held The appeal should be dismissed.

While the Court is most often preoccupied with uses and abuses of confidential information in cases where it is sought to disqualify a lawyer from further acting in a matter, or other related relief, the duty of loyalty to a current client includes the much broader principle of avoidance of conflicts of interest, in which confidential information may or may not play a role. The aspects of the duty of loyalty relevant to this appeal do include issues of confidentiality in the Canada Trust matter, but engage more particularly three other dimensions: the duty to avoid conflicting interests, a duty of commitment to the client's cause, and a duty of candour with the client on matters relevant to the retainer. The general rule is that a lawyer may not represent one client whose interests: are directly adverse to the immediate interests of another current client -- even if the two mandates are unrelated Page 3

-- unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

Here, the V law firm, and L in particular, put themselves in a position where the duties they undertook to other clients conflicted with the duty of loyalty which they already owed to the accused. Loyalty required the V law firm to focus on the interest of the accused without being distracted by other interests including personal interests. The V firm breached their duty to the accused in accepting a retainer that required them to put before the divorce court judge evidence of the illegal conduct of their client, the accused, at a time when they knew he was facing other criminal charges related to his paralegal practice, in which their firm had had a longstanding involvement. The divorce matter was adverse to the accused's interest, and advantageous to the "cut-throat" defence planned by his former business associate. Further, the V firm ought not to have met with the accused on the Canada Trust matters when it was conflicted by its defacto representation of his former business associate.

The law firm, as fiduciary, could not serve two masters at the same time. Having said that, the accused falls short on the issue of remedy. He may (and perhaps did) choose to take his complaint to the Law Society of Alberta, or seek other relief, but he is not entitled to a stay of proceedings. The law firm's conduct did not affect the fairness of the divorce action trial and there was no issue of confidential information. L's involvement in the divorce matter was in violation of his and the firm's professional obligations, but it contributed little to the accused's predicament. 'The falsification of the court documents came to light without the involvement of the V firm and the independent investigation by the police militates against a finding of abuse of process. This is manifestly not one of those clearest of cases where a stay of the jury's verdict is warranted. The Court of Appeal was correct to remit the divorce matter to the trial judge for sentencing.

Similarly, while the V law firm was in a conflict of interest when they attempted to act simultaneously for both the accused and his eventual co-accused in the Canada Trust matter, in the end, the V firm did not act for the accused. Their conflict did not result in the charges being so vitiated as to render it an abuse of process for the state to seek a conviction at a new trial. It is certainly not one of the clearest of cases in which a stay would be justified. There may be other or different evidence before the judge presiding at the new trial and the disposition of the stay application in the Canada Trust indictment, if renewed, will be for that trial judge to decide.

Cases Cited

Page 5

1995 (loose-leaf updated May 2001, release 9).

Nightingale, J. Report of the Proceedings before the House of Lords, on a Bill of Pains and Penalties against Her Majesty, Caroline Amelia Elizabeth, Queen of Great Britain, and Consort of King George the Fourth, vol. 11, Part I. London: J. Robins, 1821.

Waters, Donovan W. M. "The Development of Fiduciary Obligations", in R. Johnson et al., eds., Ghard V. La Forest at the Supreme Court of Canada, 1985-1997. Winnipeg: Canadian Legal. History Project, Faculty of Law, University of Manitoba, 2000, 81.

History and Disposition:

APPEAL from a judgment of the Alberta Court of Appeal (2000), 266 A.R. 363,228 W.A.C. 363, [2000] A.J. No. 1164 (QL), 2000 ABCA 266, allowing an appeal from a judgment of the Court of Queen's Bench (1998), 235 A.R. 152, [I9981 A.J. No. 1135 (QL), 1998 ABQB 859. ,4ppeal dismissed.

Counsel:

Nathan J. Whitling and Matthew Milne-Smith, for the appellant.

James A. Bowron, for the respondent.

The judgment of the Court was delivered by

1 BINNIE J.:-- What are the proper limits of a lawyer's "duty of loyalty" to a current client in a case where the lawyer did not receive any confidential information that was (or is) relevant to the matter in which he proposes to act against the current client's interest? The issue arises here in the context of a series of criminal prosecutions against the appellant. He complains that a member of a law firm, with which he had an ongoing solicitor-client relationship in respect of certain transactions that were the subject of criminal proceedings pending against him, provided to the police information about an unrelated matter which led directly to the laying of additional charges. He was eventually convicted on those unrelated charges. The appellant's position is that his lawyers violated their duty of loyalty, and on that account the conviction that grew out of their conflict of interest should be stayed. 2 The Alberta Court of Appeal, in brief reasons, considered the key point to be that the lawyers did not disclose to the new client "any confidential information attributable to a solicitor-and-client relationship" with an existing client ((2000), 266 A.R. 363, 2000 ABCA 266, at para. 4). In its view, the stay was unwarranted.

3 In my view, the law firm did owe a duty of loyalty to the appellant at the material time, and the law firm ought not to have taken up the cause of one of the appellant's alleged victims (Darren Doblanko) in proceedings before a civil court at the same time as it maintained a solicitor-client relationship with the appellant in respect of other matters simultaneously pending before the criminal court (the "Canada Trust" matters). The Doblanko mandate, though factually and legally unrelated to the Canada Trust matters, was adverse to the appellant's interest. The law firm, as fiduciary, could not serve two masters at the same time. Having said that, the appellant falls short on the issue of remedy. He may (and perhaps did) choose to take his complaint to the Law Society of Alberta, but he is not entitled to a stay of proceedings. The law firm's conduct ditl not affect the fairness of the Doblanko trial. Its involvement predated the laying of charges by the police. There was no issue of confidential information. The Doblanko charges were serious and would almost certainly have been laid in any event. In my view, the prosecution of the Doblanko charge was not an abuse of process. More specifically, I agree with the conclusion of the Alberta Court of Appeal that this is manifestly not one of those clearest of cases where a stay of the jury's verdict of guilt is warranted. I would therefore dismiss the appeal.

I. The Facts

4 The appellant carried on a business in Edmonton as a paralegal for many years. He was assisted by Helen Lambert. He regularly consulted "Pops" Venkatraman, a solicitor, about issues arising in his files, and when advised by "Pops" that matters exceeded his competence he would refer his clients [page6371 to the Venkatraman law firm. The Law Society of Alberta took the view that these referrals did not take place frequently enough, and in October 1994 supplied the Prosecutors' Office in Edmonton with complaints that the appellant was providing legal advice contrary to the Alberta Legal Profession Act, S.A. 1991, c. L-9.1 . The police investigation eventually led to a 92-count indictment against the appellant for a variety of different transactions related to different complainants.

5 The conflict of interest largely concerns the activities of one of the Venkatraman firm's associates, Gregory Lazin. Lazin shared office space and some facilities with the law firm in the fall of 1994. The trial judge found that as of January 1,1995 he should be considered a member of the Venkatraman firm for the purpose of conflict of interest and confidentiality by virtue of the extended definition of "firm" adopted by the Law Society of Alberta in its Code professional Conduct (loose-leaf), effective January 1, 1995, at p. ix. I say "extended meaning" because the evidence established that Lazin was essentially carrying on an independent practice despite the shared facilities. Effective May 1, 1995, however, Lazin's practice was rolled into the Venkatraman firm, and Lazin himself became an employee. He has since left. Page 7

6 The trial judge concluded that the lack of legal and factual connections among some of the 92 counts required its severance into five separate indictments. It was agreed that all five indictments would proceed before him and he would, after all the indictments had been dealt with, impose a sentence if convictions were obtained.

7 We are concerned here with two of the five indictments. The first trial involved charges that the appellant had fabricated court documents in the Doblanko divorce action. A second group of charges related to an alleged scheme to defraud Canada Trust. The appellant and his business associate, Ms. Helen [page6381 Lambert, were said to have combined their efforts to obtain from Canada Trust mortgages on behalf of people whose credit worthiness would have been rejected if their identity had been disclosed. In one such transaction, for example, a couple called Rambaran wished to buy a property but could not obtain financing by reason of their recent bankruptcy. The allegation was that the appellant went to Canada Trust ostensibly to obtain a mortgage on behalf of Helen Lambert, but in fact on behalf of the bankrupt Rambaran family, with the intention of having the Rambarans assume the mortgage once the monies had been advanced by Canada Trust. Other indictments related in part to allegations of the misappropriation of funds from an estate.

8 The conflicts of interest involving the Venkatraman firm came from two sources:

(i) With respect to the Canada Trust indictment, the film acted simultaneously for the appellant in the criminal proceedings and his business associate Helen Lambert in divorce proceedings at a time when they knew, or ought to have known, that she would also be charged in the Canada Trust criminal proceedings, with an interest adverse to his. Two members of the firm visited the appellant at the Remand Centre on April 18, 1995, including Lazin who arrived late and was there for about 12 minutes during a two-hour interview. At the time he was acting for Helen Lambert. The trial judge concluded that Lazin attended for no purpose except to collect information from the appellant that would be useful to him in his defence of Helen Lambert in the anticipated criminal proceedings. Lazin's plan was to run a "cut-throat defence", seeking to paint the appellant as the manipulative criminal and Helen Lambert as an innocent dupe. He was subsequently retained formally as her defence counsel and eventually offered the Crown Attorney's Office a deal under which Lambert would testify against the appellant if the charges against her were dropped. As it was put in cross-examination, "in re:turn for Lambert sinking [the appellant], [page6391 Lambert would walk". None of this, obviously, was in the appellant's interest. The appellant was belatedly advised that the Venkatraman law firm would not act for hirn in the Canada Trust criminal case because of its involvement with Helen Lambert. (ii) In July 1995, Lazin, still a member of the Venkatraman firm, was Page 8

approached by Darren Doblanko whose wife had obtained a divorce with the assistance of the appellant some years previously. Quite innocently, she had relied on an affidavit of service on Darren Doblanko (who had earlier deserted her). The affidavit was false. The jury found that the false affidavit of service had been prepared by the appellant. Moreover, the wife had innocently relied on a Certificate of No Appeal containing the forged signature of Doblanko. At the suggestion of the trial judge in the Doblanko divorce, Lazin suggested to Doblanko that he report the forgery to the police. In fact, Lazin steered Doblanko to the same police officer who was responsible for the Canada Trust file and other cases pending against the appellant. It was suggested by the appellant's counsel that Lazin's strategy was to multiply the allegations of dishonesty against his client to strengthen the credibility of the "cut-throat" defence he planned to run on behalf of Helen Lambert in the Canada Trust case.

11. Analvsis

9 I make three preliminary observations. The first is that while misuse of confidential information is not an issue in the Doblanko case, in which the stay was entered, it is an issue in the Canada Trust matter where Lazin, acting against the appellant's interest, sat in on part of the solicitor-client interview on April 18, 1995, described above. Secondly these [page6401 cases do not require the imputation of confidential knowledge from one partner of the firm to another. Here the same member of the firm (Lazin) had a finger in each of the conflict situations. Thirdly, we are not being asked to intervene based merely on an "appearance" of conflict. The conflicts were actual.

10 The Doblanko indictment was the first to go to trial. The appellant was convicted by the jury. The verdict was entered, but as stated, sentencing was delayed by prior arrangement until the outcome on the other four indictments was known. During the trial of the second indictment (on the Canada Trust matters), members of the Venkatraman law firm sought to avoid testifying on the basis that the firm was acting for the appellant "in circumstances that could create a c,onflictU.With the Crown's consent, the judge declared a mistrial. The trial judge then entertained the appellant's application for a stay of all proceedings. At the conclusion of the stay hearing, at which time all the relevant conflicts of interest emerged in the testimony, the trial judge stayed further action on the jury's verdict in the Doblanko matter. He also expressed the view that while he would not, having presided over the stay application, proceed to hear the Canada Trust case, it was his opinion that those proceedings ought to be stayed as well: (1998), 235 A.R. 152, 1998 ABQB 859.

11 As stated, the stay was vacated and the verdict restored by the Alberta Court of Appeal, which sent the matter back to the trial judge for sentencing.

A. The Lawyer's Duty ofloj~alty Page 9

12 Appellant's counsel reminds us of the declaration of an advocate's duty of loyalty made by Henry Brougham, later Lord Chancellor, in his defence of Queen Caroline against the charge of adultery [page6411 brought against her by her husband, King George IV. He thus addressed the House of Lords:

[A]n advocate, in the discharge of his duty, knows but one person in all the world, and that person is his client. To save that client by all means and expedients, and at all hazards and costs to other persons, and, among them, to himself, is his first and only duty; and in performing this duty he must not regard the alarm, the torments, the destruction which he may bring upon others. Separating the duty of a patriot from that of an advocate, he must go on reckless of consequences, though it should be his unhappy fate to involve his country in confusion.

(Trial of Queen Caroline (1821), by J. Nightingale, vol. 11, The Defence, Part 1, at p. 8)

These words are far removed in time and place from the legal world in which the Venkatraman law firm carried on its practice, but the defining principle -- the duty of loyalty -- is with us still. It endures because it is essential to the integrity of the administration ofjustice and it is; of high public importance that public confidence in that integrity be maintained: MacDonald Estate: v. Martin, [I9901 3 S.C.R. 1235, at pp. 1243 and 1265, and Tunny v. Gurman, [I9941 R.D.J. 10 (Que. C.A.). Unless a litigant is assured of the undivided loyalty of the lawyer, neither the public nor the litigant will have confidence that the legal system, which may appear to them to be a hostile and hideously complicated environment, is a reliable and trustworthy means of resolving their disputes and controversies: R. v. McClure, [2001] 1 S.C.R. 445,2001 SCC 14, at para. 2; Smith v. Jones, [I9991 1 S.C.R. 455. As O'Connor J.A. (now A.C.J.O.) observed in R. v. McCallen (1999), 43 O.R. (3d) 56 (C.A.), at p. 67:

... the relationship of counsel and client requires clients, typically untrained in the law and lacking the skills of advocates, to entrust the management and conduct of their cases to the counsel who act on their behalf. There should be no room for doubt about counsel's loyalty and dedication to the client's case.

13 The value of an independent bar is diminished unless the lawyer is free from conflicting interests. Loyalty, in that sense, promotes effective representation, on which the problem-solving capability of an adversarial system rests. Other objectives, I [page6421 think, can be related to the first. For example, in MacDonaldEstate, supra, Sopinka J. speaks of the "countervailing value that a litigant should not be deprived of his or her choice of counsel without good cause" (p. 1243). Dubin J.A. remarked inRe Regina and Speid (1983), 8 C.C.C. (3d) 18 (Ont. C.A.), at p. 21:

We would have thought it axiomatic that no client has a right to retain Page 10

counsel if that counsel, by accepting the brief, puts himself in a position of having a conflict of interest between his new client and a former one.

See also: Teoli v. Fargnoli (1989), 30 Q.A.C. 136.

14 These competing interests are really aspects of protecting the integrity of the legal system. If a litigant could achieve an undeserved tactical advantage over the opposing party by bringing a disqualification motion or seeking other "ethical" relief using "the integrity of the adrninistration of justice" merely as a flag of convenience, fairness of the process would be undermined. This, I think, is what worried the Newfoundland Court of Appeal in R. v. Parsons (1992), 100 Nfltl. & P.E.I.R. 260, where the accused was charged with the first degree murder of his mother. The Crown sought to remove defence counsel on the basis that he had previously acted for the father of the accused in an unrelated matrimonial matter, and might in future have to cross-examine the father at the son's trial for murder. The accused and his father both obtained independent legal advice, after full disclosure of the relevant facts, and waived any conflict. The father also waived solicitor-client privilege. The court was satisfied there was no issue of confidential information. On these facts, the court concluded that "public confidence in the criminal justice system might well be undermined by interfering with the accused's selection of the counsel of his choice" (para. 30).

15 Sopinka J. in MacDonaldEstate, supra, also mentioned as an objective the "reasonable mobility in the legal profession" (p. 1243). In an era of national firms and a rising turnover of lawyers, especially at the less senior levels, the imposition of exaggerated and unnecessary client loyalty demands, spread across many offices and lawyers who in fact have no knowledge whatsoever of the client or its particular affairs, may promote form at the expense of substance, and tactical advantage instead of legitimate protection. Lawyers are the servants of the system, however, and to the extent their mobility is inhibited by sensible and necessary rules imposed fbr client protection, it is a price paid for professionalism. Business development strategies have to adapt to legal principles rather than the other way around. Yet it is important to link the duty of loyalty to the policies it is intended to further. An unnecessary. expansion- of the duty may be as inimical to the proper functioning of the legal system as would its attenuation. The issue always is to determine what rules are sensible and necessary and how best to achieve an appropriate balance among the competing interests.

16 The duty of loyalty is intertwined with the fiduciary nature of the lawyer-client relationship. One of the roots of the word fiduciary isjdes, or loyalty, and loyalty is often cited as one of the defining characteristics of a fiduciary: McInerney v. MacDonald, [I9921 2 S.C.R. 1313, at p. 149; Hodgkinson v. Simms, [I9941 3 S.C.R. 377, at p. 405. The lawyer fulfills squarely Professor Donovan Waters' definition of a fiduciary: Page 11

In putting together words to describe a "fiduciary" there is of course no immediate obstacle. Almost everybody would say that it is a person in whom trust and confidence is placed by another on whose behalf the fiduciary is to act. The other (the beneficiary) is entitled to expect that the fiduciary will be concerned solely for the beneficiary's interests, never the fiduciary's own. The "relationship" must be the dependence or reliance of the beneficiary upon the fiduciary.

(D. W. M. Waters, "The Development of Fiduciary Obligations", in R. Johnson et al., eds., Girard V. [page6441 La Forest at the Supreme Court of Canada, 1985-1997 (2000), 81, at p. 83)

Fiduciary duties are often called into existence to protect relationships of importance to the public including, as here, solicitor and client. Disloyalty is destructive of that relationship.

B. More Than Just Confidential Information

17 While the Court is most often preoccupied with uses and abuses of confidential information in cases where it is sought to disqualify a lawyer from further acting in a matter, as in A4acDonald Estate, supra, the duty of loyalty to current clients includes a much broader principle: of avoidance of conflicts of interest, in which confidential information may or may not play a role: Montreal Trust Co. of Canada v. Basinview Village Ltd. (1995), 142 N.S.R. (2d) 337 (C.A.); Enerchem Ship Management Inc. v. Coastal Canada (The), [I9881 3 F.C. 421 (C.A.); Jans v. Coulter (G.H.) Co. (1992), 105 Sask. R. 7 (C.A.); Stewart v. Canadian Broadcasting Corp. (1997), 150 D.L.R. (4th) 24 (Ont. Ct. (Gen. Div.)); Gaylor v. Galiano Trading Co. (1996), 29 B.L.R. (2d) 162 (B.C.S.C.).

18 In Drabinsky v. KPMG (1998), 41 O.R. (3d) 565 (Gen. Div.), where the plaintiff sought an injunction restraining the accounting firm KPMG (of which the plaintiff was a client) from further investigating the financial records of a company of which the plaintiff was a senior officer, Ground J., grouping together lawyers and accountants, said, at p. 567:

I am of the view that the fiduciary relationship between the client and the professional advisor, either a lawyer or an accountant, imposes duties on the fiduciary bevond the dutv not to disclose confidential information. It includes a duty of loyalty and good faith and a duty not to act against the interests of the client. [Emphasis added.]

[page6451

Some members of the accounting profession assert the efficacy of "Chinese walls" in accounting Page 12

practices even with respect to the affairs of current clients. Whether this belief is justified in the absence of informed consent from the clients concerned is an issue for another day. Insofar as the legal profession is concerned, Ground J.'s view of the duty of loyalty to current clients is unassailable.

19 The aspects of the duty of loyalty relevant to this appeal do include issues of confidentiality in the Canada Trust matters, but engage more particularly three other dimensions:

(i) the dutv to avoid conflicting interests: Davey v. Woolley, Hames, Dale & Dingwall (1982), 35 O.R. (2d) 599 (C.A.), and Services environnementaux Laidlaw (Mercier) Ltie v. Quibec (Procureur giniral), [19'95] R.J.Q. 2393 (C.A.), including the lawyer's personal interest: Szarfer v. Chodos (1986), 54 O.R. (2d) 663 (H.C.), affd (1988), 66 O.R. (2d) 350 (C.A.); Moffat v. Wetstein (1996), 29 O.R. (3d) 371 (Gen. Div.); Stewart v. Canadian Broadcasting Corp., supra. (ii) a dutv of commitment to the client's cause (sometimes referred to as "zealous representation") from the time counsel is retained, not just at trial, i.e. ensuring that a divided loyalty does not cause the lawyer to "soft peddle" his or her defence of a client out of concern for another client, as in R. v. Silvini (1991), 5 O.R. (3d) 545 (C.A.); R. v. Widd@eld (1995), 25 O.R. (3d) 161 (C.A.); R. v. Graham, [I9941 O.J. No. 145 (QL) (Prov. Div.); and, (iii) a duty of candour with the client on matters relevant to the retainer: R. v. Henly (1990), 61 C.C.C. (3d) 455, [I9901 R.J.Q. 2455 (C.A.), at p. 465 C.C.C.,per Gendreau J.A.; Spector v. Ageda, [I9711 3 All E.R. 417 (Ch. D.), at p. 430; the Canadian Bar Association, Code ofProfe:isional Conduct (1988), c. 5, Commentary [page6461 4-6. If a conflict emerges, the client should be among the first to hear about it.

C. The Venkatraman Law Firm's Breach ofProfessiona1 Obligations

20 The present appeal involves criminal proceedings and it is in that context that I prop'ose to review the applicable legal principles.

(1) Did a Solicitor-Client Relationshi0 Exist at the Relevant Time?

21 The Crown argues that the Canada Trust retainer ended before the Doblanko retainer began, and the relevant principles are therefore those that govern acting against a former client rather than the stricter and more comprehensive mles about acting against a current client.

22 The Code ofProfessiona1 Conduct of the Law Society of Alberta defines "client" as follows, at p. viii: Page 13

"client" generally. means a person on whose behalf the lawyer renders professional services and with whom the lawyer has a current or ongoing lawyerlclient relationship, but may also include a person who reasonably believes that a lawyedclient relationship exists although ode or more of the custdinary indicia of such a relationship are absent.

23 The trial judge made the finding that "Venkatraman and Associates had a solicitor client relationship with Neil [the appellant] relating to the giving of advice generally but including specifically advice relating to matters for which Neil [the appellant] was charged" (para. 66). This relationship, which seems to have been in the nature of a general retainer, predated the events in question, and continued through the events in question. Not only did the appellant claim a continuing solicitor-client relationship but the Venkatraman law firm took the position at the time of the Canada Trust trial in 1997 that there was a continuing solicitor-client relationship (see Exhibit 6, letter dated January 14, 1997). In these circumstances, the trial judge's finding that a solicitor-client relationship existed between the appellant and the [page6471 Venkatraman law firm at all relevant times should not be disturbed.

(2) The Duty of Loyalty to an Existine Client

24 The Law Society of Alberta's Code ofProfessional Conduct provides that "[i]n each matter, a lawyer's judgment and fidelity to the client's interests must be free from compromising influences" (c. 6, Statement of Principle, p. 50). The facts of this case illustrate a number of important objectives served by this principle. Loyalty required the Venkatraman law firm to focus on the interest of the appellant without being distracted by other interests including personal interests. Part of the problem here seems to have been Lazin's determination to hang onto a piece of litigation. When Lazin was asked about "the ethical issue" in acting for Lambert, he said maybe "it was a question of not wanting to give up the file". Loyalty includes putting the client's business ahead of the lawyer's business. The appellant was entitled to a level of commitment from his lawyer that * whatever could properly be done on his behalf would be done as surely as it would have been done if the appellant had had the skills and training to do the job personally. On learning that his own lawyer had put before the divorce court evidence of his further wrongdoing, the appellant understandably felt betrayed. Equally, the public in Edmonton, where the prosecutiori of the appellant had attracted considerable notoriety, required assurance that the truth had bl:en ascertained by an adversarial system that functioned clearly and without hidden agendas.

25 The general duty of loyalty has frequently been stated. In Ramrakha v. Zinner (1994), 157 A.R. 279 (C.A.), Harradence J.A., concurring, observed, at para. 73:

A solicitor is in a fiduciary relationship to his client and must avoid situations where he has, or potentially may, develop a conflict of interests .. The logic behind [page6481 this is cogent in that a solicitor must be able to provide his client with complete and undivided loyalty, dedication, full Page 14

disclosure, and good faith, all of which may be jeopardized if more than one interest is represented.

26 The duty of loyalty was similarly expressed by Wilson J.A. (as she then was) i:n Davey v. Woolley, Hames, Dale & Dingwall, supra, at p. 602:

The underlying premise ... is that, human nature being what it is, the solicitor cannot give his exclusive, undivided attention to the interests of his client if he is tom between his client's interests and his own or his client's interests and those of another client to whom he owes the self-same duty of loyalty, dedication and good faith.

27 More recently in England, in a case dealing with the duties of accountants, the House of Lords observed that "[tlhe duties of an accountant cannot be greater than those of a solicitor, and may be less" (p. 234) and went on to compare the duty owed by accountants toformer clients (where the concern is largely with confidential information) and the duty owed to current clients (where the duty of loyalty prevails irrespective of whether or not there is a risk of disclosure of confidential information). Lord Millett stated, at pp. 234-35:

My Lords, I would affirm [possession of confidential infonnatiou] as the basis of the court's jurisdiction to intervene on behalf of a former client. otherwise where the court's intervention is soueht by an existine client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation. [Emphasis added.]

(Bolkiah v. KPMG, [I9991 2 A.C. 222 (H.L.))

28 In exceptional cases, consent of the client may be inferred. For example, governments generally accept that private practitioners who do their civil or criminal work will act against them in unrelated matters, and a contrary position in a particular case may, depending on the circumstances, be seen as tactical rather than principled. Chartered hanks and entities that could be described as professional litigants may have a similarly broad-minded attitude where: the matters are sufficiently unrelated that there is no danger of confidential information being abused. These exceptional cases are explained by the notion of informed consent, express or implied. Page 15

29 The general prohibition is undoubtedly a major inconvenience to large law partnerships and especially to national firms with their proliferating offices in major centres across Canada. Conflict searches in the firm's records may belatedly turn up files in another office a lawyer may not have been aware of. Indeed, he or she may not even be acquainted with the partner on the other side of the country who is in charge of the file. Conflict search procedures are often inefficient. Nevertheless it is the firm not just the individual lawyer, that owes a fiduciary duty to its clients, and a bright line is required. The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client -- even ifthe two mandates are unrelated -- unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

30 The Venkatraman law firm was bound by this general prohibition to avoid acting contrary to the interest of the appellant, a current client, who was a [page6501 highly vulnerable litigant in need of all the help and reassurance he could legitimately get.

(3) Breaches of the Dutv of Lovalty 31 In my view the Venkatraman law firm, and Lazin in particular, put themselves in a position where the duties they undertook to other clients conflicted with the duty of loyalty which they owed to the appellant. I adopt, in this respect, the notion of a "conflict" in s. 121 of the Restatement Third, The Law Governing Lawyers (2000), vol. 2, at pp. 244-45, as a "substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another current client, a former client, or a third person".

32 The initial conflict was to attempt to act simultaneously for both the appellant and his eventual co-accused in the Canada Trust charges, Helen Lambert. They were clearly adverse in interest. It is true that at the time Lazin and his colleague from the firm met the appellant in the Remand Centre on April 18, 1995 Lazin had not been retained by Lambert on the criminal charges. Be was acting only with respect to her divorce. It is also true that in the end the appellant was eventually represented by other counsel. Nevertheless the trial judge found that on April 18, 1995, Lazin was infact (if not yet officially) acting on Lambert's behalf in the criminal proceedings. Her indictment was reasonably anticipated (given her involvement in the subject matter of the Canada Trust charge) and, most importantly, the trial judge held that the purpose of Lazin's attendance at the Remand Centre was to get evidence to run a "cut-throat" defence against the appellant who, be found, was an ongoing client of the Venkatraman law firm. The fact that the appellant eventually looked elsewhere for a lawyer in the Canada Trust case, whether as a result of his choice or theirs, did not diminish their duty of loyalty. Nor does it make a difference that no professional fee was charged for that particular consultation. The Venkatraman firm (Lazin) appreciated that the appellant having been arrested, the long arm of the law would soon [page6511 be laid on Helen Lambert. In fact, Helen Lambert was arrested less than two months later, on June 6, 1995. Page 16

33 The second conflict relates to the Doblanko charges. As mentioned, both Doblanko and his former wife (who had by now remarried and produced children of her second "marriage") needed their earlier divorce to be regularized. The Venkatraman firm breached their duty to the appellant in accepting a retainer that required them to put before the divorce court judge evidence of the illegal conduct of their client, the appellant, at a time when they knew he was facing other criminal charges related to his paralegal practice, in which their firm had bad a long-standing involvement. It was contended that the Doblanko and Canada Trust cases were wholly unrelated in the sense tbat Lazin could not have obtained in the Doblanko mandate confidential information tbat would be relevant in the Canada Trust mandate. This, as stated, is not the test of loyalty to an existing client, and it is not entirely true either. While the two cases were wholly independent of each other in terms of their facts, the Lambert's cut-throat defence was helped by piling up the allegations of dishonest conduct in different matters by different complainants in a way that would make it easier for the jury to consider her a victim rather than a perpetrator. The linkage was 'thus strategic. The Doblanko application was initiated in July 1995. The Crown advised us that the Canada Trust criminal charges against Helen Lambert were not resolved until the spring of 1996.

34 In the course of the Doblanko application, the divorce court judge expressed the view (according [page6521 to Lazin) that Lazin should report the appellant's apparent falsification of documents to the police. I think at that point that Lazin, as an officer of the court, was obliged to do so. Lazin then calied the Law Society (without disclosing that the appellant was a client ofhis firm) who advised that Lazin could advise his divorce court client to report the matter to the police but he was not bound to. Lazin advised neither the trial judge nor the Law Society that the suspected forger (the appellant) was a client of his firm. Further, Lazin made a point of having the matter reported to the police officer who was responsible for investigating the appellant in connection with the Canada Trust and other matters.

35 It was the Venkatraman firm that put the cat among the pigeons by bringing the Doblanko application before the divorce court. Mr. Doblanko would likely have found another lawyer to make the application, and the facts might equally have eventually made their way to the police, but it was in violation of the firm's duty of loyalty to the appellant to contribute in this way to the appellant's downfall.

(4) Remedies for Breach of the Dutv of Lovalty

36 It is one thing to demonstrate a breach of loyalty. It is quite another to arrive at an appropriate remedy.

37 A client whose lawyer is in breach of his or her fiduciary duty has various avenues of redress. A complaint to the relevant governing body, in this case the Law Society of Alberta, may result in disciplinary action. A conflict of interest may also be the subject matter of an action against the lawyer for compensation, as in Szarfer v. Chodos, supra. Breach of the ethical rules that could raise concerns at the Law Society does not necessarily give grounds in a malpractice action or justify a constitutional remedy.

38 ,More specifically, in the criminal law context, if the material facts surface while court proceedings are ongoing, an application to disqualify the [page6531 lawyer from acting further may he brought, as in Re Regina andRobillard (l986), 28 C.C.C. (3d) 22 (Ont. C.A.); Re Regina and Speid, supra, at pp. 20-21; Widdifield, supra, at p. 177,per Doherty J.A.; R. v. Chen (2001), 53 O.R. (3d) 264 (S.C.J.). The conflict should, of course, he raised at the earliest practicable stage. If the trial is concluded, the conflict of interest may still be raised at the appellate level as a ground to set aside the trial judgment, but the test is more onerous because it is no longer a matter of taking protective steps but of asking for the reversal of a court judgment.

39 In R. v. Graff(1993), 80 C.C.C. (3d) 84, the Alberta Court of Appeal held that nn a post-conviction situation, if an accused is to challenge a conviction or sentence on appeal, he or she must show more than a possibility of conflict of interest; while actual prejudice need not be shown, the appellant must demonstrate the conflict of interest and that the conflict adversely affected the lawyer's performance on behalf of the appellant. See also Silvini, supra, at p. 551,per Lacourcikre J.A.; Widdifield, supra, at p. 173; R. v. Barbeau (1996), 110 C.C.C. (3d) 69 (Que. C..4.), at p. 81, per Rothman J.A. It is not necessary for the accused to demonstrate actual prejudice because "[tlhe right to have the assistance of counsel is too fundamental and absolute to allow courts to indulge in nice calculations as to the amount of prejudice arising from its denial": Glasser v. UnitedStates, 315 U.S. 60 (1942), at p. 76.

40 If the two-part conflict/impairment test is satisfied, the court may order a new trial. The appellant is unable to meet this test because, of course, he was not represented in any court proceedings (trial or pre-trial) by the Venkatraman law firm in either the Doblanko or the Canada Trust matters. Moreover he seeks more than a new trial. The appellant seeks a stay ol'the Doblanko verdict and a stay of further proceedings in the Canada Trust matters on the basis he was denied his right to effective representation contrary to s. 7 and s. 1l(d) of the Canadian [page6541 Charter of Rights andFreedoms, and that further proceedings on these matters would be an abuse of process. So abusive, he says, that this sony affair amounts to one of the "clearest of cases" where a stay is justified: UnitedStates ofAmerica v. Cobb, [2001] 1 S.C.R. 587,2001 SCC 19; UnitedStates of America v. Shulman, [2001] 1 S.C.R. 616,2001 SCC 21.

41 Here again his pathway is impeded by the fact that the Venkatraman law firm did not act as his counsel, ineffective or otherwise, at any stage of the criminal proceedings. He consulted them and took them into his confidence, but he was not represented by them. He is therefore thrown back on the "residual category" of stay applications, described in R. v. Ofconnor,[I9951 4 S.C.R. 41 1, as follows, at para. 73:

This residual category does not relate to conduct affecting the fairness of the trial or impairing other procedural rights enumerated in the Charter, but instead addresses the panoply of diverse and sometimes unforeseeable circumstances in Page 18

which a prosecution is conducted in such a manner as to connote unfairness or vexatiousness of such a degree that it contravenes fundamental notions ofjustice and thus undermines the integrity of the judicial process.

In Canada (Minister of Citizenship andImmigration) v. Tobiass, [I9971 3 S.C.R. 391, the Court added that the residual category is a small one. "In the vast majority of cases, the concern will be about the fairness of the trial" (para. 89).

42 The appellant's argument that the purity of the waters of the fountain ofjustice was irredeemably polluted in these cases by the action of the Venkatraman law firm (to borrow a metaphor from Lord Brougham's era) is very difficult to sustain on the facts.

43 The Alberta Court of Appeal noted that the actions of the Venkatraman law firm are not state actions, and therefore do not as such attract Charter scrutiny. The appellant says that a lawyer is an [page6551 "officer of the court" but this, I think, is an inadequate basis on which to base state responsibility. However, I would not want to shut the door entirely on the basis of lack of state action. At common law, tbe doctrine of abuse of process was rooted in objectionable conduct by private litigants, for example using the courts for an improper purpose. Although s. 7 of the Charter incorporates the abuse of process doctrine, it does not extinguish the common law doctrine under which the courts have an inherent and residual discretion to control their own processes and prevent their abuse: Cobb, supra, at para. 37. Even in Charter terms, there is much to be said for the view of Powell J. of the United States Supreme Court who observed in Cuyler v. Sullivan, 446 U.S. 335 (1980), that, if defence counsel is incompetent or otherwise violates his or her duties in such a way as to adversely affect the representation of an accused, "a serious risk of injustice infects the trial itself. .. . When a State obtains a criminal conviction through such a trial, it is the State that unconstitutionally deprives the defendant of his liberty" (p. 343). See also Mickens v. Taylor, 122 S. Ct. 1237 (2002), at p. 1245. We do not need to consider this argument in this case. It is difficult to see how the conduct of a law firm that is not actually engaged as defence counsel, as here, could have such a drastic impact on the constitutionality of the trial. Here there was no wrongful state action. Nor did the conduct of the Venkatraman law firm "infect" the appellant's trial with "a serious risk of injustice". Further, with respect to the tertiary ground, there is nothing in the Doblanko verdict to contravene our fundamental notions of justice.

D. The Stay Sought by the Appellant With Respect to the Doblanko Verdict

44 In my view, the stay entered by the trial judge against the Doblanko verdict was properly vacated by the Court of Appeal for the following reasons: Page 19

(i) The falsification of court documents came to light without the involvement of the Venkatraman firm. Mr. Doblanko had already obtained from the divorce court the documents incriminating the appellant befbre he came to see Lazin. Doblanko wished to remany and both he and the wife he had deserted years previously required that their status be regularized. A court action was inevitable and any judge confronted with court documents possibly falsified by someone holding themselves out as a paralegal could be expected to have the matter reported to the police. Lazin's involvement in the process was in violation of his and the tirm's professional obligations, but it in truth contributed little to the appellant's predicament. (ii) The Venkatraman firm's involvement ended with the report to the police. At that point, the police conducted their own investigation and laid charges. The "independent investigation and decision by the: authorities" to prosecute militates against a finding of abuse of process her'e: R. v. Finn, [I9971 1 S.C.R. 10, at para. 1. (iii) The appellant acknowledged that any confidential information obtained with respect to the Canada Trust matters or his other files with the Venkatraman law firm had no relevance whatsoever to the Lloblanko divorce. (iv) In light of the tenuous connection between the Venkatraman law firm and the Doblanko prosecution, it simply cannot be said that the lawyers' violation of their duty of loyalty was an "affront to fair play and decency ... disproportionate to the societal interest in the effective prosecution of criminal cases [and] the administration ofjustice": R. v. Conway, [I9891 1 S.C.R. 1659, at p. 1667. (v) The charges are extremely serious. Falsification of court documents strikes at the [page6571 root of the integrity of the court's process. It would be irrational to deprive the state of the jury's verdict because of a law firm's private conduct of which the state had no knowledge and over which it had no influence.

45 The appellant's alternative submission is that the Alberta Court of Appeal was wrong to send this case back for sentencing. He says he is entitled to a new trial in the Doblanko matter as well as the Canada Trust matters. He treats the trial judge's stays as an acquittal, and argues that where an appeal court overturns an acquittal by a judge sitting with a jury it has no power to enter a verdict of guilty; it must order a new trial: Criminal Code, R.S.C. 1985, c. C-46, s. 686(4)(b)(ii). However, the jury in this case did not acquit. It found the appellant guilty. The effect of its guilty verdict was stayed by the trial judge. As we pointed out in R. v. Pearson, [I9981 3 S.C.R. 620, at para. 15, stay procedures may "lead to a two-stage trial, in which the two stages are autonomous". The stay was lifted by the Court of Appeal. The jury's verdict was thereby not reversed but activated. For purposes of the right of an appeal to this Court, the reversal of the stay was treated as equivalent to setting aside an acquittal, but only for that limited purpose. Dickson C.J. pointed out in R. v. Jewitt, [I9851 2 S.C.R. 128, at p. 148:

We are concerned here with a stay of proceedings because of an abuse of process by the Crown. While a stay of proceedings of this nature will have the same result as an acquittal and will be such a final determination of the issue that it will sustain a plea of autrefois acquit, its assimilation to an acquittal should only be for purposes of enabling an appeal by the Crown. Othenvi:ie, the two concepts are not equated.

Accordingly the Court of Appeal was correct to remit the Doblanko matter to the trial judge for sentencing.

E. The Stay Sought by the Appellant With Respect to the Pending Canada Trust Charges

46 As mentioned, the trial judge declared a mistrial with respect to the Canada Trust charges and directed that they proceed to a new trial before a different judge. He did, however, express in his reasons the view that eventually those charges as well should be stayed because of the conflict of interest engaged in by the Venkatraman law firm. It is appropriate that we comment on his expression of opinion.

47 The conflict of interest in Canada Trust relates to a brief period of consultatioli that ended soon after it began. The Venkatraman law firm was in breach of its duty of loyalty to the appellant, but shortly thereafter they recognized the conflict and acted no further on the Canada Trust file. Other counsel were retained, who were not privy to whatever confidential information the Venkatraman firm possessed. The Helen Lambert charges have been resolved. There is no danger that the Venkatraman law firm's conflict would affect the fairness of a new trial. On the basis of the record we have before us, I would not regard the Canada Trust charges as so vitiated by the law firm's conduct as to render it an abuse of process for the state (which had no role in the conflict of interest) to seek a conviction at a new trial. In any event it is certainly not one of the "clearest of cases" in which a stay would be justified. There may of course be other or different evidence before the judge presiding at the new trial and the disposition of the stay application, if renewed, will be for that trial judge to decide.

111. Disoosition

48 I would dismiss the appeal.

Solicitors: Solicitors for the appellant: Parlee McLaws, Edmonton.

[page6591

Solicitor for the respondent: The Attorney General for Alberta, Edmonton. ---- End of Request ---- Print Request: Current Document: 1 Time Of Request: Thursday, September 24, 2009 09:13:12