Asset sale without formal procedure: Greenfire Oil and Gas insolvency

In Canadian insolvency proceedings, the balancing of competing interests is an ever-present part of the process. Not all stakeholders will be content with every decision of a debtor company or its advisors. In a situation whether the insolvent debtor cannot, by definition, satisfy all of its creditors’ claims, and time is the enemy of all, there can be opportunity for creative solutions even despite the objection of substantially all affected parties. You can please some parties sometimes, but you cannot please all of the parties all of the time.

In the recent insolvency proceedings of Greenfire Oil and Gas Ltd. and Greenfire Hangingstone Operating Corporation (collectively, Greenfire), the Alberta Court of Appeal had the occasion to revisit and comment upon the steps taken by Greenfire and its trustee under its bankruptcy proposal, Alvarez & Marsal Canada Inc. (the Proposal Trustee). The decision highlights the considerations that the court will take into account in approving a sale, the real-time nature of commercial insolvency proceedings, and the creativity and novelty that can be incorporated into traditional sales practices in the appropriate circumstances.

NOI proceedings and company details

On October 8, 2020, Greenfire filed a Notice of Intention to Make a Proposal pursuant to section 50.4(1) of the Bankruptcy and Insolvency Act (Canada), RSC 1985, c B-3, as may be amended from time to time (the BIA) (such proceedings, referred to herein as the NOI Proceedings). Greenfire is focused on oil sands development and production and their primary asset is a steam-assisted gravity drainage (SAGD) project in northern Alberta.

Decision not to undergo a formal SISP and alternative to the SISP

Due to its lack of funding, Greenfire was unable to:

1. initiate a robust formal sale and investment solicitation process (SISP);
2. restart operations; and
3. address the various actions required to be taken by Greenfire pursuant to an Order granted by the Alberta Energy Regulator (the AER), which required Greenfire to maintain its assets in a safe manner during winter weather conditions¹.

As an alternative, Greenfire and its Proposal Trustee made considerable efforts to identify and engage possible investors who may be interested in acquiring or investing in the SAGD project², which resulted in Greenfire entering into an asset purchase agreement (the APA) with Greenfire Acquisition Corporation (the purchaser)³ (an unrelated party to Greenfire). In connection with the APA, Trafigura Canada General Partnership (Trafigura) agreed to provide the necessary funding to the purchaser to purchase Greenfire’s assets if the APA was approved.

The Proposal Trustee was of the opinion that Greenfire, among others: a) made practical attempts to obtain the best price and did not acted improvidently, b) took into account the interests of all parties; and c) considered the efficacy and integrity of its attempts to achieve the best price under the difficult financial circumstances that it was inundated with⁴.

Approval of the AVO and Interim Financing Order

In order to consummate the transaction contemplated by the APA, Greenfire brought forward an application before the Court of Queen’s Bench of Alberta seeking the approval of an approval and vesting order (AVO) and the interim financing order and interim financing charge order related to the financing by Trafigura noted above (collectively, the Interim Financing Order, and together with the AVO, the Orders).

The Proposal Trustee considered a number of factors, including, inter alia, that: a) if the APA was not approved, then Greenfire would likely go bankrupt; b) there were no other credible alternatives; c) Greenfire had not been presented with any superior or credible offer; and d) the sale transaction before the Court provided for significant interim financing which would, among others, allow Greenfire to restart operations, and address the AER’s concerns and result in a modest recovery to Greenfire’s creditors⁵.

On December 17, the Honourable Justice D.B. Nixon approved and granted the Orders.

Application related to Right to Appeal pursuant to section 193 of the BIA

In response, however, Athabasca Workforce Solutions Inc. (Athabasca) and the Investor Group⁶ (together with Athabasca, the appellants) brought forward two applications before the Court of Appeal for a declaration that they have a right to appeal pursuant to subsection 193(a) and (c) of the BIA, or in the alternative, seeking leave to appeal pursuant to subsection 193(e) of the BIA.

Athabasca, in its memorandum of argument, submitted that its appeal was significant to the subject action as all of Greenfire’s creditors (other than one, an affected municipality) opposed the orders as the transaction that was the subject of the APA would result in substantial losses to Greenfire’s creditors that may have been mitigated had a proper SISP been conducted⁷.

Can an AVO be granted in the absence of a proper SISP?

While the Honourable Madam Justice M.S. Paperny of the Court of Appeal considered the appellants’ submissions, specifically that the orders were novel in that the approval of the Interim Financing Order required the approval of the proposed sale of assets as a condition and therefore, the AVO was granted in the absence of a proper SISP being conducted and with inadequate evidence of value, she disagreed. Justice Paperny stated that “[t]he approval of interim financing and sales of assets under sections 50.6 and 65.13 of the BIA are matters of judicial discretion and are highly fact dependent.” Her Ladyship noted that, inter alia:

1. a list of non-exhaustive factors to inform the exercise of the subject discretion are set forth in the BIA;
2. Justice Nixon demonstrated that he balanced the interests of all stakeholders and had regard to the precarious financial circumstances, the serious damage done to the assets, and the restarting and environmental risks; and
3. there was a lack of other viable alternative proposals, support of key stakeholders, and lack of prejudice to Greenfire’s creditors as a result of the interim financing⁸.

Consideration of the absence of the SISP in connection with the Right to Appeal Claims pursuant to Section 193

In considering the appeal brought forward by the Appellants, Justice Paperny concluded that neither subsections 193(a) nor (c) of the BIA (which provide certain limited circumstances under which an appeal exists as of right from bankruptcy proceedings) apply to the proposed appeal and therefore, leave to appeal is required. The issue related to the absence of the SISP discussed above was considered in Justice Paperny’s analysis of the factors to be considered on an application for leave to appeal under subsection 193(e) of the BIA (which provides that if the limited circumstances under which an appeal exists as of right do not apply, then a leave of a judge of the Court of Appeal is required). One of the factors to consider on an application for leave to appeal under subsection 193(e) of the BIA is whether the point on appeal is of significance to the practice. Due to certain of the reasons noted above, Justice Paperny concluded that there is no basis on the record to suggest that the appeal will have any broad significance to the practice⁹.

Appeal decision

After conducting a detailed analysis of the issues before Her Ladyship, Justice Paperny ultimately concluded that leave to appeal is required and that the Appellants failed to satisfy the test for leave and as a result, leave to appeal was denied¹⁰. In the result, in the very contested proceedings, the non-traditional sale of the oil sands project was upheld, along with the interconnectedness of the interim financing to the subject asset purchase agreement.

_________________________

¹ Fifth Report of the Proposal Trustee filed December 11, 2020, at paras 20 and 39.

² Ibid, at para 49.

³ Torys LLP acted as counsel for Greenfire Acquisition Corporation.

⁴ Ibid, atpara 55.

⁵ Ibid, at para 56.

⁶ “Investor Group” means Behrokh Azarian, Homayoun Hodaie, Mandana Rezaie, Mehran Pooladi-Darvish, Meysam Ovaici, Firooz Abbaszadeh, Mehran Joozdani, Layla Amjadi, Meer Taher Shabani-Rad, Zahra Ahmadi-Naghdehi, Afshin Shameli, Maryam Mohsen Zadeh, Parham Minoo, Haleh Peiravi, Mohammad Ahadzadeh Ardebili, Ramin Jalalpoor, Elham Vakili Azghandi, Tariq Mahmood Roshan, Amin Jalalpoor, Faisal Khan, Poonam Dharmani and Ali Nilforoush

⁷ Memorandum of Argument of Athabasca filed January 4, 2021, at para 13.

⁸ Athabasca Workforce Solutions Inc v Greenfire Oil & Gas Ltd, 2021 ABCA 66, at para 19.

⁹ Ibid, at para 19.

¹⁰ Ibid, at para 29.

This article was originally published in two parts by The Lawyer’s Daily, part of the LexisNexis Canada Group Inc. You can access the original pieces here and here.