Ontario Court of Appeal Upholds Crystallex Decision

In a unanimous decision, Crystallex (Re), 2012 ONCA 404, the Ontario Court of Appeal upheld an order of Justice Frank Newbould approving a $36 million in debtor in possession (“DIP”) financing for Crystallex International Corporation (“Crystallex”) which also gave the lender a bonus payment equal to 35 per cent of the net proceeds of Crystallex's sole material asset, an investment treaty claim against the Bolivarian Republic of Venezuela in excess of $3.4 billion and approved a management incentive plan that made a pool of up to 10 per cent of the net proceeds of the arbitration available to distribute as bonuses to key members of management.

Crystallex is a Canadian mining company. Its principal focus since 2002 has been the exploration and development of the Las Cristinas gold project in Venezuela. In February, 2011, Venezuela unilaterally rescinded Crystallex's rights to Las Cristinas. Shortly thereafter, Crystallex filed a Request for Arbitration before the Additional Facility of the International Centre for the Settlement of Investment Disputes (“ICSID”) against Venezuela pursuant to a Canada-Venezuela investment treaty. Crystallex seeks in excess of $3.4 billion from Venezuela in the ICSID arbitration as full compensation for the loss in value of its investment in Las Cristinas.

In 2004, Crystallex issued approximately $100 million worth of senior unsecured notes. The notes became due on December 23, 2011. Because of Venezuela's actions, Crystallex did not have the means by which to pay out the bonds.

Crystallex obtained protection under the Companies' Creditors Arrangement Act (“CCAA”) on December 23, 2011. The initial order authorized Crystallex to conduct an auction to raise DIP financing under Monitor-approved procedures. The auction resulted in a successful bid from Tenor Special Situations Fund LP (“Tenor”). The terms of the Tenor DIP financing, which matures on December 31, 2016, entitles Tenor to a bonus payment equal to 35 per cent of the net proceeds of any settlement or award in the ICSID arbitration along with certain governance rights in Crystallex. The bonus and the MIP can only be paid after all other creditors have been paid in full.

The Noteholders opposed the Tenor DIP on the principal ground that DIP financing is intended only to meet a CCAA debtor's needs while it is developing a plan to present to creditors, and that the Tenor DIP was beyond the scope, both in amount and duration, of what DIP financing should provide. They argued that the Tenor DIP was, in effect, a plan of arrangement being imposed without a vote. The Noteholders also opposed the amount and method by which remuneration was calculated under the MIP.

The Ontario Court of Appeal ruled that the Tenor DIP did not compromise any of the Noteholders' legal rights and was accordingly not an arrangement.

The Court held further that approval of the MIP and the DIP facility were issues of discretion for the Supervising Judge and that he had committed no error in principle in approving both. Justice Newbould approved the DIP on the basis that it did not detract from any creditor rights, was the product of an arm's length auction in which the Noteholders participated and that the Noteholders had declined to improve their bid when invited to do so.

An application for leave to appeal has been filed with the Supreme Court of Canada by counsel for the appellant, Computershare Trust Company of Canada.

McMillan LLP acted for Crystallex with a litigation team comprising Andrew Kent, Markus Koehnen and Jeffrey Levine and a finance team comprising Andrew Kent, Robert Scavone and Paul Davis.

Computershare Trust Company of Canada, on behalf of the Noteholders, was represented by Bennett Jones LLP with a team that consisted of Richard Swan, Richard Orzy, Derek Bell and Emrys Davis.

Fraser Milner Casgrain LLP acted for Tenor Capital with a litigation team of Barbara Grossman and Ryan Jacobs, supported by a restructuring team consisting of Ryan Jacobs, Ross Walker and Shayne Kukulowicz and a finance team of Michael Wunder, Don MacIntosh, Chris Turney and Kori Williams.

David Byers, Maria Konyukhova and Aaron Fransen (financing issues) of Stikeman Elliott LLP acted for the Monitor, Brian Denega and Christopher Mediratta of Ernst & Young Inc.


Andrew J.F. Kent Ross W. Walker Barbara Grossman David R. Byers R. Shayne Kukulowicz S. Richard Orzy Paul D. Davis Kori Williams Aaron Fransen Ryan Jacobs Maria Konyukhova Markus Koehnen Emrys C. Davis Richard B. Swan Michael J. Wunder Derek J. Bell Robert M. Scavone Jeffrey A. Levine Chris Turney Don Macintosh