On February 29, 2016, the Ontario Superior Court of Justice released a decision confirming claims by United States Steel Corporation (USS) in the aggregate amount of over $2 billion in the ongoing insolvency proceeding of U.S. Steel Canada Inc. (USSC).
Two principal issues were addressed by the Court. First, whether amounts advanced by USS to USSC (USS’s indirect wholly owned subsidiary) were properly characterized as debt obligations or “equity claims” under the Companies’ Creditors Arrangement Act (Canada). Second, whether certain secured claims were unenforceable for lack of consideration or void as fraudulent preferences under the Bankruptcy and Insolvency Act (Canada).
Certain stakeholders of USSC objected to the treatment of the USS claims as debt, asserting that such claims were in substance equity claims for CCAA purposes. The objectors also challenged the validity of USS’s secured claims.
A trial regarding the determination of USS’s claims was held in January 2016. In its decision, the Court rejected the objections and confirmed all of USS’s unsecured claims and virtually all of its secured claims.
Justice H. Wilton-Siegel applied a two-part test for determining how the advances made by USS to USSC should be characterized, which asks: 1) Did the lender subjectively expect to be repaid principal and interest out of the cash flows of the borrower over the term of the loans at the time the loan advances were made? and 2) Was the lender’s expectation objectively reasonable?
The Court concluded that on a balance of probabilities, at the time of the advances under the loan agreements USS expected USSC would repay interest and principal in accordance with the loan terms, and that USS’s expectations in that regard were reasonable. As such, the Court confirmed these claims as debt claims.
The Court (with the exception of one claim that remains to be determined) also confirmed USS’s secured claims.
The decision is under appeal.
Non-unionized Active Employees and Retirees were represented by Andrew Hatnay, Barbara Walancik and Adrian Scotchmer of Koskie Minsky LLP.