Anonymised, illustrative composite. Where the buyer is related to the insolvent seller, the court may approve only if two separate things are satisfied. Running a thin process to leave the management bid unopposed satisfies one of them and destroys the other.
At a glance
A machining business supplying downhole tool components to oilfield-service companies had lost two years of volume in a drilling downturn and carried $6,900,000 of claims, including a $3,200,000 secured operating facility and $1,100,000 of equipment leases.
The chief executive and the operations director had run the business for nine and eleven years respectively. They were the only people who could talk to the three remaining customers, and they wanted to buy it. See funding a buyout the managers cannot finance alone for the financing side of that.
A notice of intention was filed and the trustee ran a sale and investment solicitation process: six weeks, 38 parties contacted, nine confidentiality agreements, one indicative offer at $3,550,000 from a Saskatchewan competitor. That competitor withdrew after site visits, citing the condition of two of the machines.
At the sale motion the management vehicle’s $4,100,000 was the only offer on the table, and it was the highest number anyone had seen. The trustee supported it. The secured lender supported it.
The court did not approve it, and the reason was not the price.
The management bid at $4,100,000 comprised $2,600,000 of new senior debt, $900,000 of subordinated capital from a regional fund, $350,000 of the two managers’ own money and a $250,000 deferred element.
Against $3,200,000 of secured debt, that produced full secured recovery and about $480,000 for the estate after trustee and legal fees of roughly $310,000 and the priority wage and vacation amounts.
After the extended process, the competing binding bid came in at $3,900,000 and the managers moved to $4,350,000. The additional $250,000 went almost entirely to unsecured creditors, moving their recovery from about six cents to about nine.
An ordinary sale motion under BIA s.65.13 is decided on the six factors in s.65.13(4). Where the buyer is related, a second gate opens on top of them. Section 65.13(5): if the sale is to a related person, “the court may, after considering the factors referred to in subsection (4), grant the authorization only if it is satisfied that (a) good faith efforts were made to sell or otherwise dispose of the assets to persons who are not related to the insolvent person; and (b) the consideration to be received is superior to the consideration that would be received under any other offer made in accordance with the process leading to the proposed sale or disposition.”
Read limb (b) exactly. The comparator is “any other offer made in accordance with the process” — offers that were actually made. It is not a hypothetical arm’s-length bid, not an appraisal, and not what a well-run process might have produced. It is often described as requiring a related buyer to beat what an unrelated buyer would pay; that is not what the words say, and the difference decides motions.
The consequence is counter-intuitive and it is the point of this file. The thinner the process, the easier limb (b) becomes — with no other offers made, a related bid is superior to nothing. All the work therefore falls on limb (a), “good faith efforts… to sell or otherwise dispose of the assets to persons who are not related”. A related bidder who quietly benefits from a short, narrow marketing effort has optimised the wrong limb.
Who counts as related is defined inclusively. Section 65.13(6): “a person who is related to the insolvent person includes (a) a director or officer of the insolvent person; (b) a person who has or has had, directly or indirectly, control in fact of the insolvent person; and (c) a person who is related to a person described in paragraph (a) or (b).” Both bidders were directors, so paragraph (a) caught them by definition, and their newly incorporated vehicle was caught through paragraph (c). Incorporating a bidco does not step outside the section.
The CCAA carries the identical gate at s.36(4) and s.36(5), with the factors one subsection earlier at s.36(3). The wording of the two limbs is the same.
The court adjourned the motion and directed a further 30 days of marketing, with the trustee to approach a named list of 42 potential buyers including equipment dealers and two private equity holders of similar businesses, and to publish the opportunity in a trade listing.
One binding bid at $3,900,000 came out of it. The management vehicle raised to $4,350,000 and the sale was approved: limb (b) was then satisfied against a real competing offer, and limb (a) was satisfied by a process the court had itself specified.
The delay cost the estate roughly $68,000 in professional fees and carrying costs and returned $250,000 to it. It also produced a record that made the approval unappealable in practice, which is the part a related buyer should want most.
For the managers, the extra 30 days and the extra $250,000 bought certainty. A related-party sale approved on a six-week process with one withdrawn indication is a sale that a disappointed creditor has a real argument about, and the argument runs against title.
The way to spend less is to run the process properly first. A related bidder who insists on a wide, documented, professionally-run marketing effort — and who stays out of designing it — is building the s.65.13(5)(a) record at the point when it is cheapest.
The tell is a short process with a related bidder at the end of it, especially one that produced few or no other offers. That combination looks like a good outcome to everyone in the room and is precisely the profile s.65.13(5)(a) exists to test.
The second tell is who chose the buyer list. If the incumbent management team was consulted on which competitors to approach, the good-faith record has a hole in it before anyone bids.
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