KSV Advisory Canada’s Leading Boutique Advisory, Restructuring and Valuations Firm.

Can Courts Extend Statutory Deadlines in Only Extreme Circumstances?

On June 25, 2017, 2505234 Ontario Limited (the “Company”) signed a contract with the owners of Hotel X, (“PGH”) located in Toronto, to provide food, beverage, and catering services to the hotel. The Company invested a large sum of money in leasehold improvements at Hotel X in order to be able provide the services called for under the contract.

In July, 2020, PGH terminated the Company’s contract and engaged another entity for the services previously provided by the Company.

As a result of the contract termination, on July 20, 2020, the Company filed a Statement of Claim for $60 million in damages and costs against PGH. The litigation was the only asset available for the creditors of the Company.

On September 9, 2020, PGH, inter alia, filed a bankruptcy application against the Company.

On September 24, 2020, the Company filed a Notice of Intention to File a Proposal (“NOI”). The bankruptcy application was stayed to allow the Company time to pursue its lawsuit against PGH.

The parties agreed to an expedited timetable to complete the litigation on a timeline that would allow the Company to file a proposal within the six-month deadline required by Section 50.4(9) of the Bankruptcy and Insolvency Act (“BIA”), being March 24, 2021.

As events unfolded, it became clear that the litigation would not be resolved in order to allow the Company to file a proposal by March 24, 2021.

On February 24, 2021, the Company brought a motion to the Ontario Superior Court of Justice seeking an extension of the time to file a proposal beyond the six-month deadline. The purpose of the extension was to allow the litigation to be completed.

The Proposal Trustee supported the motion on the basis that the Company was acting in good faith, the litigation was the only potential source of recovery for the creditors and there was no material prejudice to other parties if the extension was granted.

The extension, which was unopposed, was granted notwithstanding that the BIA does not have any exceptions to extend NOI deadlines. In doing so, the Court relied on its inherent jurisdiction on court scheduling, which the court exercised due to the general impact of Covid-19. The Court also commented that it was important to ensure that debtors are not prejudiced by delays over which they have no control.

In making its decision, the Court quoted from the Durham Sports Barn Inc., 2020 ONSC 5938, which was heard six months earlier, in September, 2020, where the Court stated, “an overly strict and technical compliance (with 50.4(9)) would be contrary to the objectives of the BIA”.

The order in Durham referenced an endorsement in another case, Stephen Francis Podgurski, 2020 ONSC 2552, 79 C.B.R.,(6th) 96.

In the Podgurski case, heard in April 2020, the Superintendent of Bankruptcy brought a motion asking the Court to provide flexibility in the administration of all insolvency estates in Ontario given the economic impact of Covid-19.

The Superintendent submitted that Section 187(11) of the BIA confers discretionary powers to the Court to extend the time for any act or thing unless explicitly provided for otherwise.

The Court exercised its inherent jurisdiction and granted the relief in the Superintendent’s motion. The Court stated, “in enacting the BIA, and making amendments over the years, Parliament could never have envisioned the impact of a pandemic such as Covid-19”. The Court further stated, “this motion raises many practical questions, and it is up to this court to provide practical answers and direction”.

It should be noted that the Podgurski decision did not reference the six-month deadline set out in Section 50.4(9) of the BIA but supported extensions to the date the meeting of creditors could be held in a proposal.

As a result of the decisions in this case and Durham, the door to extend the time to file a proposal has been opened. However, the question going forward becomes whether time extensions to file a proposal will become more available to debtors who are acting in good faith and where there is no prejudice to other parties?

We think this is unlikely in a non-Covid environment. First, options exist to convert NOI proceedings to a proceeding under the Companies’ Creditors Arrangement Act, to file a proposal or to go bankrupt (which may be less than ideal, but even in that context, a proposal could be filed by the Trustee).

Second, in a January 10, 2022 directive, the Superintendent encouraged Trustees to make every effort to have the debtor file a proposal within the six-month time limit.

As a postscript, as a result of a July 5, 2021 decision, the Company was successful in its litigation against PGH. The Court awarded $7.1 million in damages and $2 million for employee statutory claims. PGH has appealed the decision, which remains pending.

KSV acted as proposal Trustee in this matter.