The “weird” legal mechanism being used by Northern Pulp in its $450 million lawsuit against Nova Scotia

This is the second of a two-part story examining how the Companies’ Creditors Arrangement Act is being employed in a lawsuit seeking $450 million from the province of Nova Scotia. Read Part 1 here.

Three months before Mountain Equipment Co-op went to the British Columbia Supreme Court for creditor protection in 2020, Northern Pulp – a Paper Excellence company – together with five affiliates and its immediate owner 1057863 B.C. Ltd, had already done so.

In June 2020, Northern Pulp et al. (identified as the “petitioners” in legal filings) declared themselves “insolvent” and sought creditor protection in the British Columbia Supreme Court, under the Companies’ Creditors Arrangement Act (CCAA).

The petitioners have been there enjoying creditor protection ever since, and the British Columbia Supreme Court has granted the seven Paper Excellence companies just about everything they’ve asked for.

They’ve had seven extensions on creditor protection, and the myriad court orders, motion materials and affidavits documenting those are all posted online by the court monitor, Ernst & Young Inc.

The most recent extension came at the end of April, when British Columbia Supreme Court Justice Shelley Fitzpatrick granted the seven companies yet another stay — until October 31, 2022 — on their creditor protection.

Before that, on April 1, Fitzpatrick issued an order for Nova Scotia to go into mediation to settle “claims” Northern Pulp and its owners, Paper Excellence Canada and Hervey Investment BV (Netherlands), made against the province in December 2021 when they launched a lawsuit in the Nova Scotia Supreme Court for alleged “losses” that could exceed $450 million.

In doing so, Fitzpatrick dismissed strongly worded arguments from Nova Scotia counsel, Robert Grant and Maurice Chiasson, who opposed the mediation.

Related: Northern Pulp says it is “insolvent” and can’t pay its pension obligations, but it’s got lots of cash to bankroll assaults on Nova Scotia’s government and laws

But how can Northern Pulp have the province pulled into court in another province to thrash out a “settlement” for a lawsuit it and its owners have filed in the Nova Scotia Supreme Court?

To answer this, we need to look at the unique powers of the Companies’ Creditors Arrangement Act.

But first, a quick look at the recent history of the Northern Pulp / Paper Excellence case, and also a closer look at how the companies incurred the debt that allowed them to get creditor protection.

Putting an end to the environmental racism of Boat Harbour

In 2015, Nova Scotia passed the Boat Harbour Act that gave Northern Pulp five years to come up with a new effluent treatment and disposal facility for its pulp mill in Pictou County.

The new facility would replace Boat Harbour, which would be remediated and restored as the precious tidal estuary that Pictou Landing First Nation knew as “A’Se’K’ (“the other room”), putting an end to a half century of what had been called one of Canada’s worst examples of environmental racism.[1]

In December 2019, Nova Scotia Environment determined that Northern Pulp had not provided sufficient information for the effluent treatment facility it proposed to replace Boat Harbour. The province thus required an Environmental Assessment Report, which could take up to two years.

In January 2020, the Boat Harbour facility was closed, and because Northern Pulp had not yet obtained approval for a replacement facility, it closed its Pictou County pulp mill and put it into hibernation.

In June 2020, Northern Pulp declared itself “insolvent” and sought creditor protection in the British Columbia Supreme Court.

On May 5, 2021, the company withdrew its replacement effluent treatment plant project from the provincial environmental assessment process.

On December 7, 2021, Northern Pulp registered a new proposal for a “mill transformation” project for a Class II environmental assessment with Nova Scotia Environment and Climate Change.

On December 16, 2021, Northern Pulp and its owners, Paper Excellence and Hervey Investment BV (Netherlands) filed a statement of claim in the Nova Scotia Supreme Court, invoking legal action against the province for “indemnified losses” that are “expected to exceed $450 million.”

Meanwhile, because they are under creditor protection, Northern Pulp et al. have a holiday on repayment of more than $86 million in unpaid loans to the province.

And although Northern Pulp has filed a lawsuit against Nova Scotia — or rather against Nova Scotians, as they pay the bills — the company continues to benefit from harvesting leases on 250,000 hectares (617,763 acres) of publicly owned Crown land in the province.

This is in addition to the 172,000 hectares (425,021 acres) of Nova Scotian land Northern Pulp owns, bought with a $75-million loan from Nova Scotians in 2010. A generous loan that, as mentioned, is currently not being repaid.

Paper Excellence ‘debt agreements’ with Northern Pulp

In its first monitor report in July 2020, Ernst & Young reported that the “consolidated liabilities” of Northern Pulp et al. amounted to $311,019,464, divided among these creditors:

• Province of Nova Scotia (secured) — $84,874,246
• Province of Nova Scotia (unsecured) — $1,300,000
• Paper Excellence Canada (secured) — $29,859,548
• Paper Excellence Canada (unsecured) — $183,453,581
• Employee related — $7,120,000
• Timberlands owners — $1,353,496
• Trade payables — $3,058,593

In his June 2020 affidavit to the British Columbia Court, Bruce Chapman, who describes himself as “general manager (Northern Pulp) of Paper Excellence Canada Holdings Corporation” and “General Manager of the Petitioners” other than the company, 1057863 B.C. Ltd., provided copies of four “debt agreements” that apparently explain how Paper Excellence became Northern Pulp’s largest creditor.

The “debt agreements” (Exhibits O, P, Q, R in the affidavit) from November 2015 assigned a total of nearly $222 million of debt from Paper Excellence companies in British Columbia and Saskatchewan to Northern Pulp.

One of the debt agreements for more than $154 million from Howe Sound Pulp & Paper to Northern Pulp was only “executed” in February 2020, after the Northern Pulp mill had closed.

Based on these debt agreements, Northern Pulp’s largest creditor by far does appear to be Paper Excellence Canada, Northern Pulp’s owner, which Statistics Canada’s Inter-corporate ownership shows is part of the corporate behemoth Sinar Mas Group that belongs to the multi-billionaire Sino-Indonesian Widjaja family.[2]

Related: Corporate shell game Part 1. Northern Pulp seeks protection from its creditors in a BC court – and its largest creditor is its owner, Paper Excellence

Related: Corporate shell game Part 2. Northern Pulp- affiliated companies say that without major concessions, they won’t be able to pay back nearly $86 million they owe to the province of Nova Scotia, so far, however, the government has not caved, and is not agreeing to new financing.

An ‘error of law and fact’?

On February 4, 2022, Northern Pulp et al. applied to the Supreme Court of British Columbia for a mandatory mediation with Nova Scotia, which would also involve their owners, Paper Excellence and Hervey Investment BV (Netherlands), and a retired judge of their choosing as moderator.

Despite strong arguments against the mediation by Nova Scotia counsel Grant and Chiasson, on April 1, 2022, Fitzpatrick ordered that the “mandatory mediation process” go ahead and be moderated by retired-Justice Thomas Cromwell. The process will be confidential, and any agreements reached will be binding on all parties.

Related: Northern Pulp and its wealthy owners seem intent on taking Nova Scotians to the cleaners

In her reasons for the mediation order, Justice Fitzpatrick noted that in 2019, the year before Northern Pulp’s mill closed, the operating revenues were nearly $286 million, and that in the first four months of 2020, after the mill’s closure revenues dropped to just $13,320,167.

The aim of the mediation, Fitzpatrick wrote, was to “pursue alternatives to the replacement ETF [Effluent Treatment Facility] for re-starting the mill,” and “to seek a settlement with the Province with respect to the Claims,” which could exceed $450 million.

Fitzpatrick wrote that she was “satisfied that the Petitioners continue to engage in the EA [environmental assessment] process in a reasonable manner.”

This was countered in an affidavit filed on behalf of Nova Scotia by Erin Graves, senior associate with Deloitte LLP, which showed that Northern Pulp had spent only 4% of the amount it had told the Court it had budgeted for the environmental assessment process for the “mill transformation” and new effluent treatment facility.

On April 12, 2022, Northern Pulp applied to the Supreme Court of Nova Scotia for a Judicial Review of the Terms of Reference that Nova Scotia Environment and Climate Change had set for the environmental assessment of its proposed “mill transformation.”

On April 21, 2022, Nova Scotia counsel appealed Fitzpatrick’s mediation order in the British Columbia Court of Appeal, arguing that it was “not an appropriate or reasonable exercise of discretion pursuant to s.11 [Section 11] of Companies’ Creditors Arrangement Act (“CCAA”) and constitutes an error of law and fact.”

On April 28, 2022, Nova Scotia counsel argued vigorously against another extension of Northern Pulp’s creditor protection under the CCAA.

Again, Fitzpatrick dismissed these arguments, and on April 29, 2022, extended the CCAA creditor protection for Northern Pulp et al. for another six months.

So that’s it in a nutshell.

Northern Pulp is “insolvent” and under creditor protection, but at the same time, it is confronting Nova Scotia in two courts and on three fronts. Northern Pulp and its wealthy owners have filed a lawsuit in the Nova Scotia Supreme Court. Northern Pulp has also filed a judicial review of the terms of the environmental assessment process in the Nova Scotia Supreme Court, and succeeded in forcing the province into mediation with Northern Pulp and its owners in the British Columbia Supreme Court, under the CCAA.

Which brings us to the nature of the CCAA itself.

The CCAA gives the courts ‘a wide swim lane’

On the surface, the CCAA looks relatively straightforward. According to the Office of the Superintendent of Bankruptcy Canada, it is a federal law that allows “insolvent corporations that owe their creditors in excess of $5 million to restructure their business and financial affairs.”

But straightforward, it is not.

A professional chartered accountant with an illustrious 30-year career, who asked for anonymity in order to speak freely, says that even to stay current with the CCAA and its complexities is a challenge, and worked at doing that for decades.

She explains that the bulk of corporate restructuring in Canada happens under the Bankruptcy and Insolvency Act, which is “very prescriptive,” meaning:

The company proposes to its creditors, “We can pay you folks 40 cents on the dollar, and this is what our cash flow looks like for the next three years. We’re going to be good. Just give us a break on the bills right now. We’ll be fine.

While the CCAA is intended to do the same thing, she says it is not as prescriptive.

“It gives the companies a wide swim lane to get through the process,” she says. This means that for the average person, it looks as if companies go to a judge to get the order they want so that they are okay, meaning “management and shareholders get all the money, and everyone else gets burned.”

“What irritates the average person about the CCAA is that it seems as if the judges and the lawyers and the companies and shareholders of the companies are just looking out for themselves, and they don’t care about anybody else,” she adds.

This “could be true,” she says. “But there’s a lot of complexity in dealing with business… Because of the complexity, the CCAA allows the company and the judges to address weird things.”

And one of those things is the power, under Section 11 of the Act, to drag Nova Scotia into mediation with companies under creditor protection in the British Columbia Supreme Court.

Section 11

Section 11 of the CCAA conveys broad and enormous powers to the court, which may, “without notice as it may see fit, make any order it considers appropriate in the circumstances.” [emphasis added]

In a telephone interview, Anna Lund, associate professor in the Faculty of Law at the University of Alberta, says the fact that Justice Fitzpatrick used Section 11 of CCAA to force Nova Scotia into mediation raises questions about the powers the CCAA gives the courts. Says Lund:

When is it appropriate for courts to use that [Section 11] power? And what are the outer limits of the power of CCAA courts, under this federal bankruptcy and insolvency jurisdiction? When would you go beyond the bankruptcy and insolvency power, and start intruding unfairly, intruding improperly into areas of provincial jurisdiction, like provincial jurisdiction over property and civil rights?

I can tell you that the court hardly ever, basically never in contemporary times, engages with the question of the outer limits of bankruptcy in insolvency law. They always just say, “We assume that this is a valid use of CCAA power.”

Lund says it “seems weird” that the British Columbia Supreme Court is using the CCAA to force Nova Scotia into mediation with Northern Pulp and its owners, to settle litigation claims the companies have filed in Nova Scotia.

If Northern Pulp were being sued by someone else, Lund says, it would be appropriate, but she thinks it’s “interesting” that in this case, Northern Pulp and its owners are the ones doing the suing of Nova Scotia, and the CCAA is inserting itself into the case.

“In a case like this one, I think this really raises questions about the scope of what courts should be doing under Section 11 [of the CCAA], and whether there needs to be restrictions under that section,” says Lund.

However, she notes, because the CCAA is federal legislation, “you will see courts in one province make orders that have an effect in another province under the CCAA.”

“The court has this broad jurisdiction to do whatever they need to do to make sure that the CCAA succeeds,” Lund says.

The CCAA is passed under the federal government’s bankruptcy and insolvency power, but, she says, “Does that mean the courts should be able to do anything if a company’s insolvent?”

And should that allow the court to step in using the CCAA and direct other pieces of litigation that are connected to the insolvency case, even when the debtor company is one of the litigants, Lund asks, before answering the question herself.

“That seems like a pretty far reach. And especially when the argument is ‘because we need this money to fund our insolvency proceedings.’”

The role of the court monitor

In their response to Northern Pulp’s request for the mediation, Nova Scotia counsel Grant and Chiasson wrote:

The Province’s willingness to negotiate assistance for Northern Pulp is predicated upon its being in the public interest of Nova Scotians and upon the preservation of the integrity of the environmental assessment and approval processes and the discharge of its duties to consult with First Nations.

The Province does not deem it to be in the public interest to engage in such negotiation at this time.

Then Grant and Chiasson noted that Northern Pulp et al. were:

… seeking significant powers for the Court-appointed mediator that fall outside what would otherwise be available, including the power of “dealing with any Court, regulatory body or other government ministry, department or agency …”

And, they wrote, the plaintiffs in the lawsuit against the province — Northern Pulp and its owners — were seeking “to shift the oversight of the Nova Scotia Litigation into this Court.”

“Section 11 of the CCAA does not provide limitless powers,” Grant and Chiasson stated, providing more than 300 of pages of case law to back up their arguments.

In their April 28 submission to the British Columbia court to oppose an extension of the CCAA creditor protection, Grant and Chiasson had this to say about the way the court monitor has handled the province’s requests:

As a major stakeholder in this CCAA proceeding, the Province’s concerns deserve more attention. It is particularly disappointing that the Monitor, as an officer of the Court, has not, despite requests through Monitor’s counsel on the part of the Province to do so, been troubled to better inform itself of the EA [environmental assessment] Process. The Monitor continues to offer nothing more than continued unqualified acceptance of the position of the Petitioners on these topics, despite a track record replete with failures and a sequence of events which have seen many of the Province’s concerns ripened to fruition.

And this brings us to the court monitor and the role it plays in CCAA cases.

“Every time a CCAA is started, there’s a monitor appointed, and the monitor is going to be a big accounting firm like Ernst & Young,” explains Anna Lund. “Their job is to assist the debtor company with going through the CCAA process, but also to oversee what the debtor is doing and report on it to the court. And for various points in the CCAA process, the monitor will file these reports, just saying what’s going on.”

According to Lund, the court monitor reports carry a lot of weight when the court is making a decision in a CCAA case, and “a lot of trust is placed in the monitor’s judgment.”

“They’re supposed to be independent,” Lund says.

But, she adds, the large accounting firms that are appointed as court monitors, “want to keep getting both those appointments.”

Related: Northern Pulp is misleading the court about how the environmental assessment process works in Nova Scotia

Seeking answers from the court monitor

The Halifax Examiner contacted Ernst & Young with a series of questions about materials provided by Northern Pulp general manager Bruce Chapman to the court, and to learn more about how Northern Pulp incurred so much debt to its owner.

The Examiner asked Ernst & Young, for example, whether the “debt agreements” provided by Chapman had been verified, given that some lacked dates on the signature pages, and involved one person signing as the director of the assignee and assignor of the debt with no documentation showing that directorship.

The Examiner also asked if Northern Pulp had provided the court with evidence that Paper Excellence, “advanced loans to the Petitioners to support their operations and capital infrastructure improvements to reduce environmental emissions and improve air quality monitoring at the Mill,” as Ernst & Young wrote in the first Court Monitor report on July 2, 2020. [3]

Ernst & Young replied, “All documents submitted to Court are located on our website at www.ey.com/ca/northernpulp. Any further information requests from the media should directed to the company at media@northernpulp.com.”

The Examiner then emailed Northern Pulp to ask for the details of the Paper Excellence loans to Northern Pulp that the court monitor reported went to “support capital infrastructure and improvements to reduce environmental emissions and improve air quality monitoring” at the Pictou pulp mill, and how those improvements were monitored.

To date, there has been no answer.

The CCAA creditor protection case in the British Columbia Supreme Court is predicated on Northern Pulp’s debt to its owners, and how it was incurred, but the Examiner could find no evidence that this has been closely examined by the court.

And unless its appeal of the mediation order is heard, Nova Scotia has no choice but to enter negotiations with Northern Pulp and its owners in the British Columbia court, because the CCAA allows the court to “make any order it considers appropriate.”

Whether that is in the public interest of Nova Scotians is — as far as the law and the British Columbia court are concerned — irrelevant.

Endnotes:

[1] The full history of the pulp mill in Pictou County is extremely convoluted and complex, and it could fill a book. In fact, it has. The first 50 years of the mill are documented in my 2017 award-winning book, The Mill – Fifty Years of Pulp and Protest. Since 2017, the Halifax Examiner has also provided in-depth coverage of the mill, its effluent facility in Boat Harbour and its effects on Pictou Landing First Nation, and on Paper Excellence companies in Canada and beyond.

[2] The Widjaja family created Paper Excellence a few years after another of the family’s corporations, its flagship Asia Pulp & Paper, defaulted on nearly US$14 billion in 2001, in what Timothy Mapes writing in The Wall Street Journal on August 15, 2003, called the “biggest and most complex corporate-debt workout in emerging markets.”

According to Mapes, two years after the default most creditors, “including almost every major international bank, many pension funds and the U.S. government,” still hadn’t seen “a dime” of what APP owed them, although APP did pay Chinese banks about $700 million in the first year after freezing debt payments.

The Wall Street Journal article continues: “Creditors wanted repayment of APP’s $13.9 billion debt. They accused the family of shifting hundreds of millions of dollars from the business into offshore accounts. Indonesian regulators seized the family-run bank, cutting off a crucial source of funds. APP’s shares were kicked off the New York Stock Exchange after their value plunged to almost nothing. Environmentalists decried the papermaker’s destruction of Indonesian rain forests.”

Eleven ambassadors to Indonesia – including Canada’s – wrote to Indonesia President Megawati Sukarnoputri in 2003 warning that, “failure to reasonably satisfy the creditors of APP will affect the confidence of future potential investors into Indonesia.”

The Wall Street Journal also reported that the creditors learned at a 2001 meeting with APP that five trading companies in the British Virgin Islands – the world’s #1 tax haven and financial secrecy jurisdiction – owed APP subsidiaries nearly US$1 billion. And: “… APP said those companies weren’t related to the group or to the Widjaja family. But The Wall Street Journal learned that several APP employees worked at those companies as officers or agents.”

A lawyer for Deutsche Bank, which APP owed US$193, wrote to a Singapore court that the Widjaja family had been “using their own companies as family piggy banks.”

[3] The questions sent to the court monitor, Ernst & Young, were:

1. Have any of the petitioners in the Northern Pulp CCAA case provided any financial records – other than those for 2019 – or audited financial reports to the British Columbia Supreme Court? If so, are any of those available and where would I find them? (I haven’t found any on the Restructuring Document Centre for Northern Pulp Nova Scotia Corporation et al.)

2. The first Court Monitor report – July 2, 2020) states about Paper Excellence Canada (PEC):

31. As indicated earlier in this Report, PEC is an owner of the Petitioners, and is both a customer and a creditor of the Petitioners.

32. PEC advanced loans to the Petitioners to support their operations and capital infrastructure improvements to reduce environmental emissions and improve air quality monitoring at the Mill.

33. The Senior Leaders have informed the Monitor that Northern Pulp currently owes PEC approximately $213.3 million, of which approximately $29.8 million is secured.

34. A more detailed explanation of the origins and details of the Petitioners’ indebtedness to PEC is contained in the First Chapman Affidavit.

Has Northern Pulp / Paper Excellence provided evidence to the Court that the loans to the Petitioners were used to support their operations and capital infrastructure improvements to reduce environmental emissions and improve air quality monitoring at the Mill? If so, is this information available?

3. In the Bruce Chapman June 2020 Affidavit, on pages 352, 360, 366, 372, there are debt agreements in which Paper Excellence and Paper Excellence companies in British Columbia and Saskatchewan assign debt to Northern Pulp. Are there other records (or audited statements) of those debt agreements in any of the Court documents?

4. What other methods are used to confirm the various debts existed prior to the dates they were reassigned, aside from the “single party” agreements? (Especially considering there are no dates on the signatures nor witnesses.) Are the signatories on the agreements confirmed as a Director for each corporation, with authority to act on behalf of the various corporations at the time of reassigning the debt?