In the recent decision of Atlantic Sea Cucumber Ltd (Re), 2023 NSSC 231 the Supreme Court of Nova Scotia in Bankruptcy and Insolvency (the "Court") departed from the long-standing norm in insolvency proceedings of granting an abridgement of time for filing and service of applications. The debtor company, Atlantic Sea Cucumber Ltd. ("ASC") applied to convert their Notice of Intention to make a proposal ("Proposal Proceedings") under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 ("BIA"), to proceedings under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 ("CCAA"). The Court ultimately denied the application based on the procedural issues with timing of filing and service.

In the subsequent decision of Atlantic Sea Cucumber Ltd (Re), 2023 NSSC 238, the Court then declined to grant the requested stay extension application respecting the Proposal Proceedings. Both decisions are presently under appeal.

Denial of the Abridgement of Time for Filing and Service

Justice Rosinski decided not to abridge the time for filing and service of ASC's application to convert its Proposal Proceedings to CCAA proceedings, finding there to be no satisfactory explanation for why the application was not filed and served ten days before the hearing, as prescribed by the CCAA. ASC had control of the preparation of the application and knew the hearing date almost a month and a half in advance. In this regard, the Court said that ASC "knowingly took a risk the Court would not grant an abridgement of the time for filing and service of its Application."

The Court held that abridging time would prejudice Weihai Taiwei Haiyang Aquatic Food Company Limited ("WTH"), a creditor of ASC who opposed the application. ASC only advised WTH two days prior to filing that they were considering a conversion application. WTH did not have the most recent report of the Monitor to base their written submissions on and they, like the Court, received ASC's supporting affidavits late and not in proper form, which effectively prevented any cross-examination on the contents. In contrast, Justice Rosinski stated that ASC would incur very little prejudice as a result of his decision given their ability to still request an extension to the stay of proceedings respecting the Proposal Proceedings.

In the result, the Court declined to grant the application to convert to CCAA as the application was not properly before it, given the time for filing and service was insufficient.

Denial of the Extension of Time to File a Proposal

ASC then brought an application mere days after their failed CCAA conversion application for an extension of time to file a proposal within its Proposal Proceedings. Again, ASC asked for an abridgement of time for filing and service of this application.

The Registrar in Bankruptcy determined that the application for the extension was not out of time, before turning to the test for such extensions established under Section 50.4(9) of the BIA. The Court held that the purpose of ASC's application was not to provide time to develop a proposal, but to assemble materials asking for future extensions stating that "the 'no brainer' that the Debtor thought it had in obtaining the CCAA initial order caught the Debtor with its pants down when the application was refused at a minutes-to-midnight deadline." Despite these comments, on a bare balance of probabilities, the Court found that ASC met the proposal viability component under Section 50.4(9).

In regard to the due diligence component of the extension test, the Court stated that ASC focused on converting the insolvency to CCAA proceedings rather than on developing a viable proposal. The Court further found that ASC failed to meet the element of good faith, given ASC's record of attempting to "strong arm" the Court by bringing "emergency" applications on the last day possible on three occasions. The Court held that the Debtor consistently tried to push their agenda upon the Court in disregard of the good faith element. For these reasons, Registrar Balmanoukian denied the extension. Even if the test for an extension had been met, the Court indicated it would have declined to grant the application using its discretionary powers.

Implications and Conclusions

Both decisions in Atlantic Sea Cucumber are a notable departure from the practice in insolvency proceedings for courts to abridge the time for filing and service of applications. Prior to this set of decisions, the courts have routinely granted such orders to accommodate the real-time nature of insolvency litigation. We will continue to watch whether other courts adopt similar approaches, given both Atlantic Sea Cucumber cases have been appealed.

For the time being, the Atlantic Sea Cucumber cases are an important reminder to parties to an insolvency proceeding that the procedural rules continue to apply to them. This is especially so with respect to the rules regarding service and appropriate notice of applications on interested parties, such that those parties can adequately consider their position and respond if necessary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.