National Post (National Edition)


Challenges solvency filing


CALGARY • Saying it's not trying to “unscramble the egg” and undo Calfrac Well Services Ltd.'s restructur­ing deal from 2020, Wilks Bros LLC is asking the Supreme Court of Canada to hear its case against the Calgary-based oilfield services company.

The Financial Post has learned that the Cisco, Texasbased investment management firm, run by billionair­e brothers Dan and Farris Wilks, is awaiting a decision from the Supreme Court of Canada on whether it will be granted leave to appeal its ongoing case against Calfrac, which it has been fighting for the past six months after losing a controvers­ial proxy contest over how the company's debts should be restructur­ed.

In its filing, Wilks argues that Calfrac should have entered a Companies' Creditors Arrangemen­t Act (CCAA) bankruptcy proceeding last year when it missed an $18.3-million debt payment in June 2020. Instead, the fracking company entered a Canada Business Corporatio­ns Act (CBCA) proceeding, which Wilks argues was inappropri­ate and also infringed on its rights as a bondholder.

In a Jan. 29 filing obtained by the Financial Post, Wilks states the CBCA “allows only solvent corporatio­ns to make such fundamenta­l changes by way of a corporate arrangemen­t,” but in the past lower courts have allowed companies to use the CBCA process even in cases where they have missed debt payments.

“The result is a judicially created insolvency regime that is unpredicta­ble, unbalanced and seemingly unconstrai­ned,” Wilks argues, adding “the arrangemen­t provisions of the CBCA are being used to avoid the substantiv­e and procedural protection­s accorded to creditors under the CCAA.”

As a result, the CBCA process “allows an insolvent corporatio­n to restructur­e without meaningful scrutiny or the applicatio­n of consistent rules and principles.”

On Oct. 16, Calfrac shareholde­rs approved the debt-restructur­ing deal proposed by Calfrac management, rejecting an alternativ­e proposal by Wilks, which kicked off a series of challenges by the familyowne­d entity.

Last month, Calfrac disclosed that it miscounted votes at its special shareholde­rs' meeting and, upon further review, it did not have sufficient shareholde­r support for the deal.

As Financial Post previously reported, Alberta's pension fund manager Alberta Investment Management Corp. (AIMCo) voted on the transactio­n but its votes should not have been counted because it was deemed a related party for participat­ing in a convertibl­e bond fundraisin­g effort.

Without AIMCo's vote, Calfrac did not have enough shareholde­r support to close its transactio­n, meaning that Wilks' alternativ­e proposal to restructur­e the company may have proceeded.

In an effort to fix the issue, Calfrac applied to the Toronto Stock Exchange to have AIMCo's bonds cancelled. The exchange granted Calfrac's request on March 29.

Wilks and Calfrac are now waiting on the Supreme Court to decide whether it will allow a hearing of the case; the filing was made Jan. 29 and the Court generally takes up to three months for such reviews.

Wilks declined to comment on whether the March 12 disclosure that Calfrac miscounted votes at its shareholde­r meeting would affect its legal case. Documents from the Supreme Court indicate the company has not tried to amend its Jan. 29 applicatio­n.

Scott Treadwell, Calfrac senior vice-president capital markets and strategy, declined to comment on the Supreme Court challenge.

Legal experts say the case is unusual because it raises issues of consistenc­y in bankruptcy and corporate law and involves a highly public and a vigorous proxy fight for control of a company.

“In general, the Supreme Court doesn't tend to do a lot in corporate law,” said Bryce Tingle, the N. Murray Edwards Chair of Business Law at the University of Calgary, adding that he believes the Court should review this case as “the CBCA is being used in ways that weren't anticipate­d when it was enacted.”

“The filings suggest that there's a divergence of practice amongst some of the courts in the country and usually when you've got this kind of split in lower courts, the Supreme Court should step in to settle the law,” Tingle said.

In the past five years, the Supreme Court has heard two cases dealing with the CBCA and three cases dealing with the CCAA process, said Michael Briggs, a partner in litigation at McCarthy Tétrault LLP in Calgary, noting it has become more common for the country's highest court to review bankruptcy law in recent years.

“Any case that the court is going to hear has to be something that is of true national significan­ce,” said Briggs, who he has been a party to cases that have sought leave to the Supreme Court, and “more often than not, you don't get leave” as the cases fail the national importance test.

Briggs said that some of the issues Wilks raises in its leave to appeal request have been dealt with in other Supreme Court of Canada decisions and the issues surroundin­g the CBCA are fairly well understood.

“I don't think the CBCA is meant only for solvent companies,” Briggs said.

Wilks argues that its case against Calfrac is of national importance because “there is a need for clear legal principles that will guide the resolution of similar cases in the future.” It argues that it has been 12 years since the Supreme Court considered a specific section of the CBCA, section 192, pertaining to insolvency, which it says is relevant to Calfrac.

Wilks is not only looking to resolve legal questions about CBCA and CCAA processes. It also wants the Supreme Court to remove a waiver that gave Calfrac protection from second-lien debt-holders, potentiall­y forcing Calfrac to repay those second-lien note holders, including Wilks, immediatel­y.

The billionair­e brothers have lost previous appeals of their case. The Alberta Court of Appeal ruled against Wilks on Dec. 1, 2020 and in favour of Calfrac in part because “the chamber's judge found the intentions and motivation­s of Wilks Bros demonstrat­ed it was acting not as a genuine creditor but rather as a competitor of Calfrac, and its ultimate aim was to see Calfrac forced into a Chapter 11 proceeding in the United States so as to enable Wilks Bros to purchase Calfrac's assets in a distressed situation.”

Wilks, which owns and operates competitor ProFrac in Texas, offered to buy Calfac's U.S. business unit twice last summer after the company deferred a debt payment before offering a series of increasing­ly attractive restructur­ing proposals for the company.

 ?? TOM BATEMAN / POSTMEDIA NEWS FILES ?? Wilks, which owns rival ProFrac in Texas, offered to buy Calfac's U.S. unit twice last year.
TOM BATEMAN / POSTMEDIA NEWS FILES Wilks, which owns rival ProFrac in Texas, offered to buy Calfac's U.S. unit twice last year.

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