



COURT OF APPEAL
        FOR BRITISH COLUMBIA




Citation:



New
                Skeena Forest Products Inc. (Re),









2005 BCCA
            2




Date: 20050105




Docket: CA032484



In the Matter of the
Companies' Creditors Arrangement
        Act
, R.S.C. 1985, c. C-36

and

In the Matter of the
Canada Business Corporations
        Act
,
R.S.C. 1985, c. C-44, as amended

and

In the Matter of the
Company Act
,
R.S.B.C. 1996, c. 62, as amended

and

In the Matter of New Skeena Forest Products Inc.,
Orenda Forest Products Ltd., Orenda Logging Ltd. and
9753 Acquisition Corp.

Respondents

(
Petitioners
)

And

Kitwanga
      Lumber Co. Ltd.

Respondent

(
Respondent
)











Before:



The Honourable
            Mr. Justice Low





(In Chambers)









R.J.M. Janes



Counsel for the Appellant
City of Prince Rupert





P.J. Reardon



Counsel for the Respondent
646325 B.C. Ltd.





D.J. Hatter



Counsel for the Respondent
H.M.T.Q. for B.C.





D. Knowles,
            Q.C.



Counsel for the Respondent
9753 Acquisition Corp.





R. Leong



Counsel for the Respondent
Attorney General of Canada





G.H. Dabbs



Counsel for the Respondent
City of Terrace





R.A. Millar



Counsel for the Respondent
Court Appointed Receiver
Ernst & Young Inc.





Place and
            Date of Hearing:



Vancouver, British Columbia





17 December 2004





Place and
            Date of Judgment:



Vancouver, British Columbia





5 January 2005







Reasons for Judgment of the Honourable Mr. Justice Low:

[1]

As
      a secured creditor of New Skeena Forest Products Ltd., the City of Prince
      Rupert seeks leave to appeal a provision included in an order made by Chief
      Justice Brenner on 1 December 2004 as part of continuing proceedings under
      the
Companies' Creditors Arrangement Act
, R.S.C. 1985, c.
      C-36 (the "
Act
").  Prince Rupert contends that
      the effect of the challenged provision is that Prince Rupert runs a considerable
      risk of having to pay significantly more than its equitable share of Debtor
      in Possession ("DIP") financing and administrative costs (collectively,
      the "CCAA Costs") under what is now known to be a failed attempt
      at corporate reorganization of the Skeena pulp mill in Prince Rupert and
      its sawmill in Terrace begun under the
Act
by an order made
      on  19 November 2003 (the "Initial Order").  As a result of this
      failure, the company is now in a full-blown process of bankruptcy liquidation
      of its assets, a process that requires the ongoing supervision of the court
      of which the order of 1 December 2004 is just one part.

[2]

The
      Province of British Columbia supports Prince Rupert's leave application.  The
      Receiver, Ernst and Young Inc., and several interested parties oppose the
      application.

[3]

The
      cases set out the matters to be considered on an application for leave
      to appeal an interlocutory order.  They are:

(1)   whether the point on appeal is of significance to the practice;

(2)   whether the point raised is of significance to the action itself;

(3)   whether the appeal is
prima facie
meritorious or, on the
      other hand, whether it is frivolous; and

(4)   whether the appeal will unduly hinder the progress of the action.

See
Power Consolidated (China) Pulp Inc. v. B.C.
          Resources Investment Corp.
(1988), 19 C.P.C. (3d) 396 (C.A.);
Chavez
          v. Sundance Cruises Corp.
(1993), 77 B.C.L.R. (2d) 328 (C.A.);
          and
Goldman, Sachs & Co. v. Sessions
, 2000 BCCA 326.

[4]

It
      is important to note that the challenged provision is discretionary and
      that the applicant has a high hurdle to scale.  This was clearly stated
      by Saunders J.A. in
Yang v. Yang
, 2000 BCCA 486 in the following
      terms:

[3] Where, as here, the matter appealed is a matter of the exercise of
      judicial discretion the burden on the applicant is substantial. The reason
      is simple, this Court does not lightly interfere with the exercise of discretion
      of a chambers judge and will only do so when satisfied that the discretion
      was not exercised judicially or was exercised on a wrong principle.

[5]

The
      Initial Order contains a provision giving priority to DIP financing over
      the security of all other creditors.  The Receiver later filed a report
      with the court proposing, among many other things, court approval of certain
      allocations of the CCAA Costs among the creditors.  The chambers judge
      adopted the report in the order of 1 December 2004.

[6]

The
      challenged provision in the order reads as follows:

THIS COURT ORDERS AND DECLARES THAT:



6.    the Receiver's proposal:

(a)   to allocate
      the CCAA Costs (as defined in the Report) on a preliminary basis against
      only those assets consisting of equipment and real property which are identified
      in the illustrative chart attached to Appendix F to the Report (the "Assets")
      pro rata based upon the appraised or assessed value of the Assets at January,
      2004, provided that such preliminary allocation will be subsequently adjusted
      based upon:

(i)   the actual
      sale proceeds realized on the future disposition of the remaining assets
      of the Petitioners which do not have values attributed to them in Appendix
      F as aforesaid; or

(ii)  such other
      value as may be subsequently attributed to such remaining assets by the
      Court...

is hereby approved...

[7]

Prince
      Rupert contends that the asset over which it holds statutory security for
      unpaid property taxes of more than $25M (the pulp mill) has been given
      an unrealistic appraised value of $3.92M in Appendix F to the Receiver's
      Report referenced in the order.  Since the appraisal was done, it has come
      to light that the property requires environmental cleanup that Prince Rupert
      says will cost about $103M.  On the other hand, the Receiver points out
      that the Province has already expended substantial sums on the cleanup
      and the final cost has not yet been determined.

[8]

Prince
      Rupert does not argue that it ought not to pay any of the CCAA Costs as
      it stood to benefit from the incurrence of those costs if the reorganization
      attempt had been successful.  But it says that assessment of its share
      of those costs based upon a value ascribed to real property that has no
      value at all is unfair.  It says that this arises because the proceeds
      received from the auction of unappraised assets (such as tree farm licences)
      will determine the pro rata share of the CCAA Costs for some creditors
      while Prince Rupert's share will be determined by an invalid appraisal.  It
      says that the effect of the order might be that secured creditors other
      than Prince Rupert will walk away with money while it will have to write
      a cheque.  Prince Rupert claims that it might have to pay $1M to $1.3M
      of the CCAA Costs now totalling about $4.7M.

[9]

The
      legal issue Prince Rupert wishes to argue on appeal is whether the court
      has jurisdiction under the
Act
to order a secured creditor
      to pay CCAA Costs in excess of the actual value of the creditor's interest
      in the estate of the debtor.  It says that there is no appellate guidance
      as to how CCAA Costs, especially DIP financing, should be allocated.  The
      precedence of the challenged provision is said to be that it would have
      a profound effect on creditors and it is arguable that the approach of
      the court should be more cautious than the approach taken by the chambers
      judge.  Prince Rupert says that therefore the point it wishes to argue
      on appeal is of importance both to the insolvency bar and in these proceedings.

[10]

Prince
      Rupert also contends that the appeal will not delay the ongoing proceedings
      in the trial court.  It says the focus now is on liquidation and there
      is no reason that process cannot continue apace pending determination of
      the appeal, especially if the appeal is expedited.

[11]

The
      Receiver emphasizes both the discretionary nature of the challenged provision
      and the fact that it is forward-looking.  The Receiver also says that Prince
      Rupert overstates the impact on it of the challenged provision and that
      what Prince Rupert fears will not come about without further order.  In
      its written submission, the Receiver says this: "The allocation proposal
      itself is interim in nature and is susceptible to re-allocation or alteration
      depending on how the assets are in fact liquidated.  As such the proposed
      appeal is anticipatory of a set of facts that are not certain to take place."

[12]

The
      recommendations in the Receiver's Report relied upon by the chambers judge
      were carefully considered.  It was imperative that the Receiver recommend
      a plan for liquidation and the sharing of costs.  Much had to be considered
      by the Receiver and by the Chief Justice.  Prince Rupert has not identified
      any basis for this court to conclude that the chambers judge did not exercise
      his discretion judicially or that he acted upon a wrong principle.  The
      challenged provision is but one aspect of lengthy and complex proceedings
      presided over by the Chief Justice who is most familiar with all aspects
      of the case and is in the best position to balance competing interests.

[13]

In
      addition, I am persuaded that the challenged provision is forward-looking
      and that adjustment based upon future events is contemplated.  Borrowing
      from the wording of the Receiver's report, the provision states that the
      CCAA Costs are allocated "on a preliminary basis" and later adjustment
      is anticipated.  Whether the result predicted by Prince Rupert will come
      about and whether such a result would be unfair to it will clearly depend
      upon future events and future orders of the court.  It is not necessary
      to appeal the present order to address the concerns advanced.

[14]

In
      my opinion, granting of leave would risk interference with the orderly
      liquidation of assets to the detriment of the creditors generally and would
      not settle a point of interest to the practice or be of significance in
      the proceedings.

[15]

Leave
      to appeal is denied.

The Honourable Mr. Justice Low


