



COURT OF APPEAL FOR ONTARIO

CITATION:
Crystallex
    (Re), 2012 ONCA 404

DATE: 20120613

DOCKET: C55434 & C55435

OConnor A.C.J.O., Blair and Hoy JJ.A.

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

And in the Matter of a Plan of
    Compromise or Arrangement of Crystallex International Corporation

Richard B. Swan, S. Richard Orzy, Derek J. Bell and Emrys
    Davis, for the appellant Computershare Trust Company of Canada

Andrew J.F. Kent, Markus Koehnen and Jeffrey Levine, for
    the respondent Crystallex International Corporation

Barbara L. Grossman, for Tenor Capital Management
    Company, L.P. and Affiliates

Robert Frank, for Forbes & Manhattan Inc. and
    Aberdeen International Inc.

David Byers, for the Monitor Ernst & Young Inc.

Heard: May 11, 2012

On appeal from the order of Justice Frank J.C. Newbould
    of the Superior Court of Justice dated January 20, 2012, with reasons reported
    at 2012 ONSC 538, and from the orders of Justice Frank J.C. Newbould of the
    Superior Court of Justice dated April 16, 2012, with reasons reported at 2012
    ONSC 2125.

Hoy J.A.:

I.

OVERVIEW

[1]

The primary issue in these appeals is the scope of financing the
    supervising judge can or should approve, without the sanction of creditors,
    while a company is under the protection of the
Companies Creditors
    Arrangement Act
, R.S.C. 1985, c. C-36, as amended (the CCAA).

[2]

The respondent Crystallex International Corporation (Crystallex) is a
    Canadian mining company. Its principal asset was the right to develop Las
    Cristinas in Venezuela, which is one of the largest undeveloped gold deposits
    in the world. Crystallex obtained this right through a contract with the
    Corporacion Venezolana de Guayana (the CVG), a state-owned Venezuelan
    corporation. On February 3, 2011, after Crystallex spent over $500 million on
    developing Las Cristinas, the CVG sent Crystallex a letter to unilaterally
    rescind the contract for reasons of expediency and convenience. There is no
    suggestion in these proceedings that the rescission was due to any
    mismanagement by Crystallex.

[3]

As a result of the cancellation of the contract, Crystallex was unable
    to pay its $100 million in senior 9.375 per cent notes due December 23, 2011
    (the Notes). It sought and, on December 23, 2011 obtained, protection under
    the CCAA.

[4]

At present, Crystallexs only asset of significance is an arbitration
    claim for US $3.4 billion against the government of Venezuela in relation to
    the cancellation of the contract. The arbitration claim is the pot of gold in
    the CCAA proceeding.

[5]

The appellant Computershare Trust Company of Canada,
in its capacity as
Trustee for the holders of
    the Notes (the Noteholders), appeals, with leave, three orders made by the
    supervising judge in the CCAA proceeding: (i) the January 20, 2012 CCAA Bridge
    Financing Order (with reasons released January 25, 2012 and reported at 2012
    ONSC 538 (the Bridge Financing Reasons)) authorizing Crystallex to obtain
    bridge financing of $3.125 million (the Bridge Loan) from the respondent Tenor
    Special Situations Fund, L.P. (Tenor L.P.); (ii) the April 16, 2012 CCAA
    Financing Order authorizing Crystallex to obtain $36 million of what the
    supervising judge characterized as Debtor in Possession (DIP) financing from
    Tenor Special Situation Fund I, LLC (Tenor) (the Tenor DIP Loan); and (iii)
    the April 16, 2012 Management Incentive Plan Approval Order approving a
    Management Incentive Plan (MIP) designed to ensure the retention of key
    executives until the arbitration is completed. The supervising judges reasons
    for the CCAA Financing Order and Management Incentive Plan Approval Order are
    reported at 2012 ONSC 2125 (the DIP Financing Reasons).

[6]

Among other conditions, the Tenor DIP Loan, due December 31, 2016,
    entitles Tenor to 35 per cent of the net proceeds of the arbitration in
    addition to interest, provides governance rights that may continue after
    Crystallex exits from CCAA protection, and requires Tenors approval to a range
    of options that might customarily be offered to unsecured creditors in seeking to
    negotiate a plan of compromise or arrangement.

[7]

Substantially all of the creditors opposed the approval of the Bridge
    Loan, the Tenor DIP Loan and the MIP. Crystallex represents that it hopes to
    negotiate a plan of arrangement or compromise with the Noteholders and other
    creditors before the current stay until July 30, 2012 expires.

[8]

The bulk of the $36 million Tenor DIP Loan comprises financing to pursue
    the arbitration claim, which may continue after the period of CCAA protection.

II.


THE LEGISLATIVE FRAMEWORK

[9]

The CCAA was amended effective September 18, 2009 to add the following
    provisions regarding the grant of a charge to secure financing required by the
    debtor:

Interim financing

11.2 (1) On application by a debtor company and on
    notice to the secured creditors who are likely to be affected by the security
    or charge, a court may make an order declaring that all or part of the
    companys property is subject to a security or charge  in an amount that the
    court considers appropriate  in favour of a person specified in the order who
    agrees to lend to the company an amount approved by the court as being required
    by the company, having regard to its cash-flow statement. The security or
    charge may not secure an obligation that exists before the order is made.

...

Factors to be considered

(4) In deciding whether to make an order, the court
    is to consider, among other things,

(a) the period during which the company is
    expected to be subject to proceedings under this Act;

(b) how the companys business and financial
    affairs are to be managed during the proceedings;

(c) whether the companys management has the
    confidence of its major creditors;

(d) whether the loan would enhance the prospects
    of a viable compromise or arrangement being made in respect of the company;

(e) the nature and value of the companys
    property;

(f) whether any creditor would be materially
    prejudiced as a result of the security or charge; and

(g) the monitors report referred to in paragraph
    23(1)(b), if any.
[1]


Prior to the enactment of these provisions, the court
    relied on its general authority under the CCAA to approve DIP financing: see
    Lloyd W. Houlden, Geoffey B. Morawetz & Janis P. Sarra,
The 2012
    Annotated Bankruptcy and Insolvency Act
(Toronto: Carswell, 2011), at p. 1175.

III.


THE BACKGROUND

A.

Events Prior to the CCAA Filings

[10]

Crystallex
    has filed a Request for Arbitration pursuant to the Canada-Venezuela Bilateral
    Investment Treaty, claiming $3.4 billion plus interest for the loss of its
    investment in Las Cristinas. The hearing of the arbitration is scheduled for
    November 11, 2013.

[11]

Crystallexs
    most significant liability is its debt to the Noteholders. In addition to
    amounts owed to the Noteholders, Crystallex has other liabilities of
    approximately CAD $1.2 million and approximately US $8 million.

[12]

The
    current Noteholders are hedge funds, some of whom purchased Notes after
    Venezuela announced its intention to expropriate Las Cristinas at prices as low
    as 25 cents on the dollar.

[13]

The
    relationship between Crystallex and the current Noteholders is hostile. Crystallex
    and the Noteholders have been in litigation since 2008. Prior to the maturity
    date of the Notes, the Noteholders twice, unsuccessfully, brought court
    proceedings against Crystallex alleging that an event had occurred which
    accelerated Crystallexs obligation to pay the Notes. Those proceedings were
    also heard by the supervising judge: see
Computershare Trust Co. of Canada
    v. Crystallex International Corp.
(2009), 65 B.L.R. (4th) 281 (S.C.),
    affd 2010 ONCA 364, 263 O.A.C. 137; and
Computershare v. Crystallex
, 2011
    ONSC 5748.

B.

Commencement of Proceedings under the CCAA and
Chapter
    15

[14]

On
    December 22, 2011, one day prior to the maturity of the Notes, Crystallex and
    the Noteholders filed competing CCAA applications. The Noteholders application
    contemplated that all existing common shares would be cancelled, an equity
    offering would be undertaken, and if, or to the extent, the equity proceeds
    were insufficient to pay out the Noteholders, the Notes would be converted to
    equity.

[15]

Crystallex
    sought authority to file a plan of compromise and arrangement, the authority to
    continue to pursue the arbitration in Venezuela, and the authority to pursue
    all avenues of interim financing or a refinancing of its business and to
    conduct an auction to raise financing. In his supporting affidavit sworn
    December 22, 2011, Robert Fung, Crystallexs Chairman and Chief Executive
    Officer, indicated that Crystallex wished to have all claims stayed against it
    until the arbitration settled or Crystallex realized the arbitration award. Crystallex
    had already received an unsolicited offer of financing from Tenor Capital
    Management.

[16]

It
    was (and is) expected that, if the arbitration is successful and the award is
    collected, there will be more than enough to pay the creditors and a
    significant amount will be available to shareholders.

[17]

On
    December 23, 2011, the supervising judge made an order granting Crystallexs CCAA
    application (the Initial Order). In his reasons released December 28, 2011,
    he explained that the Noteholders proposal was not a fair balancing of the
    interests of all stakeholders:
Re Crystallex International Corporation
,
    2011 ONSC 7701, at para. 26. The Noteholders did not appeal the Initial Order.

[18]

Crystallex
    obtained an order under chapter 15 of the United States Bankruptcy Code from
    the United States Bankruptcy Court for the District of Delaware, among other
    things giving effect to the Initial Order in the United States as the main
    proceeding.

C.

Crystallex Develops a DIP Auction Process

[19]

Paragraph
    12 of the Initial Order authorized Crystallex to pursue all avenues of interim
    financing or a refinancing of its business or property, subject to the
    requirements of the CCAA and court approval,

to permit it to proceed
    with an orderly restructuring
.
It further provided:

Without limiting the foregoing, the Applicant may conduct an
    auction to raise interim or DIP financing pursuant to procedures approved by
    the Monitor and using such professional assistance as the Applicant may
    determine with the consent of the Monitor. If such approved procedures are
    followed to the satisfaction of the Monitor then the best offer as determined
    by the Applicant pursuant to the approved procedures shall be afforded the
    protection of the
Soundair
principles so that it will be too late to
    make topping offers thereafter and such offers will not be considered by this
    Court.

[20]

Crystallex
    hired an independent financial advisory firm, Skatoff & Company, LLC, and
    developed a set of procedures to govern the solicitation of bids to provide financing
    to Crystallex. The Monitor, Ernst & Young Inc., approved the bid
    procedures. The bid procedures indicated that Crystallexs objective was to
    obtain financing of not less than $35 million, net of costs, that, on
    completion of the CCAA and U.S. Chapter 15 reorganization proceedings, would
    roll into financing maturing not sooner than December 31, 2014. The bid
    deadline was February 1, 2012.

D.

The Bridge Loan

[21]

On
    January 20, 2012, the supervising judge considered competing proposals from
    Tenor L.P. and the Noteholders to provide bridge financing. Tenor L.P. offered
    $3.125 million with interest at 10 per cent per annum. The Noteholders offered
    $3 million with interest at 1 per cent per annum.

[22]

The
    board of Crystallex, taking into account advice received from Mr. Skatoff,
    recommended the Tenor L.P. offer. Mr. Skatoff was concerned that the
    Noteholders objective may have been to defeat the larger DIP financing process
    so that they could ultimately impose financing terms on Crystallex. It was also
    his view that Crystallex should avoid entering into an important financial
    relationship with a hostile party.

[23]

The
    supervising judge approved Tenor L.P.s offer.

E.

The Noteholders Object to the DIP Auction Process

[24]

On
    January 20, 2012, the Noteholders brought a cross-motion to modify the DIP
    auction process then underway, which they severely criticized. They objected to
    the amount sought, the term, and the lender back-end entitlement a successful
    DIP lender could acquire. In their view, Crystallex was inappropriately seeking
    financing in excess of amounts required until a compromise or plan of
    arrangement could be arrived at between Crystallex and its creditors. Given
    their existing position in Crystallex, the Noteholders also objected to being
    required to sign a non-disclosure agreement containing a standstill provision
    in order to be a qualified bidder.

[25]

The
    supervising judge held that if the Noteholders wished to be considered as a qualified
    bidder, they would have to sign a non-disclosure agreement: Bridge Financing Reasons,
    at para. 27. As to their other concerns, he wrote, at para. 29:

In my view these objections are premature and it is not
    necessary for me to consider their strength at this stage. The time for filing
    bids from qualified bidders has not yet expired and what bids will be received
    is unknown. It is when a successful bidder has been chosen and the DIP facility
    is before the court for approval that these issues raised by the Noteholders
    would be more appropriately dealt with. Until then, there is no factual
    foundation for judgment to be passed on the bid procedures for the DIP facility
    for which Crystallex will seek approval.

F.

Competing DIP Financing Offers: The Tenor DIP Loan and
    the Noteholders Offer

[26]

The
    bidders who responded to the request for DIP financing included three hedge
    funds that hold approximately 77 per cent of the Notes and Tenor.

[27]

Those
    hedgefund Noteholders proposed a loan of $10 million with a simple interest
    rate of 1 per cent repayable on October 15, 2012.

[28]

The
    supervising judge described Tenors proposed terms in the DIP Financing Reasons:

[23]   The Tenor DIP
    facility contains the following material financial terms:

(a)     Tenor will advance $36 million to
    Crystallex due and payable on December 31, 2016. This period for the loan is
    based on Crystallexs arbitration counsels assessment of the likely timing of
    a decision from the arbitral tribunal and collection of the award.

(b)     The advances will be in four tranches,
    being $9 million upon execution of the loan documentation and approval of the
    facility by court order in Ontario, the second being $12 million upon any
    appeal of the Ontario court order approving the facility being dismissed and
    upon a U.S court order approving the facility, the third being $10 million when
    Crystallex has less than $2.5 million in cash and the fourth being $5 million
    when Crystallex again has less than $2.5 million in cash.

(c)     The loans are to be used to (i) repay
    an interim bridge loan of $3.25 million advanced by Tenor with court approval
    of January 20, 2012 and payable on April 16, 2012, (ii) fees and expenses in
    connection with the facility, (iii) general corporate expenses of Crystallex
    including expenses of the restructuring proceedings and of the arbitration in
    accordance with cash flow statements and budgets of Crystallex approved by
    Tenor from time to time.

(d)     Crystallex will pay Tenor a $1 million
    commitment fee.

(e)     $35 million of the loan amount will
    bear PIK interest (payment in kind, meaning it is capitalized and payable only
    upon maturity of the loan or upon receipt of the proceeds of the arbitration)
    at the rate of 10% per annum compounded semi-annually.

(f)      Tenor will receive additional
    compensation equal to 35% of the net proceeds of any arbitral award or
    settlement, conditional upon the second tranche of the loan being
    advanced.  Net proceeds of the award or settlement is defined as the
    amount remaining after payment of principal and interest on the DIP loan, taxes
    and proven and allowed unsecured claims against Crystallex, including the noteholders,
    the latter of which will have a special charge for the unsecured amounts owing.
    Alternatively, Tenor can convert the right to additional compensation to 35% of
    the common shares of Crystallex.  This conversion right is apparently
    driven by tax considerations.

[24]    The Tenor DIP
    facility also provides for the governance of Crystallex to be changed to give
    Tenor a substantial say in the governance of Crystallex. More particularly:

(a)      Crystallex shall have a reduced five
    person board of directors, being two current Crystallex directors, two nominees
    of Tenor and an independent director selected by agreement of Crystallex and
    Tenor.

(b)      The independent director shall be
    chair of the board of directors and shall not have a second-casting or tie-breaking
    vote.

(c)      The independent director shall be
    appointed a special managing director and shall have all the powers of the
    board of directors to (i) the conduct of the reorganization proceedings in
    Canada and in the U.S. and the efforts of Crystallex to reorganize the
    pre-filing claims of the unsecured creditors, (ii) any matters relating to the
    rights of Crystallex and Tenor as against the other under the facility, (iii)
    the administration of the MIP to the extent not otherwise delegated to the bonus
    pool committee under the MIP, and (iv) to retain any advisor in respect of
    these matters. The special manager shall first consult with a non-board
    advisory panel, consisting of the three Crystallex directors who will step down
    from the board, and consider in good faith their recommendations.

(d)      With respect to matters that may not
    at law be delegable to the special managing director, he will be required to
    obtain board approval. If the Tenor nominees use their votes to block that
    approval, Tenor will forfeit its 35% additional compensation.

[25]    The Tenor DIP
    facility contains proscribed rights of Tenor in the event of default. Tenor may
    seize and sell assets other than the arbitration proceeding (i.e. any cash and
    unsold mining equipment). It may not sell the arbitration claim. If there is a
    default before any arbitration award, Tenor would have the right to apply to
    court to have the Monitor or a Canadian receiver and manager appointed to take
    control of the arbitration proceedings. If such application were not granted,
    Tenor would be entitled to exercise the rights and remedies of a secured
    creditor pursuant to an order, the loan documentation or otherwise at law.

[29]

Mr.
    Skatoff recommended, and the board of Crystallex agreed, to accept the Tenor
    DIP Loan. Mr. Skatoff indicated, in an affidavit sworn March 20, 2012, that he
    had recommended that the board reject the Noteholders offer of a $10 million
    loan for 6 months because Crystallex could not be assured that it could borrow
    the balance of the required funds at the expiry of that period on the same
    terms as the Tenor DIP Loan.

G.

The Noteholders Further,
Competing
Offer to Allay Mr. Skatoffs Concerns

[30]

In
    his affidavit on behalf of the Noteholders, sworn March 27, 2012, Mr. Mattoni
    responded to Mr. Skatoffs concern by committing that the Noteholders would be
    prepared to,

provide financing to Crystallex on the same terms as the
    [Tenor DIP Loan], in the event that prior to October 1, 2012, the Court orders
    that such long-term financing is appropriate and necessary. The Noteholders
    would reserve their complete and unfettered ability as creditors to continue to
    oppose stay extensions or attempts to secure such long-term financing outside
    of a Plan of compromise (including, specifically, financing to the extent
    contemplated by the Proposed Loan), but they will provide it if it is ordered
    by the Court on the same basis as currently proposed with Tenor...

H.

The Noteholders Proposed Plan

[31]

Prior
    to the April 5, 2012 hearing, the Noteholders proposed a plan to indicate a
    good faith intention to bargain. They did not seek approval of this proposed
    plan at the April 5, 2012 hearing.

[32]

The
    plans terms included that the Noteholders would provide a $10 million loan on
    the terms described above; exchange their debt for approximately 58 per cent of
    the equity; provide $35 million to Crystallex in exchange for 22.9 per cent of
    the equity; and provide incentives to management at a lesser level than the
    MIP. Their proposed plan left approximately 14 per cent of the equity for the
    existing shareholders.

I.

The Management Incentive Plan

[33]

The
    Noteholders had criticized the independent directors of Crystallex as not being
    sufficiently independent. As a result, the independent directors of Crystallex
    comprising the compensation committee retained Jay Swartz, a partner of Davies
    Phillips Vineberg, to determine, from the perspective of an independent
    director, what an appropriate MIP would be. He in turn retained an independent
    national executive compensation consulting firm to provide expert advice. Mr.
    Swartz opined that the overall compensation proposal for the establishment of
    the bonus pool for the benefit of Crystallexs management was reasonable in the
    circumstances. The independent directors of Crystallex comprising the
    compensation committee approved the MIP.

[34]

At
    para. 102 of the DIP Financing Reasons, the supervising judge described the
    MIP:

In sum, a pool of money, consisting of up to 10% of the net
    proceeds of the arbitration up to $700 million and 2% of any further net
    proceeds, after all costs and charges, including the amounts owing to
    noteholders, is to be set aside and money in this pool may be paid to the
    beneficiaries of the MIP, depending on the determination of an independent
    committee. The amounts to be allocated to participants by the compensation
    committee are discretionary and could be nil. No one will be entitled to any
    particular amount. Members of the compensation committee will not be eligible
    for any payments.

[35]

The
    MIP sets out a number of factors to be considered by the compensation committee
    in exercising its discretion. They include the amount and speed of recovery,
    the amount of time and energy expended by the individual, and the opportunity
    cost to the individual in staying with Crystallex.

[36]

In
    the view of the Noteholders, the MIP is too generous. They proposed that
    management receive 5 per cent through an equity participation in any after tax
    award. They also took issue with the range of persons eligible under the MIP.

J.

The April 5, 2012 motion

[37]

On
    April 5, 2012, Crystallex sought orders approving, among other things, the
    Tenor DIP Loan and the MIP. The Noteholders as well as Forbes & Manhattan
    Inc. and Aberdeen International Inc., creditors owed approximately $2.5 million
    by Crystallex, opposed both the Tenor DIP Loan and the MIP. The one shareholder
    who attended opposed the MIP.

[38]

The
    supervising judge approved the Tenor DIP Loan and the MIP.
[2]
He also extended the stay until July 30, 2012.

K.

Events since April 5, 2012

[39]

Tenor
    made the first, $9 million advance under the Tenor DIP Loan. The Bridge Loan
    was repaid out of the first advance.

[40]

At
    the hearing of this appeal, the Monitor advised that Crystallex would require
    further funds before the anticipated release of this courts decision.
    Crystallex accepted Tenors offer to advance a further $4 million to
    Crystallex, on the same terms as the first, $9 million tranche of the Tenor DIP
    Loan. Accordingly, this further advance does not entitle Tenor to participate
    in any arbitration proceeds, or trigger any change in the governance of
    Crystallex. If the Noteholders appeal succeeds, the additional amounts
    advanced by Tenor are, like the first tranche, to be immediately repaid with
    interest at the rate of 1 per cent per annum, and the Noteholders shall fund
    the repayment. No commitment fee is payable in respect of this additional
    advance.

IV.


THE supervising
    JUDGES REASONS

A.

The Bridge Loan

[41]

The
    supervising judge noted, at para. 5 of the Bridge Financing Reasons, that Tenor
    L.P.s bridge financing proposal was really short-term DIP financing. With
    respect to the boards recommendation  based on Mr. Skatoffs advice  that Tenor
    L.P.s proposal be approved, he wrote, at para. 12:

This was a business judgment protected by the business judgment
    rule so long as it was a considered and informed judgment made honestly and in
    good faith with a view to the best interests of Crystallex. See
Re Stelco
    Inc
. (200[5]), 9 C.B.R. (5th) 135 (Ont. C.A.) regarding the rule and its
    application to CCAA proceedings. I see no grounds for concluding that the
    decision of Crystallex to prefer the Tenor bridge financing proposal is not
    protected by the business judgment rule or that I should not give it
    appropriate deference. [Citation corrected.]

[42]

The
    supervising judge noted, at para. 13, that the Monitor has no basis to say
    that the business judgment exercised by the Crystallex board of directors was
    unreasonable. The supervising judge accordingly approved the Bridge Loan.

[43]

Mr.
    Skatoff expressed concern that the Noteholders objective in offering bridge financing
    on such advantageous terms (interest at the rate of 1 per cent, as opposed to
    the 10 per cent in the Tenor L.P. offer) was to undermine the DIP auction
    process. The supervising judge observed, at para. 14:

Whether Mr. Skatoff is correct in his concerns, it seems to me
    that the relatively minor extra cost involving the Tenor proposed bridge
    financing for at most a few months must be weighed against the risk of harm to
    the longer-term DIP financing auction process, and that for the sake of that
    process, it is preferable not to run the risks that Mr. Skatoff is concerned
    about.

B.

The Tenor DIP Loan

[44]

The
    substance of the supervising judges reasons for approving the Tenor DIP Loan 
    as set out in the DIP Financing Reasons  may be summarized as follows.


i.

The exercise of business judgment by the board of directors of
    Crystallex in approving the Tenor DIP Loan is a factor that can be taken into
    account by the court in considering whether to make an order under s. 11.2(1)
    of the CCAA (at para. 35).


ii.

The Tenor DIP Loan did not amount to a plan of arrangement or
    compromise. Notably, it did not take away the rights of the Noteholders as
    unsecured creditors to apply for a bankruptcy order or to vote on a plan of
    compromise or arrangement. A vote of the creditors was therefore not required (at
    para. 50). In coming to this conclusion, the supervising judge relied on
Re
    Calpine Canada Energy Limited
,

2007 ABQB 504, 415 A.R. 196, leave
    to appeal refused, 2007 ABCA 266, 417 A.R. 25.


iii.

Crystallex intended to negotiate a plan of compromise or arrangement
    with the Noteholders during the stay extension until July 30, 2012 (paras. 48,
    126). The Tenor DIP Loan is therefore distinguishable from the financing
    rejected by the court in
Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital
    Corp.
, 2008 BCCA 327, 296 D.L.R. (4th) 577, because in that case the
    debtor did not have an intention to propose an arrangement or compromise to its
    creditors.


iv.

Because the Tenor DIP Loan involves the grant of a financial interest in
    part of the assets of Crystallex, it is appropriate to consider the
Soundair
factors in deciding whether to approve it (at para. 59). Crystallex conducted a
    robust competitive bidding process (at para. 39).


v.

Mr. Skatoffs evidence was that the Noteholders proposed six month
    facility would seriously erode the chances of Crystallex obtaining third party
    financing in October (at para. 90). Counsel for Computershare had said during
    argument on the motion that the Noteholders were not prepared to agree to such
    a $35 million facility at this time but only at some future time as the $10
    million facility they now proposed became due (at para. 27). While it would
    have been preferable if the Noteholders had been willing to lend on the basis
    of the terms of the Tenor DIP facility, it was made clear during argument that
    the noteholders were not prepared at this time to do so (at para. 91).


vi.

As to the enumerated factors in s. 11.2(4):

(a)     Given that Crystallex intends, if
    possible, to negotiate an acceptable plan of arrangement or compromise, the
    length of time during which Crystallex is expected to be subject to the CCAA
    proceedings is not a determinative factor. The financing will be required to
    pursue the arbitration (at para. 62) and, as the supervising judge noted, the
    only way any of the creditors will receive any substantial cash payment is from
    the proceeds of the arbitration (at para. 47);

(b)  The management of the business and
    affairs of Crystallex are a reasonable compromise between Crystallex and Tenor
    designed to protect the interests of the stakeholders, including the
    noteholders (at para. 73). The fact that Tenor is given substantial governance
    rights does not in itself mean that the DIP Tenor Loan should not be approved.
    Tenor does not have the right to conduct the reorganization proceedings or the
    arbitration proceeding. Moreover, under s. 11.5(1) of the CCAA, the court may
    remove a director whom it is satisfied is unreasonably impairing or is likely
    to unreasonably impair the possibility of a viable compromise or arrangement
    being made. Arguably, a court could remove a Tenor nominee under this section
    without triggering an event of default under the Tenor DIP Loan (at paras.
    63-71);

(c)     While the Noteholders expressed
    extreme displeasure at Crystallexs managements delay in commencing
    arbitration proceedings, they do not oppose management having a continuing role
    in the arbitration (at para. 72);

(d)     The Noteholders argument that the
    terms of the Tenor DIP Loan  in particular, the fact that the refusal of the
    court to grant a stay or a bankruptcy are events of default, the grant of a 35
    per cent interest in the arbitration proceeds, and the limits on the type of
    restructuring that can be concluded without the approval of Tenor  will
    effectively prevent any plan of arrangement was rejected (at paras. 74-82). While,
    as the Monitor points out, the introduction of a third party, Tenor, with
    consent rights to certain actions will add complexity to the negotiation of a
    CCAA plan (at para. 93), the Tenor DIP Loan would enhance the prospects of a
    viable compromise or arrangement (at para. 83):

... Crystallex requires additional financing to pay its
    expenses and continue the arbitration. A DIP loan allows the company to have
    the arbitration financed, which if it were not at this stage would impair the
    arbitration and perhaps the attitude of  Venezuela towards the arbitration
    claim, and as such enhances the viability of a CCAA plan. I have not accepted
    the argument of the noteholders that the loan would prevent a plan of
    arrangement.

(e)     The supervising judge noted that
    Crystallexs principal asset is its US $3.4 billion arbitration claim against
    Venezuela (at para. 12); and

(f)  In considering the Noteholders
    complaints of prejudice in the context of what the market is demanding for a
    DIP loan and in all the circumstances, the creditors have not been materially
    prejudiced by the Tenor DIP Loan (at para. 84).

C.

The Management Incentive Plan

[45]

The
    supervising judge considered the Noteholders objections to the quantum and
    method for providing an incentive to management, the inclusion of certain
    persons in the MIP, and the approval of the MIP before the negotiation of a
    plan.

[46]

In
    the DIP Financing Reasons, the supervising judge observed, at para. 109, that
    whether employee retention provisions should be ordered in a CCAA proceeding
    was a matter of discretion. He noted that the provisions of the MIP had been
    approved by an independent committee of the board of directors with impressive
    qualifications, relying on the opinion of Mr. Swartz. In providing that
    opinion, Mr. Swartz indicated that the absolute amount of the bonus pool could
    be very substantial and, in allocating it, the compensation committee may have
    to carefully consider the absolute amounts to be paid to each member of the
    Management Group in order to satisfy its fiduciary duties: see DIP Financing
    Reasons, at para. 108. The supervising judge also noted that Mr. Swartz had
    retained an independent national executive compensation consulting firm to
    provide expert advice.

[47]

Citing
Grant Forest Products Inc. (Re)
(2009), 57 C.B.R. (5th) 128 (Ont.
    S.C.) and
Timminco Ltd. (Re)
, 2012 ONSC 948, the supervising judge wrote,
    at para. 112 of the DIP Financing Reasons, I see no reason why the business
    judgment rule is not applicable, particularly when the provisions of the MIP
    have been approved by an independent committee of the board. He further noted,
    at para. 115, what appears to be the practice of approving employee retention
    plans before any plan has been negotiated and, at para.105, that the Tenor DIP
    Loan was conditional on the approval of a MIP acceptable to Crystallex and
    Tenor.

[48]

As
    to who should be eligible to participate in the MIP, at para. 117, the
    supervising judge noted that the independent committee had exercised its
    business judgment on the matter and that the participants were known to Mr.
    Swartz . Having reviewed the evidence, the supervising judge could not say
    that any of the persons included in the MIP should not be there.

V.
THE partieS
    SUBMISSIONS

A.

The Noteholders Submissions

[49]

The
    Noteholders frame their opposition to the Tenor DIP Loan on a number of bases.

[50]

They
    argue that s. 11.2, titled Interim financing, only permits a supervising
    judge to approve financing to meet the debtors needs while it is developing a
    plan to present to its creditors.

[51]

The
    Noteholders also argue that the supervising judges finding that the Tenor DIP
    Loan would enhance the prospects of a viable compromise or arrangement was
    unreasonable because it resulted from an error of principle, namely an improper
    focus on the fact that it provided financing for the arbitration.

[52]

The
    Noteholders submit that the supervising judge misapprehended the evidence in
    finding that the Noteholders were not willing to match the Tenor DIP Loan, and
    this error affected the outcome of the motion.

[53]

They
    argue that the supervising judge erred in deferring to the business judgment of
    the directors of Crystallex in approving both the Bridge Loan and the Tenor DIP
    Loan. They argue that directors always make a recommendation and, if Parliament
    had thought this was a relevant factor, it would have specifically enumerated
    it in s. 11.2(4) of the CCAA.

[54]

They
    argue that the supervising judge erred in principle in focusing on what was the
    most expedient way to fund the arbitration (as opposed to Crystallexs needs
    while negotiating a plan with the Noteholders) and, in doing so, committed the
    same error as the motion judge in
Cliffs Over Maple Bay
.

[55]

The
    Noteholders position is that the Tenor DIP Loan is effectively an arrangement,
    in the guise of a financing, and Crystallex is misusing the CCAA to impose a
    restructuring without the requisite creditor approval.

[56]

The
    Noteholders submit that this court should order Crystallex to accept the
    Noteholders matching DIP loan offer.

[57]

They
    also renew their objections to the MIP.

B.

Crystallexs Submissions

[58]

Crystallex
    argues that the Noteholders appeal with respect to the Bridge Loan is moot
    because the loan has been advanced, spent and repaid.

[59]

As
    to the Tenor DIP Loan, it argues that approving it was within the discretion of
    the supervising judge, the supervising judge exercised his discretion on a wide
    variety of findings of fact, capable of evidentiary support in the record, and
    there is no basis for this court to intervene. It relies on
Century
    Services Inc. v. Canada (Attorney General)
, 2010 SCC 60, [2010] 3 S.C.R.
    379, which recently addressed the broad discretionary jurisdiction of a
    supervising judge under the CCAA. Crystallex also points to
Air Canada (Re)
(2004), 47 C.B.R. (4th) 169 (Ont. S.C.), as an instance where exit financing
    was approved before a plan had been approved by creditors.

C.


Tenors Submissions

[60]

Tenor
    argues that interim financing in the heading to s. 11.2 of the CCAA does not
    mean short term, but rather refers to the interval between two points or
    events, and s. 11.2 does not contain anything that would fetter the discretion
    of the supervising judge to select an end point beyond the expected
    conclusion of a plan. It argues that the duration of the Tenor DIP Loan is
    tailored to Crystallexs unique circumstance: all stakeholders acknowledge that
    the arbitration must be pursued in order for there to be meaningful recovery. In
    any event, it argues, marginal notes, such as the heading interim financing
    in s. 11.2, are not part of the statute, and their value is limited when a
    court must address a serious problem of statutory interpretation, citing the
Interpretation
    Act
, R.S.C. 1985, c. I-21, s. 14, and
Imperial Oil Ltd. v. Canada;
    Inco Ltd. v. Canada
, 2006 SCC 46, [2006] 2 S.C.R. 447, at para. 57.

[61]

Moreover,
    Tenor submits, the supervising judge was in the best position to perform the
    careful balancing of interests required to facilitate a successful
    restructuring.

VI.


ANALYSIS

A.

The Appeal from the Bridge Financing
Order

[62]

The
    Noteholders did not strongly pursue their appeal of the Bridge Financing Order.
    The relief sought at the conclusion of the hearing related to the Tenor DIP
    Loan and not the Bridge Loan. The Bridge Loan was disbursed, spent and repaid.
    I agree with the respondents that the Noteholders appeal with respect to the
    Bridge Loan is moot. I will therefore confine my analysis to the Tenor DIP Loan
    and the MIP.

B.

The Appeal from the
Tenor
DIP Financing
Order

(1)

Century Services
Inc.
    v. Canada (Attorney General)

[63]

The
    Supreme Court of Canada had occasion to interpret the CCAA for the first time
    in
Century Services
. It used that opportunity to make clear that the
    CCAA gives the courts broad discretionary powers. Those powers must, however,
    be exercised in furtherance of the CCAAs purposes: para. 59. Section 11, in
    particular, was drafted in broad language which provides that a supervising
    judge may, subject to the restrictions set out in this Act  make any order
    that it considers appropriate in the circumstances.
[3]
For the majority in
Century Services
, Deschamps J. wrote:

[69]    The
CCAA
also explicitly provides for certain
    orders

[70]    The general language of the
CCAA
should not be
    read as being restricted by the availability of more specific orders. However,
    the requirements of appropriateness, good faith, and due diligence are baseline
    considerations that a court should always bear in mind when exercising
CCAA
authority. Appropriateness under the
CCAA
is assessed by inquiring
    whether the order sought advances the policy objectives underlying the
CCAA
.
    The question is whether the order will usefully further efforts to achieve the
    remedial purpose of the
CCAA
 avoiding the social and economic losses
    resulting from liquidation of an insolvent company. I would add that
    appropriateness extends not only to the purpose of the order, but also to the
    means it employs. Courts should be mindful that chances for successful
    reorganizations are enhanced where participants achieve common ground and all
    stakeholders are treated as advantageously and fairly as the circumstances
    permit.

[64]

It
    is with the Supreme Courts interpretation of the scope of judicial discretion
    under the CCAA in mind that I turn to s. 11.2 and the question of whether it
    permits a supervising judge to approve financing that may continue for a
    significant period after CCAA protection ends, without the approval of
    creditors.

(2)

Section 11.2 of the CCAA

[65]

Section
    11.2 is headed Interim Financing. Headings may be used as an aid in
    interpreting the meaning of a statute:  R. Sullivan,
Sullivan on the
    Construction of Statutes
, 5th ed. (Markham: LexisNexis Canada Inc., 2008),
    at p. 394, Interim generally means temporary or provisional:
Canadian
    Oxford Dictionary
, 2d ed. The weight to be given to a heading depends on
    the circumstances.

[66]

I
    agree with the Noteholders that s. 11.2 contemplates the grant of a charge, the
    primary purpose of which is to secure financing required by the debtor while it
    is expected to be subject to proceedings under the CCAA. A further purpose,
    however, is to enhance the prospects of a plan of compromise or arrangement
    that will lead to a continuation of the company, albeit in restructured form,
    after plan approval.

[67]

Section
    11.2(4)(a) directs the court to consider the period during which the debtor is
    expected to be subject to proceedings under the CCAA. It stops short of
    confining the financing to the period that the debtor is subject to the CCAA. Section
    11.2(4)(d) directs the court to consider if the financing would enhance the
    prospects of a viable compromise or arrangement.

[68]

Having
    regard to the broad remedial purpose of the CCAA and the broad residual
    authority of a supervising judge described in
Century Services
, in my
    view section 11.2 does not restrict the ability of the supervising judge, where
    appropriate, to approve the grant of a charge securing financing before a plan
    is approved that may continue after the company emerges from CCAA protection.
    Indeed, although in very different circumstances, financing to be available on
    the debtors emergence from CCAA protection (sometimes called exit financing)
    was approved before a plan was approved in
Air Canada
.
[4]
Both
Century Services
and section 11.2, however, in my view, signal
    that it would be unusual for a court to approve exit financing where opposed by
    substantially all of the creditors. Exit or post-plan financing is often a key
    element, or a pre-requisite, of the plan voted on by creditors.

[69]

The
    question becomes whether the unique facts of this case permitted the
    supervising judge to approve interim financing that was of such duration and
    structure that it could well outlast the CCAA protection period. This court should
    not substitute its decision for that of the supervising judge. I must ask this
    question through the lens of the applicable standard of review.

(3)

Standard of review

[70]

Appellate
    review of a discretionary order under the CCAA is limited. Intervention is
    justified only for an error in principle or the unreasonable exercise of
    discretion:
Ivaco Inc. (Re)
(2006), 83 O.R. (3d) 108 (C.A.), at para.
    71. An appellate court should not interfere with an exercise of discretion
    where the question is one of the weight or degree of importance to be given to
    particular factors, rather than a failure to consider such factors or the correctness,
    in the legal sense, of the conclusion:
New Skeena Forest Products Inc., Re
,
    2005 BCCA 192, 39 B.C.L.R. (4th) 338, at para. 26.

(4)

The supervising judge did not err in principle or unreasonably exercise
    his discretion

[71]

As
    detailed below, I conclude that there is no basis for interfering with the
    supervising judges exercise of discretion in approving the Tenor DIP Loan.

[72]

Most
    significantly, in this case, the supervising judge found there could be no meaningful
    recovery, and therefore no successful restructuring, without the financing of
    the arbitration. Although the Noteholders characterized the Tenor DIP Loan as
    exit financing, it furthered the remedial purpose of the CCAA. To that
    extent, it is appropriate in the first sense used by Deschamps J. in
Century
    Services
, even though it may well outlast the period of CCAA protection. The
    supervising judges focus on the fact that the Tenor DIP Loan provided
    financing for the arbitration was not, in the circumstances, an error of
    principle.

[73]

In
    my view, the Noteholders real argument is that the
means
by which the
    Tenor DIP Loan was approved were not appropriate. Ideally, a CCAA supervising
    judge is able to assist creditors and debtors in coming to a compromise. The
    creditors and Crystallex have not achieved common ground on a very
    significant matter. Effectively, the Noteholders argue that the creditors have
    not been treated as advantageously and fairly as the circumstances permit. They
    are the senior creditors and their offer to provide DIP financing on terms they
    argue matched those of the Tenor DIP Loan was not accepted. With sufficient
    financing in place to fund the arbitration, their leverage in negotiating a
    share of the arbitration proceeds has been reduced. Moreover, the Noteholders
    argue, the supervising judge erred in applying the business judgment rule, and,
    contrary to
Cliffs Over Maple Bay
, involuntarily stayed their rights
    during what they characterize as a restructuring. I consider each of these
    arguments below.

a.

The Noteholders competing DIP loan offer

[74]

The
    Noteholders point to their affidavit on the April motion indicating they would
    submit to an order to advance funds on the same terms as the Tenor DIP Loan in
    the event that prior to October 1, 2012, the Court orders that such long-term
    financing is appropriate and necessary. The supervising judge wrote that it
    would have been a preferable outcome if the Noteholders had been prepared to
    lend at the time of the April motion on the terms of the Tenor DIP facility:
    DIP Financing Reasons, at para. 91. The Noteholders argue that: they were
    prepared to advance funds on the terms of the Tenor DIP Loan, if so ordered;
    the supervising judge misapprehended the evidence; and, given the supervising
    judges comment that it would have been preferable if the Noteholders had been
    prepared to lend, that misapprehension affected the outcome of the motion.

[75]

The
    supervising judges comment at para. 91 of the DIP Financing Reasons makes his
    real concern clear. There, he stated that at this time the Noteholders were
    not prepared to lend on the terms of the Tenor DIP Loan. The Noteholders view
    as of April 5, 2012 was that such long-term financing was
not
necessary, as the $10 million they offered to
    advance at that time met Crystallexs then cash requirements. The Noteholders
    reserved their rights to continue to oppose the approval of long term financing
    before they had come to an agreement with Crystallex about their entitlement,
    as creditors. Further hearings, and further arguments, were required. The
    supervising judge found, at para. 83 of the DIP Financing Reasons, that not
    putting sufficient financing in place to finance the arbitration at this
    stage would impair the arbitration. There was no suggestion from counsel for
    the Noteholders that on April 5, 2012 the Noteholders were prepared to waive
    the condition permitting them to continue to oppose the approval of long term
    financing. I am not satisfied that the supervising judge clearly misapprehended
    the evidence.

b.

Loss of leverage

[76]

In
    Crystallexs view, a reduction of the Noteholders leverage was desirable. It
    points to the Noteholders competing CCAA application, seeking to cancel all of
    the shareholders equity, which the supervising judge rejected as not fairly
    balancing the interests of all stakeholders. The Noteholders plan,
    subsequently proposed, would entitle them to 46 per cent of the equity in
    return for giving up their Notes, which Crystallex also views as excessive.
[5]


[77]

Crystallex
    argues that the Noteholders are not contractually entitled to convert their
    Notes to equity, and should therefore not be entitled to do so. Moreover, they
    argue, in the event of bankruptcy, the Noteholders would only be entitled to
    recover their principal and interest at the statutory rate of 5 per cent under
    the
Bankruptcy and Insolvency Act
, R.S.C. 1985, c. B-3, and, if the
    arbitration is realized, they will be entitled to the higher rate of interest
    they are contractually entitled to under the Notes. As Deschamps J. noted at
    para. 77 of
Century Services
, participants in a reorganization
    measure the impact of a reorganization against the position they would enjoy
    in liquidation.

[78]

The
    Noteholders counter that, contractually, they were entitled to be repaid on
    December 23, 2011 and, since they were not, and Crystallex proposes to defer
    repayment for several years and repay the Notes only if the arbitration is
    successful, the long delay entitles them to some equity participation. Moreover,
    contractually, Crystallex is restricted from incurring the Tenor DIP Loan,
    which will be senior to the Notes.

[79]

Crystallex
    points to the terms of the Initial Order, affording the best offer the
    protection of the
Soundair
principles, and providing that topping
    offers would not be considered by the court. Crystallex points out that the
    Noteholders did not appeal the Initial Order and argues that accepting the
    Noteholders matching offer would offend the
Soundair
principles. In
    Crystallexs view, the Noteholders were treated fairly.

[80]

In
    turn, the Noteholders argue that the Initial Order authorized Crystallex to
    conduct an auction to raise
interim or DIP financing
pursuant to
    procedures approved by the Monitor. Since the outset, the Noteholders maintained
    their objection that the auction process sought more than interim or true DIP
    financing. The supervising judge deferred consideration of their objections
    until the DIP facility was before the court for approval.

[81]

The
    Noteholders are sophisticated parties. They pursued a strategy. It ultimately
    proved less successful than hoped. It appears that the supervising judge would
    have been prepared to approve the advance of funds to Crystallex by the
    Noteholders, on the terms of the Tenor DIP Loan, notwithstanding the
Soundair
principles, had the Noteholders agreed to do so, without condition, on April 5,
    2012.

[82]

The
    facts of this case are unusual: there is a single pot of gold asset which, if
    realized, will provide significantly more than required to repay the creditors.
    The supervising judge was in the best position to balance the interests of all stakeholders.
    I am of the view that the supervising judges exercise of discretion in
    approving the Tenor DIP Loan was reasonable and appropriate, despite having the
    effect of constraining the negotiating position of the creditors.

c.

The business judgment rule

[83]

The
    supervising judge held that in addition to the factors in s. 11.2(4) of the
    CCAA, he could take into account the exercise or lack thereof of business
    judgment by the board of directors of a debtor corporation in considering DIP
    financing: DIP Financing Reasons, at paras. 32-35. He cited
Stelco Inc.
    (Re)
(2005), 75 O.R. (3d) 5 (C.A.), as authority for this proposition.
[6]


[84]

The
    fact that a debtors board of directors recommends interim financing is not a determinative
    factor, and in some cases may not be a material factor, in considering whether
    to make an order under s. 11.2. It would be unusual if the board did not
    recommend the financing for which the debtor seeks approval.

[85]

Stelco
should not be read as authority for the principle that the recommendation of
    the directors of a debtor under CCAA protection is entitled to deference in
    evaluating whether financing should be approved under s. 11.2 of the CCAA where
    the factors outlined in s. 11.2(4) have not been complied with. In
Stelco,
the debtor did not seek court approval of a recommendation of the board. In the
    case of interim financing, the court must make an independent determination, and
    arrive at an appropriate order, having regard to the factors in s. 11.2(4). It
    may consider, but not defer to, and is not fettered by, the recommendation of
    the board.

[86]

The
    weight given by the supervising judge to the business judgment of the board of
    directors of Crystallex in recommending the Tenor DIP Loan is not, however, a
    basis for this court to interfere with his decision:
New Skeena Forest
    Products
,

at

para. 26.

d.

Cliffs Over Maple Ba
y
is distinguishable

[87]

In
Cliffs Over Maple Bay
, the
    debtor was the developer of a 300 acre site intended to include residential
    units, a golf course and a hotel. The debtor obtained protection under the CCAA
    and sought approval of financing that would permit it to complete material
    parts of the development. It believed that the proceeds generated from the sale
    of units thus completed would be sufficient to fund the remaining portions of the
    development and that, if the development were completed, there would be
    sufficient sale proceeds to satisfy all of the debtors obligations.

[88]

The
    motion judge approved the financing; the mortgagees of the development
    appealed. The British Columbia Court of Appeal noted, at para. 35, that it was
    not suggested that the debtor intended to propose an arrangement or compromise
    to its creditors before embarking on its restructuring plan. The court allowed
    the appeal, writing:

[37]  DIP financing should not be authorized to permit the
    debtor company to pursue a restructuring plan that does not involve an
    arrangement or compromise with its creditors ...

[38] ... What the Debtor Company was endeavouring to accomplish
    in this case was to freeze the rights of all of its creditors while it
    undertook its restructuring plan without giving the creditors an opportunity to
    vote on the plan. The CCAA was not intended, in my view, to accommodate a
    non-consensual stay of creditors rights while a debtor company attempts to carry
    out a restructuring plan that does not involve an arrangement or compromise
    upon which the creditors may vote.

[89]

I
    agree with the supervising judge that this case can be distinguished from
Cliffs
    Over Maple Bay
, which turned on the courts finding that the debtor did
    not intend to negotiate a plan with its creditors.

[90]

While
    Mr. Fung initially indicated that Crystallexs plan was to stay creditors
    claims until the arbitration was settled or realized, his more recent evidence
    was that approval of the Tenor DIP Loan does not preclude further discussions
    about a plan with the creditors. In submissions before the supervising judge,
    and again before this court, counsel for Crystallex reiterated that Crystallex
    intended to exit from CCAA protection as soon as a plan was negotiated with the
    creditors and approved, and that Crystallex intended to negotiate a plan by the
    expiry of the stay on July 30, 2012. The supervising judge found that
    Crystallex intended to negotiate a plan with its creditors. There is some basis
    in the record for such a conclusion.

(5)

T
he Tenor
DIP
Loan
is not
an arrangement

[91]

An
    arrangement or compromise cannot be imposed on creditors unless it has been
    approved by a majority in number representing two thirds in value of the
    creditors: see s. 6(1) of the CCAA.

[92]

The
    supervising judge rejected the argument that the Tenor DIP Loan was a plan of
    arrangement or compromise and therefore required the approval of the creditors.
    He held, at para. 50 of the DIP Financing Reasons:

A "plan of arrangement" or a "compromise"
    is not defined in the CCAA. It is, however, to be an arrangement or compromise
    between a debtor and its creditors. The Tenor DIP facility is not on its face
    such an arrangement or compromise between Crystallex and its creditors.
    Importantly the rights of the noteholders are not taken away from them by the
    Tenor DIP facility. The noteholders are unsecured creditors. Their rights are
    to sue to judgment and enforce the judgment. If not paid, they have a right to
    apply for a bankruptcy order under the BIA. Under the CCAA, they have the right
    to vote on a plan of arrangement or compromise. None of these rights are taken
    away by the Tenor DIP.

[93]

I
    agree. While the approval of the Tenor DIP Loan affected the Noteholders
    leverage in negotiating a plan, and has made the negotiation of a plan more
    complex, it did not compromise the terms of their indebtedness or take away any
    of their legal rights. It is accordingly not an arrangement, and a creditor
    vote was not required. In this case it was within the discretion of the
    supervising judge to approve the Tenor DIP Loan.

C.

The Appeal from the Management Incentive Plan Approval
    Order

[94]

In
    my view, the supervising judge did not err in principle or unreasonably
    exercise his discretion in approving the MIP. I see no basis for this court to
    intervene.

[95]

As
    the supervising judge noted, employee retention provisions are frequently
    authorized before a plan is negotiated. The supervising judge was alive to the
    exceptionally large amounts that might be paid to beneficiaries of the MIP
    (including Mr. Fung) in this case. The supervising judge took specific note of
    the issues that the Noteholders had raised in the past regarding the extent to
    which the independent committee of the board that recommended the MIP was truly
    independent, and the steps taken by that committee to address those concerns.

[96]

The
    recommendation of an independent committee of the board that has obtained
    expert advice is entitled to more weight in the consideration of a MIP than is
    the recommendation of the board in the consideration of whether financing
    should be approved under s. 11.2 of the CCAA. The CCAA does not list specific
    factors to be considered by the court in the case of a MIP. Moreover, the board
    would have the best sense of which employees were essential to the success of
    its restructuring efforts.

[97]

In
    addition to considering the recommendation of the independent committee of the
    board and Mr. Swartz, the supervising judge also reviewed the evidence to
    consider whether any persons had been included in the MIP who should not have
    been. He did not rely solely on the boards recommendation.

VII.

DISPOSITION

[98]

Accordingly,
    I would dismiss the appeals of the CCAA Bridge Financing Order, the CCAA
    Financing Order, and the Management Incentive Plan Approval Order.

VIII.

COSTS

[99]

If
    the parties cannot agree, I would order that Crystallex and Tenor provide their
    submissions on the issue of costs within 14 days, and that the Noteholders, if
    so advised, provide their submissions in response within 10 days thereafter. No
    reply submissions are to be provided without leave.

Released:
June 13, 2012                             Alexandra
    Hoy J.A.

DOC                                                                 I
    agree D. OConnor A.C.J.O.

I
    agree R.A. Blair J.A.





[1]
Paragraph 23(1)(b) provides that the monitor shall review the
    companys cash-flow statement as to its reasonableness and file a report with
    the court on the monitors findings.



[2]
The MIP was approved subject to an amendment
(
agreed to by Crystallex
)
to provide that
    the value of any stock options ultimately realized by participants of the MIP
would
be deducted from the amount of any bonus awarded under the
    MIP on a tax neutral basis.



[3]

The full text of section 11 is as follows:

11.
    Despite anything in the
Bankruptcy and Insolvency Act or the Winding-up and
    Restructuring Act,
if an application is made under this Act in respect of
    a debtor company, the court, on the application of any person interested in the
    matter, may, subject to the restrictions set out in this Act, on notice to any
    other person or without notice as it may see fit, make any order that it
    considers appropriate in the circumstances.



[4]
In
Air Canada
,
Farley J. approved a global
    restructuring agreement which included a commitment of an existing creditor to
    provide exit financing of approximately US $585 million on the companys
    emergence from CCAA. DIP financing was in place; the financing at issue was
    clearly recognized as exit financing. The restructuring agreement was not
    opposed by substantially all of the creditors. Nor was it argued that it
    adversely affected the ability of the creditors and the debtor to negotiate a
    compromise or arrangement.



[5]
The Noteholders proposed that they receive 22.9 per cent of the
    equity for the $36 million needed for the arbitration and 58 per cent of the
    equity in return for giving up their Notes, for a total of approximately 81 per
    cent of the equity. Assuming that the Noteholders sought a maximum total
    entitlement of 81 per cent, if they advanced the $36 million on the terms of
    the Tenor DIP Loan, as they now seek to do, the amount of equity on conversion
    of their notes would be 46 per cent. See the DIP Financing Reasons, at para.
    77.



[6]
An incorrect citation for
Stelco
was given in the DIP
    Financing Reasons, at para. 33.


