Judge looks at papers

The Court of Appeal for Ontario overturned a lower court ruling that granted certain investors in the funds of failed manager Bridging Finance Inc. the first crack at getting their money back.

In April, Chief Justice Geoffrey Morawetz of the Superior Court of Justice ruled that investors with “rescission” claims — investors who bought Bridging funds based on disclosure that allegedly contained misrepresentations — had a priority claim on the funds’ assets.

That ruling found that provisions of securities law that give investors a right to unwind their purchases within 180 days when an offering document contains a misrepresentation took priority over the principle that creditors should generally be treated equally in an insolvency.

Now, that decision has been reversed on appeal.

In a unanimous decision, the appeal court found there is nothing in securities legislation that indicates it should take priority over the insolvency law. 

“When legislatures grant priorities, they do so in clear and unambiguous terms,” it said, finding that there’s no explicit priority in securities law. 

“The whole point of creating statutory priorities is to alert the world regarding the distribution scheme for a given fund. The idea is to create certainty so that claimants understand where they stand relative to other claimants. A clear priority scheme also makes it easier for courts to adjudicate competing claims,” the appeal court said.

“The important public policy objectives of certainty, transparency, and efficiency underlying statutory priorities would be eroded if courts presume an intention of a legislature to create a priority,” it added.

At the same time, the court upheld the lower court’s ruling that another group of investors who also sought priority in the insolvency proceeding — investors who tried to redeem their funds before they were cease-traded but didn’t get their redemptions processed in time — are not entitled to any priority either. 

“The motion judge correctly determined that these claims had not crystallized as at the time of the [receivership] order and that they were still subject to Bridging’s discretion to refuse to honour or postpone the redemption requests,” the appeal court said.

The appeal court found that all investors should be treated equally in the insolvency procedure.

“There is no basis to find a priority for either the redemption claims or the statutory rescission claims,” it said. “This is consistent with the constating documents of the Bridging funds, which provided that holders of units had the same rights and obligations as all other holders of the same class or series of units.”

Bridging investors are expected to recover between $700 million and $900 million, or 34% to 41%, of the $2.1 billion that was supposed to be in the funds when they were cease-traded and the fund manager was put into receivership.

Had the rescission claimants been given priority, as the lower court initially decided, this could have reduced that total by about $200 million.

Investors with unprocessed redemptions represented another $218 million in potential priority claims.