Will investors in the Bridging Finance Inc. funds be treated equally, or will some be more equal than others? That question likely won’t be answered until early in the new year.

Following a two-day hearing on a motion to determine whether certain investors deserve priority in the liquidation of the failed alternative fund manager, Chief Justice Morawetz of the Ontario Superior Court of Justice indicated it’ll likely be early January before he’s in a position to hand down a decision.

At issue is whether certain investors can claim priority as the Bridging funds’ assets are liquidated and distributed to investors — a process that is expected to leave investors with significant losses.

When Bridging was placed into receivership, its funds claimed to have combined assets of about $2.1 billion, yet the firm’s receiver (PricewaterhouseCoopers LLP) expects to recover only between $700 million and roughly $900 million of that total (between 34% and 41% of the firm’s assets under management) for investors.

Before the process of returning money to investors can begin, however, the court must decide whether certain investors are entitled to be paid before others.

Lawyers for two different groups of investors are arguing that their clients should go to the front of the line: investors who bought Bridging funds, shortly before the receivership, under offering memorandums that contained misrepresentations; and investors who sought to redeem their funds before the firm was placed into receivership but didn’t get those redemptions processed in time.

Among other things, lawyers for the former group argue that investors who invoke their statutory right of rescission (based on alleged misrepresentations in the funds’ offering memoranda) cease to become unitholders, and that their claims against the funds under the statutory investor protection provisions should be paid first.

“In a receivership under the Securities Act, this court should recognize and give effect to the statutory rights of unitholders under securities legislation,” they argued in court filings.

Lawyers for the investors who tried but failed to get their money out before the firm was placed into receivership argue that these redemption demands represent a contractual liability from the funds to the investors that must be paid before money is returned to other unitholders.

“It would be inherently unfair to disregard the liabilities owing to those unitholders whose contractual rights were exercised not fortuitously, nor by luck, but were the consequence of their own considered business decisions, and then treat them the same as those unitholders who had
not exercised such rights, had chosen to maintain their investment with Bridging, and had no vested future benefit or certainty of a future claim,” they said in court filings.

The firm’s receiver, and lawyers appointed to represent investors’ interests early on in the proceedings, argue that all of the funds’ investors should be treated equally when it comes to returning money, given that the funds are insolvent. They argue that the basic principle of treating investors equally in an insolvency must prevail.

How the court rules on these issues will have a significant impact on how much money investors recover of the failed firm’s funds.

In any scenario, investors are facing heavy losses from the collapse of Bridging. But if certain investor claims are granted priority and upheld, the pot of money left for the remaining investors would be even smaller. According to a court filing by PwC, in that scenario, those investors would share between 17% and 26% of the funds’ remaining assets.