CRA implicitly finds that creditors’ approval of a CCAA plan of compromise for a trust which was economically captive to them did not cause them to act in concert

CDS trusts entered into credit default swaps with counterparties desiring credit protection for their bond portfolios and funded their purchase of the required collateral for their CDS obligations by issuing short-term notes. Most or all of these trusts defaulted on their notes in the 2008 financial crisis.

One such trust settled litigation with its non-resident CDS counterparty (the "Bank") under a compromise which was voted on and approved by the Noteholders under a CCAA plan. Under this settlement, the Bank  made payments under the CDS, which were applied by the Trust to repay all of the unpaid Note principal but only a portion of the unpaid interest (with recourse for such interest obligations being specified in the CCAA plan to be only to the Trust assets.)  In the meantime, the Bank had acquired some of the Notes directly and through non-resident subsidiaries.

CRA ruled that interest so paid to the Bank and its subs was not "participating debt interest," stating that the fact that the interest paid was "based on the available cash in the Trust…does not impact the conclusion that the interest… is not being computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion."

CRA also ruled that the entering by the Bank and its subs into the settlement would not by itself result in their being considered to not deal at arm's length with the Trust. This did not directly address the more interesting issue of whether the Noteholders collectively (and, therefore, perhaps each Noteholder, such as the Bank, individually) should be considered to be not dealing at arm’s length with the Trust having regard to the Trust being economically captive to its Noteholders (i.e., no one else in the circumstances could receive any Trust distribution). However, this ruling may imply that CRA was comfortable with this issue, which sounds right given that voting on the Plan and entering into the settlement should not by itself be sufficient to conclude that the Noteholders acted in concert respecting the Trust.

Neal Armstrong. Summary of 2014 Ruling 2014-0539791R3 under s. 212(1)(b).