Bellatrix Exploration: Why a charge sometimes just isn’t enough

A recent decision in the Companies’ Creditors Arrangement Act (“CCAA”) proceedings of Bellatrix Exploration Ltd.[1] (“Bellatrix”) serves as a useful reminder to professionals that a court-ordered charge may not be enough to ensure their fees will be paid at the end of the day.

Bellatrix is a publicly traded oil and gas company based in Calgary, Alberta. It obtained protection under the CCAA on October 2, 2019, having been significantly impacted by the various industry challenges facing Western Canada’s oil and natural gas markets, including depressed oil and natural gas prices.

Prior to its filing, Bellatrix engaged a bank to act as its sale advisor (“Sale Advisor”) pursuant to the terms of an Engagement Letter dated September 9, 2019 (“Engagement Letter”). The Engagement Letter stipulated that the Sale Advisor’s compensation would be comprised of: (1) a monthly work fee; and (2) a transaction fee of $2,750,000 plus a percentage of the sale price, contingent on Bellatrix completing a transaction.

On October 2, 2019, Bellatrix was granted an Initial Order under the CCAA (“Initial Order”). The Initial Order approved the Engagement Letter and the payment of the Sale Advisor’s fees and expenses. It also provided for a charge in favour of the Sale Advisor securing the transaction fee (“Fee Charge”). The Fee Charge ranked 7^th behind various other charges, including a 5^th ranking charge in favour of National Bank of Canada, acting as agent (“First Lien Agent”) for a group of lenders (“First Lien Lenders”) securing certain pre-filing secured debt.

At the comeback hearing on October 9, 2019, Bellatrix was granted a Strategic Process Approval Order approving a sale and investment solicitation process (“SISP”) for the business and assets or shares of Bellatrix.

After approximately six months and a significant downturn in the oil and gas market, the only binding offer received in the SISP was an offer from Return Energy Inc. doing business as Spartan Energy Corp. (“Spartan”). The offer contemplated a going concern asset sale that included substantially all of Bellatrix’s oil and gas assets. The offer was in the form of an asset purchase agreement (“APA”) which directed payment of fees under the Engagement Letter (if not paid before closing) to be paid out of sale proceeds.

On May 7, 2020, the Court heard submissions on Bellatrix’s application seeking approval of the APA. On May 8, 2020, Madam Justice Hollins of the Alberta Court of Queen’s Bench approved the APA. However, given that the purchase price was not sufficient to satisfy the amounts owing to the First Lien Lenders, Madam Justice Hollins requested further submissions from the parties regarding the exact form of approval and vesting order (“AVO”).

On May 12, 2020, submissions were made on the form of AVO. The Sale Advisor took the position that the transaction fee was payable pursuant to the terms of the Engagement Letter. The Sale Advisor argued that this was not a priority dispute and that its transaction fee was a regular fee, the payment of which was envisioned by the Initial Order and the Engagement Letter.[2]

For their part, the First Lien Lenders argued that payment of the transaction fee would be contrary to the priorities set out in the Initial Order. They pointed out that both the Engagement Letter and the Initial Order differentiated between the regular monthly fee charged by the Sale Advisor and the transaction fee, the latter of which was earned and calculated differently and ranks below the First Lien Lenders’ charge pursuant to the Initial Order.[3] Accordingly, the First Lien Agent brought an application seeking an order preventing Bellatrix from making any payment of funds to the Sale Advisor on account of the transaction fee unless the indebtedness owed to the First Lien Lenders was satisfied.

Madam Justice Hollins released her decision allowing the First Lien Agent’s application on May 29, 2020. Madam Justice Hollins acknowledged that the company’s financial prospects had diminished significantly since the application for the Initial Order and that, at that time, it was unlikely that anyone foresaw a situation in which the purchase price for Bellatrix’ assets would not be sufficient to clear at least the court-ordered charges, including the First Lien Lenders’ debt.[4]

However, Madam Justice Hollins was not prepared to accept the Sale Advisor’s argument that the separation of the transaction fee from the monthly work fee and its priority charge were done only as “extra” protection for payment of the transaction fee. According to Madam Justice Hollins, to accept this argument would render meaningless the separate definitions and treatment of the work fee and the transaction fee in the Engagement Letter itself and, more obviously, in the Initial Order. These documents were painstakingly negotiated by the parties and the distinction between the work fee and the transaction fee was made purposefully and clearly.[5]

Accordingly, Madam Justice Collins ruled that the transaction fee is subject to the priorities in the Initial Order and, given that the sale price is not sufficient to cover higher ranking debts, no transaction fee will be paid to the Sale Advisor.[6] The Sale Advisor has sought leave to appeal from the Alberta Court of Appeal.

This decision serves as a reminder to professionals to carefully consider the prospect that an insolvency transaction might not play out as expected. The court will uphold a deal that professionals enter into regardless of the assumptions on which that deal was based.

In our view, the key takeaways from the decision are:

• Sometimes a charge isn’t enough to protect your fees. The ranking of your charge matters and should be carefully considered. Often times, institutions will utilize their corporate finance and M&A teams to conduct a sale process. These teams should consult with their restructuring and insolvency colleagues, or speak with an insolvency lawyer, when negotiating an engagement to ensure that the unique pitfalls of an insolvency situation are taken into account. We have been involved in numerous situations where sale advisors will administer a sale process in an insolvency situation without negotiating for a charge because the parties involved were unaware of the option.
• Carefully scrutinize the language used to describe when the obligation to pay fees arises. The Bellatrix decision is grounded in the language contained in the Engagement Letter and the Initial Order. The outcome may have been considerably different for the Sale Advisor if the wording of the Engagement Letter and the Initial Order better supported their position.
• Always keep in mind that an insolvent company’s financial situation may change quickly and drastically.

If you have any questions or matters you would like to discuss please contact a member of our Miller Thomson Restructuring team.

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[1] 2020 ABQB 348 [Decision].

[2] Decision, ibid. at para. 11.

[3] Decision, ibid. at para. 12.

[4] Decision, ibid. at para. 19.

[5] Decision, ibid. at para. 17.

[6] Decision, ibid. at para. 22.