There’s Gold in Them Thar Claims: Funding Cross-Border Litigation in Crystallex’s Cross-Border Insolvency

Michael D. Good, Managing Principal, South Bay Law Firm, Torrance, California, USA

The sale of distressed businesses or business assets at auction is a regular feature of insolvency practice in commercially sophisticated jurisdictions around the world. Somewhat less common (and particular mainly to those jurisdictions with strong corporate rescue cultures) is the practice of financing the continued operations of distressed firms while those firms reorganise under court supervision. Rarer still is the notion that such financing should, like a sale, be put out for bid at the best terms.
Yet that is precisely what Canadian gold mining concern Crystallex International Corp. achieved recently in a Canadian insolvency proceeding, with concurrent recognition from the US Bankruptcy Court in Delaware in an ancillary Chapter 15 proceeding.
The Crystallex matter offers an interesting – and very creative – approach to monetising what might otherwise be a highly illiquid, speculative, and potentially inaccessible asset held by a troubled company: Significant arbitration claims.

The company and its claim
Crystallex filed for protection under Canada’s Companies’ Creditors Arrangement Act (CCAA) on 23 December 2011. The company operates an open pit mine in Uruguay and three gold mines in Venezuela.
Among its Venezuelan projects is the 9,600-acre Las Cristinas mine. Court papers filed in Crystallex’s case said the site’s untapped gold deposits are among the largest in the world, containing an estimated 20 million ounces of gold. Crystallex filed for Chapter 15 bankruptcy protection in Delaware on the same date to protect its US assets while seeking a Canadian restructuring. Delaware Bankruptcy Judge Peter Walsh granted recognition on 20 January.
Crystallex’s financial troubles allegedly stem from the Venezuelan government’s threatened revocation of Crystallex’s operating agreement for the Las Cristinas project as a result of the company’s failure to obtain an environmental permit. Crystallex blames this failure on the Venezuelan government’s own continued failure to grant the permit.
The company continues to operate, but appears to be staking its restructuring hopes primarily on arbitration claims for CAD 3.8 billion in alleged losses suffered in connection with the Las Cristinas agreement. Crystallex said it has invested more than CAD 500 million in the uncompleted Las Cristinas project. The company believes an arbitration award will provide sufficient funds to pay all its creditors in full while leaving value for the company’s shareholders.
Those creditors include secured lenders China Railway Resources Group (owed CAD 2.5 million) and Venezolano Bank about (owed CAD 1 million). They also include CAD 104.14 million in 9.34% senior unsecured notes issued on 23 December 2004. Crystallex’s CCAA filing and its concurrent Chapter 15 petition were filed on the same date its notes matured.

The auctioned post-petition financing
Once under the protection of Canadian and US Courts, the company sought to alleviate its immediate liquidity concerns by means of a debtor-in-possession (DIP) facility. Such financing facilities are a common feature of both US and Canadian practice. Specifically, Crystallex sought a debtor-in-possession loan of CAD 35 million, convertible into an 'exit facility'.
What was unusual about the company’s approach to DIP financing was its proposal to open the facility to competitive bidding. Crystallex reported to both the Ontario Superior Court of Justice and the US Bankruptcy Court that it was in receipt of multiple expressions of interest in such a facility. Meanwhile, pending the completion of due diligence and approval of such a facility by the Canadian Court, Cyrstallex sought recognition of a much smaller CAD 3.125 million 'bridge facility' from Tenor Special Situations Fund, L.P., which the Canadian Court approved on 20 January.