Over the past 20 years significant advances have been made in the efforts to coordinate multinational insolvency proceedings. In Canada, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency was largely implemented in Part IV of the Companies' Creditors Arrangement Act (Part IV is functionally equivalent to Chapter 15 of the US Bankruptcy Code), which deals with the recognition and enforcement of foreign insolvency proceedings. However, as with all international efforts to date, Part IV of the act deals with entities on an individual basis and does not address how to deal with corporate groups. In a recent case involving the Part IV filing of the Elephant & Castle Group (E&C), the Ontario Superior Court of Justice addressed the concept of a corporate group filing.
On June 28 2011 E&C commenced proceedings in the US Bankruptcy Court for the District of Massachusetts Eastern Division under Chapter 11 of Title 11 of the US Bankruptcy Code. The purpose of the Chapter 11 proceedings was to allow E&C to continue to operate in the ordinary course while it pursued the sale of its business. E&C operates and franchises authentic, full-service, British-style restaurant pubs in both the United States and Canada. Concurrently with the Chapter 11 filing, E&C also sought recognition of the Chapter 11 proceedings in the Ontario court as a 'foreign main proceeding' under the act.
The E&C group totals 14 companies, including three Canadian entities, one of which is the parent company. All of the Canadian debtors' registered offices are in Canada. In addition, nearly half of E&C's operating locations are in Canada, approximately 43% of its employees work in Canada and GE Canada Equipment Financing GP (another Canadian company) is E&C's primary secured creditor. As such, E&C sought to rebut the centre of main interest (COMI) presumption prescribed by the act for the Canadian debtors. In the absence of proof to the contrary, the act deems the debtor's registered office to be the COMI (this is the same as provided for under the UNCITRAL model law). The remaining companies in the E&C group were all incorporated in various US jurisdictions.
The issue before the Ontario Superior Court of Justice was whether the Chapter 11 proceedings should be recognised as a foreign proceeding and, if so, whether they were a 'foreign main proceeding' or a 'foreign non-main proceeding' under Section 47 of the act. If the court recognises the Chapter 11 proceedings as a foreign main proceeding, the relief under Section 48, including the stay of proceedings, is automatic instead of discretionary. A 'foreign main proceeding' is defined in the act as a foreign proceeding in a jurisdiction where the debtor has its COMI.
On July 4 2011 the court granted the relief that E&C had requested and recognised the Chapter 11 proceedings as a foreign main proceeding. The court's endorsement declared that the court was satisfied that E&C had met the requirements of Section 47(1), and that it was appropriate for the court to recognise the foreign proceeding. The court further found that the presumption contained in Section 45(2) – that each debtor's COMI is its registered office – was rebutted in the circumstances and the debtors' COMI was found to be the United States. In arriving at this finding, the court cited the jurisprudence on the issue of a debtor's COMI and noted that in interpreting COMI, the following factors are usually significant:
- the location of the debtor's headquarters, head office or nerve centre;
- the location of the debtor's management; and
- the location that significant creditors recognise as being the centre of the company's operations.
The court further noted that E&C's headquarters, head office or nerve centre was in Boston, Massachusetts and the location of the debtors' management was in Boston. The fact that GE, the primary secured creditor, did not oppose the relief sought was also relevant to the court's decision. In these circumstances, the court concluded that for the purposes of this application, each of the E&C entities, including the Canadian debtors, had their COMI in the United States. Having reached this conclusion, certain mandatory relief set out in Section 48(1) of the act was granted (ie, a mandatory stay of proceedings), along with the remainder of the relief sought.
For further information on this topic please contact Kenneth Kraft or Sara-Ann Wilson at Heenan Blaikie LLP by telephone (+1 416 360 6336), fax (+1 416 360 8425) or email ([email protected] or [email protected]).