American Bankruptcy Institute: Caribbean Symposium 2009
Cross-border insolvency proceedings involving affiliated debtors within a corporate group are becoming quite common. Professionals in the United States and Canada are being challenged more than ever to understand, and factor into their planning, the law and practice of the neighboring jurisdiction in order to provide effective advice and strategic counsel. Understanding the issues and dynamics material to cross-border proceedings is critical to the effective management of a troubled situation and the execution of a successful restructuring strategy. This includes the effective use of a proceeding commenced under chapter 15 ("Chapter 15") of title 11 of the United States Code (the "Bankruptcy Code").
Some Highlights of the Canadian Experience in relation to Chapter 15 Proceedings
There is a growing body of cases in which a Chapter 15 process has been used in conjunction with a Canadian insolvency and/or restructuring proceeding. The context for the use of Chapter 15, in conjunction with a Canadian proceeding, has been quite varied. It has been employed as a vehicle to assist a trustee in bankruptcy in the administration of an estate in bankruptcy in Canada (the Canadian equivalent of a chapter 7 bankruptcy, which is administered under the Bankruptcy and Insolvency Act), an interim receiver or receiver appointed by a court in Canada to administer property and assets of Canadian and/or U.S. debtors in a liquidation or securities act proceeding, by the court-appointed monitor (the "Monitor") appointed as a foreign representative in a proceeding commenced under the Companies' Creditors' Arrangement Act (the "CCAA") in connection with cross-border relief sought and even by the court-appointed foreign representative of a debtor seeking to implement a corporate plan of arrangement in a non-insolvency context.
Meeting the requirements for recognition under Chapter 15 – Lessons Learned
Persons petitioning for recognition under Chapter 15 must ensure that its technical requirements for recognition are met; a factor to be considered when orders are being made in the foreign proceeding in order to avoid mishaps.
A foreign representative may apply to the U.S. court for recognition of a foreign proceeding in which the foreign representative has been appointed by filing a petition for recognition. The petition is to be accompanied by evidence of the existence of the foreign proceeding and appointment of the foreign representative, which evidence may be a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative.
Daymonex Limited initiated a Canadian restructuring proceeding under the proposal (restructuring) provisions of the BIA. A trustee was appointed in the proceeding, who was also appointed as an interim receiver under the BIA. Neither the trustee, nor the interim receiver, had the powers to manage or operate the debtor. When an individual who was a director and officer of the debtor filed the Chapter 15 petition, recognition was initially denied because there was not sufficient evidence of that person's status as a foreign representative. This situation was rectified by a return hearing before the Canadian court where an order was obtained that expressly appointed the director as a foreign representative for the purpose of initiating and proceeding with the Chapter 15 proceeding (Daymonex Limited, Ont. S.C.J. (Commercial List), Court File No. 07-CL-6832, unreported February 14, 2007). Following this, the Canadian proceedings were recognized by the U.S. court as foreign main proceedings: In re Daymonex Limited, Case No. 07-90171 (Bankr. S.D. Ind. February 26, 2007).
Interim Relief Pending Recognition
Recognition of a foreign proceeding under Chapter 15 is only ordered following notice and a hearing. As such, in many cases the filing of a petition for recognition is followed by one or more motions seeking orders for emergency or temporary relief. U.S. courts, in appropriate cases, have shown themselves willing to enter orders for provisional or interim relief sought by the foreign representative to:
- provide for a stay of proceedings and restrain actions against a debtor and its property and assets;
- give effect to interim debtor in possession ("DIP") financing and associated liens granted in the foreign proceeding;
- give effect to a stay of proceedings against officers and directors provided in the Initial Order (defined below) in the Canadian proceeding;
- pursuant to section 361 of the Bankruptcy Code and as adequate protection for the use of cash collateral by a court-appointed receiver, grant a replacement lien in favour of existing secured creditors;
- facilitate a sale of assets by approving a sales process, bidding procedures, break-up fee and expense reimbursement approved of by a Canadian court;
- provide for the examination of witnesses;
- permit the debtors assets located in the United States to be maintained, administered and/or realized upon by the Debtors, subject to the oversight of the Monitor in the CCAA proceeding; and
- provide that section 365(e)(1) of the Bankruptcy Code apply to the debtors' real property leases, so as to prevent their termination.
Using jurisdiction to advantage: Canada as the Primary Jurisdiction
A CCAA restructuring case tends to be less costly and, in most cases, will require fewer court hearings to administer than a proceeding under chapter 11 of the Bankruptcy Code ("Chapter 11"). In place of many first day orders, the Canadian court will grant an omnibus single order (the "Initial Order"). The Initial Order typically grants a broad stay of proceedings against the debtor and its property and assets, restrains third party actions against the debtor, its property and assets and, usually, its directors and officers, requires parties to continue to perform their contracts with the debtor, permits the debtor to pay wages and statutory obligations (pre and post-filing), permits the debtor to pay post-filing obligations, grants security and charges in favour of the debtor's professionals, its officers and directors, the court-appointed Monitor and lender(s) providing interim financing, may permit the debtor to undertake activities to downsize its operations and dispose of its non-core assets (often with a dollar cap), permits the debtor to repudiate real property leases and other agreements and appoints the Monitor. In a cross-border case, the Initial Order will request the aid and assistance of the U.S. courts to recognize and give effect to the Initial Order, and may also approve of a cross-border protocol (the effect of which may be delayed until a corresponding order is made by a U.S. Court). Under the CCAA, there is no statutory mechanism for the appointment of an official committee of creditors whose legal and financial advisors are paid for by the debtors. The process for retention by the debtors of its legal and financial advisors is not court supervised. There is no statutory restriction on the use of cash collateral. There is also currently no statutory mechanism for the acceptance, rejection or assignment of executory contracts.
Having regard to the foregoing, in circumstances where it is necessary to obtain a stay of process or administer assets situated in the U.S., there may be economic and strategic advantages to doing so under the protection of Chapter 15 rather than Chapter 11. This may account for why there are a growing number of Chapter 15 cases that have been initiated in conjunction with a Canadian (main) insolvency proceeding. These cases have given rise to an expanding number and variety of Chapter 15 recognition orders. Some recent examples of interest follow.
The CCAA proceeding and affiliated Chapter 15 case involving MuscleTech Research and Development Inc. and affiliated debtors ("MuscleTech") (Ont. S.C.J., Court File No 06-CL-6241) were recognized as foreign main proceedings under Chapter 15 by the Bankruptcy Court for the S.D.N.Y. (Case No 06-10092, January 18, 2007). The Chapter 15 proceeding was administered by the District Court for the S.D.N.Y. (the "District Court"), as it also had jurisdiction over certain multi-district litigation against Muscle-Tech and others in relation to a diet product, known as ephedra.
Ephedra-based product liability litigation, as well as other non-certified consumer liability class actions (the "U.S. Litigation") precipitated MuscleTech's filings. Through the use of the Chapter 15 process, MuscleTech obtained orders from the District Court recognizing and giving effect to orders made in the CCAA proceeding. This included injunctions staying the U.S. Litigation, and the approval of a claims resolution process. Efforts to challenge the District Court's recognition of the Canadian claims resolution order were not successful (In re Ephedra Products Liability Litigation,349 B.R. 333 (S.D.N.Y. 2006)). The MuscleTech decision was the first to consider the "manifestly contrary" to public policy language of section 1506 of the Bankruptcy Code. The District Court held that this exception should be narrowly interpreted and was not an impediment to its recognition of the Canadian claims resolution process, even though such process denied claimants the right to a jury trial.
In 2007, MuscleTech's plan was approved by creditors and sanctioned (confirmed) by the Canadian Court. The plan and sanction order were novel for Canada because they contained broad third party non-debtor releases and injunctive relief in favour of retailers and insurers that had funded the plan. MuscleTech subsequently obtained an order from the District Court recognizing and giving effect to the Canadian plan and sanction order, including the non-debtor releases and injunctions. In making this order, the District Court subjected the CCAA plan to far less scrutiny than would have been the case if it had been filed as a plan in a Chapter 11 case.
In the Chapter 15 proceedings involving Hollinger Inc. and other CCAA debtors, an order was also made giving recognition and effect in the United States to the claims process implemented in the CCAA proceeding: In re Hollinger Inc. et al, Case No.:17-11029 (PJW) ( Bankr. D. Del May 22, 2008).
The Chapter 15 process has been well deployed in relation to the Destinator group of companies: In re Destinator Technologies, Inc. (lead case), Case No. 08-1103(CSS) (Bankr. D. Del) ("Destinator"). The Destinator companies filed for protection under the CCAA on May 20, 2008. Prior to recognizing the Canadian proceedings as foreign proceedings, the U.S. Bankruptcy Court entered a temporary restraining order ("TRO") authorizing the foreign applicants' to incur post-petition indebtedness, including granting a first priority lien against the foreign applicants' U.S. assets in favour of the post-petition lenders: Destinator, May 20, 2008. The TRO included a provision staying proceedings against former, current and future directors and officers of the foreign applicants, as was included in the initial CCAA order. A further Order for provisional relief, was entered three days' later, which Order approved of a sales and bidding process for assets situated in the U.S. and gave full force and effect to the initial CCAA order in the U.S., including the DIP financing provisions and the liens created under the Initial Order.
On June 6, 2008, the Bankruptcy Court formally recognized the CCAA proceedings as foreign main proceedings and continued the effect of the provisional order. On July 8, 2008, the Bankruptcy Court gave effect to the sales approval and vesting order made in the Canadian proceedings in relation to assets situated in the U.S., including ordering that the approved purchaser was a good faith purchaser, granting all the protections afforded under section 363(m) of the Bankruptcy Code to such purchaser, and ordering the purchased assets to vest in the purchaser free and clear of all liens, claims and encumbrances of any kind under section 363(f) of the Bankruptcy Code.
In the MAAX Group restructuring (In re MAAX Corporation (lead case) Case No.: 08-1143(CSS) (Bankr. D. Del) ("MAAX"), on July 14, 2008, the Bankruptcy Court entered a provisional order that invoked the protection of section 365(e)(1) of the Bankruptcy Code to prevent the termination of real property leases in the United States that were critical to a proposed sale transaction. The Order granting recognition of the Canadian CCAA proceedings as foreign main proceedings was entered on August 5, 2008. Pursuant to the recognition order:
- the initial CCAA order was given full force and effect in the U.S.;
- the order vesting title to the purchased assets in the purchaser that was made in the CCAA proceeding was given full force and effect, with the purchaser receiving the protection of a good faith purchaser under section 363(m) of the Bankruptcy Code;
- title to the purchased assets was vesting in the purchaser free and clear of all liens pursuant to 363(f) of the Bankruptcy Code; and
- MAAX was authorized and empowered to assign all real property leases required to be assigned under the purchase agreement.
What makes the MAAX case particularly interesting is that the U.S. proceedings were commenced almost one month following the commencement of the CCAA proceeding and only after a sales process had been pursued for a period of time in Canada outside of any formal restructuring process. The Canadian-led sales process involved a broad marketing of the business and the solicitation of non-binding indications of interest from prospective purchasers, but did not include a court supervised sales, bid and auction process. In the end, none of the indications of interest were sufficient to repay the existing senior secured lenders in full. As a consequence, the senior secured lenders offered to purchase the business for the amount of the senior secured indebtedness, together with the amount of interim financing provided and the assumption of certain liabilities (trade and employee-related debt). The Canadian court approved of the sale transaction, after which the CCAA debtors applied to the U.S. Bankruptcy Court to have the Canadian CCAA proceeding recognized as a foreign main proceeding, as well as for approval of the proposed sale transaction. As such, the MAAX debtors were able to proceed with a sales transaction, without going through a section 363 sales process (and, in fact, following a sales process that was quite different than that a typical section 363 sales process), while at the same time delivering much of the same benefits to the purchaser as would be available in a section 363 sale.
U.S. as the primary jurisdiction
There is an established history of cases in which the principal proceeding is conducted under Chapter 11, with U.S. debtors and/or their Canadian affiliates, filing under section 18.6 of the CCAA.
Section 18.6 of the CCAA is currently the primary means for a Chapter 11 debtor to seek a comprehensive stay of proceedings in Canada, without commencing a concurrent proceeding. Examples of proceedings initiated under section 18.6 include: Nortel, DURA Automotive, Allied Holdings, Foamex, Kaiser Aluminum, Heating Oil Partners, Pliant Corporation, Core-Mark International, Androscoggin Energy, United Airlines, PSINet and Babcock & Wilcox.
As these cases demonstrate, a section 18.6 proceeding can serve as a mechanism for recognizing and implementing orders made in a Chapter 11 case, including:
- Stays of proceeding.
- Claims processes.
- Bidding and sale processes.
- DIP financing and security.
- Plan confirmation.
- Injunctive relief to implement a plan.
Canadian courts generally look to ensure that orders in respect of which recognition is requested are fair and reasonable having regard to the rights of creditors in Canada or, if not, are modified to be so. In the case of Allied Holdings, approval of the Chapter 11 claims process order was granted, but made subject to the U.S. claims bar date being extended for a group of creditors who may not have received notice of the process, with a corresponding requirement that notice of the claims process be advertised in the national edition of a Canadian newspaper (In Re Allied Holdings Inc, Case No 05-CL-6007, Order made February 6, 2008 (Ontario S.C.J. (Commercial List)).
In January 2008, Quebecor World Inc. ("QWI") and many of its U.S. operating subsidiaries (referred to as the "Quebecor U.S. Debtors") filed proceedings under the CCAA. This was followed by the commencement of Chapter 11 cases in the S.D.N.Y. by the Quebecor U.S. Debtors, but not QWI. On September 29, 2008, the Quebec Superior Court approved of a claims process Order in the Quebecor CCAA proceedings (the "Claims Procedure Order"). The Claims Procedure Order approved of a Cross-Border Claims Protocol. On September 30, 2008, a similar order was entered in the U.S. Chapter 11 cases. Among other things, the Claims Procedure Protocol requires claims against only QWI to be filed in the CCAA proceedings, and claims against one or more of the Quebecor U.S. Debtors to be filed in the Chapter 11 proceedings. A common claims bar date was approved by each of the Canadian and U.S. Courts.
On September 30, 2008, eight months following the commencement of the CCAA case, QWI filed a petition under Chapter 15 with the S.D.N.Y. This presumably was done to take advantage of the provisions of Chapter 15, while at the same time maintaining QWI's principal administration under the CCAA: In re Quebecor World Inc., Case No.: 08-01314 (Bankr. S.D.N.Y.). The recognition order, in addition to recognizing the QWI CCAA proceeding as a foreign main proceeding, includes a provision giving force and effect to the Claims Procedure Order made in the CCAA proceeding and makes such order binding upon all persons within the jurisdiction of the U.S. Court.
In the Pope & Talbot cases, the U.S. and Canadian corporate debtors initially filed under the CCAA in Canada and under Chapter 11 in the U.S. In addition, certain affiliated partnerships filed under Chapter 11 (not being legally able to do so under the CCAA).
The Pope & Talbot proceedings have transitioned from restructurings into liquidations. In Canada, the property and assets of the CCAA debtors are being administered by a court-appointed receiver. In July of 2008, this receiver was empowered to sell the remaining assets of all of the Pope & Talbot debtors, including assets located in the U.S.
In the U.S., the Chapter 11 cases were converted to cases under chapter 7 of the Bankruptcy Code ("Chapter 7"). Where the same debtor is subject to a Chapter 7 process and a Canadian receivership, however, both the receiver and the Chapter 7 trustee may have similar powers and authority in relation to the debtors' property and assets. This can give rise to uncertainty regarding who is in control, who has final authority or responsibility for decisions to be made, which court has jurisdiction to supervise the process and which jurisdiction's law and/or process ought to apply in relation to various issues that may arise. It can also lead to delay and cost inefficiencies, neither of which is optimum in a liquidation scenario.
On September 8, 2008, the Bankruptcy Court for the District of Delaware entered an order under Chapter 15 in relation to the Chapter 7 Pope & Talbot debtors. This order was made in response to petitions filed by the Canadian receiver seeking recognition of the Canadian receivership proceedings as foreign main proceedings and for related relief: In re Pope & Talbot Inc., et at. (lead case), Case No.: 08-11933 (CSS) (Bank. D. Del.). Pursuant to the recognition order that was entered on September 5, 2008, the Canadian receiver was given interim authority to administer assets within the territorial jurisdiction of the United States. On September 18, 2008, the Bankruptcy Court entered an order in the Chapter 15 cases, permitting the Canadian receiver to proceed with a sale of certain real property situated in the state of Washington. A final Chapter 15 recognition order was made on October 17, 2008. Among other provisions, this order entrusts the Canadian receiver (i) pursuant to section 1521(a) of the Bankruptcy Code, with final authority over the administration or realization of all of the Pope & Talbot debtors' assets within the territorial jurisdiction of the United States, and (ii) pursuant to section 1521(b) of the Bankruptcy Code, with the distribution of such assets, subject to any limitations, terms and conditions imposed by the supervising Canadian Court in the receivership.
Recognition of Foreign Insolvency Proceedings under the pending Canadian insolvency law reforms
There is legislation that has been enacted but is not yet in force (the "Insolvency Reforms") that amends the BIA and CCAA. Among the pending reforms are new provisions providing for the recognition of foreign insolvency proceedings that are based on the provisions of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency 1997 (the "Model Law"). A Canadian version of Chapter 15, modelled on, but not identical to, the Model Law is included in the Insolvency Reforms.
A "foreign proceeding" is defined in the Insolvency Reforms as a judicial or administrative proceeding, including an interim proceeding, in a jurisdiction outside of Canada dealing with a creditors' collective interests generally under any law relating to bankruptcy or insolvency in which a debtor company's business and financial affairs are subject to control or supervision by a foreign court for the purpose of reorganization.
A "foreign main proceeding" is defined as a foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests. This is similar to the definition under Chapter 15.
A "foreign non-main proceeding" is defined under the Insolvency Reforms as a proceeding "other than a foreign main proceeding". There is no requirement, as under Chapter 15, for the debtor to have an establishment in the jurisdiction in which the foreign proceeding is pending. This distinction might be expected to lead to a different result in relation to the recognition of a foreign non main proceeding by a Canadian court than has been reached by the U.S. Courts in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122(Bankr. S.D.N.Y.) and In re Basis Yield Alpha Fund (Master),49 Bankr. Ct. Dec 89 (Bankr. S.D.N.Y.).
There are other distinctions between Chapter 15 and the provisions for recognition of foreign proceedings under the Insolvency Reforms. It is anticipated, however, that once they come into effect, the Insolvency Reforms will be broadly applied and interpreted by Canadian courts, much as has been accomplished under the existing legislation and case law.