A recent decision of the Ontario Superior Court of Justice, Commercial List, refined the factors to be considered when determining the centre of main interests (COMI) of debtor companies which are part of a larger corporate group. The case arose in the context of Lightsquared LP seeking an order under Part IV of the Companies' Creditors Arrangement Act. Part IV deals with the recognition of foreign insolvency proceedings and is similar to Chapter 15 of the US Bankruptcy Code (both are modelled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law).
On May 14 2012 the applicant and various of its affiliates (collectively, the debtors) commenced voluntary reorganisation proceedings in the US Bankruptcy Court for the Southern District of New York by filing voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. The applicant was authorised by the US court to act as the foreign representative of the debtors in the Companies' Creditors Arrangement Act proceedings.
The applicant, in its capacity as foreign representative, sought an order from the Ontario court recognising the Chapter 11 proceeding as a "foreign main proceeding", along with other related relief. Pursuant to Section 48(1) of the Companies' Creditors Arrangement Act, if a foreign proceeding is characterised as a 'foreign main proceeding', as opposed to a 'foreign non-main proceeding', the relief as set out therein – including an order staying any actions, suits or proceedings against the debtor – is automatic and not at the discretion of the presiding judge.
Section 45(1) of the Companies' Creditors Arrangement Act defines a 'foreign main proceeding' as a foreign proceeding in a jurisdiction where the debtor has its COMI. Section 45(2) of the act provides that in the absence of proof to the contrary, a debtor's registered office is deemed to be its COMI.
The debtors were an integrated corporate group consisting of approximately 20 entities. All but four of those entities had their registered office in the United States. The registered offices of three of the debtors were located in Canada. As the Ontario court noted, Part IV of the Companies' Creditors Arrangement Act does not consider corporate groups. Despite the presumption in Section 45(2), the applicant argued that the Canadian debtors' COMI was not in the location of their registered offices, and was instead in the United States.
Each of the Canadian debtors was a wholly owned subsidiary of the applicant and relied on the applicant for all or substantially all of its operational funding. One of the Canadian debtors provided mobile satellite services to customers located in Canada and employed approximately 43 employees; the remaining two were holding companies with no employees.
All of the debtors, including the Canadian debtors, were managed in the United States as an integrated group from a corporate, strategic and management perspective. In particular:
- corporate and other major decision making occurred in the consolidated offices in New York and Virginia;
- all of the senior executives were US residents;
- the majority of management of all of the debtors was shared;
- the majority of employee administration, human resource functions, marketing and communication decisions were made in the United States;
- the US-based employees oversaw the cash-management system utilised by all of the debtors; and
- various other business functions – including pricing decisions, accounts payable and accounts receivable – were shared between all of the debtors.
In addition, the Canadian debtors guaranteed the credit facilities extended to the applicant as borrower, which guarantees were secured by the Canadian debtors' assets, making the majority of the debtors' creditors also common across the corporate group.
The Ontario court held that where it is necessary to go beyond the presumption in Section 45(2) of the Companies' Creditors Arrangement Act , the following three principal factors, considered as a whole, will indicate whether the location in which the proceeding has been filed is the debtor's COMI:
- The location is readily ascertainable by creditors;
- The location is one in which the debtor's principal assets or operations are found; and
- The location is where the management of the debtor takes place.
This review, the Ontario Court stated, is designed to determine that the location of the proceeding in fact corresponds to where the debtor's principal place of business actually is, consistent with the expectations of those that deal with the enterprise. The Ontario court further noted that this analysis is consistent with the preliminary commentary in the Report of UNCITRAL Working Group V (Insolvency Law) of its 41st Session, and is intended as a refinement of the views previously expressed in Re Massachusetts Elephant & Castle Group Inc (2011) (82 CBR (5th) 102).
After considering these factors and the facts set out above, the Ontario court concluded that the COMI of the Canadian debtors was in the United States and, as such, the Chapter 11 of the proceeding was a foreign main proceeding. Having concluded that the proceeding was a foreign main proceeding, the Ontario court granted the relief set out in Section 48(1) of the Companies' Creditors Arrangement Act . In addition, pursuant to Section 49(1) of the act , which grants authority to the court to make any order it considers appropriate if it is necessary for the protection of the debtor's property or the interests of its creditors, the Ontario court granted the supplementary and ancillary relief sought by the applicant, including recognising the first-day orders granted in the Chapter 11 proceeding.
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