On August 18, 2011, Mr. Justice Morawetz, of the Ontario
Superior Court of Justice, released an important decision in regard
to preference actions in the matter of Tucker v. Aero Inventory
(UK) Limited (together with Aero Inventory plc, Aero).
Administration proceedings were commenced against Aero on
November 11, 2009, in the High Court of Justice of England and
Wales. Norton Rose OR obtained recognition of the joint
administrators appointed in the UK proceeding (the Administrators)
as foreign representatives under Part IV of the Companies'
Creditors Arrangement Act. Subsequently, over the objections
of Air Canada, the Ontario court authorized the Administrators to
assign Aero in bankruptcy in Canada for the express purpose of
pursuing any reviewable transactions, settlements and preferences
(Preference Actions) that may have taken place in Canada. The
trustee in bankruptcy subsequently asserted Preference Actions
under the Bankruptcy and Insolvency Act against Air Canada
seeking to recover approximately US$75 million in respect of a
number of transactions between Aero and Air Canada in the months
before the commencement of the UK proceedings. In its materials,
the trustee reported that the secured creditors of Aero were likely
to suffer a significant shortfall in the recovery of their secured
claims such that there was not likely to be any recovery for
unsecured creditors (beyond certain statute-prioritized
Air Canada subsequently brought a motion seeking, among other
things, orders declaring that any proceeds of the Preference
Actions were not subject to the rights of the secured creditors.
Air Canada asserted that it would be entitled to participate in any
recoveries from the Preference Actions against it as an unsecured
The court noted the apparent inconsistency in Canadian and
Commonwealth jurisprudence and academic commentary but accepted
that the jurisprudence could be resolved by correctly applying
insolvency principles and personal property security principles.
Norton Rose OR argued that, in this case, the secured creditors had
the equivalent of fixed charges in the transferred property rather
than uncrystallized floating charges found in jurisprudence cited
by Air Canada. Norton Rose OR pointed to the potentially anomalous
result that would follow if an insolvent person could defeat such
rights of a secured creditor by simply granting a preference
immediately prior to assigning itself into bankruptcy if the
subsequent reversal of the preference would be such that the
proceeds would benefit only unsecured creditors (including, in this
case, Air Canada, who purported to settle its unsecured claims
through the transactions sought to be challenged).
The Ontario Court ruled that the proceeds of Preference Actions
recovered by the trustee are brought into the estate and
distribution is subject to the rights of secured creditors. The
court further ruled that the bringing of Preference Actions and
recovery of proceeds by the trustee does not preclude the secured
creditors from pursuing other remedies they may have. The court
noted that, while the secured creditors might have other remedies,
at the outset of the proceedings, when investigations may not be
complete, it may be difficult to pinpoint any specific remedy.
Secured creditors will be aware that remedies under contract or
statute would involve different factual elements and burdens of
proof and might very well have involved significant costs and
lengthy time periods to resolve outside the insolvency
Norton Rose OR LLP
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
The Court of Queen's Bench of Alberta authorized a disposition of a debtor's assets by a receiver immediately upon appointment and without being forced to conduct a marketing process within the receivership proceedings.
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