Originally published in Banking & Finance Law Review, vol. 24, no. 1, September 2008.

Shifting Gears in Cross-border Insolvencies: From Comity to COMI

Canada has taken steps to enact portions of the Model Law on Cross-Border Insolvency, which was adopted on May 30, 1997, by the UN Commission on International Trade Law (UNCITRAL). Portions of the Model Law were incorporated into both the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act. Although not yet proclaimed into force, practitioners should expect that the new regime will eventually become the law of Canada. This article briefly reviews the development of the law in Canada related to cross-border insolvency, analyzes how the concept of centre of main interests (COMI) has been interpreted in Europe and the United States, and examines some practical considerations flowing from the new regime for international insolvencies. Finally, the authors include a list of guiding principles that have developed with respect to the interpretation of COMI to date, which are likely important factors in forming the basis of analysis in Canada moving forward.

Le Canada a entrepris des démarches pour adopter certaines parties de la Loi type sur l'insolvabilité internationale proposeé le 30 mai 1997 par la Commission des Nations Unies pour le droit commercial international (CNUDCI). Certaines parties de cette loi ont été intgrées dans la Loi sur la faillite et l'insolvabilité et dans la Loi sur les arrangements avec les créanciers des compagnies. Bien qu'il ne soit pas encore en vigueur, les avocats s'attendent á ce que le nouveau régime devienne un jour loi au Canada. Le présent article donne un bref aperc¸u de l'évolution du droit au Canada en matiére d'insolvabilité internationale, analyse l'interprétation de la notion de « centre des intéreÆts principaux » faite en Europe et aux é tats-Unis et fait état de certaines considérations pratiques á l'égard de la mise en place éventuelle du nouveau régime pour les cas d'insolvabilité internationale. Enfin, les auteurs décrivent les principes directeurs élaborés jusqu'á ce jour relativementá l'interprétation de la notion de « centre des intéreÆts principaux »; ces principes joueront sans doute un roÆle important au Canada.

Canada has followed the lead of a number of other industrialized countries by taking steps to enact portions of the Model Law on Cross- Border Insolvency,1 which was adopted on May 30, 1997, by the UN Commission on International Trade Law (UNCITRAL). Portions of the Model Law were incorporated2 into both the Bankruptcy and Insolvency Act3 and the Companies' Creditors Arrangement Act.4 Although Chapter 47 has been passed and has received royal assent, it has not been proclaimed into force except for a few provisions that are not relevant for the purposes of this article.

Bill C-62, setting out proposed amendments to Chapter 47, was introduced on June 13, 2007. It was widely believed that once Bill C- 62 was passed, Chapter 47 would be proclaimed into force. However, Bill C-62 died on the order paper when Parliament was dissolved, further delaying the implementation of Chapter 47. On October 29, 2007, the new session of Parliament adopted Bill C-62 and reintroduced it as Bill C-125 with all previous readings being adopted. Bill C-12 was subsequently approved by the Canadian Senate in December 2007 and was enacted as Bill C-36.

Although a number of recommendations have been made for further reform, there appears to be no concerted effort to further amend or revise the international insolvency provisions of Chapter 47. As a result, practitioners should expect that the new regime for international insolvencies set out in Chapter 47 (referred to here as the "Canadian Recognition Provisions") will eventually become the law of Canada. This article briefly reviews the development of the law in Canada related to crossborder insolvency, analyzes how the concept of centre of main interests (COMI) has been interpreted in Europe and the United States and examines some practical considerations flowing from the new regime for international insolvencies.

1. INTERNATIONAL RECOGNITION OF FOREIGN JUDGMENTS BEFORE COMI

Historically, recognition of foreign judgments in Canada has been based on the principle of comity. The concept of comity and the test for recognition of foreign judgments in Canada were both outlined in Morguard Investments Ltd. v. De Savoye,6 a case outside the insolvency context that dealt with the recognition of a decision from another province. Here, the Supreme Court of Canada (SCC) referred to previous decisions in providing a definition of comity that has been used widely by Canadian judges:

"Comity" in the legal sense, is neither a matter of absolute obligation, on the one hand, nor one of mere courtesy and good will, upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.7

The Court held that comity should be applied where there is a "real and substantial connection" between the jurisdiction in which the judgment was given and the action before the court.8

More recently, the SCC expanded on this concept outside the insolvency context in Beals v. Saldanha,9 which dealt with the enforcement in Canada of a judgment from Florida. Here, the majority of the Court held that the "real and substantial connection" test articulated in Morguard in the context of judgments from other provinces also applies to the recognition and enforcement of foreign judgments from courts outside Canada. The Court also discussed the importance of international comity, the prevalence of international cross-border transactions and the call for a modernization of private international law. The Court stated that enforcement of foreign judgments is not absolute. In some circumstances a foreign decision will not be enforced, including where enforce-ment of a foreign judgment is antithetical to the Canadian view of natural justice, public policy or fraud:

A Canadian defendant sued in a foreign jurisdiction has the ability to redress any real or apparent unfairness from the foreign proceedings and the judgment's subsequent enforcement in Canada. The defences applicable in Ontario are natural justice, public policy and fraud.10

However, the Court cautioned that these defences are not to be used lightly and that the defence of public policy should have a narrow application.11

Canadian courts have tended to grant recognition orders in cases involving proceedings under the U.S. Bankruptcy Code,12 recognizing that such proceedings have a purpose similar to that of Canadian bankruptcy proceedings. In doing so, courts have examined the similarities between the bankruptcy systems of the two nations and determined that Canadian creditors are granted treatment under U.S. bankruptcy law that is roughly equivalent to what they would be entitled to under Canadian law.

One of the leading cases on the recognition of a Chapter 11 proceeding in Canada under the doctrine of international comity is Roberts v. Picture Butte Municipal Hospital.13 In Roberts, Dow Corning Corporation (DCC) applied to an Alberta court for a permanent stay of the Canadian claims related to product liability actions for breast implant leaks, on the grounds that the Court should recognize the jurisdiction of the U.S. Bankruptcy Court for the Eastern District of Michigan, Northern Division. DCC had filed for Chapter 11 protection under the U.S. Bankruptcy Code after being unable to settle over 700,000 claims, including 30,000 arising in Canada. The Canadian claimants argued that Canadian courts are not bound automatically by the stay imposed by the U.S. Bankruptcy Code because comity is a discretionary matter and the Court's discretion should not be exercised in favour of DCC.

In deciding that a stay should be imposed in Canada, Justice Forsyth commented on the similarity between the U.S. Bankruptcy Code and the BIA in regard to the respective stay provisions. He said that stay provi-sions in both statutes have the same underlying philosophy: to ensure a fair distribution of assets among all creditors, not just among those who happen to have begun proceedings prior to the initiation of bankruptcy.14 As Justice Forsyth found that the U.S. Bankruptcy Code and Canadian bankruptcy legislation had similar procedures and procedural safeguards, he determined that it was appropriate to recognize the U.S. Chapter 11 proceedings under the doctrine of comity, and he granted a stay in Canada.

Two companion decisions from the SCC, collectively referred to as the "Holt Cases," articulate a detailed analysis of the Canadian approach to the recognition of foreign insolvency orders under the doctrine of international comity.15

The Holt Cases involved conflicting claims arising from three jurisdictions:

  1. The owner of the ship was a Belgian company and was placed into bankruptcy proceedings under Belgian law.

  2. U.S. suppliers to the ship asserted a maritime lien under U.S. law.

  3. The vessel was located in Canadian waters and was arrested under an order issued by the Federal Court of Canada (FCC) at the request of the holders of the U.S. maritime liens.

In this case, the Belgian bankruptcy trustee commenced two separate proceedings before two separate courts in Canada. Initially, the Belgian bankruptcy trustee applied for a stay of the FCC proceeding before the FCC, and it was only after such relief was denied that the Belgian trustee sought recognition of the Belgian bankruptcy proceedings before the Quebec Superior Court and asked that court to stay all proceedings in Canada. When the FCC refused to honour the stay issued by the Quebec Superior Court, both rulings were appealed and eventually were heard simultaneously by the SCC. In the end, the SCC upheld the decision of the FCC and ruled that the Quebec Superior Court had exceeded its jurisdiction in making an order staying the FCC proceedings.

Unlike earlier decisions addressing the availability of recognition orders for foreign insolvency proceedings, the SCC set out principles for future recognition orders. The Court examined both the "universalist" approach and the "territorialist" approach to such recognition proceedings, and stated:

[C]ourts and commentators have identified two general approaches to distributing assets in such proceedings. Under the "territoriality" approach, or the "GrabRule," the court in each jurisdiction where the debtor has assets distributes the assets located in that jurisdiction pursuant to local rules. Under the "universality" approach, a primary insolvency is instituted in the debtor's domiciliary country, and ancillary courts in other jurisdictions—typically in jurisdictions where the debtor has assets—defer to the foreign proceeding and in effect collaborate to facilitate the centralized liquidation of the debtor's estate according to the rules of the debtor's home country.16

The Court rejected both the universalist and the territorialist approaches and held that the Canadian approach was somewhere in the middle of the two models:

Canada has adhered to a middle position (dignified by the name "plurality approach") which recognizes that different jurisdictions may have a legitimate and concurrent interest in the conduct of an international bankruptcy, and that the interests asserted in Canadian courts may, but not necessarily must, be subordinated in a particular case to a foreign bankruptcy regime. The general approach reflects a desire for coordination rather than subordination, with deference being accorded only after due consideration of all of the relevant circumstances rather than automatically accorded because of an abstract "universalist" principle.17

In endorsing the "pluralist" model, the SCC mandated a discretionary approach for judges in Canada with respect to the recognition of foreign insolvency orders. In each case, a judge is required to examine the factors outlined by the SCC before it can determine whether the Canadian court should or should not enforce the requests and orders of the foreign bankruptcy court.

2. SECTION 18.6 OF THE CCAA (AND PART XIII OF THE BIA)

Since 1997, courts have also been legislatively enabled to respect comity and foreign decisions and judgments through section 18.6 of the CCAA.18 These provisions allow orders to be made by Canadian courts with respect to foreign insolvency proceedings. A court is empowered to approve or implement arrangements that will result in the coordination of CCAA proceedings with foreign proceedings.19 A "foreign proceeding" is defined under the CCAA as "a judicial or administrative proceeding commenced outside Canada in respect of a debtor under a law relating to bankruptcy or insolvency and dealing with the collective interests of creditors generally."20

Perhaps the most significant element of section 18.6 is the wide discretion that it gives to the court to make orders to facilitate the coordination of proceedings. Under section 18.6(2), "[t]he court may, in respect of a debtor company, make such orders and grant such relief as it considers appropriate to facilitate, approve or implement arrangements that will result in a co-ordination of proceedings under this Act with any foreign proceeding." This broad discretion is also evident in section 18.6(3), which states that a court can make an order on such terms and conditions as it considers appropriate, and in section 18.6(4), which states that nothing prevents a court, on application of a foreign representative or other interested person, from applying such legal or equitable rules governing the recognition of foreign insolvency orders and assistance to foreign representatives as are not inconsistent with the CCAA.

Notwithstanding the broad discretion found in section 18.6, the section includes safeguards to ensure that Canadian law and public policy are respected. Under section 18.6(5), a court is not required to make any order that does not comply with the laws of Canada or to enforce any order made by a foreign court. This section, although not mandatory, preserves a court's jurisdiction to refuse to enforce any foreign order that is not in line with the laws or public policy of Canada.

Courts have relied upon section 18.6 on a number of occasions to recognize foreign insolvency proceedings in Canada. Properly constituted Chapter 11 proceedings are commonly recognized as a "foreign proceeding" under the CCAA. The seminal case on the application of section 18.6 is Babcock & Wilcox Canada Ltd., Re21 In this case, a solvent corporation, Babcock & Wilcox Canada Ltd. (BW Canada), sought an interim order under section 18.6 declaring that the proceedings commenced by its U.S. parent for protection under Chapter 11 in connection with mass asbestos-related tort claims be recognized as a foreign proceeding for the purposes of section 18.6 and that BW Canada be allowed to avail itself of that section. Justice Farley of the Ontario Superior Court of Justice, relying on section 18.6(3) and (4) of theCCAA, held that the Chapter 11 proceedings were a foreign proceeding and that BW Canada was entitled to a stay of proceedings and other ancillary relief under section 18.6.

In Babcock & Wilcox, Justice Farley took the opportunity to articulate some of the factors to provide guidance on how section 18.6 should be applied:22

  1. The recognition of comity and cooperation between the courts of various jurisdictions are to be encouraged.

  2. Respect should be accorded to the overall thrust of foreign bankruptcy and insolvency legislation in any analysis unless in substance generally it is so different from the bankruptcy and insolvency law of Canada or perhaps because the legal process that generates the foreign order diverges radically from the process here in Canada.

  3. All stakeholders are to be treated equitably, and to the extent reasonably possible, common or like stakeholders are to be treated equally, regardless of the jurisdiction in which they reside.

  4. The enterprise is to be permitted to implement a plan to reorganize as a global unit, especially where there is an established interdependence on a transnational basis of the enterprise and to the extent reasonably practicable, one jurisdiction should take charge of the principal administration of the enterprise's reorganization, where such principal type approach will facilitate a potential reorganization and which respects the claims of the stakeholders and does not inappropriately detract from the net benefits which may be available from alternative approaches.

  5. The role of the court and the extent of the jurisdiction it exercises will vary on a case by case basis and depend to a significant degree upon the court's nexus to that enterprise; in considering the appropriate level of its involvement, the court would consider:

  1. the location of the debtor's principal operations, undertaking and assets;

  2. the location of the debtor's stakeholders;

  3. the development of the law in each jurisdiction to address the specific problems of the debtor and the enterprise; and

  4. the substantive and procedural law that may be applied so that the aspect of undue prejudice may be analyzed.
  1. Where one jurisdiction has an ancillary role,

  1. the court in the ancillary jurisdiction should be provided with information on an ongoing basis and be kept apprised of developments in respect of that debtor's reorganizational efforts in the foreign jurisdiction; and

  2. stakeholders in the ancillary jurisdiction should be afforded appropriate access to the proceedings in the principal jurisdiction.

  1. As effective notice as is reasonably practicable in the circumstances should be given to all affected stakeholders, with an opportunity for such stakeholders to come back into the court to review the granted order with a view, if thought desirable, to rescind or vary the granted order or to obtain any other appropriate relief in the circumstances.23

Courts have also relied upon section 18.6(2) to approve reorganization plans that have received the requisite creditor and court approvals under Chapter 11, effectively binding Canadian creditors and assets to the foreign plan. In Loewen Group, Re, the insolvent debtor, Loewen Group Inc. (Loewen), brought a motion under section 18.6(2) for recognition of a U.S. plan of arrangement and for a related vesting order. Loewen was incorporated under provincial law in British Columbia. Justice Farley held that the shareholder voting provisions of the provincial statute had no effect in the context of the sale of the assets of an insolvent corporation in a CCAA proceeding. He determined that recognizing and giving effect to the U.S. court proceedings in Canada fell within the Court's jurisdiction under section 18.6(2), and Loewen's Chapter 11 plan was given full force and effect in Canada.24

In another section 18.6(2) decision, Laidlaw, Re,25 the applicant debtors had commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code and brought an application under section 18.6(2) of the CCAA for an order recognizing and implementing the U.S. order confirming the Chapter 11 plan of reorganization and implementing the plan in Canada. The application was granted, with Justice Farley stating that section 18.6(2) provides a court with the authority to coordinate proceedings under the Act with any foreign proceeding.26 He further stated:

The purpose of s. 18.6(2) is to give the Court broad and flexible jurisdiction to facilitate cross-border insolvency proceedings which involve concurrent filings in Canada under the CCAA and in a foreign jurisdiction under the insolvency laws of that latter jurisdiction.27

3. LIMITATION ON RECOGNITION

As with the rules of comity, courts in Canada have imposed limits on when a foreign insolvency order will be given recognition under section 18.6. In Teleglobe Inc., Re,28 a bank (a creditor of the foreign debtor) requested an order from Justice Farley that Teleglobe Inc. (TCan) repay to Teleglobe Colombia SA (TCol), a related party, amounts that TCan had received from TCol after TCan had obtained CCAA relief. The bank had brought a motion under section 18.6(4) as an "interested person," but the Court held that it was not appropriate to stretch the doctrine of comity so far that the claim of TCol is "leapfrogged over the queue of the other unsecured creditors of TCan."29 In coming to this decision, the Court held: "[t]he Canadian insolvency court must protect the rights of all creditors, foreign or domestic; however, it would be contrary to the doctrine of equal treatment of creditors to prefer—or advance—the interest of foreign creditors over the interests of domestic creditors."30

In Menegon v. Philip Services Corp.,31 a case dealing with separate Chapter 11 and CCAA plans, the Court refused to issue an order approving the imposition of a U.S. plan on Canadian creditors. In doing so, the Court noted that the initial plan put forward for approval was flawed, on the basis that various claims of Canadian creditors were being dealt with only under the U.S. plan, which resulted in some Canadian creditors being unable to vote on the plan (whereas such creditors would be entitled to vote under Canadian law). In refusing to approve the plan, the Court held that "comity and international co-operation do not mean that one Court must cede its authority and jurisdiction over its own process or over the application of the substantive laws of its own jurisdiction, whenever any kind of differences between the two jurisdictions may arise."

To view the complete version of this article please Click Here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.