Overview and Why This Case Matters
In Royal Bank of Canada v Mundo Media Ltd1, the Ontario Superior Court of Justice found the presence of an arbitration clause between two parties did not preclude a court-appointed Receiver in the insolvency proceedings from asserting claims by the debtor against third parties not involved in the insolvency proceedings.
This is noteworthy, as typically the 'single proceeding model' in the context of insolvency proceedings is meant to centralize claims by creditors against the debtor, not claims by the debtor against other third parties.
While the 'single proceeding model' has typically been a 'shield' to protect debtors from having to defend claims in multiple proceedings or jurisdictions, the Court has opened the door to the 'single proceeding model' being used as a 'sword' to permit a Receiver to select the forum in which it will pursue a claim on behalf of a debtor contrary to a valid, binding international commercial agreement.2
This case matters because it provides a carve-out for a stay of proceedings in cases where a debtor claims against a third party where a binding arbitration clause exists. What was once, perhaps, viewed as pro-forma, is no longer such if this decision becomes the prevailing approach.
Background
This case centers around two parties: Mundo Media Ltd. ("Mundo") and SPay Inc. ("SPay").
Mundo is a technology company operating in Canada and the United States while SPay is a sports management technology company which also operates in both jurisdictions.
On April 9, 2019, Mundo was placed in receivership by the Ontario Superior Court of Justice pursuant to s. 243 of the Bankruptcy and Insolvency Act ("BIA").3
The appointment order authorized the Receiver to exercise all remedies available to Mundo, to collect money owed to Mundo and prosecute proceedings with respect to Mundo and its property. As such, the Receiver asserted a claim against SPay for what it says is money owed to Mundo from a contract between Mundo and SPay.
In fact, SPay had two contracts with Mundo, both of which were executed in 2017. One was a Management and Support Agreement ("the First Agreement") and the second was a Publisher Agreement ("the Second Agreement"). Mundo's Receiver asserted that SPay owed Mundo $4.1 million under the First Agreement. That was Mundo's largest outstanding account receivable owing in the receivership.4 As part of its presumptive defence, SPay asserted a right of set-off relating to amounts owing to it by Mundo under the Second Agreement.
Both agreements contained an arbitration clause that required disputes arising to be arbitrated in New York according to the JAMS Comprehensive Arbitration Rules & Procedures and applying New York Law.5
SPay sought to stay the Receiver's motion for judgment in the Receivership proceeding, asserting that the claim needed to be arbitrated in New York pursuant to the agreement's arbitration clause. While SPay argued arbitration would be the proper forum to adjudicate this dispute, the Superior Court of Justice disagreed and opted against granting the stay of proceedings as requested by SPay, for reasons discussed below.
Is the Receiver bound by the arbitration agreement?
The UNCITRAL Model Law, incorporated by reference in the International Commercial Arbitration Act, 2017, requires the court to refer a matter to arbitration upon a party's request, unless there are grounds on which the court should refuse the stay. The threshold is a low one. A stay "must be granted" unless there is some cogent reason to ignore the express terms of the arbitration clause.
In this case, is the fact that one of the parties is under receivership enough to displace the presumption of arbitration?
The Receiver made two arguments:
- This issue was addressed by the British Columbia (BC) Court of Appeal in Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339, where the stay was declined; and
- The "single proceeding model" dictates that the mutual claims ought to be resolved in the receivership proceedings.
The Court dismissed the first argument, noting that the BC Court of Appeal determined that the Receiver does not step into the shoes of the debtor and is therefore not bound by the arbitration clause in the agreement. In effect, a receiver is entitled to disclaim the arbitration agreements between the parties. That decision was appealed to the Supreme Court of Canada, which heard arguments on that issue. The decision is under reserve. The Superior Court of Justice deciding this matter indicated that it was not prepared to accept the BC Court of Appeal's reasoning, and because it was not bound to follow the decision, declined to do so.
The Court, however, was persuaded by the Receiver's second argument, which was that the "single proceeding model" is intended to avoid the chaos and inefficiency of a de-centralized receivership process. In this case, the Receiver was seeking to realize on a significant asset for the benefit of all creditors. Requiring the Receiver to commence an arbitration in proceeding is inconsistent with the object of the BIA and would potentially send the Receiver "scurrying to multiple jurisdictions". 6
On that basis, the Court dismissed the motion to stay the proceeding in favour of arbitration.
Concluding Thoughts
Staying court proceedings in favour of arbitration is typically the norm in Ontario. However, this may not be the case where one of the parties to the arbitration agreement and potential arbitration is subject to receivership proceedings.
What we can observe in this decision and in the Petrowest decision, is that courts are favouring what they perceive as the efficiency and judicial economy afforded by receivership proceedings, over party autonomy in deciding how a dispute is to be disposed of in the context of receivership proceedings.
Stay tuned for our thoughts and analysis on the Supreme Court of Canada's decision in Petrowest once released, and whether it will affirm that a Receiver is entitled to disclaim a pre-insolvency arbitration agreement.
Footnotes
1. Royal Bank of Canada v. Mundo Media Ltd., 2022 ONSC 2147 ("Mundo Media")
2. Mundo Media at 20
3. Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3)
4. Mundo Media at 3.
5. Mundo Media at 5.
6. Mundo Media at 38
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