Newsletter Article
Cross-Border Cases: Corporate Group COMI
Published: 04/01/2011
By Deborah S. Grieve Re Gyro-Trac (USA) Inc. (“Gyro-Trac””) is the first appellate decision to consider the centre of main interests (COMI) of a corporate group. In that case, the Quebec Court Appeal upheld the lower court’s decision to recognize proceedings under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) and to stay Canadian bankruptcy proceedings against Canadian members of a corporate group.
Recent amendments to the Companies’ Creditors Arrangement Act (“CCAA”) and the Bankruptcy and Insolvency Act (“BIA”) incorporate the Canadian version of Model Cross-Border Insolvency Law that had been adopted by UNCITRAL (United Nations Commission on International Trade Law) in 1997. The Model Law principles adopted by Canada provide for the formal recognition of foreign insolvency proceedings and for access to Canadian courts for foreign representatives.
A foreign insolvency proceeding must be characterized as either a main or a non-main proceeding. A foreign main proceeding is one which takes place in the country in which the debtor’s COMI is located. When a group of related corporations in different countries seeks to restructure, COMI issues can become much more interesting.
In Re Gyro-Trac (USA) Inc., the parent company and one subsidiary (“Quebec Companies”) each had its registered office in Quebec. Under the Model Law, a debtor’s COMI is presumed to be the location of its registered office. The registered office of the other subsidiary was in South Carolina. All employees of the Gyro-Trac group were employed by the subsidiary in South Carolina. The sole director and shareholder of the parent company lived in South Carolina. The Quebec Companies had closed their offices in Quebec. Almost all of the group’s assets were in South Carolina. Other than its Canadian banker, all of the group’s secured creditors and most unsecured creditors were American.
On March 10, 2010, the Canadian lender applied for bankruptcy orders against the Quebec Companies. The bankruptcy hearing was scheduled for March 24, 2010. On March 19, 2010, the companies all filed for protection under Chapter 11 in South Carolina and the Bankruptcy Court issued orders authorizing each debtor-in-possession to act as its own foreign representative in proceedings outside the US. On March 23, 2010, the day before the scheduled Canadian bankruptcy hearing, the three foreign representatives of the Gyro-Trac group moved under the CCAA for recognition of the US proceedings and to stay the Canadian bankruptcy proceedings.
Despite the statutory presumption that the registered head office of a debtor corporation is its COMI, the Quebec Superior Court attributed greater importance to the location of the commercial activities of the corporations. The Court found that neither of the Quebec Companies carried on any commercial activity in Canada, and that the Group’s commercial activities were conducted exclusively through the American subsidiary, and managed from South Carolina. Accordingly the Court concluded that the COMI of the Quebec Companies was located in South Carolina. The Quebec Superior Court therefore recognized the Chapter 11 proceedings as foreign main proceedings, and stayed the Canadian bankruptcy applications.
The Court was concerned that if the Chapter 11 proceedings were not held to be foreign main proceedings, the Canadian bankruptcy proceedings could not be stayed under the new Canadian legislation, and the debtor group would lose its opportunity to restructure. The Court noted that the Canadian lender was protected in the U.S. proceedings (without commenting on the fact that the U.S. concept of “adequate protection” has not otherwise been imported into Canadian insolvency law).
The Canadian lender appealed and argued that the lower court had erred in introducing the concept of a principal place of business of a corporate group rather than considering each debtor individually. The Quebec Court of Appeal dismissed the appeal and held that the lower court, while it had referred to the activities, management and creditors of the Gyro-Trac group as a whole, had considered the COMI of each individual debtor. The appellate court indicated that COMI is a question of fact, and the facts in this case showed that the principal activities of the Quebec Companies, from both an “economic” and “control” standpoint, were in the U.S. The decision of the lower court was upheld, as it supported the purpose of the new rules, namely the equitable and efficient administration of insolvency proceedings in an international context, protection of the interests of creditors and debtors, and the facilitation of restructurings in order to protect investments and preserve employment.
Notes:
The COMI of corporate groups is the subject of current studies by the Insolvency Working Group of the United Nations Commission on International Trade Law (UNCITRAL). The author participated in the 39th meeting of UNCITRAL’s Insolvency Working Group in December 2010.
For an overview of cases considering the Canadian cross-border insolvency provisions in the first year since their enactment, see D. S. Grieve “The New Canadian Cross-Border Insolvency Regime – Reflections on the First Year” 2010 A.R.I.L. 299.
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