Resources

Related expertise

Financial Services
Restructuring & Insolvency

Restructuring and Insolvency

Restructuring and Insolvency Group e-COMMUNIQUÉ - April 2011

Published: 04/01/2011

In This Issue

Cross-Border Cases: Corporate Group COMI

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.

Top

Perfection by Possession: Possession Not Required

Under Canadian personal property security legislation perfection of a security interest is effected by registration or by taking possession of the collateral. Perfection relates to the steps required to be taken in relation to a security interest in order to make it effective against third parties. A security interest is only enforceable against third parties if it has attached and been perfected.

In a recent Alberta case Michael Kallis and Suzanne Kallis v. First Capital Management Ltd. et al. the Court examined the issue of perfection as a result of possession by an escrow agent. The pledged shares were to be secured by delivering them to an escrow agent. Under Canadian law, in certain circumstances, possession by an escrow agent can constitute perfection of a security interest. However, in deciding if the purported security interest had been perfected, the Court was faced with a unique set of facts in this case as the share certificates in question had not actually been delivered to the escrow agent.

The Trustee disallowed the secured creditor’s claim on the basis that by failing to deliver the share certificates to the escrow agent, the security interest was not enforceable as it had not been perfected by possession. The creditor appealed the Trustee’s disallowance on the basis that a transfer of the securities to the escrow agent was not required, as the debtor had always acknowledged that the shares in question were being held for that specific creditor. The primary piece of evidence indicating that the debtor was holding the shares for the creditor was a post-it note on the share certificates indicating that they were being held for that creditor.

Remarkably, the Court granted the creditors’ appeal and determined that perfection of the security interest had been effected despite the fact that the share certificates had not been delivered to the escrow agent and remained in the possession of the debtor. In making this ruling the Court placed emphasis on the fact that the debtor had maintained and acknowledged that it was physically holding the pledged shares on behalf of the creditor, and that this acknowledgement constituted “delivery”. The Court concluded by stating:

There need be no actual delivery to an escrow agent, even though that was anticipated, and indeed required, in one of the agreements. The escrow agent need not make the acknowledgment. The acknowledgment may be made, as it was in this case, by the debtor who had previously acquired possession of those certificates. The security has therefore been sufficiently perfected and the Applicants are entitled to be regarded and treated as secured creditors.

This decision is important as it suggests that the concept of possession under personal property security legislation may be broader than actual physical possession, and that in some instances possession can be deemed even if the collateral remains in the possession of the debtor.

Editor’s Note: Copies of the Court decision discussed in this article are available from Michael Casey at mcasey@casselsbrock.com.

Top

Section 38 BIA Claims – It’s What You Know That Counts

By Larry Ellis

Pursuant to section 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) a creditor of the bankrupt estate can obtain the trustee’s right to pursue estate litigation where the trustee refuses or fails to pursue such litigation. In a recent Ontario case, Indcondo Building Corp. v. Sloan [2010], CarswellOnt 9785, the Court of Appeal was asked to determine whether the limitation period for the assigned litigation commences with the trustee’s knowledge of the facts giving rise to the claim or the assignee’s knowledge of those facts. The Court of Appeal determined that pursuant to the Limitations Act, 2002, S.O. c.24 (the “LTA”) the limitation period commences on the earlier of the trustee’s discovery of the facts or the creditor’s discovery of them.

Background

On January 13, 2004, the Bankrupt filed a voluntary assignment in bankruptcy. In April 2006 a creditor of the Bankrupt’s estate obtained an order pursuant to section 38 of the BIA obtaining the trustee’s rights to pursue an alleged fraudulent conveyance from the Bankrupt made to his wife in the late 1990’s and commenced proceedings to set it aside (the “Conveyance Litigation”).

The Bankrupt sought the dismissal of the Conveyance Litigation on the basis that it was statute barred under the LTA. Counsel for the Bankrupt argued that actions must be commenced within two years from the date on which the claimant discovered the facts giving rise to the claim. Given that the trustee was appointed in 2004, more than two years prior to the start of the Conveyance Litigation, the Bankrupt’s counsel argued that the Conveyance Litigation ought to be barred on the basis that it was commenced outside the limitation period. The motions Judge held that the trustee’s discovery of the claim was the relevant limitation under the LTA and barred the Conveyance Litigation.

The Court of Appeal arrived at a different conclusion. The Court of Appeal referred to the LTA’s provisions for scenarios where litigation rights are assigned. In those circumstances, the limitation period commences on the earlier of the assignor’s discoverability or the assignee’s discoverability. The Court of Appeal’s decision had the unusual result of preserving the Conveyance Litigation because, during the time the creditor learned the facts giving rise to the Conveyance Litigation, the limitation period was unlimited, as opposed to the two year period now prescribed under the LTA.

The take away from the Court of Appeal’s decision is that creditors seeking to pursue a Trustee’s cause of action must first determine when they [and the Trustee] became aware of the facts giving rise to the cause of action. If their knowledge of these facts is two years old or more their efforts to pursue the trustee’s claim will be statute barred (unless their knowledge predates the LTA). A creditor under these circumstances would have to use creative means to maintain the trustee’s cause of action. Options available include having the interested creditor fund the estate so as to let the trustee pursue the claim directly or having another creditor to the estate, that didn’t know of the facts giving rise to the cause of action, pursue an assignment of the trustee’s claim under section 38 of the BIA.

Top

Death and Bankruptcy: Escaping one but not the other

By David Ward

May a deceased person who dies in bankruptcy having failed to complete his duties under the Bankruptcy and Insolvency Act be discharged from bankruptcy?

This was the question that the British Columbia Supreme Court wrestled with earlier this year in a reported decision that began by noting that there was no jurisdiction on point.

The BC Court dealt with three matters in bankruptcy chambers, noting that neither the trustees involved, or the representatives of the Office of the Superintendent of Bankruptcy Canada called upon, were able to provide the Court with any authority upon which the discretion to grant a discharge to a bankrupt following his demise might be exercised.

The BIA legislates the discharge of bankrupts. The Court (which by definition under the BIA include a registrar in bankruptcy) has the discretion to grant or refuse a discharge. The discharge language is permissive, indicating a discretionary decision. Each bankruptcy case must turn on its particular facts.

What then is the effect of the death of the bankrupt who is not yet completed his duties?

The BC Court began by noting that the discharge process is essential to the proper administration of the bankruptcy system and that a discharge is not a matter of right. The success or failure of any bankruptcy system depends upon the proper administration of the discharge provisions.

In deciding whether a bankrupt should be discharged, consideration must be given both to the rehabilitation of the bankrupt and the integrity of the bankruptcy system. In regards to the rehabilitation objective, the Court observed that the point is moot; the bankrupt is deceased.

The court further concluded that, generally speaking, the integrity of the system is also not compromised in circumstances where a deceased bankrupt is discharged despite not having completed counselling. This is the case, for example, where the bankrupt passes away unexpectedly or merely runs out of time to complete the requirement. In these cases, the bankruptcy system is not perceived as too lax when its effect on the bankrupt is cut short by their death.

In the BC Supreme Court case of Simoes, Re., upon application of these principles, the bankrupts involved were discharged.

Top

Professional Notes - April 2011

Bruce Leonard chaired a panel on international insolvency issues at the Annual Meeting of the American College of Bankruptcy in Washington, D.C. on March 18, 2011. Bruce is a Director of the College and Chair of the College’s International Committee. The College is an invitational organization comprised of senior insolvency practitioners, Judges, academics and credit professionals from the United States and fifteen other countries worldwide.

Deborah Grieve has been selected as the 2011 winner of the Fetner Award, presented by the highly-regarded International Women’s Insolvency & Restructuring Confederation (IWIRC). IWIRC, a global network of more than 1,000 professionals, fosters business relationships, advanced education and leadership development in the area of insolvency and restructuring for women in a variety of related fields, including law, accounting, finance and turnaround management, among others. The Fetner Award is given to a distinguished international IWIRC member who has provided an exceptional contribution to the organization over the past year.

IWIRC’s Canadian Network, of which Deborah is currently President, was also recognized with the 2011 Ryan Award for the Network that best exemplified the objectives and values of IWIRC over the past year.

Top