This article examines the principles that the Canadian courts will apply to determine the centre of main interest (COMI) for a debtor with operations in more than one jurisdiction. The determination is an important one, since it will effectively decide whether the relief of a stay of proceedings granted under section 48 of the Companies' Creditors Arrangement Act is automatically available, or only given at the court's discretion.
This is part of the PLC multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.
In the last 20 years or so, there have been significant advances in co-ordinating multinational insolvency proceedings. However, one of the largest issues facing multinational businesses is choosing in which jurisdiction (or jurisdictions) to commence proceedings. Where a corporation operates in only one country, the choice is straightforward. However, many current businesses operate in more than one jurisdiction.
Traditionally, this meant that if a multinational business needed to restructure it had to commence insolvency proceedings in each country where the business operated. This significantly increases the costs and can operate as a barrier to attempting a restructuring, consequently resulting in the business being liquidated instead of being rescued.
Another difficulty can arise where a corporate group has operations in multiple jurisdictions, and not all of those jurisdictions have statutory regimes that allow for corporate reorganisations. There will then be a decided advantage to try and find ways to justify reorganising as many entities as possible within the corporate group in a jurisdiction that promotes reorganisation, rather than in a jurisdiction that does not.
In order to combat this problem the international insolvency community developed the concept of the "centre of main interest" (COMI). The idea behind COMI is that an insolvency proceeding can be commenced in the debtor's COMI, and less expensive ancillary proceedings can be commenced in the other jurisdictions where the debtor's business operated. This concept was encapsulated in several international agreements including both the Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) (which is in effect in all EU member states except Denmark) and the UNCITRAL Model Law on Cross-Border Insolvency 1997 (UNCITRAL Model Insolvency Law) (which has been incorporated into the domestic law of several other nations, including both the United States (Chapter 15, US Bankruptcy Code) and in Canada (Part IV, Companies' Creditors Arrangement Act (CCAA) (R. S. C 1985 c. C-36, as amended); Part XIII, Bankruptcy and Insolvency Act (R. S. C. 1985, c. B-3, as amended)).
The aim of the UNCITRAL Model Insolvency Law is to create a standard regime encouraging co-operation in dealing with multinational insolvencies. It does not prescribe specific rescue procedures or list the priorities of creditors. However, it does:
Promote the concept of judicial co-operation between insolvency courts in different jurisdictions.
Introduce the idea that there should be one primary proceeding, initiated in the debtor's COMI, with the courts in other countries offering co-operation to the court in the debtor's COMI (primarily by granting of stays of domestic proceedings where the court in the debtor's COMI has granted a stay in respect of the debtor).
Allow the debtor's creditors to deal with their claims in the debtor's COMI, instead of in another jurisdiction's court which could favour domestic creditors.
The rationale behind the UNCITRAL Model Insolvency Law is that international co-operation will enhance and promote an international rescue culture, encouraging reorganisations that can preserve a business's value for the benefit of all stakeholders, as oppose to liquidations which effectively destroy the business's value.
In Canada, the UNCITRAL Model Insolvency Law co-ordinating foreign proceedings was largely implemented in Part IV of the Companies' Creditors Arrangement Act (CCAA) (Part IV is functionally equivalent to Chapter 15 in the United States Bankruptcy Code), which deals with recognising and enforcing foreign insolvency proceedings. However, as with all international efforts to date, Part IV of the CCAA only deals with entities on an individual basis. The procedures for dealing with corporate groups are not addressed. Recently, the Part IV filing of the Elephant & Castle group of companies (collectively, "E&C") provided the Ontario Superior Court of Justice (Ontario Court) with the opportunity to address the concept of a corporate group filing (2011 ONSC 4201).
On 28 June 2011, E&C commenced proceedings (Chapter 11 Proceedings) in the United States' Bankruptcy Court for the District of Massachusetts Eastern Division, under Chapter 11 of Title 11 of the United States Bankruptcy Code. The purpose of the Chapter 11 Proceedings was to allow E&C to continue to operate in the ordinary course of business while it pursued the sale of its business. E&C operated and franchised authentic, full-service British style restaurant pubs in both the United States and Canada. Concurrently with the Chapter 11 filing, E&C also sought recognition of the Chapter 11 Proceedings in the Ontario Court as a "foreign main proceeding" under Part IV of the CCAA.
Chapter 11 (and legislation to similar effect in other countries) allows a corporation to attempt to reorganise for the benefit of its creditors. Upon the commencement of Chapter 11 proceedings a moratorium is imposed on the creditors' ability to seek payment on claims that preceded the commencement of those proceedings. Counterparties to various key contracts (for example, intellectual property licensors and landlords) are prohibited from terminating their contracts as a result of any amounts that were owed as at the date of filing. In addition, the debtor company is able to attempt to reject contractual arrangements that are unduly onerous. The aim is to:
Address the issues that would otherwise likely result in the company's liquidation if not resolved.
Come to an arrangement which is acceptable to the majority of the company's creditors.
The proceedings are conducted under judicial supervision to attempt to ensure that the interests of the debtor, the creditors and other relevant stakeholders (for example, regulators, if applicable) are balanced with regard to the overall statutory framework.
Under the CCAA, when dealing with international insolvencies, the debtor's COMI is presumed to be the jurisdiction in which it was incorporated: "For the purposes of this Part [IV], in the absence of proof to the contrary, a debtor company's registered office is deemed to be the centre of its main interests" (author's emphasis added). In identifying the debtor's COMI, the issue therefore becomes what constitutes proof to the contrary where there is an intention to show that the jurisdiction of incorporation is not actually the COMI.
The E&C group, a total of 14 companies, included three Canadian entities (Canadian Debtors) including the parent company. All the Canadian Debtors' registered offices were in Canada. In addition:
Nearly one-half of E&C's operating locations were in Canada.
Approximately 43% of the employees worked in Canada.
GE Canada Equipment Financing GP (another Canadian company) was E&C's primary secured creditor.
E&C sought to rebut the COMI presumption prescribed by the CCAA for the Canadian Debtors (which was Canada). In the absence of proof to the contrary, the debtor's registered office is deemed by the CCAA to be the COMI (this is the same as provided for under the UNCITRAL Model Insolvency Law). The remaining companies in the E&C group were all incorporated in various American jurisdictions.
The issue before the Ontario Court was whether the Chapter 11 Proceedings should be recognised as a foreign proceeding and, if so, whether they were a "foreign main proceeding" or a "foreign non-main proceeding" under section 47 of the CCAA. If the court recognises the Chapter 11 Proceedings as a "foreign main proceeding" then the relief available under section 48 of the CCAA (including the stay of proceedings) is automatic instead of discretionary. A "foreign main proceeding" is defined in the CCAA as a foreign proceeding in a jurisdiction where the debtor has its COMI. Since the stay of proceedings is automatic, there is no need to rely on the court exercising its discretion in favour of allowing the stay. The court is obliged to grant the stay of proceedings and give effect to the foreign proceedings. Therefore there is a considerable advantage to having the domestic court accept that foreign proceedings are, in fact, a foreign main proceeding.
On the other hand, a finding that the foreign proceeding is a "foreign non-main proceeding" isn't necessarily fatal. However, the applicant in this instance must convince the domestic court to exercise its discretion to grant the stay of foreign proceedings. In addition, even if the domestic court is prepared to grant a stay of proceedings, it may be on different terms to those that would apply if the stay was automatic. Whenever a party relies on judicial discretion, there is always the risk that the court may exercise that discretion in a different way to what is reasonably expected.
In the E&C case, the Ontario Court granted the relief E&C requested and recognised the Chapter 11 Proceedings as a "foreign main proceeding". The court was satisfied for the reasons elaborated on below that E&C had met the requirements of section 47(1) of the CCAA and that it was appropriate for the court to recognise the foreign proceeding in Canada. Section 47(1) of the CCAA provides that: "If the court is satisfied that the application for the recognition of a foreign proceeding relates to a foreign proceeding and that the applicant is a foreign representative in respect of that foreign proceeding, the court shall make an order recognising the foreign proceeding". The court is also mandated in section 47(2) to declare whether the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding.
The Ontario Court found that the presumption contained in section 45(2) (that each of the Canadian debtors' COMI is their registered office, in Canada) was rebutted in the circumstances and the debtors' COMI was found to be the United States. In arriving at this finding, the Ontario Court cited the jurisprudence on the issue of a debtor's COMI and noted that, in interpreting COMI, the following factors are usually significant:
The location of the debtor's headquarters, head office functions or nerve centre.
The location of the debtor's management.
The location which significant creditors recognise as being the centre of the company's operations.
The Ontario Court further noted that E&C's headquarters, head office functions or nerve centre was in Boston, Massachusetts and the location of the debtors' management was in Boston. The fact that GE Canada Equipment Financing GP (the primary secured creditor) did not oppose the relief sought was also relevant to the court's decision. In these circumstances, the Ontario Court concluded that, for the purposes of this application, each of the E&C entities, including the Canadian Debtors, have their COMI in the United States. Having reached this conclusion, certain mandatory relief set out in section 48(1) of the CCAA was granted (that is, a mandatory stay of proceedings), along with the remainder of the relief sought.
Although each case will turn upon its own unique facts, this case may well stand as an important international precedent. Where a multinational enterprise is largely run from one country, even though its operations may be spread relatively evenly in two or more countries, regard can be had back to the head office in cases where the operation is largely centralised. Conversely, where the operations are largely run on an individual country-by-country basis, a court is likely to reach the opposite conclusion and determine that the COMI is, in fact, in the jurisdiction of incorporation.
Qualified. Ontario, Canada, 1991
Areas of practice. Insolvency and restructuring; financial services.
Acting as Canadian counsel to the Elephant & Castle Group in the Chapter 11/CCAA proceedings.
Acting for CBS in the Canwest Media CCAA proceedings.
Acting for Shell Canada in the SemCAMS CCAA proceedings.
Acting for Federal Insurance Company in the Pope & Talbot CCAA proceedings.
Acting for Jarvis Street Pharma and GLR Resources Corp in their BIA proceedings.
Acting for Strategic Resources Acquisition Corp in its CCAA proceeding.