Issues and Strategies in US-Canada Cross-Border Restructurings  

publication 

2009 - (PLC Cross-border Restructuring and Insolvency Handbook 2008/09)

PLC Cross-border Restructuring and Insolvency Handbook 2008/09

Cross-border insolvency proceedings involving affiliated debtors within a corporate group are becoming the norm. Professionals in the US and Canada are being challenged more than ever to understand, and factor into their planning, the law and practice of the neighbouring jurisdiction in order to provide effective advice and strategic counsel. Understanding the issues and dynamics material to cross-border restructurings is critical to the effective management of a troubled situation and the execution of a successful restructuring strategy. This chapter focuses on key issues and trends relevant to cross-border restructurings between the US and Canada, including: 

  • How recent economic developments are affecting US-Canadian cross-border restructurings.
  • Legislative distinctions.
  • Canadian insolvency reform.
  • Looking at using jurisdiction to advantage through the example of the recent Chapter 15 case involving MuscleTech.
  • Meeting the requirements for recognition under Chapter 15.
  • Recognition of foreign non-main proceedings under existing law and pending insolvency reforms in Canada.
  • Whether new provisions for the recognition of foreign insolvency proceedings mean the end of parallel or concurrent Chapter 11 and CCAA filings.
  • Assets sales and the need for debtors and other stakeholders to understand and respect the differences in jurisdictional approaches and law. 

Economic developments affecting US-Canadian cross-border restructurings

The US is Canada's largest trading partner. In 2007, Canada was the second biggest exporter to the US, having fallen slightly behind China. Canada's economy is highly integrated with that of the US. Factors affecting the US economy impact heavily on Canadian businesses. The rapid rise of the Canadian dollar relative to the US dollar, the decline of the US "Big Three" automakers, the downturn in US property values that triggered the subprime mortgage loan crisis, and the current recessionary environment in the US with its attendant decrease in consumer confidence and spending, have already begun to take their toll north of the border. 

The single most influential economic development in both jurisdictions this past year is the US subprime mortgage loan crisis. Countries globally, Canada included, have been subjected to significant secondary fall-out because of the unprecedented exposure of investors to US subprime mortgage loans through complex structured finance products. In August of 2007, these events led to the complete failure of one segment of the Canadian asset-backed commercial paper (ABCP) market (being non-bank backed ABCP). Unease over the magnitude of prospective losses has sparked uncertainty and concern among investors and created an avalanche of capital exposure for banks, institutional investors, hedge funds and others. This could worsen further in the event of the failure of monoline insurers or others providing credit protection. 

In the coming months, US and Canadian businesses will attempt to deal with domestic economic issues, a severe and sudden tightening credit environment and strengthening global competition. In insolvency cases, time and money pressures may fuel the growing trend toward asset sales in lieu of plans and, in some sectors, liquidations in lieu of going concern sales. Non-institutional capital sources are anticipated to play an increasing role in funding restructurings and merger and acquisition activities involving financially distressed businesses. This will introduce a different dynamic into many restructurings, as the objectives and tactics of hedge and equity funds can be very different from those of banks and other institutional players.

Legislative distinctions

While similar in operation and purpose, there are many legislative differences between restructuring legislation in the US and Canada. Title 11 of chapter 11 (Chapter 11) of the United States Code (11 USC §§ 101 et seq) (Bankruptcy Code) governs the restructuring of financially challenged debtors in the US, with recognition of foreign proceedings being governed by chapter 15 of the Bankruptcy Code (Chapter 15).  

In Canada, most formal business restructurings are accomplished using the proposal provisions of the Bankruptcy and Insolvency Act (RSC 1985, cB-3) (BIA) or the Companies' Creditors Arrangement Act(RSC 1985, cC-36) (CCAA). The CCAA is used in more complex cases because of its flexibility and when it is anticipated that the restructuring may take longer than the time frame allowed for under the BIA. There are far fewer legislative provisions relating to restructurings under the BIA and CCAA than under Chapter 11, leaving many significant issues to be defined and refined by jurisprudence. The breadth and scope of orders made under the CCAA demonstrate the willingness of courts to exercise a broad discretion in dealing with the unique circumstances of restructuring cases.  

Among the meaningful differences that currently exist between insolvency legislation in Canada and the US is that in Canada there is no: 

  • New estate created on the initiation of the proceeding.
  • Concept of adequate protection.
  • Restriction on the use and disposition by a debtor of cash collateral or the use, sale or lease of other property held as security.
  • Provision precluding pre-filing security from encumbering after-acquired property.
  • Statutory authority to grant priority or priming liens for loans advanced to the debtor during the restructuring.
  • Statutory authority for the creation of committees of unsecured creditors or equity holders, or imposing the disclosure requirements of Rule 2019 of the Federal Rules of Bankruptcy Procedure.
  • Administrative expense claims for persons who supply goods and services post-filing.
  • Provisions (with some restricted exceptions) for the acceptance, rejection or assignment of executory contracts, including collective bargaining agreements, or statutory requirement for the payment of cure costs in relation to executory contracts being assumed and/or assigned.
  • Statutory cram-down mechanism.
  • Absolute priorities rule.
  • Subordination of claims of equity holders or a statutory authority to subordinate claims based on equitable subordination (itself a doctrine not embraced by Canadian courts). 

In practice, some of these legislative differences have been bridged by courts relying on the discretion given to them under, or the use of inherent jurisdiction to fill in gaps in, the CCAA. A notable example of this has been the granting of charges in favour of lenders who agree to provide interim financing to the debtor during the restructuring and, in some cases, to give such charges priority over existing security. 

The CCAA has certain unique features, such as the requirement for the appointment of a third party officer of the court (monitor), to monitor the business and financial affairs of the debtor, report to the court and assume other responsibilities mandated under the CCAA and directed by the court. Most US-Canadian cross-border proceedings are conducted in Canada under the provisions of the CCAA. For this reason, in relation to Canada, the balance of this chapter will focus principally on CCAA law and practice.

Canadian insolvency law reform

Canada has enacted reforms to its bankruptcy, insolvency and restructuring legislation, which are not yet in force. When they become effective, these reforms (Insolvency Reforms) will introduce some provisions that will more closely align the laws of the two jurisdictions (in a distinctively Canadian way that in many respects is very different than under the Bankruptcy Code), regarding: 

  • Debtor-in-possession (DIP) financing and priming liens.
  • Public availability of creditors lists.
  • Restricting the operation of ipso facto clauses in contracts to which the debtor is a party.
  • Assumption, rejection and assignment of executory contracts (with some exclusions).
  • Protection for intellectual property licensees.
  • Asset sales and orders vesting title in assets free and clear of existing liens.
  • Protection for lessors of aircraft objects.
  • Challenging of preferences and transactions at undervalue in a CCAA proceeding.
  • Claims of equity holders in relation to their equity interests being treated as equity.
  • The recognition of foreign insolvency proceedings based on the provisions of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency 1997 (Model Law). 

Pursuant to the Insolvency Reforms, the CCAA will now apply to income trusts with assets in Canada whose units are traded on a prescribed stock exchange. The Insolvency Reforms include protections for wage earners. In the context of restructurings, they give power to the court to remove directors. Significantly, the Insolvency Reforms will broaden the nature and extent of legislatively-sanctioned charges that may be granted by Canadian courts, many of which may be given priority over an existing security interest. Today, priming charges are very often given in favour of the debtor's professional advisers, the monitor and its advisors, and directors and officers. Under the Insolvency Reforms, the following charges and/or statutory priorities may be granted or will exist: 

  • Administration charges in favour of estate professionals, such as the monitor and its advisers, debtor's counsel and other interested persons.
  • Charges to secure indemnities to directors and officers.
  • Priorities for prescribed amounts of wages and vacation pay owing to employees.
  • Priorities for unpaid regular pension contributions, but likely not special contributions relating to unfunded liabilities.
  • Charges in favour of persons mandated by the court to supply goods and services post-filing, but relating only to their post-filing exposure.
  • Charges in favour of persons providing DIP financing. 

In Canada there are also provincial and federal laws that may impose statutory liens and trusts that can rank ahead of the claims of secured creditors in a restructuring.

Using jurisdiction to advantage

The CCAA proceeding and affiliated Chapter 15 case involving MuscleTech Research and Development Inc and affiliated debtors (MuscleTech) (Ont SCJ, Court File No 06-CL-6241), were recognized as foreign main proceedings under Chapter 15 by the United States Bankruptcy Court (Bankruptcy Court) for the Southern District of New York (SDNY) (January 18, 2007, Case No 06-10092 (Bankr SDNY)). The Chapter 15 proceeding was administered by the District Court for the SDNY (District Court), as it also had jurisdiction over certain multi-district litigation against Muscle-Tech and others in relation to a diet product, known as ephedra. 

Ephedra-based product liability litigation, as well as other non-certified consumer liability class actions (US Litigation) precipitated MuscleTech's filings. Through the use of the Chapter 15 process, MuscleTech obtained orders recognizing and giving effect to orders made in the CCAA proceeding. This included injunctions staying the US Litigation, and the approval of a claims resolution process. Efforts to challenge the District Court's recognition of the Canadian claims resolution order were not successful (Re Ephedra Products Liability Litigation 349 BR 333 (SDNY 2006)). This was the first case to consider the "manifestly contrary" to public policy language of section 1506 of the Bankruptcy Code. The District Court held that this exception should be narrowly interpreted and was not an impediment to recognition of the Canadian claims resolution process, even though such process denied claimants the right to a jury trial.  

In 2007, MuscleTech's plan was approved by creditors and sanctioned by the CCAA court. The plan and sanction order were novel for Canada because they contained broad third party non-debtor releases and injunctive relief in favour of retailers and insurers that had funded the plan. MuscleTech subsequently obtained an order from the District Court recognizing and giving effect to the Canadian plan and sanction order, including the non-debtor releases and injunctions. In making this order, the District Court subjected the CCAA plan to far less scrutiny than would have been the case if it had been filed as a plan in a Chapter 11 case.

Meeting the requirements for recognition under Chapter 15

Persons petitioning under Chapter 15 must ensure that its technical requirements have been met; a factor to be considered when drafting orders in the foreign proceeding in order to avoid mishaps.   

Daymonex Limited involved a Canadian restructuring under the proposal provisions of the BIA. A trustee had been appointed in the proceeding, who was also appointed as an interim receiver under the BIA. Neither the trustee, nor the interim receiver, had the powers to manage or operate the debtor. When a third party director and officer of the debtor filed the Chapter 15 petition, recognition was initially denied because there was not sufficient evidence of that person's status as a foreign representative. This situation was rectified by a return trip to the Canadian court where an order was obtained that appointed the director as a foreign representative for the purpose of initiating and proceeding with the Chapter 15 proceeding (Daymonex Limited, Ont SCJ (Commercial List), Court File No. 07-CL-6832, unreported February 14, 2007). Following this, the Canadian proceedings were recognized as foreign main proceedings (In Re Daymonex Limited, Case No. 07-90171, February 26, 2007 (Bankr SDI)). 

The importance of meeting the requirements for recognition has also been underscored in a recent Chapter 15 decision involving two Bear Stearns funds that came under the administration of joint provisional liquidators under the Companies Law of the Cayman Islands. The Bankruptcy Court for the SDNY denied the petitions for recognition of these proceedings as either foreign main or foreign non-main proceedings (In Re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd 374 BR 122 (Bankr SDNY) (Bear Stearns)). 

Under Chapter 15, a foreign main proceeding is a foreign proceeding that is pending in the country where the debtor has the centre of its main interest (COMI). Section 1516(c) provides that, in the absence of evidence to the contrary, the debtor's registered office is presumed to be the COMI (the Statutory Presumption). If the foreign proceedings are recognized as foreign main proceedings, certain automatic protections are triggered, most notably an automatic stay of proceedings. If the foreign proceedings are recognized as foreign non-main proceedings, the US court still has the discretion to make orders, including in the nature of injunctive relief. The definition of foreign non-main proceeding requires the debtor to have an establishment in the country in which the foreign proceeding is pending (section 1502(5), Chapter 15). Establishment is defined as any place of operations where the debtor carries on a non-transitory economic activity (section 1502(2), Chapter 15). 

In Bear Stearns, the court held that the debtors' COMI was not the Cayman Islands, as a result of which the liquidation proceeding involving these debtors was not a foreign main proceeding. The court further held that the debtors, who were prohibited from carrying on business, and had no office or place of business, no employees and no assets, in the Cayman Islands, could not be said to have an establishment in the Cayman Islands. Recognition was not to be a "rubber stamp". The proceedings were not found eligible for relief as foreign non-main proceedings. 

The court in Bear Stearns took a different approach than had the court in the much publicised case of In re SPhinX, Ltd, 351 BR 103 (Bankr SDNY, 2006) (Re SPhinX). In Re SPhinX, the Bankruptcy Court also found that the COMI was not the Cayman Islands. The Bankruptcy Court, however, did recognize the proceeding as a foreign non-main proceeding in similar circumstances, without focusing on whether the debtor in that case could be said to have an establishment in the foreign country (again the Cayman Islands) such that it actually met the test for recognition of a foreign non-main proceeding.  

The case of In re Basis Yield Alpha Fund (Master) 49 Bankr Ct Dec 89 (Bankr SDNY) also involves foreign liquidation proceedings commenced in the Cayman Islands. The registered office of Basis Yield Alpha Fund is the Cayman Islands. No objections to recognition were filed in the Chapter 15 case. The provisional liquidators moved before the Bankruptcy Court for summary judgment. They argued that the absence of objections to the petition and the existence of the registered office in the Grand Caymans (in view of the Statutory Presumption) were sufficient to establish the foreign debtor's COMI as being the Cayman Islands. 

The Court did not agree. Among other things, it stated that the Statutory Presumption exists "for the purposes of speed and convenience, and to save stakeholders costs in straightforward cases, but does not tie the hands of a court to examine the facts more closely in any instances where the court regards the issue to be sufficiently material to further inquiry". While recognition could be granted under a section 1516 presumption, the Court did not agree that it must do so. In a case where facts showing a COMI are set out in the petition or an accompanying affidavit and there is no opposition, the Court acknowledged that further evidence may not be required. In this case, however, the Court noted the petition was "strikingly silent" as to the nature or extent of any business activity that the foreign debtor conducted in the Cayman Islands. As genuine issues of material fact were found to exist regarding the location of the COMI, the Court denied the motion for summary judgment.

Recognition of foreign non-main proceedings

Recognition under the insolvency reforms

A Canadian version of Chapter 15, modelled on, but not identical to, the Model Law is included in the Insolvency Reforms. In Canada, however, the debate on whether a proceeding is a foreign non-main proceeding may well be different than in the US and other jurisdictions. Foreign non-main proceeding is defined under the Insolvency Reforms as a proceeding that is not a foreign main proceeding, without there being a requirement that there be an establishment in the jurisdiction in which the foreign proceeding was commenced.

Existing recognition process under the CCAA

Currently, section 18.6 of the CCAA is the primary means for a Chapter 11 debtor to seek a comprehensive stay of proceedings in Canada without commencing a concurrent proceeding. Examples of proceedings initiated under section 18.6 include: DURA Automotive, Allied Holdings, Foamex, Kaiser Aluminum, Heating Oil Partners, Pliant Corporation, Core-Mark International, Androscoggin Energy, United Airlines, PSINet and Babcock & Wilcox.  

As these cases demonstrate, a section 18.6 proceeding can serve as a mechanism for recognizing and implementing orders made in a Chapter 11 case, including:  

  • Stays of proceeding.
  • Claims processes.
  • Bidding and sale processes.
  •  DIP financing and security.
  • Plan confirmation.
  • Injunctive relief to implement a plan.  

Canadian courts generally look to ensure that orders for which recognition are requested are fair and reasonable having regard to the rights of creditors in Canada or, if not, are modified to be so. In the case of Allied Holdings, approval of the Chapter 11 claims process order was granted, but made subject to the US claims bar date being extended for a group of creditors who may not have received notice of the process, with a corresponding requirement that notice of the claims process be advertised in the national edition of a Canadian newspaper (In Re Allied Holdings Inc, Case No 05-CL-6007, Order made February 6, 2008 (Ontario SCJ (Commercial List)).

Does mutual recognition of foreign insolvency proceedings mean the end of concurrent Chapter 11 and CCAA filings?

The enactment of Chapter 15 has not meant the end of concurrent or parallel filings under Chapter 11 following or together with a CCAA filing. In January 2008, Quebecor World Inc (QWI) and many of its US operating subsidiaries (referred to as US Debtors and, together with QWI, Quebecor Debtors) filed proceedings under the CCAA. This was followed by the commencement of Chapter 11 cases in the SDNY by the US Debtors, but not QWI. As part of the initial order made in the CCAA cases, the Canadian court approved of a cross-border insolvency protocol, to become effective on its approval by the SDNY Bankruptcy Court.  

The Quebecor initial order provides that the stay of proceedings and powers granted to the US Debtors are deemed to conform to the extent and scope of the stay applicable in the Chapter 11 cases. In the case of conflicts between the operation of the Canadian and US stays of proceedings in relation to the US Debtors, and the powers granted to the US Debtors in the Canadian proceeding and the Chapter 11 proceedings, the Chapter 11 proceedings govern. In the case of conflicts between the charges and security granted in favour of the DIP lenders in the initial order and those granted by the US Debtors on against assets of such debtors in the US in the Chapter 11 proceedings, the latter governs.  

The Quebecor protocol incorporates the American Law Institute's Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases. In many respects it is similar to other Canadian-US protocols, seeking to encourage co-operation and co-ordination and accommodate communications between the two courts and being more procedural than substantive in nature. It provides that transactions for the sales of property of the US Debtors are subject to the sole approval of the Bankruptcy Court and transactions for the sale of property of QWI are subject to the sole approval of the Canadian court. It also provides that the US court has jurisdiction to deal with matters relating to the DIP loans and security in relation to the US Debtors and the Canadian court those matters in relation to QWA. 

In the cross-border proceedings involving Pope & Talbot Inc and affiliated debtors, being both US and Canadian debtors (collectively referred to as Pope & Talbot Debtors), a protocol, similar to the Quebecor protocol, was approved by both courts. The US and Canadian corporate debtors in Pope & Talbot filed in both jurisdictions. In addition, certain partnerships filed under Chapter 11 (not being legally able to do so under the CCAA). Under this protocol, out of the ordinary course sales of real property of the Canadian debtors located in Canada and of the US debtors located in the US are subject to the jurisdiction of the Canadian and US courts, respectively.  

In a CCAA proceeding there is far less court supervision of the retention and compensation of a debtor's professional advisers than there is in a Chapter 11 case. As such, US-Canada cross-border protocols often exempt all Canadian professionals (even those retained by US debtors) from the scrutiny of the US Bankruptcy Court. The Quebecor protocol provides that the retention and compensation of Canadian professionals retained by any of the Quebecor Debtors and any professionals (Canadian or US) retained solely by QWI are subject to the sole and exclusive jurisdiction of the Canadian Court. US professionals retained by the US Debtors are subject to the sole and exclusive jurisdiction of the Bankruptcy Court. Pursuant to the Pope & Talbot protocol, Canadian professionals retained by any of the Pope & Talbot Debtors (including US debtors) are subject to the sole and exclusive jurisdiction of the Canadian court, and US professionals retained by the Pope & Talbot Debtors (including Canadian debtors) are subject to the jurisdiction of the US court.  

Some cross-border cases involve contemporaneous, but separate proceedings involving different, but related entities within a corporate group. A recent example of this is the US and Canadian proceedings involving Calpine Corporation and its direct and indirect subsidiaries. The Calpine cases demonstrate that the filing of concurrent proceedings (that is, no debtors filing in both jurisdictions) is not necessarily a recipe for keeping jurisdictional issues distinct, even where there is a procedural cross-border protocol in place.  

For example, consider what could happen should a US and Canadian court each be requested to decide substantive legal issues common to the debtors in both jurisdictions.  In 2007, these concerns were mediated, in the case of the US and Canadian Calpine debtors, by the focused efforts of parties on both sides of the border to achieve a negotiated resolution of claims, including large inter-company claims between Canadian and US debtors. 

The Canadian court described the Calpine proceedings as being "extremely complex, involving many related corporations and partnerships, highly intertwined legal and financial obligations and a number of cross-border issues" (Calpine Canada Energy Ltd., Re 2007 CarswellAlta 1050, July 31, 2007(Alta QB)); leave to appeal refused at 2007 Alta1097, August 17, 2007 (Alta CA (In Chambers)). Several significant cross-border issues needed to be resolved between the US and Canadian debtors before either of the cases could be completed.  

Ultimately, a settlement was brokered between the Canadian and US debtors to avoid lengthy and costly litigation that could have deadlocked each estate. The resulting global settlement agreement (GSA) was approved in each jurisdiction, following a joint hearing presided over by both courts. The approval of the GSA was opposed in Canada by a bondholder group and others. They argued, among other things, that the GSA was in substance a "plan of compromise or arrangement" and, as such, could not be approved by the court until it was put to the creditors for a vote. The Canadian court did not agree. It found that the GSA compromised and settled certain claims of the CCAA debtors, the US debtors and the trustee of a trust indenture to which one of the debtors was a party, but not the claims of creditors who were not a party to it. It then approved the GSA as being an agreement that was fair and reasonable, beneficial to creditors as a whole and a "remarkable step forward in resolving the CCAA filing". 

Assets sales

Asset sales are an area of cross-border restructuring law and practice that emphasise the need for debtors and other stakeholders to understand and respect the differences in jurisdictional approaches and law. When this is done, cross-border asset sales tend to proceed relatively smoothly. Failure to respect the practice and law of the other jurisdiction, whether deliberate or inadvertent, can result in uncertainty, tension and delay, none of which is optimum when trying to complete a sales transaction. While in both the US and Canada orders can be made to convey title to the purchased assets free and clear of liens and encumbrances, parties are advised to keep in mind that such orders should be made by a court that has the jurisdiction to deal with such property and encumbrances.  

A Canadian sales process is typically very different from sale under section 363 of the Bankruptcy Code. Stalking horse bids, break-up fees and other bid protections and auctions are rare. Purchase agreements recommended to the court for approval are often not made public and prospective purchasers are rarely given the opportunity to submit a higher or better offer once the successful bidder has been recommended to the court. Canadian courts are reluctant to override a transaction recommended by the debtor and monitor, if the sales process followed is found to have fairness and integrity.  

A US section 363 sales process has more formalised bidding procedures, greater openness and transparency, and less secrecy than does a typical Canadian sales process. Where there is a desire or need to conduct a single or a co-ordinated cross-border sales process, it is becoming increasingly frequent for Canadian courts to permit Canadian debtors to sell assets pursuant to US-styled bidding and sales procedures. This is also sometimes the case in a purely domestic Canadian proceeding where the universe of bidders is expected to include US bidders who may be more favourably disposed to participating if the process is one with which they are comfortable.  

In Pope & Talbot, the Canadian court has made several orders approving US style bidding and sale procedures. In response to one motion to approve of a stalking horse bid and break-up fee, it noted these features as being "somewhat unusual" in a CCAA proceeding. The court nonetheless made the order because on the facts of the case, including the length of time the assets were exposed to the market before the filing, the recent deterioration of economic conditions and the fact that the agreement with the stalking horse bidder followed extensive arm's length negotiations, the process proposed was fair and reasonable (In Re Pope & Talbot Ltd., Docket No. S077839, unreported November 29, 2007 (BCSC (In Chambers)). 

The Chapter 11 and CCAA cases involving the Bombay group of companies provide a recent example of how to successfully co-ordinate a cross-border sales process involving different debtors within a corporate group in an extremely compressed time frame. On 20 September 2007, the US Bombay entities (Bombay US) filed for protection under Chapter 11. On 27 September, 2007 The Bombay Furniture Company of Canada Inc – La Compagnie de Mobilier Bombay du Canada Inc (Bombay Canada) commenced a CCAA proceeding. Bombay Canada did not file in the US. 

The Bombay group designed, sourced, imported and marketed furniture and home accessories, mainly through retail outlets in Canada and the US. The operations of Bombay Canada, including head office functions, inventory purchasing and distribution, intellectual property rights, management, administrative support and information technology, were significantly intertwined with Bombay US. Before the Chapter 11 filings, the Bombay group had conducted a marketing process for the sale of the entire operations and had selected a stalking horse bidder whose bid included assets of Bombay Canada. 

On 5 October 2007, the Canadian court was asked to approve of the same sale process already approved by the US court, including the stalking horse bid (Agency Agreement) and bidding procedures incorporating an auction process. To maximize the value of the retail store inventory, it was critical for the sales process to be completed as far in advance of the holiday season as possible. 

In the initial order, the CCAA monitor was directed to review the sale process that was conducted by Bombay US and report back to the Canadian court. Before the motion to approve of a sale process for Bombay Canada, the monitor reported that the Agency Agreement had been revised to address Canadian aspects of the proposed transaction, including by permitting the assets of Bombay Canada to be removed from the auction process. The monitor further reported that it and Bombay Canada would be participating in the consideration of bids submitted to the Bombay group and attending the sales auction in New York. The Canadian court authorised Bombay Canada to enter into the Agency Agreement, as amended, with the proviso that any applicable break-up fee would be pro-rated between Bombay US and Bombay Canada. It otherwise approved of the US sales process.  

Due to the interest of two potential bidders in making a going concern offer for Bombay Canada, its assets were removed from the auction process. Negotiations ensued resulting in a hybrid transaction with one of these groups. As a result, an agency agreement was entered into for the sale of the inventory of Bombay Canada (and the acquisition, by an affiliate of the inventory buyer of certain intellectual property rights from Bombay US (Canadian IP)). A second purchaser agreed to offer employment to the employees of Bombay Canada, assume its real property leases and purchase the Canadian IP from the affiliate. On 19 October 2007, after intensive negotiations to settle the agency and purchase agreements, the Canadian court approved of the sale of the Bombay Canada assets to these parties. 

Bombay highlights that in cases involving an integrated US and Canadian corporate group it is sometimes necessary for a Canadian court to approve of the participation of a Canadian debtor in a US-directed and styled sales process. It also underscores that the Canadian court must be convinced that the process, as initially proposed or modified, is in the best interests of the Canadian debtor and its creditors.

Other issues and trends

Canada remains a challenging jurisdiction within which to accomplish the restructuring of a business burdened by uncompetitive labour costs arising from a unionised work force. Canadian insolvency legislation does not provide a mechanism for the rejection of an unprofitable collective bargaining agreement. Nor can an insolvent Canadian corporation take advantage of legislation such as The Employment Retirement Insurance Security Act 1974 to facilitate the termination of an economically oppressive defined benefit pension plan. Those that purchase assets of an operating business also face the risk of inheriting significant successor employer obligations.  

When and if the Insolvency Reforms become effective, issues that will be of interest to US stakeholders include new provisions that will require publication of a creditors list and permit charges in favour of interested parties. These provisions may facilitate the formation and funding of creditor committees in appropriate instances. The Insolvency Reforms will also introduce provisions dealing with preferences and transactions at undervalue, where no such remedies were previously available to creditors in a CCAA proceeding. 

The influence of US-administered funds as lenders, creditors and equity participants in Canadian cases has already been felt and is growing. These influenceshave led to increased litigation, a trend that is likely to continue when additional tools, such as the ability to pursue preference claims under the CCAA, are added to the arsenal of players who might already have a combative tendency.  

One final observation for US parties: with the increase in cross-border cases, it has become fairly common for the official committee of unsecured creditors in a US case to retain Canadian counsel to help ensure that its viewpoint is reflected in the Canadian proceeding and that it receives up-to-date information regarding the Canadian case. It has been the writer's experience that the Canadian courts will generally permit Committee counsel to actively participate in a CCAA proceeding. Cases such as Bombay demonstrate that this approach can bring value to the US estates.

© This chapter was first published in PLC Cross-border Restructuring and Insolvency Handbook 2008/09 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact iain.plummer@practicallaw.com, or visit www.practicallaw.com/restructurehandbook .