Centralization in Canadian Insolvency Proceedings

Commercial insolvency can affect stakeholders located in multiple jurisdictions and possessing diverse legal rights. A recent notable trend in Canadian insolvency law is the centralization in insolvency proceedings, where courts have recognized that an effective restructuring of an insolvent business may depend on the centralization of stakeholder claims in a single proceeding. This applies even when such an approach would be inconsistent with the parties’ contractual rights, statutory laws or Canada’s federal structure outside of the insolvency context.

In this article, we have reviewed some recent decisions that indicate the continuing importance of centralization of proceedings to Canadian insolvency courts.

1. Peace River Hydro Partners v. Petrowest Corp.

The most notable example of Canadian courts favouring a centralized approach in an insolvency context is the Supreme Court of Canada (SCC) decision in Peace River Hydro. In this case, a court-appointed receiver sought to initiate a court proceeding against certain contractual counterparties of the insolvent debtor.

The agreements relied on by the receiver to bring these court proceedings contained multiple arbitration clauses. The contractual counterparties sought to rely on these clauses to stay the court proceedings in favour of arbitration in accordance with provincial legislation. In contrast, the receiver took the position that enforcing the arbitration clauses in the context of the debtor’s receivership proceedings would be expensive, inefficient, and compromise the integrity of the proceedings to the detriment of the stakeholders of the insolvent debtor.

Faced with both the tension between the parties’ pre-insolvency contractual rights and the objectives of insolvency law, the SCC prioritized the single proceeding model, permitting the court action to continue despite the mandatory arbitration clauses.

2. Mundo Media Ltd. (Re)

The Ontario courts reached a similar conclusion in Mundo Media. In that case, the Court of Appeal concluded (on leave to appeal) that a receiver’s motion for payment of unpaid invoices brought in the receivership proceedings of an insolvent debtor could proceed despite a mandatory arbitration clause requiring arbitration in New York.

The court reasoned that pre-insolvency contractual dispute resolution mechanisms must yield to a centralized single insolvency proceeding where enforcing the contractually agreed mechanism could have an adverse impact on the efficient workings of the insolvency proceeding.

3. MPX International Corporation (Re)

In MPX, the Ontario Superior Court of Justice extended the CCAA stay of proceedings to several international foreign subsidiaries of the parent company under CCAA protection. This approach had the effect of centralizing claims against the Canadian debtors and their foreign-based subsidiaries in the Canadian CCAA proceedings. The basis for this relief was to avoid the instability of uncoordinated realization and enforcement attempts made in overseas jurisdictions that would be detrimental to the debtors’ economic community as a whole.

4. 1057863 B.C. Ltd. (Re)

In 1057863 B.C. Ltd., the British Columbia Supreme Court approved a mandatory mediation process to resolve a significant dispute between the CCAA debtors and an important stakeholder. This order was made in the absence of a mediation agreement and over the objections of the affected stakeholder. In coming to this decision, the court emphasized that the creation of a mediation forum in the context of insolvency proceedings had real potential to assist in the restructuring of the insolvent company and could avoid future litigation in other forums.

5. Arrangement relatif à Bloom Lake (Re)

Finally, in a decision from last year in Bloom Lake, the Quebec Superior Court considered whether it could hear a motion to dissolve a company headquartered in Newfoundland and Labrador in connection with a Quebec CCAA proceeding. In exercising its discretion under federal insolvency legislation, the court concluded it had jurisdiction to hear the motion on the basis of the objectives of insolvency law, which favour the centralization of issues affecting an insolvent debtor in a single proceeding.

Conclusion

These decisions emphasize that Canadian courts see the centralization in insolvency disputes to be critical to furthering the objectives of commercial restructurings. Parties engaged in insolvency proceedings should consider how their pre-insolvency contractual rights with respect to dispute resolution and other legal rights may be impacted as a result.

For more information, please contact any member of the Restructuring & Insolvency group.