A Model for Canadian Cross-Border Insolvency

Shortly after its U.S. petition was filed, Core-Mark filed an application under section 18.6 of the Canadian Companies' Creditors Arrangement Act (the CCAA) in the Supreme Court of British Columbia. The CCAA is federal legislation passed by the Government of Canada dealing with restructurings, and operates in a manner roughly akin to Chapter 11. Specifically, section 18.6(2) of the CCAA provides that “[t]he [Canadian] court may, in respect of a debtor company, make such orders and grant such relief as it considers appropriate to facilitate, approve or implement arrangements that will result in co-ordination of proceedings under this Act with any foreign proceeding.” The purpose of section 18.6(2) of the CCAA is to give the court broad and flexible jurisdiction to facilitate cross-border insolvency proceedings that involve concurrent filings in Canada under the CCAA and in a foreign jurisdiction under the insolvency laws of that jurisdiction. In appropriate circumstances, this may include a Canadian court making an order that recognizes and gives effect to insolvency proceedings in foreign courts.

Mr. Justice Tysoe of The Supreme Court of British Columbia (the Canadian Court) issued an order under section 18.6 that, among other things, recognized Core-Mark's bankruptcy proceedings in the United States as a “foreign proceeding” for purposes of the CCAA and appointed an information officer that was required to provide a report to the Canadian Court once every three months on the status of the U.S. proceedings.

Protecting the Assets

Core-Mark's initial concerns were protecting its Canadian assets. The company had relationships with major suppliers who threatened to take COD payments for new products and apply those payments to old debt. There was also the concern that U.S. creditors would take action against Core-Mark's assets in Canada, which would frustrate the ability of the company to reorganize in the United States. Under the CCAA, there is no statutory equivalent to the automatic stay provisions of section 362 of the Bankruptcy Code. An application must be made to obtain similar relief. Section 18.6(3) of the CCAA allows the courts to issue orders “on such terms and conditions as the court considers appropriate in the circumstances,” leaving the Canadian courts flexibility to craft a stay order to meet the needs of the company. The Canadian Court in Core-Mark granted a stay against all actions, enforcements and proceedings against the company for a specified period of time (which was extended further by subsequent orders). The imposition of the stay provided Core-Mark and its affiliates the breathing room they needed to proceed with the primary restructuring in the U.S.

All orders in the U.S. bankruptcy that had a significant impact on Canadian creditors were disclosed to the Canadian creditors, and the more significant orders were specially recognized by the Canadian Court. For example, the Canadian Court was asked to, and did, adopt the U.S. claims process and bar date. This was significant because Canadian courts have not always agreed that there should be one claims process. For example, in the Philip Services Corp. restructuring, the company sought approval in Ontario of a Canadian plan of arrangement that would require all Canadian claims against Philip to be dealt with in the company's U.S. proceedings. Menegon v. Philip Services Corp. (1999), 11 C.B.R. (4th) 262 (Ont. S.C.J. [Commercial List]). In not approving the plan, Mr. Justice Blair expressed his concern that forcing Canadian creditors of Philip to file claims in the U.S. would take away their right to vote on the Canadian plan as proposed. The court held that comity and international co-operation do not mean that one court must cede its authority and jurisdiction over its own process or over the application of the substantive laws of its own jurisdiction, whenever any kind of differences between the two jurisdictions arise.

A Happy Balance

In Core-Mark, a happy balance was reached to satisfy similar concerns by creditors. Canadian creditors, particularly the provincial governments, which were major creditors, did not want to jeopardize any statutory or other special rights they may have enjoyed in Canada, and wanted to preserve their ability to call upon Canadian statutes that afforded them favorable treatment. After extensive discussions and negotiations with key Canadian creditors, all stakeholders committed to a single claims process recognizing the U.S. claims process and bar date as applicable in Canada and binding on Canadian creditors, without prejudice to the Provincial Governments' rights and remedies under Canadian statutes. Additionally, both the U.S. Court and the Canadian Court entered orders that held that the mere fact of filing a proof of claim in the U.S. proceeding by a Canadian creditor was not deemed a submission to the jurisdiction of the U.S. Court by the Canadian creditor.

The single claims process was critical to the quick and efficient emergence of Core-Mark from Chapter 11. Not only are dual claims processes costly, as the debtor is funding two claims processes, but they are also inefficient. With two claims processes, creditors who do business both in Canada and the United States would inevitably have filed claims in both jurisdictions leading to problems with large amounts of duplicate claims.

As the next significant follow-up to the single claims process, it was crucial to ensure that all creditors were treated fairly pursuant to one plan of reorganization. The Canadian Court, upon application, allowed Core-Mark to adopt the U.S. plan and balloting process as the single plan process and relieved Core-Mark of the obligation of filing a separate plan of reorganization under the CCAA. Obtaining this order was a substantial benefit to Core-Mark as it allowed the restructuring to proceed on one time track on a global basis that encompassed all creditors. Core-Mark also sought and received approval of an order recognizing and implementing the confirmed U.S. plan of reorganization in the Canadian proceedings, which order had the effect of making the plan enforceable in Canada and ensuring that all claims against Core-Mark in Canada would be treated pursuant to the terms of a single plan.

The key facts that the Canadian Court considered in entering these orders, were that: 1) the Canadian proceeding was ancillary to the primary restructuring activity by the parent and its other subsidiaries without Canadian operations because, among other things, the majority of Core-Mark's business was conducted in the United States; 2) the U.S. claims process was intended to treat claimants equally, regardless of the jurisdiction in which they resided; 3) the U.S. plan of reorganization was comprehensive in nature and contemplated a global restructuring of the companies, including the Canadian operations; 4) ample notice had been given to the Canadian Court of the developments in the U.S. proceedings; and 5) ample notice had been given to the Canadian creditors of Core-Mark's intentions.

Immeasurable Benefit

The benefit of filing ancillary proceedings directly in Canada and moving for relief under section 18.6 for Core-Mark were immeasurable. The filing served the key purpose of allowing all of the debtors' assets to be reorganized in a central fashion, without the worry of piece-meal attack from creditors outside of the U.S. As Judge Blair summarized when he approved the cross-border protocol in Olympia & York:

“Insolvency disputes with international overtones and involving property and assets in a multiplicity of jurisdiction are becoming increasingly frequent. Often there are differences in legal concepts — sometimes substantive, sometimes procedures — between the jurisdictions. The [c]ourts of the various jurisdictions should seek to cooperate amongst themselves, in my view, in facilitating the transborder resolution of such disputes as a whole, where that can be done in a fashion consistent with their own fundamental principles or jurisprudence. The interests of international cooperation and comity, and the interests of developing at least some degree of certitude in international business and commerce, call for nothing less.”

Olympia & York Developments Ltd., 20 C.B.R. (3d) 165, 169 (1993). Core-Mark was a textbook case of cooperation and efficiency in a cross-border restructuring. Implementation of the strategy allowing the U.S. proceeding to be the primary proceeding while simultaneously recognizing the rights of Canadian creditors allowed Core-Mark to emerge from bankruptcy protection more quickly and cost-effectively.

The trend toward commercial globalization has led to an increase in the number and complexity of cross-border bankruptcy cases. The ability to overcome differences in legal systems, often through the cooperation and coordination of courts in different countries, can be a key factor in the success or failure of a restructuring.

A Successful Case

A recent successful case of harmonious cross-border insolvency was Core-Mark International, Inc. Core-Mark, a Delaware company, filed for Chapter 11 protection in the United States, simultaneously with its parent company, Fleming Companies, Inc., to restructure debt located at the parent level. The immediate concern for Core-Mark was the protection of its Canadian assets and a quick emergence from bankruptcy. At the time of its U.S. bankruptcy filing on April 1, 2003, Core-Mark had and still continues to carry on significant operations in Canada, with headquarters in Northern California as well as British Columbia. Fleming was the largest U.S. wholesale distributor of foods and Core-Mark was the third largest distributor of goods to convenience stores in the U.S.

Shortly after its U.S. petition was filed, Core-Mark filed an application under section 18.6 of the Canadian Companies' Creditors Arrangement Act (the CCAA) in the Supreme Court of British Columbia. The CCAA is federal legislation passed by the Government of Canada dealing with restructurings, and operates in a manner roughly akin to Chapter 11. Specifically, section 18.6(2) of the CCAA provides that “[t]he [Canadian] court may, in respect of a debtor company, make such orders and grant such relief as it considers appropriate to facilitate, approve or implement arrangements that will result in co-ordination of proceedings under this Act with any foreign proceeding.” The purpose of section 18.6(2) of the CCAA is to give the court broad and flexible jurisdiction to facilitate cross-border insolvency proceedings that involve concurrent filings in Canada under the CCAA and in a foreign jurisdiction under the insolvency laws of that jurisdiction. In appropriate circumstances, this may include a Canadian court making an order that recognizes and gives effect to insolvency proceedings in foreign courts.

Mr. Justice Tysoe of The Supreme Court of British Columbia (the Canadian Court) issued an order under section 18.6 that, among other things, recognized Core-Mark's bankruptcy proceedings in the United States as a “foreign proceeding” for purposes of the CCAA and appointed an information officer that was required to provide a report to the Canadian Court once every three months on the status of the U.S. proceedings.

Protecting the Assets

Core-Mark's initial concerns were protecting its Canadian assets. The company had relationships with major suppliers who threatened to take COD payments for new products and apply those payments to old debt. There was also the concern that U.S. creditors would take action against Core-Mark's assets in Canada, which would frustrate the ability of the company to reorganize in the United States. Under the CCAA, there is no statutory equivalent to the automatic stay provisions of section 362 of the Bankruptcy Code. An application must be made to obtain similar relief. Section 18.6(3) of the CCAA allows the courts to issue orders “on such terms and conditions as the court considers appropriate in the circumstances,” leaving the Canadian courts flexibility to craft a stay order to meet the needs of the company. The Canadian Court in Core-Mark granted a stay against all actions, enforcements and proceedings against the company for a specified period of time (which was extended further by subsequent orders). The imposition of the stay provided Core-Mark and its affiliates the breathing room they needed to proceed with the primary restructuring in the U.S.

All orders in the U.S. bankruptcy that had a significant impact on Canadian creditors were disclosed to the Canadian creditors, and the more significant orders were specially recognized by the Canadian Court. For example, the Canadian Court was asked to, and did, adopt the U.S. claims process and bar date. This was significant because Canadian courts have not always agreed that there should be one claims process. For example, in the Philip Services Corp. restructuring, the company sought approval in Ontario of a Canadian plan of arrangement that would require all Canadian claims against Philip to be dealt with in the company's U.S. proceedings. Menegon v. Philip Services Corp. (1999), 11 C.B.R. (4th) 262 (Ont. S.C.J. [Commercial List]). In not approving the plan, Mr. Justice Blair expressed his concern that forcing Canadian creditors of Philip to file claims in the U.S. would take away their right to vote on the Canadian plan as proposed. The court held that comity and international co-operation do not mean that one court must cede its authority and jurisdiction over its own process or over the application of the substantive laws of its own jurisdiction, whenever any kind of differences between the two jurisdictions arise.

A Happy Balance

In Core-Mark, a happy balance was reached to satisfy similar concerns by creditors. Canadian creditors, particularly the provincial governments, which were major creditors, did not want to jeopardize any statutory or other special rights they may have enjoyed in Canada, and wanted to preserve their ability to call upon Canadian statutes that afforded them favorable treatment. After extensive discussions and negotiations with key Canadian creditors, all stakeholders committed to a single claims process recognizing the U.S. claims process and bar date as applicable in Canada and binding on Canadian creditors, without prejudice to the Provincial Governments' rights and remedies under Canadian statutes. Additionally, both the U.S. Court and the Canadian Court entered orders that held that the mere fact of filing a proof of claim in the U.S. proceeding by a Canadian creditor was not deemed a submission to the jurisdiction of the U.S. Court by the Canadian creditor.

The single claims process was critical to the quick and efficient emergence of Core-Mark from Chapter 11. Not only are dual claims processes costly, as the debtor is funding two claims processes, but they are also inefficient. With two claims processes, creditors who do business both in Canada and the United States would inevitably have filed claims in both jurisdictions leading to problems with large amounts of duplicate claims.

As the next significant follow-up to the single claims process, it was crucial to ensure that all creditors were treated fairly pursuant to one plan of reorganization. The Canadian Court, upon application, allowed Core-Mark to adopt the U.S. plan and balloting process as the single plan process and relieved Core-Mark of the obligation of filing a separate plan of reorganization under the CCAA. Obtaining this order was a substantial benefit to Core-Mark as it allowed the restructuring to proceed on one time track on a global basis that encompassed all creditors. Core-Mark also sought and received approval of an order recognizing and implementing the confirmed U.S. plan of reorganization in the Canadian proceedings, which order had the effect of making the plan enforceable in Canada and ensuring that all claims against Core-Mark in Canada would be treated pursuant to the terms of a single plan.

The key facts that the Canadian Court considered in entering these orders, were that: 1) the Canadian proceeding was ancillary to the primary restructuring activity by the parent and its other subsidiaries without Canadian operations because, among other things, the majority of Core-Mark's business was conducted in the United States; 2) the U.S. claims process was intended to treat claimants equally, regardless of the jurisdiction in which they resided; 3) the U.S. plan of reorganization was comprehensive in nature and contemplated a global restructuring of the companies, including the Canadian operations; 4) ample notice had been given to the Canadian Court of the developments in the U.S. proceedings; and 5) ample notice had been given to the Canadian creditors of Core-Mark's intentions.

Immeasurable Benefit

The benefit of filing ancillary proceedings directly in Canada and moving for relief under section 18.6 for Core-Mark were immeasurable. The filing served the key purpose of allowing all of the debtors' assets to be reorganized in a central fashion, without the worry of piece-meal attack from creditors outside of the U.S. As Judge Blair summarized when he approved the cross-border protocol in Olympia & York:

“Insolvency disputes with international overtones and involving property and assets in a multiplicity of jurisdiction are becoming increasingly frequent. Often there are differences in legal concepts — sometimes substantive, sometimes procedures — between the jurisdictions. The [c]ourts of the various jurisdictions should seek to cooperate amongst themselves, in my view, in facilitating the transborder resolution of such disputes as a whole, where that can be done in a fashion consistent with their own fundamental principles or jurisprudence. The interests of international cooperation and comity, and the interests of developing at least some degree of certitude in international business and commerce, call for nothing less.”

Olympia & York Developments Ltd., 20 C.B.R. (3d) 165, 169 (1993). Core-Mark was a textbook case of cooperation and efficiency in a cross-border restructuring. Implementation of the strategy allowing the U.S. proceeding to be the primary proceeding while simultaneously recognizing the rights of Canadian creditors allowed Core-Mark to emerge from bankruptcy protection more quickly and cost-effectively.