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This article has been contributed to the blog by Patrick Riesterer and Jamie Rosenblatt. Patrick Riesterer is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP and Jamie Rosenblatt is an articling student at Osler, Hoskin & Harcourt LLP.
In Re Electro Sonic Inc., 2014 ONSC 942, 2014 CarswellOnt 1568, the Ontario Superior Court of Justice granted an order for the administrative consolidation of two debtor companies that had filed notices of intention to make proposals pursuant to s. 50.4 of the Bankruptcy and Insolvency Act (the “BIA”). The Court also allowed the proposal trustee to act as foreign representative for the purposes of applying for recognition of the proceedings in the United States Bankruptcy Court.
Proposals under the BIA
The proposal provisions of the BIA have a similar purpose as the Companies’ Creditors Arrangement Act (“CCAA”): to provide a means for insolvent corporations to reorganize their affairs as an alternative to bankruptcy and thereby continue operations for the benefit of multiple stakeholders, including creditors, employees and customers.
Under BIA proposal proceedings, a company remains a “debtor-in-possession” and can seek to restructure as a going concern by obtaining a stay of proceedings upon filing a Notice of Intention to make a Proposal (an “NOI”) to its creditors. Once an NOI is filed, the debtor will have the opportunity to make a proposal to its creditors rather than making a formal declaration of bankruptcy. BIA proposal proceedings are more restrictive than proceedings commenced under the CCAA, as the BIA has detailed provisions on the process and timing of a restructuring, including a strict time limit on how much time a debtor has between the filing of an NOI and the filing of the proposal. Failure to file a proposal within six months of the filing of an NOI results in an automatic bankruptcy. Despite these strictures, access to the BIA is less difficult and less costly than access to the CCAA, making it a more sensible alternative for smaller enterprises. In addition, proposal proceedings are available to individuals.
Electro Sonic Inc. (“ESI“) is an Ontario corporation with its registered office in Markham, Ontario. Electro Sonic of America LLC (“ESA“) is a Delaware limited liability corporation which carries on business from a facility in Tonawanda, New York. Both companies are owned by the Rosenthal family. Both companies are involved in the distribution of electronic and electrical parts. On February 6, 2014, both companies filed NOIs. MNP Ltd. was appointed proposal trustee.
The companies applied for three types of relief: (i) the administrative consolidation of the two proceedings; (ii) the approval of an Administrative Professionals Charge on the property of both companies to secure payment of the reasonable fees of the legal advisors; and, (iii) authorization that the proposal trustee could act as foreign representative of the NOI proceedings and could apply to the United States Bankruptcy Court for relief pursuant to Chapter 15 of the U.S. Bankruptcy Code. The court granted all the relief sought.
The Court explained that bankruptcy proceedings operate subject to the general principle that litigation should secure the just, most expeditious and least expensive determination of every proceeding on its merits. Administrative consolidation, which involves the joining together of two closely-related bankruptcy proceedings so that they can proceed and be managed together, helps to achieve this goal.
In granting the request for consolidation, the Court considered a number of factors. For example, the evidence disclosed that the operations of ESI and ESA were highly integrated, sharing a common managing director as well as consolidated accounting, finance and human resource functions. In addition, ESI had been the sole customer of ESA in 2013 and 2014. Finally, both companies shared the same lender. For these reasons the Court agreed that administrative consolidation was appropriate.
ESA was a Delaware corporation with its place of business in New York State. Section 50(1) of the BIA authorizes an “insolvent person” to make a proposal. Section 2 of the BIA defines an “insolvent person” as one “who resides, carries on business or has property in Canada”. The Court noted that these statutory definitions establish the criteria upon which an Ontario court can assume jurisdiction in proposal proceedings.
Before granting the administrative charge requested by the debtors, the Court considered a number of items. One issue considered by the Court was whether or not ESA qualified as an “insolvent person” as defined in the BIA. In finding that ESA did satisfy the statutory definition of “insolvent person”, the Court relied on evidence filed by ESA that is maintained some assets, specifically a U.S. dollar bank account, in Canada. This fact meant that it was appropriate for ESA to file an NOI and to have its assets charged to secure expenses related to the administration of same.
Authorization of Proposal Trustee to act as Foreign Representative
Under s. 279 of the BIA, the court may authorize any person or body to act as a representative in respect of any proceeding under the BIA for the purposes of having them recognized in a jurisdiction outside of Canada. In Re Electro, the Court found that the proposal trustee was the most appropriate person to act in this capacity and should be authorized to apply to the United States Bankruptcy Court for relief pursuant to Chapter 15 of the U.S. Bankruptcy Code.
While the BIA proposal regime is more structured than the CCAA, the decision in Re Electro shows that the courts will bring the same flexible and practicable approach to proposals under the BIA as is commonly seen in CCAA proceedings. The Court found grounds to grant the order consolidating the two proposals to permit a debtor company and its foreign subsidiary to obtain relief in the same proceedings. This approach shows that the courts are interested in assisting debtors in obtaining expedient and cost effective access to insolvency protection, consistent with the purpose of the BIA. Proposal proceedings should be viewed as an alternative to CCAA proceedings for smaller companies.
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