NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick, Sachin Kanabar and Jake Leibner. Steven Golick is a partner in the Insolvency and Restructuring Group of Osler Hoskin & Harcourt LLP, Sachin Kanabar is an associate in the group and Jake Leibner is a summer student-at-law in the group.
In the recent decision of Probe Resources Ltd., Re, the British Columbia Supreme Court (the “Court”) contemplated the application of Part IV of the Companies’ Creditors Arrangement Act (“Part IV”), which came into force on September 18, 2009. The Court was asked to grant an order recognizing the order of the United States Bankruptcy Court for the Southern District of Texas Houston Division (the “U.S. Bankruptcy Court”). The U.S. Bankruptcy Court had made an order sanctioning a plan of reorganization (the “Plan”) under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) of Probe Resources Ltd. (“Probe Canada”), a Canadian public corporation, and its four wholly owned subsidiaries (collectively with Probe Canada, “Probe”), all of which were incorporated in the U.S. However, notwithstanding the advanced stage of the Chapter 11 proceedings, and that Probe Canada, the parent of the group, was a Canadian incorporated company and was a Chapter 11 debtor, no recognition orders had previously been sought by any of the debtors in Canada.
While Probe’s head office was in British Columbia, none of Probe’s business operations were in Canada.
In November 2010, Probe’s U.S. subsidiaries commenced Chapter 11 proceedings. Shortly thereafter, in December 2010, Probe Canada also filed under Chapter 11. The U.S. Bankruptcy Court ordered a joint administration of all five bankruptcy cases (the “Chapter 11 Proceeding”). By the middle of March 2011, Probe’s creditors had approved the Plan. On March 21, 2011, the Honourable Judge Karen Brown of the U.S. Bankruptcy Court granted an order confirming the Plan.
One of Probe Canada’s Canadian creditors filed a notice of civil claim in Canada against Probe Canada on March 21, 2011. Probe Canada, as the proposed foreign representative for Probe, brought an application in Canada pursuant to Part IV to recognize the Chapter 11 Proceeding as a foreign main proceeding and thus obtain an order staying all proceedings in Canada. Probe Canada also sought to recognize various orders of the U.S. Bankruptcy Court including the order confirming the Plan. The hearing of this application was on March 31, 2011.
In deciding whether to grant a recognition order under Part IV, the Court must consider a number of items, including the following three issues: (i) Is there proof that the applicant is a “foreign representative”?; (ii) Is there proof of the existence of a “foreign proceeding”?; and (iii) If so, is the proceeding a “foreign main proceeding” or a “foreign non-main proceeding”?
Proof of a “foreign representative” and proof of a “foreign proceeding”
While Part IV is silent on whether a debtor can act as the foreign representative under the statute, in this case, Probe Canada was authorized by order of the U.S. Bankruptcy Court to act as foreign representative on behalf of Probe with respect to the Chapter 11 Proceeding. The Court found that Probe Canada could properly act as foreign representative for all five companies. While not referenced in the reasons, this is not unique and other courts in Canada have made similar findings.
Part IV also requires that the foreign representative’s application include certified copies of the instruments that both commenced the foreign proceeding and that authorized the foreign representative to act. In the alternative, the foreign representative may provide a certificate from the foreign court affirming the existence of the foreign proceeding and affirming the foreign representative’s authority to act. In this case, certified copies of the documents were not provided, nor were certificates from the U.S. Bankruptcy Court; only uncertified copies were submitted to the Court.
In the absence of certified documents or certificates, Part IV allows the Court to accept any other evidence that it considers appropriate to establish the existence of the foreign proceeding and the foreign representative’s authority to act. In this case, the Court was satisfied that the affidavit evidence and copies of documents sufficiently satisfied this provision. However, the Court noted that in future applications there must be some reasonable explanation as to why the prescribed documents were not provided before the Court would resort to considering alternate forms of proof for these matters.
Whether the proceeding is a “foreign main proceeding” or a “foreign non-main proceeding”
This distinction determines whether certain provisions of relief are mandatory or within the discretion of the Court. Part IV defines a “foreign main proceeding” as a foreign proceeding in a jurisdiction where the debtor company has its centre of main interests (“COMI”).
In the absence of proof to the contrary, under Part IV, a debtor company’s registered office is presumed to be its COMI. This concept is identical to the method of determining COMI under section 1516(c) of the United States Bankruptcy Code.
The Court reviewed commentary by various authors which indicate that the presumption may be rebutted if there are factors which, viewed objectively by third parties, would lead to the conclusion that its COMI is elsewhere, and that these relevant objective and ascertainable factors include: (1) the location of headquarters; (2) the location of those who manage the debtor’s business; (3) the location of primary assets and operations, and; (4) the location of the majority of creditors.
In this case, Probe Canada’s registered office was in British Columbia. However, the Court noted that the “legitimate expectations” of third parties materially affected by the restructuring proceedings would consider Probe’s COMI to be in the U.S. The Court arrived at this conclusion by considering the following facts: (i) all of Probe’s business operations were through its U.S. subsidiaries; (ii) all of Probe’s revenues were derived in the U.S.; (iii) all of its operating assets were located in the U.S., while only nominal assets were located in Canada; and (iv) only one of Probe’s directors resided in British Columbia. However, the Court noted that it was not advised as to where the other directors were located.
Based on all of the foregoing, the Court concluded that Probe’s COMI was in the U.S. As such, the Chapter 11 Proceeding was a “foreign main proceeding” under Part IV and the Court was required to issue an order staying proceedings in Canada. The Court noted that even if the Chapter 11 Proceeding was considered to be a “foreign non-main proceeding”, the Court would have exercised its discretion to grant the same relief in this case.
It is of interest that the Court concluded that the various factors, when taken as a whole, allowed it to conclude that the “legitimate expectations” of third parties was that Probe’s COMI was in the U.S. It will be of interest to see whether future applications for recognition orders will follow this approach in determining the COMI of a debtor, and what evidence will be required to prove such “legitimate expectations” of third parties.
The Court was also asked to recognize other orders of the U.S. Bankruptcy Court including the order approving of the joint disclosure statement, the order relating to the confirmation hearing, and the order confirming the Plan. The court reviewed the Plan, considered similar provisions under the Companies’ Creditors Arrangement Act and made the recognition order as requested.
While it is not clear in the decision, the timing of Probe’s application for a recognition order may have been motivated by the filing of the notice of civil claim against Probe on March 21, 2011. Although the Court granted the requested recognition order, in light of the lateness of the proceeding, the Court dismissed the foreign representative’s request to only publish notice of the recognition order for one week and required Probe Canada to publish such notice for two consecutive weeks as prescribed by the statute. Clearly, it would have been preferable to commence the Part IV proceedings at an earlier time.
This area of law is still under development. This case provides guidance to practitioners involved in applications for recognition orders under Part IV.
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