NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick and Patrick Riesterer. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Patrick Riesterer is an associate in the group.
Section 11.2 of the Companies’ Creditors Arrangement Act (“CCAA”) gives the Canadian court explicit authority to grant a priority charge for amounts owing to a DIP Lender; however, the section provides that the charge may not be granted to secure an obligation that exists before the order is made. Section 11.2 effectively prevents a roll-up of pre-petition debt into a DIP Loan. A “roll-up” is an arrangement where all or a portion of pre-petition loans provided by a lender are “rolled-up” into the post-petition DIP Facility provided by the same lender, effectively giving the DIP Lender the benefit of the DIP Charge for pre-filing obligations. We have previously reported on certain creeping roll-up arrangements that may be permitted by section 11.2 of the CCAA.
In the recent decision in Re Hartford Computer Hardware, Inc. et al., the Canadian court recognized an order of the United States Bankruptcy Court for the Northern District of Illinois Eastern Division (the “US Court”) granting a roll-up in a cross-border proceeding despite the prohibition on roll-ups in s. 11.2 of the CCAA.
Hartford Computer Hardware, Inc. and certain of its affiliates (collectively, “Hartford”) were subject to Chapter 11 proceedings in Illinois and those proceedings had been recognized in Canada as foreign main proceedings pursuant to Part IV of the CCAA.
Hartford had previously obtained from the Canadian court recognition of an Interim DIP Facility Order that had been granted by the US court. In a motion heard on February 1, 2012, Hartford sought approval of the Final DIP Facility Order. The Final DIP Facility Order contained a partial roll-up, whereby all cash collateral in the possession of Hartford on the day of the Chapter 11 filing or acquired afterward was deemed to have been remitted to the pre-petition secured lender for repayment of the pre-petition secured loan and a corresponding loan was deemed to have been made under the DIP Facility.
The Canadian court approved the Final DIP Facility Order despite the roll-up. In reaching this conclusion, the Canadian court considered the following facts: (i) the motion was for recognition of an order made in a foreign main proceeding; (ii) the US Court had found that there was good cause to approve the Final DIP Facility Order despite hearing certain objections to it; (iii) the Final DIP Facility Order was supported by the Unsecured Creditors’ Committee; and (iv) the Canadian unsecured creditors would be treated no less favourably than US unsecured creditors. One of the most significant factors in the decision was the fact that the order had been granted by the US Court in a foreign main proceeding.
After noting the prohibition on roll-ups in s. 11.2 of the CCAA, the Canadian court observed that s. 49 of the CCAA permits a Canadian court to make any order that it considers appropriate when recognizing an order of a foreign court, provided that the Canadian court is satisfied that the order is necessary for the protection of the interests of the debtor, a creditor or creditors.
The Canadian court also noted that s. 61(2) of the CCAA permits the Canadian court to refuse to recognize the orders of a foreign court where doing so would be contrary to public policy. The Canadian court decided that s. 61(2) of the CCAA should be interpreted restrictively, in light of the Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency. The Canadian court relied on the report of the Information Officer which it had appointed, which stated that there would be no material prejudice to Canadian creditors if the Canadian court recognized the Final DIP Facility, and that nothing was being done that was contrary to the applicable provisions of the CCAA. The Canadian court therefore found that the Final DIP Facility Order did not raise any public policies issues and recognized the Final DIP Facility Order.
It could be argued that the roll-up of Hartford’s pre-petition debt provided for in the Final DIP Facility Order was only a roll-up in theory, and not a roll-up in fact. The Canadian court observed that the cash collateral on hand as of the date of the Chapter 11 petition was effectively spent during the Chapter 11 proceedings and replaced with advances under the DIP Loan, so that all of the cash collateral available as of the date of the Final DIP Facility Order was cash advanced by the DIP Lender.
This case provides a window into the distinction between the orders that are available in a plenary case under the CCAA compared with the orders that can be recognized under Part IV. Clearly, the Canadian courts are very sensitive to the need for close cooperation between the US and Canadian courts in cross border insolvency matters.
The views and opinions expressed herein are exclusively the personal views of the guest contributors only, unless otherwise attributed. Information and opinions expressed herein do not necessarily represent the views of Weil, its attorneys, or its clients. Please see the complete Disclaimer for additional terms and conditions of use of this blog.
Copyright © 2019 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, Warsaw, and Washington, D.C.